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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 0-27818
DOANE PRODUCTS COMPANY
(Exact name of Registrant as specified in its charter)
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DELAWARE 43-1350515
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
WEST 20TH STREET AND
STATE LINE ROAD
JOPLIN, MISSOURI 64804
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (417) 624-6166
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
As of February 28, 1998, Registrant had outstanding 1,000 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
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PART I
PAGE
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submissions of Matters to a Vote of Security-Holders . . . . . . . . . . . . . . . . . . . . . . 9
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART III
Item 10. Directors and Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix F
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ITEM 1- BUSINESS
THE COMPANY
On October 5, 1995, the Company was acquired (the
"Acquisition") through the merger of DPC Subsidiary Acquisition Corp. with and
into the Company's predecessor, Doane Products Company (the "Predecessor"),
which immediately merged with and into the Company (formerly known as DPC
Transition Corp.), with the Company being the surviving entity. Immediately
following such mergers, DPC Transition Corp. changed its name to Doane Products
Company. DPC Subsidiary Acquisition Corp. and DPC Transition Corp. were both
newly organized Delaware corporations formed for the sole purpose of effecting
the Acquisition.
The Company is a wholly-owned subsidiary of DPC Acquisition
Corp. ("DPCAC"). DPCAC was formed to acquire the Company by a group of
investors (the "Investors"), which included (a) certain members of the
Company's management, (b) Summit/DPC Partners, L.P. ("Summit"), an affiliate of
Summit Capital, Inc. ("SCI"), (c) DLJ Merchant Banking Partners, L.P. and
certain of its affiliates ("DLJMB"), all of which are affiliates of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJSC"), and (d) Chase Manhattan
Investment Holdings, Inc. ("CMIHI"), a wholly-owned subsidiary of The Chase
Manhattan Corporation.
The purchase price for the Acquisition was $249.1 million,
including existing indebtedness. The Acquisition was financed through (i) a
senior credit facility consisting of a syndicate of lenders led by Mercantile
Bank of St. Louis National Association ("Mercantile Bank"), which provides term
loan borrowings of $90 million and revolving loan borrowings of up to $25
million (the "Senior Credit Facility"), (ii) the sale of $120 million principal
amount of senior subordinated increasing rate notes of the Company (the "Bridge
Notes"), and (iii) a securities purchase agreement with the Investors providing
for (a) the sale of the Company's 14.25% Senior Exchangeable Preferred Stock
due 2007 (the "Preferred Stock") and warrants to purchase common stock of DPCAC
for $30 million, and (b) common stock of DPCAC for $27.5 million. The Bridge
Notes and $40 million of term loan borrowings were refinanced on March 4, 1996,
with the proceeds of $160 million principal amount of the Company's 10 5/8%
Notes due 2006 (the "Senior Notes"). As used herein, the term "Acquisition"
means the acquisition of the Company by DPCAC, the refinancing of existing
indebtedness and the payment of related fees and expenses.
GENERAL
The Company manufactures and distributes its pet food products
utilizing thirteen manufacturing and warehouse facilities and three additional
distribution warehouse facilities, all of which are located in proximity to
customers, raw materials and transportation networks. This network of
manufacturing and warehouse facilities reduces freight costs for raw materials
and finished goods and facilitates direct store shipment programs. Since 1987,
the Company has constructed seven new manufacturing facilities and renovated or
expanded most of its other manufacturing facilities. In constructing and
renovating such facilities, the Company utilizes in-house capabilities for the
design, manufacture, installation and repair of its pet food manufacturing
equipment, thereby reducing capital costs and start up times for plant
construction and renovation.
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The Company has been the primary supplier of private label dry
pet food products to Wal-Mart Stores, Inc. ("Wal-Mart") since 1970 and to the
Sam's Club division of Wal-Mart ("Sam's Club") since 1990. The Company
utilizes a computerized order and distribution system to ship product directly
from the Company's manufacturing and warehouse facilities to virtually all
domestic Wal-Mart stores, a majority of which are located within 250 miles of
the Company's facilities. The Company's direct ship program, which reduces
customer inventory, handling and warehouse expenses, is enhanced by the
location and number of the Company's facilities. The Company also offers
direct shipment programs to, and utilizes electronic data interchange systems
with, other customers, and believes that its experience with such programs and
systems is an important competitive factor that has allowed it to attract new
customers and increase sales to existing customers.
PRODUCTS AND SERVICES
The Company's primary product is dry pet food, which generated
approximately 92%, 93%, and 93% of the Company's total net sales in 1995, 1996
and 1997, respectively. Non-manufactured products generated approximately 6%,
5% and 6% of the Company's total net sales in 1995, 1996 and 1997,
respectively. The Company's engineering services group generated 1% to 2% of
the Company's net sales in each of such years.
Dry Pet Food Products. The Company produces, markets and
distributes a wide selection of high quality dry pet food products,
predominantly for dogs and cats. The Company manufactures dry pet food under
approximately 130 different private labels, and also manufactures various
branded products for national pet food companies. The dog food product lines
have accounted for the largest portion of the Company's dry pet food shipments.
Such shipments, excluding biscuits, represented approximately 85%, 84% and 84%
of the Company's dry pet food shipments (tonnage) in 1995, 1996 and 1997,
respectively. The Company's cat food product lines accounted for approximately
12% of the Company's dry pet food shipments (tonnage) in each of 1995, 1996 and
1997.
Non-Manufactured Products. Non-manufactured products include
cat litter, canned pet products and pet treats produced by third parties. The
Company receives these items at its facilities and aggregates them with the
Company's manufactured products for combined shipment to certain customers.
The Company provides this service as a part of its direct shipment program.
Engineering Services Group. The Company generally utilizes
its in-house engineering services group to design and supervise plant
construction with the objective of reducing construction costs and ensuring
quality control. The Company also designs and builds extruders, conveyors,
dryers and other parts and equipment, including replacement parts, for pet food
manufacturing facilities of the Company and third parties. The engineering
services group includes a repair staff to provide machinery and equipment
service and repair at the Company's production facilities and reduce production
downtime.
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SEASONALITY OF PET FOOD
The Company's sales are somewhat seasonal. The Company
typically experiences an increase in net sales during the first and fourth
quarters of each year, as is typical in the pet food industry. The seasonality
of the pet food business is generally attributable to cooler weather, which
results in increased dog food consumption.
SALES AND DISTRIBUTION
The Company's direct sales force seeks new accounts and
negotiates with mass merchandisers, membership clubs, feed stores and specialty
pet stores. The Company generally uses independent food brokers in obtaining
business from grocery stores. The Company also seeks to generate new business
through the expansion of its product lines and the development of new marketing
programs to existing customers.
The Company does not own or operate any transportation
equipment. Most of the Company's products are distributed utilizing its
customers' transportation networks. Several of the Company's largest customers
utilize the Company as a "just-in-time" supplier and maintain trailers at the
Company's manufacturing and distribution facilities. The trailers are loaded
and shipped either directly to individual stores or to customers' distribution
centers. Customers not utilizing their own fleets either arrange their own
transportation or have the Company arrange transportation on a contract basis
through common carriers.
CUSTOMERS
The Company produces, markets and distributes a wide selection
of dry pet food products under private labels for approximately 300 customers,
including mass merchandisers, membership clubs, national and regional grocery
chains, specialty pet store chains, farm and feed store chains, and grocery and
feed mill wholesalers and cooperatives. The Company also manufactures branded
pet food products for national pet food companies in accordance with customer
specifications and standards. In addition, the Company remarkets
non-manufactured pet products, manufactures and sells pet food production
equipment and parts, and fabricates other steel products to customer
specifications.
In 1997, Wal-Mart and Sam's Club accounted for 63.0% of the
Company's net sales. The Company has been the primary supplier of private
label dry pet food products to Wal-Mart since 1970 and to Sam's Club since
1990. A portion of the Company's sales to Wal-Mart is attributable to branded
pet food products manufactured and distributed by the Company for national pet
food companies. The Company utilizes a computerized order and distribution
system to ship product directly to virtually all domestic Wal-Mart stores, a
majority of which are located within 250 miles of the Company's facilities.
The Company generally does not have written contracts with its
customers. The loss of any significant customer, or customers, which in the
aggregate represent a significant portion of the Company's sales, would have an
adverse impact on the Company's operating results and cash flows.
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COMPETITION
The pet food business is highly competitive. The companies
that produce and market the major national branded pet foods are national or
international conglomerates that are substantially larger than the Company and
possess significantly greater financial and marketing resources than the
Company. The private label pet food products sold by the Company's customers
compete for access to shelf space with national branded products on the basis
of quality and price. National branded products compete principally through
advertising to create brand awareness and loyalty, and, increasingly, through
pricing. The Company expects that price competition from national branded
manufacturers may occur from time to time in the future. To the extent that
there is significant price competition from the national branded manufacturers
or such manufacturers significantly increase their presence in the private
label market, the Company's operating results and cash flow could be adversely
affected. The Company also competes with regional branded manufacturers and
other private label manufacturers and competes to manufacture certain products
for national branded pet food companies.
RAW MATERIALS AND PACKAGING
The principal raw materials required for the Company's
manufacturing operations are bulk commodity grains and foodstocks, including
corn, soybean meal, wheat middlings, meat and bone meal, and corn gluten meal.
The Company generally purchases raw materials one to three months in advance.
The Company generally purchases the raw material requirements of each of its
manufacturing facilities locally due to the high freight cost of transporting
bulk commodity products. As a result, raw material costs may vary
substantially among manufacturing facilities due to local supply and demand and
varying freight costs. Raw materials are generally purchased from large
national commodity companies and local grain cooperatives. The Company does
not maintain long-term contracts with any of its suppliers.
Packaging is a material component of the Company's raw
material costs. The Company has four main suppliers of packaging. The Company
has no long term contracts with any of its packaging suppliers.
The Company's raw material costs fluctuate, sometimes rapidly
and significantly. Generally, the Company prices its pet food products based
on the costs of raw materials and certain other costs plus a conversion charge
(which includes a profit factor). The Company periodically adjusts its product
prices based upon fluctuations in raw material costs. However, the Company's
customers generally discourage frequent changes in prices and there is often a
lag between raw material cost fluctuations and adjustments in sales prices. In
the short-term and particularly in the event of rapid or significant short-term
cost fluctuations, the prices at which the Company sells its products may not
fully reflect cost fluctuations. There can be no assurance as to the timing or
extent of the Company's ability to implement future price adjustments in the
event of significantly increased raw material costs. The Company's recent
experience has been that it has not been able entirely or immediately to pass
through such cost increases to its customers.
The availability and price of agricultural commodities are
subject to price fluctuations that create price risk. The Company manages the
price risk created by market fluctuations by
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hedging portions of its primary commodity products purchases, principally
through exchange traded futures and options contracts that are designated as
hedges. The terms of such contracts are generally less than one year.
Settlement of positions are either through financial settlement with the
exchanges or via exchange for the physical commodity in which case the Company
delivers the contract against the acquisition of the physical commodity.
The Company's policy does not permit speculative commodity
trading. Futures and options contracts are accounted for as hedges, and gains
and losses are recognized in the period realized as part of the cost of
products sold and in the cash flows. The deferred net futures and options
position is reported on the balance sheet as a current asset for net loss
positions and as a deferred credit for net gain positions. In addition to
futures and options, the Company also contracts for future physical
procurement, in which case unrealized gains and losses are deferred to the
applicable accounting period. Typically, maturities vary and do not exceed
twelve months.
There can be no assurance that advance purchasing strategies
and hedging activities will have the desired effect of counter-balancing raw
material cost increases. Conversely, should raw material costs decrease below
the costs reflected in the Company's advance purchases and hedges, such
activities could adversely affect the Company's results of operations compared
to what they otherwise would have been. See ITEM 7- "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
RESEARCH AND DEVELOPMENT
The Company's research and development department consists of
a staff of chemists and nutritionists, a central laboratory used for research
and development, and laboratories at each of the Company's production
facilities used for quality control. The research and development department
formulates the mix of raw materials and vitamins and minerals and tests the
nutritional content of new products. Independent commercial kennels and
catteries are used for comparison taste tests to nationally branded products to
assure digestibility and palatability as well as to substantiate the
nutritional content of new products.
GOVERNMENTAL REGULATION
The Company is subject to federal, state and local laws and
regulations intended to protect the public health and the environment,
including air and water quality, fuel storage tanks and waste handling and
disposal. The Company considers itself to be in material compliance with
applicable environmental laws and regulations currently applicable to its
business and operations. Compliance with environmental laws and regulations
historically has not had a material effect on the Company's capital
expenditures, earnings or competitive position, and the Company does not
anticipate that such compliance will have a material effect on the Company in
the future. Environmental laws and regulations have changed substantially in
recent years and the Company believes that the trend of more expansive and more
strict environmental legislation and regulations will continue. While the
Company believes it is in substantial compliance with applicable environmental
and worker safety laws, there can be no assurance that additional costs for
compliance will not be incurred in the future or that such costs will not be
material.
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The Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons who are considered statutorily responsible for the release of
a "hazardous substance" into the environment. These persons include the owner or
operator of a facility where a hazardous substance release occurred and
companies that disposed or arranged for the disposal of hazardous substances.
Persons who are or were responsible for the releases of hazardous substances
under CERCLA may be subject to joint, several and retroactive liability for the
costs of environmental response measures. While there can be no assurance of the
position that may be taken by any environmental agency with respect to the
Company's past operations in connection with any CERCLA site, the Company has
not received, nor does it expect to receive, any notice that it is or will be
designated a potentially responsible party to any CERCLA site. Some of the
Company's manufacturing facilities are located within industrial areas. In the
past, nearby industries have suffered releases of hazardous substances to the
environment that are the subject of CERCLA investigations. It is possible that
these neighboring environmental activities may have impacted some of the
Company's properties. The Company has not been advised, nor does it expect to be
advised, by any environmental agency that it is considered a potentially
responsible party for the neighboring environmental conditions, and the Company
has no reason to believe that such conditions would have a material adverse
effect on the Company.
The manufacturing and marketing of the Company's products are subject
to regulation by federal regulatory agencies, including the Occupational Safety
and Health Administration ("OSHA"), the Food and Drug Administration ("FDA") and
the United States Department of Agriculture ("DOA"), and by various state and
local authorities. The FDA also regulates the labeling of the Company's
products. The Company procures and maintains the necessary permits and licenses
in order to operate its facilities and considers itself to be in material
compliance with applicable OSHA, DOA, and FDA requirements.
TRADEMARKS
Certain of the Company's brands are protected by trademark
registrations in the United States. The Company believes that its registered
trademarks are adequate to protect such brand names.
EMPLOYEES
As of December 31, 1997, the Company had approximately 1,243 employees,
of which approximately 132 were management and administrative personnel and
approximately 1,111 were manufacturing personnel. Of this number, 324 employees
in three of the Company's plants were represented by labor unions at each of the
plants. The collective bargaining agreement with respect to the Birmingham,
Alabama plant covers 86 employees as of December 31, 1997, and expires in
January 2001. The collective bargaining agreement with the Joplin, Missouri
plant covers 193 employees as of December 31, 1997, and expires in January 1999.
The collective bargaining agreement with the Muscatine, Iowa plant covers 45
employees as of December 31, 1997, and expires in December 1999. The Company
considers its relations with its employees to be satisfactory.
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain of the statements set forth under ITEM 1- "BUSINESS" and ITEM
7- "MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and elsewhere in this Form 10-K, such as the statements regarding
planned capital expenditures and the availability of capital resources to fund
capital expenditures, are forward-looking and are based upon the Company's
current belief as to the outcome and timing of such future events. There are
numerous risks and uncertainties that can affect the outcome and timing of such
events, including many factors beyond the control of the Company. These factors
include, but are not limited to, the cost of raw materials and packaging,
competition, the Company's continued business relationship with certain
customers, the uncertainty of environmental matters, the highly leveraged
condition of the Company and the various restrictive covenants to which the
Company is subject.
Should one or more of these risks or uncertainties occur, or should
underlying assumptions prove incorrect, the Company's actual results and plans
for 1998 and beyond could differ materially from those expressed in the
forward-looking statements.
ITEM 2 - PROPERTIES
The Company owns thirteen manufacturing and warehouse facilities and
operates three separate distribution warehouses, two of which are owned by the
Company with the third being leased. The Company also owns its executive office
building, its central laboratory, a machining facility and a steel fabrication
facility, all of which are located in the Joplin, Missouri area. The
manufacturing facilities are generally located in rural areas to minimize land
and labor costs and to be in proximity to customers, raw materials and
transportation networks, including rail transportation.
Since 1987, the Company has constructed seven new manufacturing and
warehouse facilities, purchased and renovated an existing facility, and
renovated or expanded most of its other manufacturing and warehouse facilities.
The Company's facilities are currently operating near capacity to meet current
demand. The Company anticipates that additional facilities will be necessary in
order to support continued growth of the Company's business. See ITEM 7-
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-Liquidity and Capital Resources."
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The following table summarizes the Company's manufacturing and
warehouse facilities.
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LOCATION YEAR BUILT SQUARE FOOTAGE
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Manufacturing and Warehouse Facilities
Muscatine, Iowa ................................................ 1970 99,500
Tracy, California............................................... 1976 110,000
Manassas, Virginia.............................................. 1979 80,300
San Bernardino, California...................................... 1983 109,300
Birmingham, Alabama(1).......................................... 1954 114,600
Temple, Texas................................................... 1987 110,300
Joplin, Missouri(2)............................................. 1989 274,000
Tomah, Wisconsin................................................ 1990 78,000
Washington Court House, Ohio.................................... 1991 135,000
Pueblo, Colorado................................................ 1991 94,000
Orangeburg, South Carolina...................................... 1995 138,500
Everson, Pennsylvania(3)........................................ 1956 88,200
Miami, Oklahoma................................................. 1997 60,000
Distribution Warehouses
Ocala, Florida.................................................. 1978 78,100
Alexandria, Louisiana........................................... 1990 33,400
Guilderland, New York(4)........................................ -- 43,200
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(1) This facility was acquired by the Company in 1983. Major plant expansions
were undertaken in 1988 and 1989.
(2) The Company's original manufacturing facility, located in Joplin, Missouri,
was rebuilt in 1989.
(3) This facility was acquired by the Company in February 1997.
(4) This warehouse is leased by the Company. All other properties are owned by
the Company.
In November 1996, a subsidiary of the Company, DPC International
Limited, acquired approximately 50% of the issued and outstanding capital stock
of Effeffe, S.p.a., an Italian company that manufactures dry pet food. The total
purchase price was approximately $2,000,000. The Company's investment is
accounted for using the equity method.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business that
management believes would not have a material adverse effect on its financial
condition or results of operations.
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ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not registered under the Securities Act
and, therefore, is not traded on a securities exchange. The Company did not sell
any unregistered securities in 1997.
ITEM 6 - SELECTED FINANCIAL DATA
The following tables present (i) selected historical financial data of
the Company prior to the Acquisition ("Predecessor") as of and for each of the
years ended December 31, 1993 and 1994 and the nine month period ended September
30, 1995, and (ii) selected historical financial data of the Company after the
Acquisition ("Successor") as of and for the three month period ended December
31, 1995, and for each of the years ended December 31, 1996 and 1997. The
selected historical financial data as of and for each of the years ended
December 31, 1993 and 1994 and the nine month period ended September 30, 1995
have been derived from the audited financial statements of Predecessor. The
selected historical financial data as of and for the three month period ended
December 31, 1995 and for each of the years ended December 31, 1996 and 1997
have been derived from the audited financial statements of Successor. The
results of operations for the three month period ended December 31, 1995 are not
necessarily indicative of the results of operations of Successor for the full
year. The financial data set forth below should be read in conjunction with ITEM
7- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Company's financial statements and notes thereto included in
ITEM 8- "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA".
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PREDECESSOR SUCCESSOR
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Nine Three
Months Months
Ended Ended
September 30, December 31,
1993 1994 1995 1995 1996 1997
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(DOLLARS IN THOUSANDS)
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INCOME STATEMENT DATA:
Net sales:
Pet food ............................. $ 304,097 $ 328,065 $ 270,049 $ 105,301 $ 468,292 $ 508,271
Non-manufactured products ............ 23,782 30,625 18,844 4,408 24,337 32,740
Engineering .......................... 7,106 6,514 5,825 1,909 8,079 7,303
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Total net sales .................... 334,985 365,204 294,718 111,618 500,708 548,314
Gross profit ........................... 55,846 57,966 48,612 14,920 55,732 67,980
Selling expenses ....................... 12,900 11,155 8,773 3,298 14,844 17,052
General and administrative expenses .... 12,502 12,972 9,833 4,009 15,977 18,944
Unusual items(1) ....................... -- -- 9,440 -- -- --
Income from operations ................. 30,444 33,839 20,566 7,613 24,911 31,984
Net income (loss)(2) ................... 28,528 31,000 16,746 1,024 (1,518) 6,234
Non-cash preferred stock dividends(3) .. -- -- -- 1,069 4,670 5,308
Accretion of preferred stock(4) ........ -- -- -- 269 1,076 1,077
OTHER DATA:
EBITDA(5) .............................. $ 35,103 $ 38,613 $ 33,804 $ 10,063 $ 35,264 $ 43,216
Interest expense(6) .................... 1,773 2,597 3,707 5,926 21,665 21,452
Non recurring finance charge(7) ........ -- -- -- -- 4,815 --
Depreciation and amortization .......... 4,526 4,660 3,694 2,359 11,157 12,141
Ratio of EBITDA to interest expense .... -- -- -- 1.7x 1.6x 1.9x
Ratio of earnings to fixed charges(8) .. 17.2x 13.1x 5.6x 1.3x .9x 1.4x
Additions to property and equipment:
Maintenance .......................... 1,888 1,891 1,290 567 2,353 2,012
Expansion(9) ......................... 2,231 10,268 2,934 730 5,548 12,425
Pet food sold (thousands of tons) ...... 897 942 774 288 1,189 1,237
Net cash provided by
operating activities ................. 25,820 39,250 12,954 2,711 18,583 20,972
Net cash used in investing activities .. 4,070 12,368 3,677 209,346 11,489 15,161
Net cash provided by (used in)
financing activities ................. (17,768) (16,808) (20,568) 204,635 (8,644) (5,811)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-----------------------------------------------------
AT DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
-----------------------------------------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ........................... $ 31,194 $ 35,410 $ 38,894 $ 26,123 $ 25,645
Total assets ............................. 117,962 142,710 309,584 338,293 338,184
Long-term debt (including current portion) 32,776 68,436 209,738 206,603 200,410
Preferred stock(10) ...................... -- -- 18,414 24,160 30,545
Stockholders' equity ..................... 50,148 31,759 40,111 33,247 33,946
</TABLE>
(1) Represents nonrecurring bonus payments to senior management in connection
with the Acquisition.
(2) Net income of Predecessor does not include any provision for federal income
taxes. Prior to the Acquisition, Predecessor was organized as a subchapter
S corporation. Consequently, Predecessor did not pay federal, state or
local income taxes except in those states that did not recognize subchapter
S status or that required the payment of franchise taxes based on income.
10
<PAGE> 13
(3) Dividends on the Preferred Stock are payable quarterly at a rate of 14.25%
per annum, accrete to the Liquidation Value and may be paid through the
issuance of additional shares of Preferred Stock on each dividend payment
date through September 30, 2000.
(4) Represents accretion of the excess of the Liquidation Value over the
carrying value of the Preferred Stock (see footnote 9 below).
(5) EBITDA (earnings before interest, taxes, depreciation, amortization and
unusual item) is presented here not as a measure of operating results, but
rather as a measure of the Company's operating performance and ability to
service debt.
(6) Interest expense for 1996 and 1997 excludes amounts for the amortization of
deferred financing costs to avoid duplication, because these amounts are
included in depreciation and amortization.
(7) Amount represents fees relating to the $120 million of Bridge Notes
associated with the Acquisition. These fees were expensed in March 1996 in
connection with the refinancing of the Bridge Notes with proceeds from the
sale of the Senior Notes.
(8) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes and extraordinary items plus fixed
charges (excluding capitalized interest). Fixed charges consist of interest
(including capitalized interest) on all indebtedness, amortization of
deferred financing costs and that portion of rental expense that management
believes to be representative of interest.
(9) Includes the construction of new manufacturing or distribution facilities
and expenditures to increase production capacity or capability.
(10) The Preferred Stock had an initial liquidation preference of $30 million
and was sold as a unit with warrants to purchase shares of common stock of
DPCAC for aggregate consideration of $30 million. Approximately $12.9
million of such consideration was allocated to the value of the warrants
and is recorded as stockholders' equity.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company derives substantially all of its revenue from the sale of
dry pet food products. Historically, approximately 85% to 90% of pet food cost
of goods sold has been comprised of raw material and packaging costs with labor,
insurance, utilities and depreciation comprising the remainder. As a result,
volatility in marketplaces for certain commodity grains and food stocks used in
the Company's production process can have a significant impact on the
profitability of the Company. The Company periodically adjusts prices based on
cost fluctuations, however, the Company's customers generally discourage
frequent changes in prices and there is often a lag between cost fluctuations
and adjustments in sales prices. In the short-term and particularly in the event
of rapid or significant short-term cost fluctuations, the prices at which the
Company sells its products may not fully reflect cost fluctuations. There can be
no assurance as to the timing or extent of the Company's ability to implement
future price adjustments in the event of significantly increased raw material
costs. The Company's recent experience has been that it has not been able
entirely or immediately to pass through such cost increases to its customers.
11
<PAGE> 14
The Company manages the price risk created by market fluctuations by
hedging portions of its primary commodity products purchases, principally
through exchange traded futures and options contracts that are designated as
hedges. The terms of such contracts are generally less than one year. Settlement
of positions are either through financial settlement with the exchanges or via
exchange for the physical commodity in which case the Company delivers the
contract against the acquisition of the physical commodity.
The Company's policy does not permit speculative commodity trading.
Futures and options contracts are accounted for as hedges, and gains and losses
are recognized in the period realized as part of the cost of products sold and
in the cash flows. The deferred net futures and options position is reported on
the balance sheet as a current asset for net loss positions and as a deferred
credit for net gain positions. In addition to futures and options, the Company
also contracts for future physical procurement, in which case unrealized gains
and losses are deferred to the applicable accounting period. Typically,
maturities vary and do not exceed twelve months. Unrealized losses of $.9
million were deferred on outstanding contracts at December 31, 1997.
Operating expenses are comprised of selling, general and administrative
expenses. Selling expenses are primarily (a) brokerage fees, (b) promotions,
volume incentive discounts and rebates paid to customers, and (c) salaries and
fringe benefits for sales personnel. A significant portion of the Company's
general and administrative expenses are relatively fixed. As a result, these
expenses typically do not increase proportionately with increases in volume and
product sales.
Sales of non-manufactured products include sales of cat litter, canned
pet products and pet treats produced by third parties. The Company receives
these items at its manufacturing facilities and warehouses and aggregates them
with the Company's products for combined shipment to certain customers. The
Company provides this service as part of its direct shipment program.
The Company's sales are somewhat seasonal. The Company typically
experiences an increase in net sales during the first and fourth quarters of
each year, as is typical in the pet food industry. The seasonality of the pet
food business is generally attributable to cooler weather, which results in
increased dog food consumption.
Prior to the Acquisition, the Company was organized as a subchapter S
corporation. Consequently, the Company did not pay federal, state or local
income taxes except in those states that did not recognize subchapter S status
or that required payment of franchise taxes.
The financial statements for the three months ended December 31, 1995,
and the years ended December 31, 1996 and December 31, 1997 are presented on
Successor's new basis of accounting, while the financial statements for the nine
months ended September 30, 1995 are presented on the Predecessor's historical
cost basis of accounting. The principal differences between the financial
statements for Predecessor and for Successor are Successor's financial
statements have increased debt expense, new depreciable basis, goodwill and
corporate level taxes.
12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, capital
expenditures and working capital requirements from cash flow from operations,
bank borrowings and industrial development bonds. The Company had working
capital of $25.6 million at December 31, 1997. Net cash provided by operating
activities was $15.7 million, $18.6 million and $21.0 million for the twelve
month period ended December 31, 1995, and for the years ended December 31, 1996
and 1997, respectively. Net cash provided by (used for) borrowings was
approximately $139.7 million, ($9.0) million and ($6.7) million, respectively,
for such periods.
Historically, principal uses of cash have been stockholder dividends,
capital expenditures and working capital. During the three year period ended
December 31, 1997, the Company spent $27.9 million on capital expenditures, of
which $21.6 million was used to acquire and construct additional manufacturing
capacity, including a new manufacturing facility, a renovated manufacturing
facility and five new production lines in existing facilities, and $6.3 million
was used to maintain existing manufacturing facilities. During the year ended
December 31, 1997, the Company spent $14.4 million on capital expenditures, of
which $12.4 million was used for expansion, including (a) the acquisition (in
February 1997), renovation and equipping of the Everson, Pennsylvania
manufacturing and warehouse facility, (b) the construction of a new
manufacturing and warehouse facility for the production of treats in Miami,
Oklahoma, which commenced operations on August 12, 1997 and (c) the addition of
a biscuit line to the Washington Court House facility. The Company financed the
Miami, Oklahoma facility through the issuance on March 12, 1997 of $6.0 million
of industrial development revenue bonds ("Industrial Development Bonds"), which
are secured by a mortgage lien and security interest on certain real and
personal property. The Industrial Development Bonds were recorded at $5.7
million at December 31, 1997, which was net of the reserve fund.
The Company has entered into a Share Purchase Agreement to purchase
100% of the outstanding stock of IPES IBERICA, S.A. ("IPES") for approximately
$28 million. IPES is a private label pet food manufacturer located in Spain,
with $20 million in net sales in 1997. The Company intends to finance the
acquisition through non-recourse borrowings in Spain for 75% of the purchase
price, with the balance of the purchase price to be provided by the existing
Senior Credit Facility. Closing of the transaction is subject to no material
adverse change in the business of IPES, completion of due diligence and meeting
all applicable Spanish regulatory requirements.
It is expected that existing manufacturing facilities, notwithstanding
the recent capital expenditures on new and existing facilities, will not be
sufficient to meet the Company's anticipated volume growth for the next several
years. Accordingly, the Company anticipates that additional facilities will be
necessary in order to support continued growth of the Company's business. The
Company has continued to examine alternatives for expanding its business either
through construction of additional manufacturing capacity or acquisition of
manufacturing assets. Such potential acquisitions could include acquisitions of
operating companies. The Company intends to finance such expansions or
acquisitions with borrowings under existing or expanded credit facilities, or
the issuance of additional equity, depending on the size of the proposed
expansions or acquisitions.
As a result of the Acquisition and the sale of the Senior Notes, the
Company is highly
13
<PAGE> 16
leveraged and has significantly increased cash requirements for debt service
relating to the Senior Credit Facility, the Senior Notes and the Industrial
Development Bonds. The Company's ability to borrow is limited by the Senior
Credit Facility and the limitations on the incurrence of indebtedness under the
Trust Indenture under the Senior Notes. The Company anticipates that its
operating cash flow, together with amounts available to it under the Senior
Credit Facility and new industrial development bonds, will be sufficient to
finance working capital requirements, debt service requirements and anticipated
capital expenditures during the 1998 calendar year.
In connection with the Acquisition, the Company entered into the Senior
Credit Facility with a syndicate of lenders led by Mercantile Bank providing for
term loan borrowings of $90.0 million (the "Term Loan Facility") and a revolving
credit facility of $25.0 million (the "Revolving Credit Facility") that the
Company uses for working capital and capital expenditures. Approximately $84.3
million of the Term Loan Facility was advanced to the Company at the time of the
Acquisition, $1.8 million was advanced on December 29, 1995 to repay certain
industrial development bonds and an additional $3.1 million was advanced in 1996
to redeem additional industrial development bonds. The Senior Credit Facility
was amended on February 28, 1996 to modify, among other things, certain
covenants, the maturity date and the repayment schedule. In conjunction with
such amendment, the Company repaid $40 million in principal amount of term loan
borrowings with a portion of the proceeds of the sale of the Senior Notes. The
Senior Credit Facility was also amended on June 28, 1996 and March 31, 1997 to
modify certain financial covenants.
Mandatory repayments under the Term Loan Facility, as amended, are
required to be made on a quarterly basis. Such repayments commenced on September
30, 1996, with two quarterly payments of $2.1 million having been paid in 1996,
and quarterly payments of $2.6 million having been paid in 1997. The quarterly
payments will increase to $2.9 million per quarter in 1998 and 1999, and $3.7
million in the first two quarters of 2000 with the balance due in September
2000. In addition, the Company is required to make annual payments equal to a
specified percentage of cash flow based on certain levels of indebtedness. The
Term Loan Facility and the Revolving Credit Facility mature on September 30,
2000. The Company is required to make payments under the Revolving Credit
Facility sufficient to reduce total amounts outstanding under the Revolving
Credit Facility to specified levels for 30 consecutive days in each year.
Substantially all of the Company's assets are pledged to secure the performance
of the Company's obligations under the Senior Credit Facility.
At December 31, 1997, the Company had borrowing capacity in the amount
of $24.2 million under the Revolving Credit Facility, which was net of $.8
million for outstanding letters of credit. Long term debt outstanding at
December 31, 1997 consisted of $160.0 million Senior Notes, the Term Loan
Facility in the amount of $34.7 million, and Industrial Development Bonds in the
net amount of $5.7 million.
RESULTS OF OPERATIONS
The following discussion is based on the historical financial
statements included in ITEM 8 - "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA".
The results for the three month period ended December 31, 1995, and for each of
the years ended December 31, 1996 and 1997, reflect the Acquisition, which has
been accounted for using the purchase method
14
<PAGE> 17
of accounting. The total purchase price of $249.1 million, including existing
indebtedness (exclusive of fees and expenses of approximately $13.0 million),
was allocated to the assets and liabilities acquired based upon their respective
fair values. As a result, beginning October 1, 1995, the Company recorded
expenses for depreciation and amortization significantly in excess of historical
levels recorded by the Predecessor. In addition, the results of operations of
the Company have been significantly affected by the impact of the financing of
the Acquisition, including interest expense on the indebtedness incurred in
connection with the Senior Credit Facility, the Bridge Notes, and the Senior
Notes.
The historical combined results of operations of the Company for the
twelve month period ended December 31, 1995, and the years ended December 31,
1996 and December 31, 1997 are not directly comparable to the results of
operations of Predecessor due to the effects of the Acquisition.
<TABLE>
<CAPTION>
1995
PREDECESSOR SUCCESSOR COMBINED SUCCESSOR
------------- ------------ -------------------- -------------------------------------------
NINE MONTH THREE MONTH TWELVE MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995 1996 1997
------------- ------------ -------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .................... $ 294.7 $ 111.6 $ 406.3 100.0% $ 500.7 100.0% $ 548.3 100.0%
Cost of sales .............. 246.1 96.7 342.8 84.4 445.0 88.9 480.3 87.6
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ................. 48.6 14.9 63.5 15.6 55.7 11.1 68.0 12.4
Operating expenses:
Selling .................... 8.8 3.3 12.1 3.0 14.8 2.9 17.1 3.1
General administrative ..... 9.8 4.0 13.8 3.4 16.0 3.2 18.9 3.5
Unusual item ............... 9.4 0.0 9.4 2.3 0.0 0.0 0.0 0.0
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses ... 28.0 7.3 35.3 8.7 30.8 6.1 36.0 6.6
Income from operations ....... 20.6 7.6 28.2 6.9 24.9 5.0 32.0 5.8
Interest expense ............. 3.7 5.9 9.6 2.3 22.7 4.5 22.6 4.1
Non-recurring finance charge . -- -- -- -- 4.8 1.0 -- --
Other expense (income) ....... (0.1) (0.1) (0.2) (0.0) (0.2) (0.0) (0.2) (0.0)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes ... 17.0 1.8 18.8 4.6 (2.4) (0.5) 9.6 1.7
Provision for income taxes ... 0.2 0.8 1.0 0.2 (0.9) (0.2) 3.4 0.6
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) (1) ........ $ 16.8 $ 1.0 $ 17.8 4.4% $ (1.5) (0.3)% $ 6.2 1.1%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) For Predecessor, net income does not include any provision for federal
income taxes.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The following table sets forth the Company's net sales for each sales
component and gross profit for the years ended December 31, 1997 and December
31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, %
1996 1997 CHANGE
--------------------------------------------
Net sales: (DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Pet food ...................... $ 468.3 $ 508.3 8.5%
Non-manufactured products ..... 24.3 32.7 34.6
Engineering products .......... 8.1 7.3 (9.9)
------------ ------------ ------------
Total ........... $ 500.7 $ 548.3 9.5%
============ ============ ============
Gross profit ...................... $ 55.7 $ 68.0 22.1%
</TABLE>
15
<PAGE> 18
Net Sales. Net sales for 1997 increased 9.5% to $548.3 million from
$500.7 million in 1996. Pet food net sales increased 8.5% to $508.3 million for
1997 from $468.3 million in 1996. Of this amount, approximately 4.3% was due to
increases in tons sold, and the balance was principally the result of price
increases implemented in late 1996 to mitigate increases in raw material costs
that occurred throughout 1996. Net sales of non-manufactured products increased
34.6% to $32.7 million for 1997 from $24.3 million in 1996 due to distribution
of additional products. Engineering products net sales decreased 9.9% to $7.3
million for 1997 from $8.1 million in 1996 due to the focusing of the Company's
efforts on its projects at Everson, Pennsylvania, Washington Court House, Ohio
and Miami, Oklahoma.
Gross profit. Gross profit for 1997 increased 22.1% to $68.0 million
from $55.7 million in 1996. Of this amount, 15.1% represents improvements in pet
food margins due to the aforementioned price increases and some reduction in the
cost of certain raw materials in the latter part of 1997. The balance of the
gross profit improvement is largely due to the additional non-manufactured
products. Gross profit increased as a percentage of net sales to 12.4% for 1997
from 11.1% in 1996.
Operating expenses. Operating expenses for 1997 increased to $36.0
million (6.6% of net sales) from $30.8 million (6.2% of net sales) in 1996.
Selling expenses increased to $17.1 million for 1997 from $14.8 million in 1996
due to (i) increases in sales promotions, volume incentive discounts and
brokerage costs resulting from increased pet food tons sold and (ii) increases
in salaries and related fringe benefits. General and administrative expenses
increased to $18.9 million for 1997 from $16.0 million in 1996 due to (i)
increases in salaries and related fringe benefits associated with annual wage
increases, additional personnel, and increased bonuses due to improved
performance; (ii) increases in property taxes on new and expanded facilities;
and (iii) increases in expenses associated with the installation of new
information systems.
Income from operations. Income from operations for 1997 increased 28.5%
to $32.0 million from $24.9 million in 1996. Income from operations as a
percentage of net sales increased to 5.8% for 1997 from 5.0% in 1996, due to
improved pet food margins and additional non-manufactured products sales.
Interest expense. Interest expense decreased to $22.6 million for 1997
from $22.7 million in 1996. Interest expense reductions resulting from payments
on the Term Loan Facility were largely offset by additional interest expense on
proceeds from the Industrial Development Bonds that were used to finance the
construction of the new Miami, Oklahoma facility. Interest expense as a
percentage of net sales decreased to 4.1% from 4.5% in 1996.
Net income. Net income for 1997 increased to $6.2 million from a net
loss of $1.5 million in 1996, primarily as a result of increased pet food
margins and additional non-manufactured products sales.
16
<PAGE> 19
Year Ended December 31, 1996 Compared to Combined Twelve Month Period Ended
December 31, 1995
The following table sets forth the Company's net sales for each sales
component and gross profit for the year ended December 31, 1996 and the combined
twelve month period ended December 31, 1995:
<TABLE>
<CAPTION>
COMBINED TWELVE
MONTH PERIOD ENDED YEAR ENDED %
DECEMBER 31, 1995 DECEMBER 31, 1996 CHANGE
-------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Pet food ................... $ 375.4 $ 468.3 24.7%
Non-manufactured products .. 23.2 24.3 4.7
Engineering products ....... 7.7 8.1 5.2
-------------------- -------------------- --------------------
Total ............. $ 406.3 $ 500.7 23.2%
==================== ==================== ====================
Gross Profit ........................ $ 63.5 $ 55.7 (12.3)%
</TABLE>
Net sales. Net sales for 1996 increased 23.2% to $500.7 million from
$406.3 million in the twelve month period ended December 31, 1995. Pet food net
sales increased 24.7% to $468.3 million for 1996 from $375.4 million in the
twelve month period ended December 31, 1995. This increase was primarily due to
a 12.0% increase in tons sold, of which 2.2% represented new business, and price
increases implemented throughout the year in response to higher raw material
costs. Net sales of non-manufactured products increased 4.7% for 1996 to $24.3
million due to distribution of additional items. Engineering net sales increased
5.2% for 1996 to $8.1 million.
Gross profit. Gross profit for 1996 was negatively impacted by
increases in the costs of most raw materials. The cost increases were partially
offset by an increase in tons of pet food sold and price increases implemented
throughout the year. Gross profit for 1996 was also negatively impacted by $1.9
million due to increased depreciation resulting from the write-up of assets in
connection with the Acquisition. Gross profit as a percentage of net sales for
the periods declined from 15.6% in 1995 to 11.1% for 1996, primarily due to
decreased margins on pet food sales.
Operating expenses. Operating expenses decreased 12.8% to $30.8 million
for 1996 from $35.4 million in the twelve month period ended December 31, 1995.
This was due primarily to the nonrecurrence in 1996 of $9.4 million of unusual
expenses recorded as of September 30, 1995 in connection with the Acquisition.
Selling expenses increased to $14.8 million for 1996 from $12.1 million in the
twelve month period ended December 31, 1995. This increase was primarily
attributable to a $1.9 million increase in promotions, volume incentive
discounts, rebates and brokerage fees resulting from increased pet food tons
sold. General and administrative expenses increased to $16.0 million for 1996
from $13.8 million in the twelve month period ended December 31, 1995, primarily
due to additional depreciation and amortization expenses in the amount of $2.6
million incurred in connection with the Acquisition. Operating expenses as a
percentage of net sales decreased to 6.2% from 8.7% in the twelve month period
ended December 31, 1995.
17
<PAGE> 20
Income from operations. Income from operations decreased 11.7%, or $3.3
million, to $24.9 million for 1996 from $28.2 million in the twelve month period
ended December 31, 1995. Income from operations as a percentage of net sales
decreased to 5.0% for 1996 from 6.9% in the twelve month period ended December
31, 1995, primarily as a result of lower pet food margins and increased
depreciation and amortization expense.
Nonrecurring charge. In the year ended December 31, 1996, $4.8 million
in nonrecurring interim debt financing costs were written off concurrent with
the issuance of the Shares.
Interest expense. Interest expense increased to $22.7 million for 1996
from $9.6 million in the twelve month period ended December 31, 1995 due to the
debt incurred to finance the Acquisition.
Net income. Net income (loss) decreased to $(1.5) million for 1996 from
$17.8 million in the twelve month period ended December 31, 1995, as a result of
lower pet food margins, increased interest, depreciation and amortization
expenses and nonrecurring financing fees.
YEAR 2000
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Year 2000
issue results from computer programs being written using two digits (rather than
four) to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. Additionally, the Company could be adversely affected by Year
2000 problems in computer systems of the Company's customers or vendors. The
Company presently believes that, with modifications to existing software and
converting to new software, the Year 2000 issue will not pose significant
internal operational problems for the Company's computer systems, as so modified
and converted, and the modification and conversion costs will not be significant
to the Company's financial results.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable to the Company for this Annual Report on Form 10-K.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the information beginning on page F-1, which is
filed as a part of this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
18
<PAGE> 21
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers and directors of the Company and the directors of DPCAC:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George B. Kelly............................ 48 Chairman of the Board, Director and Assistant
Secretary
Bob L. Robinson............................ 60 Chief Executive Officer and Director
Douglas J. Cahill.......................... 38 President and Chief Operating Officer
Thomas R. Heidenthal....................... 46 Senior Vice President, Chief Financial Officer
and Secretary
Terry W. Bechtel........................... 55 Vice President--Co-Pack Business Development
Earl R. Clements........................... 47 Vice President--Production
Richard D. Wohlschlaeger................... 45 Vice President--Customer Development
Richard A. Hannasch........................ 44 Vice President--Marketing and New Products
Michael R. Blalock......................... 47 Vice President--Procurement
David L. Horton............................ 38 Vice President--Fulfillment
Peter T. Grauer............................ 52 Director
M. Walid Mansur............................ 38 Director
Andrew H. Rush............................. 40 Director
Jeffrey C. Walker.......................... 42 Director
</TABLE>
All directors hold office until the next annual meeting of stockholders
or until their successors have been elected and qualified. Certain of the
directors above are designated pursuant to an investors agreement. See ITEM 13-
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS-- Investors' Agreement." For
information regarding employment agreements with the executive officers of the
Company above, see ITEM 11- "EXECUTIVE COMPENSATION-- Employment Agreement of
Chief Executive Officer" and "--Employment Agreements with other Executive
Officers."
George B. Kelly has been Chairman of the Board of the Company since
October 5, 1995 and Chairman of the Board of DPCAC since June 1995. Mr. Kelly
has been the Chairman of the Board of SCI since July 1990. Mr. Kelly currently
is a director of Alegis Group, Inc., American Tower Corp., Billboard Acquisition
Company, LLC, Independent Gas Company Holdings, and Sevenday International, Inc.
Bob L. Robinson joined the Company in August 1960 and has served as
Chief Executive Officer of the Company since March 1992. Mr. Robinson also
served as President of the Company from March 1992 through December 1997. Mr.
Robinson became a director of the Company and DPCAC on October 5, 1995. Prior to
being named President and Chief Executive Officer, Mr. Robinson served as
Executive Vice President from January 1976 through February
19
<PAGE> 22
1992.
Douglas J. Cahill joined the Company as its Chief Operating Officer
in September 1997, and began serving as President of the Company in January
1998. Prior to joining the Company, Mr. Cahill served as President of Olin
Corporation's Winchester Division and was also a Corporate Vice President and
Officer of Olin Corporation.
Thomas R. Heidenthal joined the Company in March 1997. Prior to
joining the Company, Mr. Heidenthal served as Vice President Finance and
Administration of TA Instruments, Inc. Mr. Heidenthal is a Certified Public
Accountant.
Terry W. Bechtel has served as Vice President--Co-Pack Business
Development since November 1997. Mr. Bechtel joined the Company in June 1973 and
served as Vice President--Administration of the Company from March 1990 until
October 1997, and as Vice President--Sales from September 1976 through February
1990.
Earl R. Clements has served as Vice President--Production of the
Company since 1987. Mr. Clements joined the Company in 1968 and has held several
managerial positions in the Company's various production facilities prior to
serving as Vice President--Production.
Richard D. Wohlschlaeger joined the Company in April 1993 and has
served as Vice President--Customer Development since November 1997. Prior to
joining the Company, Mr. Wohlschlaeger held various management positions at
Ralston Purina Company, including Group Director, Trade Marketing and Eastern
Division Sales Director.
Richard A. Hannasch joined the Company in October 1996 and has served
as Vice President--Marketing and New Products since November 1997. Prior to
joining the Company, Mr. Hannasch served as Director, Business Development for
Ralston Purina Company's International Division.
Michael R. Blalock joined the Company in May 1975 and has served as
Vice President--Procurement of the Company since September 1997. Mr. Blalock
served as Director of Purchasing from 1986 through 1997, and in various sales
capacities prior to 1986.
David L. Horton joined the Company in November 1997 as Vice President--
Fulfillment. Prior to joining the Company, Mr. Horton served as Vice President
of Manufacturing and Engineering of Olin Corporation's Winchester Division.
Peter T. Grauer has been a director of the Company and DPCAC since
October 5, 1995 and has been a Managing Director of DLJ Merchant Banking, Inc.
since September 1992. From April 1989 to September 1992, he was a Co-Chairman of
Grauer & Wheat, Inc., an investment firm specializing in leveraged buyouts.
Prior thereto, Mr. Grauer was a Managing Director of DLJSC. Mr. Grauer is a
director of EZ Buy and EZ Sell Recycler Corporation, Total Renal Care Holdings
Inc., Decision One Holdings, Inc., Nebco Evans Holdings, Inc., and Bloomberg
L.P.
M. Walid Mansur has been a director of the Company and DPCAC since
October 5, 1995. Mr. Mansur has served as the president of Drafil Investments
Inc. since 1990 and has
20
<PAGE> 23
been a managing director of Aspen Venture Partners since 1993.
Andrew H. Rush has been a director of the Company and DPCAC since
October 5, 1995 and a Managing Director of DLJ Merchant Banking, Inc. since
January 1997. From May 1992 until January 1997, Mr. Rush was an officer of DLJ
Merchant Banking, Inc. From January 1989 to May 1992, Mr. Rush held various
titles at DLJSC.
Jeffrey C. Walker has been a director of the Company and DPCAC since
April 1996. Mr. Walker has been Managing General Partner of Chase Capital
Partners, the private equity investment arm of The Chase Manhattan Corporation,
since 1988, and a General Partner thereof since 1984. Mr. Walker is a director
of the Monet Group, Inc., 800-Flowers, Guitar Center, Six Flags Theme Park, Inc.
and Harris Chemical.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
the compensation provided by the Company to its Chief Executive Officer and
certain other persons serving as executive officers for the three years ended
December 31, 1997 who earned $100,000 or more in combined salary and bonus
during such year (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
-------------------------
Name & Principal Position FISCAL SALARY BONUS ALL OTHER
- ------------------------- YEAR ($) ($) COMPENSATION(2)
---- --- --- ---------------
<S> <C> <C> <C> <C>
Bob L. Robinson, 1997 $ 366,000 $ 569,294 $ 2,270
Chief Executive Officer 1996 366,000 420,289 2,100
1995 366,000 575,784 4,048,265(3)
Douglas J. Cahill, 1997 91,667 100,000 304,092(5,6)
President and Chief Operating Officer
Thomas R. Heidenthal 1997 145,833 93,000 46,533(5)
Senior Vice President, Chief
Financial Officer and Secretary
Terry W. Bechtel, 1997 198,000 45,000 2,270
Vice President--Co-Pack Business 1996 198,000 45,000 2,100
Development 1995 198,000 45,000 1,350,561(4)
Earl R. Clements, 1997 168,000 75,000 2,270
Vice President--Production 1996 168,000 46,200 2,100
1995 168,000 75,000 1,350,561(4)
</TABLE>
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus reported for each executive officer.
21
<PAGE> 24
(2) Amount includes health and life insurance premiums paid by the Company on
behalf of the executive officer.
(3) Includes a payment of $4,046,173 made by the Company to Mr. Robinson in
connection with the Acquisition.
(4) Includes a payment of $1,348,469 made by the Company to such person in
connection with the Acquisition.
(5) Includes relocation expenses and gross up for taxes of $128,335 for Mr.
Cahill and $44,641 for Mr. Heidenthal.
(6) Includes a sign on bonus of $175,000 for Mr. Cahill.
EMPLOYMENT AGREEMENT OF CHIEF EXECUTIVE OFFICER
Mr. Bob L. Robinson and the Company entered into an employment
agreement effective as of September 1, 1994 (the "Employment Agreement")
pursuant to which Mr. Robinson serves as Chief Executive Officer of the Company.
The term of the Employment Agreement is for five years, renewable for an
additional year at the Company's option. The Employment Agreement, as amended on
August 31, 1995, provides for Mr. Robinson to receive an annual salary of
$366,000. In addition, Mr. Robinson is entitled to receive an annual bonus equal
to 1% of the first $20,000,000, or part thereof, of the Company's annual net
income before interest and taxes plus 2% of the Company's annual net income
before interest and taxes in excess of $20,000,000, prorated for the portion of
the year Mr. Robinson was employed. The Employment Agreement provides for a five
year non-competition agreement commencing upon termination of Mr. Robinson's
employment with the Company. The Employment Agreement is subject to early
termination by the Company for cause or upon the death or disability of Mr.
Robinson. If the Employment Agreement is terminated without cause by the
Company, Mr. Robinson is entitled to receive the base salary and bonus he would
have received until the end of his employment term.
Mr. Robinson will be entitled to supplemental retirement benefits at
the conclusion of his term of employment. The benefits are payable for 10 years
and the annual payments are equal to the difference between the lesser of
$200,000 or 43% of Mr. Robinson's base salary and bonus payment for the year
before his termination of employment with the Company and the annual benefit Mr.
Robinson will be entitled to receive under the Company's Employee Retirement
Plan. Currently, the Company estimates that Mr. Robinson's annual benefit under
the Company's Employee Retirement Plan will be at least $120,000.
EMPLOYMENT AGREEMENTS WITH OTHER EXECUTIVE OFFICERS
The Company entered into employment agreements with all other Named
Executive Officers effective January 1, 1998. The terms of such employment
agreements are substantially similar except for salary and bonus amounts.
Earnings targets are established annually by the Company's Board of Directors
under the Executive Officers bonus plan. The base bonus for achievement of
targeted earnings is 50% of base salary for all Named Executive Officers other
than Mr. Cahill, whose base bonus is 100% of base salary. There is no cap on the
bonus for such employment agreements. Each employment agreement provides for a
term of three years with automatic one year extensions. Such agreements are
subject to early termination by the Company for cause without severance. The
employment agreements for Messrs. Bechtel and Clements provide (i) that
terminations due to death or disability, or without cause, entitles the
executive to receive severance payments equal to one year's base salary and
bonus, and (ii) for
22
<PAGE> 25
a one year non-competition agreement commencing upon termination for any
reason. The employment agreements for Mr. Heidenthal and Mr. Cahill contain
similar provisions except that the severance and non-competition terms are two
and three years, respectively. Mr. Cahill's employment agreement also provides
an additional sign-on bonus of $175,000 payable at the first anniversary of his
date of hire.
STOCK OPTION PLAN
Effective as of November 1, 1996, DPCAC adopted the DPC Acquisition
Corp. Management Stock Purchase Plan and the DPC Acquisition Corp. 1996 Stock
Option Plan, as amended (the "Stock Option Plan"). Effective June 19, 1997,
DPCAC adopted the DPC Acquisition Corp. 1997 Management Stock Purchase Plan,
which resulted in the sale of 75,000 shares of Class A Common Stock of DPCAC for
$10.00 per share to certain key employees, including sales of 50,000 shares to
Mr. Heidenthal, and 3,000 shares to Mr. Bechtel, both of whom are Named
Executive Officers. As a result of the implementation of such stock purchase
plans, DPCAC has sold 125,000 shares of Class A Common Stock to thirteen key
employees (which includes sales to five executive officers) for $10.00 per
share. In total, fifteen members of the Company's operating management team
(including executive officers who purchased Class A Common Stock in connection
with the Acquisition) have individually invested a total of $4.85 million to
purchase approximately 485,000 shares (approximately 21.2% of the issued and
outstanding common stock of DPCAC). Additionally, under the Stock Option Plan,
DPCAC issued options in 1997 to four new key employees covering 176,000 shares
of DPCAC's Class A Common Stock, which included 100,000 shares to Mr. Cahill
(25,000 shares at $10.00 per share with a one-year term and 75,000 shares at
$20.00 per share with a ten-year term), and 50,000 shares to Mr. Heidenthal at
$10.00 per share with a ten-year term. As of December 31, 1997, the Stock Option
Plan covered 518,500 shares (net of options terminated in 1997 covering 32,250
shares) of Class A Common Stock to sixty key employees. The two stock purchase
plans and the Stock Option Plan are intended to encourage certain employees of
the Company to develop a sense of proprietorship and personal involvement in the
development and financial success of the Company.
EMPLOYEE RETIREMENT PLAN
Certain employees of the Company, including each of its executive
officers, are participants in the Company's Employee Retirement Plan (the
"Retirement Plan"). The Retirement Plan is a noncontributory, tax-qualified plan
and provides that the normal retirement age is 65, or the end of the fifth year
of participation in the plan, if later. The amount of pension payable at normal
or later retirement under the Retirement Plan is based on the employee's years
of service with the Company (up to 35 years) and the employee's average monthly
compensation (based on the employee's highest five consecutive calendar years
within the last 10 years of participation). An employee's normal retirement
benefit will be a monthly benefit equal to .85% of the employee's average
monthly compensation multiplied by the employee's years of service (up to 35
years), plus .65% of the employee's average monthly compensation in excess of
$650 multiplied by the employee's years of service (up to 35 years).
23
<PAGE> 26
At December 31, 1997, the following individuals had the number of years
of service indicated: Mr. Robinson, 37 years; Mr. Bechtel, 24 years; Mr.
Clements, 29 years; and Messrs. Cahill and Heidenthal less than one year each.
The Internal Revenue Code of 1986, as amended, places certain maximum
limitations on the amount of benefits that may be payable under tax qualified
plans, such as the Retirement Plan. In addition, compensation in excess of
$160,000 annually may not be taken into account in determining the benefits. In
general annual benefits may not exceed $125,000 per year from the Retirement
Plan with such limit adjusted periodically to reflect cost of living expenses.
NON-QUALIFIED SALARY CONTINUATION AGREEMENTS
The Company has entered into agreements with all Named Executive
Officers to provide benefits to such employees or their beneficiaries in the
event of the death of the employee or retirement by the employee at age 65 or on
or after age 55 with 20 years of service with the Company. If the employee
remains employed until age 65, the employee (or the employee's beneficiary) will
receive an annual retirement benefit payable for 10 years in accordance with a
specified formula. If the employee terminates employment before age 65 but after
age 55 and with 10 years of service with the Company, the employee's retirement
benefit will be reduced in accordance with percentages specified in the
agreement, depending upon the employee's age at retirement ranging from 100% at
age 65 to 55.8% at age 55.
COMMITTEES
The Company's Board of Directors has established Audit and Compensation
Committees. The Audit Committee consists of Messrs. Rush, Mansur and Walker,
each of whom is a non-employee director of the Company. The Audit Committee
meets separately with representatives of the Company's independent auditors and
with representatives of senior management in performing its functions. The Audit
Committee reviews the general scope of audit coverages, the fees charged by the
independent auditors, matters relating to the Company's internal control
systems, and other matters related to audit functions.
The Compensation Committee consists of Messrs. Grauer, Mansur and
Walker, each of whom is a non-employee director of the Company. The Compensation
Committee administers DPCAC's stock option plan, and in this capacity makes all
option grants or awards to Company employees, including executive officers,
under the plan. In addition, the Compensation Committee is responsible for
making recommendations to the Board of Directors with respect to the
compensation of the Company's Chief Executive Officer and its other executive
officers, and is responsible for the establishment of policies dealing with
various compensation and employee benefit matters for the Company.
DIRECTOR COMPENSATION
Directors receive no compensation for serving on the Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For transactions with Compensation Committee members Grauer and Mansur,
see ITEM 13- "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS- Transactions with
24
<PAGE> 27
DLJMB and its Affiliates" and "Transactions with M. Walid Mansur".
ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All the issued and outstanding shares of common stock of the Company
are held by DPCAC. As of February 28, 1998, the Company had 1,200,000 shares of
Preferred Stock issued and outstanding, 200,000 of which were held by CMIHI. The
following table sets forth the ownership of the issued and outstanding shares of
Class A Common Stock, par value $.0001 per share, and Class B Common Stock, par
value $.0001 per share, of DPCAC (the Class A Common Stock and the Class B
Common Stock are collectively referred to herein as the "DPCAC Common Stock") by
each person who is a director of the Company or DPCAC, each of the Named
Executive Officers, all persons that are directors and executive officers of the
Company and DPCAC as a group, and each owner of more than 5% of the outstanding
shares of such DPCAC Common Stock as of February 28, 1998. The Class B Common
Stock is non-voting. Except as otherwise discussed below, each of the directors,
executive officers, and 5% stockholders has sole voting and investment power
with respect to all shares indicated as being owned by such person. For
information regarding the Investors' Agreement, see ITEM 13- "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS -- Investors' Agreement."
<TABLE>
<CAPTION>
PERCENT OF
SHARES OF COMMON OUTSTANDING COMMON
NAME OF BENEFICIAL OWNER (1) STOCK OF DPCAC(2) STOCK OF DPCAC
---------------------------- ----------------- ------------------
<S> <C> <C>
Summit/DPC Partners, L.P. (3).................................. 720,000 25.0%
DLJMB (4)...................................................... 1,128,732 28.2
CMIHI (5)...................................................... 915,746 29.5
Laura Hawkins Mansur........................................... 828,000 28.8
Peter T. Grauer (4)............................................ 1,128,732 28.2
George B. Kelly (3)............................................ 720,000 25.0
Jeffrey C. Walker (5).......................................... 915,746 29.5
M. Walid Mansur (6)............................................ 828,000 28.8
Andrew H. Rush (4)............................................. 1,128,732 28.2
Bob L. Robinson (7)............................................ 256,500 8.7
Douglas J. Cahill (7).......................................... 25,000 0.9
Thomas R. Heidenthal (7)....................................... 57,750 2.0
Terry W. Bechtel (7)........................................... 63,080 2.2
Earl R. Clements (7)........................................... 80,080 2.8
All executive officers and directors as a group (14 persons)... 4,119,359 93.7
</TABLE>
(1) The address of Summit/DPC Partners, L.P. and Mr. Kelly is 8 Greenway Plaza,
Suite 714, Houston, Texas 77046. The address of DLJMB and Messrs. Grauer
and Rush is 277 Park Avenue, New York, New York 10172. The address of CMIHI
and Mr. Walker is 380 Madison Avenue, 12th Floor, New York, New York 10017.
The address of Laura Hawkins Mansur and Mr. Mansur is 5602 Indian Circle,
Houston, Texas 77056. The address of Messrs. Bechtel, Cahill, Clements,
Heidenthal and Robinson, is West 20th St. and State Line Road, Joplin,
Missouri 64804.
25
<PAGE> 28
(2) The shares listed are shares of DPCAC's Class A Common Stock unless
otherwise noted.
(3) Summit/DPC Partners, L.P. is a limited partnership of which Summit Capital,
Inc. serves as the general partner. Mr. Kelly, a director of DPCAC and the
Company, is Chairman of the Board and a stockholder of SCI. Mr. Kelly may
be deemed to beneficially own the shares indicated because of Mr. Kelly's
affiliation with Summit/DPC Partners, L.P. Mr. Kelly disclaims beneficial
ownership of such shares within the meaning of Rule 13d-3 under the
Exchange Act.
(4) All of the shares indicated as owned by DLJMB are shares that may be
acquired by DLJMB within 60 days pursuant to the exercise of warrants. Of
the shares indicated, warrants to purchase 531,687, 237,740, 13,784,
214,410 and 131,111 shares are held by DLJ Merchant Banking Partners, L.P.,
DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant
Banking Funding, Inc. and DLJ First ESC L.L.C., respectively. DLJMB is a
limited partnership, the general partner of which is DLJ Merchant Banking,
Inc., an affiliate of DLJSC. Messrs. Grauer and Rush are both directors of
DPCAC, and each serves as a Managing Director of DLJ Merchant Banking, Inc.
and, as such, may be deemed to beneficially own such shares. Messrs. Grauer
and Rush disclaim beneficial ownership of such shares within the meaning of
Rule 13d-3 under the Exchange Act.
(5) Represents shares held by CMIHI and related parties. Of the 915,746 shares
indicated as owned by CMIHI, 107,000 are shares of Class A Common Stock,
583,000 are shares of Class B Common Stock and 225,746 are shares issuable
within 60 days upon exercise of warrants. CMIHI is an affiliate of The
Chase Manhattan Corporation. Mr. Walker, a director of DPCAC, is Managing
General Partner of Chase Capital Partners, an affiliate of The Chase
Manhattan Corporation, and may be deemed to beneficially own the shares
indicated as owned by CMIHI. Mr. Walker disclaims beneficial ownership of
85,600 shares of Class A Common Stock, 466,400 shares of Class B Common
Stock and warrants to purchase 180,597 shares of Common Stock within the
meaning of Rule 13d-3 under the Exchange Act.
(6) All of the shares indicated as owned by Mr. Mansur are owned by Laura
Hawkins Mansur and may be deemed to be beneficially owned by Mr. Mansur.
Mr. Mansur disclaims beneficial ownership of such shares within the meaning
of Rule 13d-3 under the Exchange Act.
(7) Shares issued and outstanding to Bob L. Robinson: 200,000; Douglas J.
Cahill: none; Thomas R. Heidenthal: 50,000; Terry W. Bechtel: 53,000; and
Earl R. Clements: 70,000. The amounts in excess of these represent options
that may be exercised within 60 days.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INVESTORS' AGREEMENT
In connection with the Acquisition, the Company, DPCAC, Summit, CMIHI,
DLJMB and the other stockholders of DPCAC (collectively, the investors in DPCAC
and the Company are referred to as the "Investors") entered into an Investors'
Agreement (the "Investors' Agreement"). The Investors' Agreement contains
provisions concerning the governance of DPCAC and the Company, restrictions on
the transferability of the securities of DPCAC and the Company acquired by the
Investors and registration rights for such securities. The governance provisions
of the Investors' Agreement provide that the boards of directors of both DPCAC
and the Company will consist of seven members; including two designees of DLJMB,
three designees of SCI on behalf of certain Investors other than DLJMB, and the
Chief Executive Officer of the Company. Currently, there are only six members of
such boards of directors. The governance provisions of the Investors' Agreement
require the approval of a
26
<PAGE> 29
majority of the directors, including a designee of each of DLJMB and SCI, for
certain significant corporate actions by either DPCAC or the Company, including;
mergers, sales of significant assets, declaration of dividends, incurrence of
indebtedness in excess of $5 million in principal amount, capital expenditures
in excess of $2.5 million individually and $5 million per year, compensation and
other benefits for senior management and the appointment of executive officers.
TRANSACTIONS WITH DLJMB AND ITS AFFILIATES
In addition to certain payments of fees and reimbursements for
out-of-pocket expenses paid to DLJSC and DLJ Bridge Finance, Inc. in connection
with the Acquisition, DLJSC has entered into a financial advisory agreement with
the Company and DPCAC pursuant to which it will act as a financial advisor to
the Company until such time as DPCAC consummates an initial public offering of
its Common Stock resulting in the receipt of at least $35 million in gross
proceeds or five years, whichever is shorter. The financial advisory agreement
provides for an annual retainer fee of $100,000 plus reimbursable expenses to be
paid by the Company.
In connection with the Acquisition, DLJMB purchased 1,000,000 shares
(83%) of the Preferred Stock and warrants to purchase 1,128,732 shares (25.7% on
a fully diluted basis) of DPCAC's Common Stock for an aggregate of $25 million.
DLJMB also entered into the Investors' Agreement with the Company pursuant to
which DLJMB has designated Messrs. Grauer and Rush to the Boards of Directors of
both DPCAC and the Company. In December 1997, DLJMB and certain of its
affiliates sold their shares of Preferred Stock to DLJSC, who thereupon sold
such shares to qualified institutional buyers (as defined in Rule 144A under the
Securities Act).
TRANSACTIONS WITH SCI
In addition to certain payments of fees and reimbursements for out-of-
pocket expenses in connection with the Acquisition, SCI has entered into a
management advisory agreement with the Company for a term of five years or until
such time as DPCAC consummates an initial public offering of its Common Stock
resulting in the receipt of at least $35 million in gross proceeds, whichever is
shorter, and pursuant to which the Company will pay SCI an annual fee of
$200,000 plus reimbursable expenses.
SCI is the general partner of Summit, which is the owner of 720,000
shares of Class A Common Stock (16.4% on a fully diluted basis) of DPCAC.
Pursuant to the Investors' Agreement, SCI has designated Messrs. Kelly, Walker
and Mansur to the Boards of Directors of both DPCAC and the Company.
SCI and Summit are also parties to the Investors' Agreement.
See-"Investor's Agreement" above.
27
<PAGE> 30
TRANSACTIONS WITH CMIHI
CMIHI is the owner of (i) 200,000 shares of Preferred Stock, (ii)
690,000 shares in the aggregate of DPCAC's Class A Common Stock and Class B
Common Stock and (iii) warrants to purchase 225,746 shares of DPCAC's common
stock. CMIHI's ownership of DPCAC's Common Stock is 20.8% on a fully diluted
basis. CMIHI is also a party to the Investors' Agreement. See-"Investors'
Agreement" above.
TRANSACTIONS WITH M. WALID MANSUR
M. Walid Mansur, a director of the Company, was paid $250,000 and will
be paid an additional $250,000 in 10 equal quarterly installments of $25,000 per
quarter for services rendered in connection with the Acquisition and related
financings. Mr. Mansur's spouse, Laura Hawkins Mansur, owns 828,000 shares of
DPCAC's Class A Common Stock (18.8% on a fully diluted basis).
The Company believes that the terms of the transactions described above
were no less favorable to the Company than could have been obtained from
unaffiliated parties.
PART IV
ITEM 14- EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedule:
See Index to Financial Statements, Supplemental Data and
Financial Statement Schedule, which appears on page F-1
herein.
(3) *Exhibits: The following documents are filed as exhibits to
this report:
2.1 Agreement and Plan of Merger dated as of August 31, 1995 among
Doane Products Company, DPCAC and DPC Subsidiary Acquisition
Corp; list of schedules to such Merger Agreement; Agreement of
Company to furnish such schedules to the Commission upon its
request.
3.1 Certificate of Incorporation of the Company, as amended.
28
<PAGE> 31
****3.2 Certificate of Amendment to Certificate of Incorporation of
the Company.
3.3 Bylaws of the Company, as amended.
4.1 Form of Trust Indenture between the Company and U.S. Trust
Company of Texas, N.A.
4.2 Revolving Credit and Term Loan Agreement dated as of October
5, 1995 among the Company, Mercantile Bank of St. Louis
National Association, as agent for the Banks named therein,
and the Banks named therein.
4.3 Amended and Restated Revolving Credit and Term Loan Agreement
dated as of February 28, 1996 among the Company, Mercantile
Bank of St. Louis National Association, as agent for the Banks
named therein, and the Banks named therein.
***4.4 First Amendment to Amended and Restated Revolving Credit and
Term Loan Agreement dated as of June 28, 1996 among the
Company, Mercantile Bank of St. Louis National Association, as
agent for the Banks named therein, and the Banks named
therein.
***4.5 Second Amendment to Amended and Restated Revolving Credit and
Term Loan Agreement dated as of March 31, 1997 among the
Company, Mercantile Bank of St. Louis National Association, as
agent for the Banks named therein, and the Banks named
therein.
9.1 Investors' Agreement dated as of October 5, 1995 among DPC
Acquisition Corp., the Company, Summit Capital Inc.,
Summit/DPC Partners, L.P., Chase Manhattan Investment
Holdings, Inc. DLJ Merchant Banking Partners, L.P., DLJ
International Partners, C.V., DLJ Offshore Partners, C.V., DLJ
Merchant Banking Funding, Inc. and certain other persons named
therein.
10.1 Doane Products Company Employee Retirement Plan.
10.2 Employment Agreement dated September 1, 1994, as amended on
August 31, 1995, between the Company and Bob L. Robinson.
**10.3 Employment Agreement dated January 1, 1998 between the Company
and Douglas J. Cahill.
**10.4 Employment Agreement dated January 1, 1998 between the Company
and Thomas R. Heidenthal.
29
<PAGE> 32
**10.5 Employment Agreement dated January 1, 1998 between the Company
and Terry W. Bechtel.
**10.6 Employment Agreement dated January 1, 1998 between the Company
and Earl R. Clements.
***10.7 DPC Acquisition Corp. 1996 Stock Option Plan.
**10.8 First Amendment to DPC Acquisition Corp. 1996 Stock Option
Plan.
**10.9 Second Amendment to DPC Acquisition Corp. 1997 Stock Option
Plan.
**12.1 Statement regarding Computation of Ratios.
**23.1 Consent of KPMG Peat Marwick LLP
**27.1 Financial Data Schedule
- ----------
* Except as otherwise noted herein, all of the Exhibits hereto are
incorporated by reference from the corresponding Exhibit number in the
Registration Statement on Form S-1, Registration No. 33-98110.
** Filed herewith.
*** Incorporated by reference from the corresponding Exhibit number in the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, or the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997.
**** Incorporated by reference from the corresponding Exhibit number in the
Company's Registration Statement on Form S-4, Registration No.
333-43643.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
30
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DOANE PRODUCTS COMPANY
By /s/ Bob L. Robinson
--------------------------------------
Bob L. Robinson
Chief Executive Officer and Director
Date March 23, 1998
------------------------------------
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By /s/ Bob L. Robinson
-----------------------------------------------
Bob L. Robinson
Chief Executive Officer and Director
Date March 23, 1998
---------------------------------------------
By /s/ Thomas R. Heidenthal
-----------------------------------------------
Thomas R. Heidenthal
Senior Vice President, Chief Financial Officer
and Principal Accounting Officer
Date March 23, 1998
---------------------------------------------
By /s/ George B. Kelly
-----------------------------------------------
George B. Kelly
Chairman of the Board
Date March 23, 1998
---------------------------------------------
31
<PAGE> 34
By /s/ Peter T. Grauer
-----------------------------------------------
Peter T. Grauer
Director
Date March 23, 1998
---------------------------------------------
By /s/ Andrew H. Rush
-----------------------------------------------
Andrew H. Rush
Director
Date March 23, 1998
---------------------------------------------
By /s/ Jeffrey C. Walker
-----------------------------------------------
Jeffrey C. Walker
Director
Date March 23, 1998
---------------------------------------------
By /s/ M. Walid Mansur
-----------------------------------------------
M. Walid Mansur
Director
Date March 23, 1998
---------------------------------------------
32
<PAGE> 35
DOANE PRODUCTS COMPANY
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(WITH INDEPENDENT AUDITORS'
REPORT THEREON)
F-1
<PAGE> 36
Independent Auditors' Report
Board of Directors
Doane Products Company:
We have audited the accompanying consolidated balance sheets of Doane Products
Company - Successor as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows of Doane
Products Company - Successor for the years ended December 31, 1997 and 1996 and
for the three month period ended December 31, 1995, and the consolidated
statements of income, stockholders' equity and cash flows of Doane Products
Company - Predecessor for the nine months ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Doane Products Company
Successor at December 31, 1997 and 1996, and the results of operations and cash
flows of Doane Products Company - Successor for the years ended December 31,
1997 and 1996 and for the three month period ended December 31, 1995 and of
Doane Products Company - Predecessor for the nine month period ended September
30, 1995 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Houston, Texas
February 13, 1998
F-2
<PAGE> 37
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Successor
--------------------------
Assets 1996 1997
--------- ---------
<S> <C> <C>
Current assets:
Accounts receivable, less allowance for doubtful accounts;
$0 and $58 in 1996 and 1997, respectively $ 68,279 $ 66,369
Inventories 30,737 32,426
Prepaid expenses and other 7,368 3,550
--------- ---------
Total current assets 106,384 102,345
--------- ---------
Property and equipment, at cost:
Land 3,987 4,037
Buildings and improvements 25,395 29,439
Machinery and equipment 65,377 76,442
Furniture and fixtures 1,932 2,536
Automotive equipment 1,000 1,016
Construction in progress 3,504 1,972
--------- ---------
101,195 115,442
Less accumulated depreciation 8,112 15,448
--------- ---------
93,083 99,994
Goodwill, net of amortization 126,068 122,882
Other assets 12,758 12,963
--------- ---------
Total assets $ 338,293 $ 338,184
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 10,417 $ 11,667
Accounts payable 51,303 42,422
Accrued expenses:
Salaries and commissions 3,223 4,714
Accrued interest 6,379 6,223
Rebates and other promotional accruals 7,510 9,064
Other 1,429 2,610
--------- ---------
Total current liabilities 80,261 76,700
Deferred compensation 4,030 4,081
Long-term debt 196,186 188,743
Deferred income taxes 409 4,169
--------- ---------
280,886 273,693
--------- ---------
Senior exchangeable preferred stock, 3,000 shares authorized,
1,200 shares issued 24,160 30,545
Stockholders' equity:
Common stock, par value $.01. Authorized and
issued 1,000 shares -- --
Additional paid in capital 40,825 41,675
Retained earnings (7,578) (7,729)
--------- ---------
33,247 33,946
--------- ---------
Total liabilities and stockholders' equity $ 338,293 $ 338,184
========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 38
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the years ending December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Predecessor Successor
-------------- ----------------------------------------------------------
Nine month Three month
period ended period ended Year ended Year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 294,718 $ 111,618 $ 500,708 $ 548,314
Cost of goods sold 246,106 96,698 444,976 480,334
-------------- -------------- -------------- --------------
Gross profit 48,612 14,920 55,732 67,980
-------------- -------------- -------------- --------------
Operating expenses:
Selling 8,773 3,298 14,844 17,052
General and administrative 9,833 4,009 15,977 18,944
Unusual items 9,440 -- -- --
-------------- -------------- -------------- --------------
28,046 7,307 30,821 35,996
-------------- -------------- -------------- --------------
Income from operations 20,566 7,613 24,911 31,984
Other income (expense):
Interest expense (3,707) (5,926) (22,687) (22,621)
Nonrecurring finance charge -- -- (4,815) --
Miscellaneous 104 91 218 260
-------------- -------------- -------------- --------------
(3,603) (5,835) (27,284) (22,361)
-------------- -------------- -------------- --------------
Income (loss) before income taxes 16,963 1,778 (2,373) 9,623
Provision (benefit) for income taxes 217 754 (855) 3,389
-------------- -------------- -------------- --------------
Net income (loss) $ 16,746 $ 1,024 $ (1,518) $ 6,234
============== ============== ============== ==============
Net income (loss) applicable to
common stock (note 5) -- $ (314) $ (7,264) $ (151)
Basic net income (loss) per common share -- $ (314) $ (7,264) $ (151)
Pro forma earnings data (unaudited)
Net income as reported $ 16,746
Pro forma adjustment for federal
and state income tax expense 5,861
--------------
Pro forma net income $ 10,885
==============
Pro forma basic net income per
common share $ 189
============== ============== ============== ==============
Weighted average shares outstanding 57,500 1,000 1,000 1,000
============== ============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 39
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the years ending December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Predecessor Sucessor
----------- -------------------------------------------------
Nine month Three month
period ended period ended Year ended Year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 16,746 $ 1,024 $ (1,518) $ 6,234
Items not requiring (providing) cash:
Depreciation and amortization 3,694 2,359 15,972 12,141
Accrued deferred compensation (93) 23 282 51
Loss on sale of property and equipment 10 -- 26 116
Deferred income tax expense (benefit) -- 1,102 (855) 3,389
Equity in foreign joint venture -- -- -- (187)
Changes in:
Accounts receivable 1,800 (7,620) (21,176) 1,910
Inventories (2,424) (2,954) (3,141) (1,689)
Prepaid expenses and other (498) (571) (5,479) 3,818
Accounts payable (11,526) 4,084 32,155 (8,881)
Accrued expenses 5,245 7,034 2,317 4,070
Other -- (1,770) -- --
----------- ----------- ----------- -----------
Net cash provided by operating activities 12,954 2,711 18,583 20,972
----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 571 -- 26 39
Capital expenditures, including interest capitalized (4,224) (1,297) (7,901) (14,437)
Acquisition related payments -- (207,961) (1,087) --
Increase in cash value of life insurance (24) (88) (112) (324)
Investment in foreign joint venture -- -- (1,979) --
Other -- -- (436) (439)
----------- ----------- ----------- -----------
Net cash used in investing activities (3,677) (209,346) (11,489) (15,161)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt (7,225) 204,348 163,136 5,698
Increase in debt issuance costs -- -- (5,909) (468)
Retirement of prior indebtedness -- (46,013) -- --
Net borrowings under short-term credit agreements 595 (6,800) -- --
Net borrowings under revolving credit agreement -- -- 1,475 (1,475)
Principal payments on long-term debt (786) (4,400) (167,746) (10,416)
Dividends paid (13,152) -- -- --
Issuance of preferred stock -- 17,075 -- --
Capital contribution -- 40,425 400 850
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (20,568) 204,635 (8,644) (5,811)
----------- ----------- ----------- -----------
Decrease in cash and
cash equivalents (11,291) (2,000) (1,550) --
Cash and cash equivalents, beginning of period 14,841 3,550 1,550 --
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 3,550 $ 1,550 $ -- $ --
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 40
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
For the years ending December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------------------------------------------
Common stock Treasury Stock
------------------------ Paid-in ------------------------- Retained
Shares Amount capital Shares Amount earnings Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 100,000 $ 50 $ -- $ (42,500) $ (34,000) $ 65,709 $ 31,759
Net income -- -- -- -- -- 16,746 16,746
Dividends declared -- -- -- -- -- (13,152) (13,152)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances, September 30, 1995 100,000 $ 50 $ -- $ (42,500) $ (34,000) $ 69,303 $ 35,353
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Predecessor
----------------------------------------------------------------------------------------------
Common stock Treasury Stock
-------------------------- Paid-in ------------------------- Retained
Shares Amount capital Shares Amount earnings Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Beginning balances, October 1, 1995 -- $ -- $ -- -- $ -- $ -- $ --
Capital contribution 1,000 -- 40,425 -- -- -- 40,425
Net income -- -- -- -- -- 1,024 1,024
Preferred stock dividends -- -- -- -- -- (1,069) (1,069)
Accretion of preferred stock -- -- -- -- -- (269) (269)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1995 1,000 -- 40,425 -- -- (314) 40,111
Capital contribution -- -- 400 -- -- -- 400
Net loss -- -- -- -- -- (1,518) (1,518)
Preferred stock dividends -- -- -- -- -- (4,670) (4,670)
Accretion of preferred stock -- -- -- -- -- (1,076) (1,076)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1996 1,000 -- 40,825 -- -- (7,578) 33,247
-----------
Capital contribution -- -- 850 -- -- -- 850
Net income -- -- -- -- -- 6,234 6,234
Preferred stock dividends -- -- -- -- -- (5,308) (5,308)
Accretion of preferred stock -- -- -- -- -- (1,077) (1,077)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 1,000 $ -- $ 41,675 -- $ -- $ (7,729) $ 33,946
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 41
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, 1997, 1996 and 1995
(1) ACQUISITION
On October 5, 1995 Doane Products Company (Doane) was acquired (the
Acquisition) through the merger (the Merger) of DPC Subsidiary
Acquisition Corp. with and into Doane with Doane being the surviving
entity (Successor). DPC Subsidiary Acquisition Corp. was a newly
organized Delaware corporation formed for the sole purpose of effecting
the Acquisition. Doane is a wholly-owned subsidiary of DPC Acquisition
Corp. (DPCAC). The purchase price was $249.1 million, including existing
indebtedness. The acquisition was financed with a senior credit facility
which provides term loan borrowings of $90 million and revolving loan
borrowings of up to $25 million, $120 million of senior subordinated
increasing rate notes, and $30 million of 14.25% Senior Exchangeable
Preferred Stock. The cost of the acquisition has been allocated on the
basis of the estimated fair value of the assets acquired and liabilities
assumed. The allocation resulted in goodwill of approximately $129
million. The goodwill is being amortized over 40 years on a
straight-line basis.
For financial statement purposes, the Acquisition and Merger was
accounted for as a purchase acquisition effective October 1, 1995. The
effects of the acquisition have been reflected in the Company's assets
and liabilities at that date. As a result, the Company's financial
statements for the periods subsequent to September 30, 1995 are
presented on the Successor's new basis of accounting, while financial
statements for September 30, 1995 and prior periods are presented on the
Predecessor's historical cost basis of accounting.
In connection with the Acquisition and Merger, the Company recorded
certain merger related expenses of $9,440 consisting primarily of bonus
payments to certain members of management, which have been charged to
operations as of September 30, 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company manufactures dry pet foods and operates a machine shop and a
structural steel fabrication plant. The Company extends unsecured credit
in the form of current accounts receivable, principally to large
distributors and retailers throughout the United States, with credit
extended to one customer approximating 70% and 65% of accounts
receivable at December 31, 1996 and 1997, respectively.
PRINCIPLES OF CONSOLIDATION
In November 1996, the Company formed a UK holding company, DPC
International, Ltd., a wholly-owned subsidiary of Doane Products
Company, to account for its 50% investment in a foreign joint venture.
The Company is accounting for its investment under the equity method of
accounting. The accompanying consolidated financial statements for
December 31, 1996 and 1997 include the accounts of Doane and its
wholly-owned subsidiary. All inter-company transactions and balances
have been eliminated.
(Continued)
F-7
<PAGE> 42
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIS OF PRESENTATION
Certain reclassifications have been made to the fiscal 1996 consolidated
financial statements to conform with the fiscal 1997 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents consist
primarily of repurchase agreements and certificates of deposit.
INVENTORIES
All inventories are valued at the lower of cost or market. Cost is
determined using the FIFO method.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over the estimated useful life of
each asset ranging from three to forty years. Annual depreciation is
computed using the straight-line method.
In fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-lived Assets and for Long Lived Assets to be Disposed Of (SFAS
121). Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.
When such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. The adoption of SFAS 121 did
not have a material impact on the Company's consolidated financial
statements.
INCOME TAXES
Effective October 1, 1995, concurrent with the Acquisition and the
Company's change from an S Corporation for federal income tax purposes
to a C Corporation, the Successor Company began applying the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," (FAS 109). FAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax bases of assets and liabilities. These deferred taxes are measured
by applying current tax laws. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
(Continued)
F-8
<PAGE> 43
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired in the Acquisition and is being amortized by
the straight-line method over 40 years. The Company's policy is to
periodically evaluate such cost to determine whether there has been any
impairment in value. Accumulated amortization was $4,046 and $7,300 at
December 31, 1996, and 1997, respectively.
RECOGNITION OF REVENUE
Revenue is recognized at the time the product is shipped.
COMMODITY HEDGES
The Company manages price risk created by market fluctuations by hedging
portions of its primary commodity products purchases, principally
through exchange traded futures and options contracts which are
designated as hedges. The terms of such contracts are generally less
than one year. Settlement of positions are either through financial
settlement with the exchanges or via exchange for the physical commodity
in which case the Company delivers the contract against the acquisition
of the physical commodity.
The Company's policy does not permit speculative commodity trading.
Futures and options contracts are accounted for as hedges, and gains and
losses are recognized in the period realized as part of the cost of
products sold and in the cash flows. The deferred net futures and
options position is reported on the balance sheet as a current asset for
net loss positions and as a deferred credit for net gain positions. In
addition to futures and options, the Company also contracts for future
physical procurement, in which case unrealized gains and losses are
deferred to the applicable accounting period. Typically, maturities vary
and do not exceed twelve months.
Deferred losses on these outstanding contracts were $5,398 and $917
at December 31, 1996 and 1997, respectively.
USE OF ESTIMATES IN PREPARATION
OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(Continued)
F-9
<PAGE> 44
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA FINANCIAL DATA
Pro forma net income per common share and pro forma income taxes are set
forth herein because the Predecessor Company previously operated as a
subchapter S Corporation.
Pro forma net income per share of common stock is calculated based on
net income reduced by pro forma income taxes, divided by the weighted
average number of shares of common stock outstanding.
Pro forma income taxes reflect federal income taxes that would have been
incurred had the Predecessor Company been subject to such taxes. Such
amounts have been deducted from net income in the accompanying
statements of income, pursuant to the rules and regulations of the
Securities and Exchange Commission.
FINANCIAL INSTRUMENTS
Fair value estimates are made at discrete points in time based on
relevant market information. These estimates may be subjective in nature
and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. The Company believes that
the carrying amounts of its current assets, current liabilities and
long-term debt approximate the fair value of such items.
NET INCOME (LOSS) PER COMMON SHARE
In fiscal 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128).
In accordance with SFAS 128, basic net income (loss) per common share is
computed based upon the weighted average number of common shares
outstanding during each period. The Company does not have any
potentially dilutive securities at December 31, 1995, 1996, and 1997.
Net income (loss) is decreased (increased) by unpaid cumulative
preferred stock dividends and the accretion of the preferred stock in
calculating net income (loss) attributable to the common shareholder.
(3) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
------- -------
<S> <C> <C>
Raw materials $ 7,268 $ 8,449
Packaging materials 10,609 10,735
Finished goods 12,860 13,242
------- -------
$30,737 $32,426
======= =======
</TABLE>
(Continued)
F-10
<PAGE> 45
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Senior Credit Facility $ 46,603 $ 34,712
Senior Notes 160,000 160,000
Industrial Development Revenue Bonds
(net of reserve funds) -- 5,698
-------- --------
206,603 200,410
Less current maturities 10,417 11,667
-------- --------
$196,186 $188,743
======== ========
</TABLE>
SENIOR CREDIT FACILITY
In connection with the Acquisition, the Company entered into a senior
credit facility effective October 5, 1995 (the Senior Credit Facility)
with several lending institutions. The Senior Credit Facility, as
amended, provides for an aggregate principal amount of loans of up to
$85,000 consisting of $60,000 in aggregate principal amount of term
loans (the Term Loan Facility) and a $25,000 revolving credit facility
(the Revolving Credit Facility).
The Term Loan Facility matures on September 30, 2000 and is due in
quarterly installments in increasing amounts, ranging from $2,100 to
$3,700, commencing September 30, 1996. The Senior Credit Facility
provides for mandatory prepayments of the Term Loan Facility based on
certain performance targets as well as proceeds of asset sales which are
subject to certain permitted exceptions. The Revolving Credit Facility
matures on September 30, 2000. The Company is required to reduce
borrowings under the Revolving Credit to $10,000 or less for 30
consecutive days during the fiscal years ended September 30, 1996 and
1997, and to $7,500 or less for 30 consecutive days during each fiscal
year ended September 30 thereafter.
(Continued)
F-11
<PAGE> 46
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Indebtedness under the Senior Credit Facility bears interest at a rate
based, at the Company's option, upon (i) the Base Rate plus 1.50% with
respect to Base Rate Loans and (ii) the LIBOR Rate for one, two, three
or six months plus 2.75% with respect to LIBOR Rate Loans; provided,
however, the interest rates are subject to reductions in the event the
Company meets certain performance targets. The Revolving Credit Facility
bore interest at 9.5% and 9.3% for the years ended December 31, 1996 and
1997, respectively. The Term Loan Facility bore interest at a weighted
average rate of 8.47% for the period from October 5, 1995 to December
31, 1995, and 7.95% and 8.44% for the years ended December 31, 1996 and
1997, respectively.
The Company is required to pay a commitment fee based on the committed
undrawn amount of the Revolving Credit Facility during the preceding
quarter equal to .375% per annum, payable in arrears on a quarterly
basis during 1996 and equal to .5% per annum, payable in arrears on a
quarterly basis, thereafter; provided, such fee may be reduced after
1996 to as low as .25% based on certain performance targets.
The Senior Credit Facility is secured by substantially all of the assets
of the Company and a pledge of all of the Company's common stock held by
DPCAC.
The Senior Credit Facility requires the Company to meet certain
financial tests, including minimum cash flow, minimum cash flow coverage
ratio and maximum leverage ratios. The Senior Credit Facility also
contains covenants which, among other things, will limit the incurrence
of additional indebtedness, the nature of the business of the Company
and its subsidiaries, investments, leases of assets, ownership of
subsidiaries, dividends, transaction with affiliates, asset sales,
acquisitions, mergers and consolidations, liens and encumbrances and
other matters customarily restricted in such agreements.
The Company had approximately $24,225 available under the revolving
credit agreement at December 31, 1997 which expires in 1999.
BRIDGE NOTES
The bridge notes (the Bridge Notes) matured on October 5, 1996 and bore
interest at a floating rate equal to the sum of (i) the prime rate, (ii)
5.00%, and (iii) an additional percentage amount, equal to 1.00%
effective from March 30, 1996 and increasing by .50% effective from and
including each quarterly anniversary of such date until the Bridge Notes
are paid in full; provided that the interest rate shall not exceed 20%
per annum. On March 4, 1996, the Bridge Notes were repaid with the
proceeds from the issuance of the Senior Notes. The Bridge Notes bore
interest at a rate of 13.50% per annum at December 31, 1995 and for the
period January 1, 1996 to March 4, 1996. In connection with this debt
refinancing, the Company incurred a $4,815 non-recurring finance charge
to write-off debt issuance costs associated with the Bridge Notes.
(Continued)
F-12
<PAGE> 47
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SENIOR NOTES
The Senior Notes (the Senior Notes) bear interest at the rate of 10.625%
per annum, payable semiannually on March 1 and September 1 of each year,
commencing on September 1, 1996. The Senior Notes are redeemable, at the
Company's option, in whole or in part, from time to time, on or after
March 1, 2001, initially at 105.313% of their principal amount and
thereafter at prices declining to 100% at March 1, 2004 until maturity,
in each case together with accrued and unpaid interest to the redemption
date. In addition, at any time on or prior to March 1, 1999, the Company
may redeem up to 35% of the aggregate principal amount of the Notes
originally issued with the net cash proceeds of one or more public
equity offerings, at 109.625% of their principal amount, together with
accrued and unpaid interest, if any, to the redemption date; provided
that at least $104,000 in principal amount of the Senior Notes remain
outstanding immediately after any such redemption.
The Senior Notes are general senior unsecured obligations of the
Company, ranking senior to all subordinated indebtedness of the Company
and ranking pari passu in right of payment to all other senior
indebtedness of the Company. Lenders under the Senior Credit Facility
have claims with respect to the assets constituting collateral for such
indebtedness that are effectively senior and right of payment to the
claims of holders of the Senior Notes. The Senior Notes were issued
pursuant to the Note Indenture which contains covenants restricting or
limiting the ability of the Company and its subsidiaries to pay
dividends or make other restricted payments, incur additional
indebtedness and issue preferred stock, create liens, incur dividends
and other payment restrictions affecting subsidiaries, enter into
mergers or consolidations, make asset sales, enter into transactions
with affiliates, and engage in other lines of business. Under certain
circumstances, the Company is required to offer to purchase all
outstanding Senior Notes at a purchase price in cash equal to 100% of
their principal amount, plus accrued and unpaid interest to the date of
repurchase, with the proceeds of certain asset sales. Upon a Change of
Control (as defined in the Note Indenture) each holder of Senior Notes
will have the right to require the Company to repurchase all or any part
of such holder's Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest to
the date of purchase.
INDUSTRIAL REVENUE BONDS, OTTAWA COUNTY, OKLAHOMA
On March 12, 1997 the Company issued $6,000 of industrial development
revenue bonds (the "Bonds") through the Ottawa County Finance Authority
in Miami, Oklahoma. The Bonds bear interest at the rate of 7.25% payable
on each December 1 and June 1, commencing December 1, 1997. The Bonds
are subject to mandatory redemption prior to maturity, in part, at a
redemption price of 100% of the principal amount thereof, plus accrued
interest to the redemption date, in varying principal amounts on June 1
of each year from 2007 through 2017.
(Continued)
F-13
<PAGE> 48
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Bonds are general secured obligations of the Company, ranking senior
to all subordinated indebtedness of the Company and on a parity in right
of payment with all other senior indebtedness of the Company. The Bonds
are additionally secured by a Mortgage and Security Agreement.
Aggregate annual maturities of long-term debt at December 31, 1997 were:
<TABLE>
<S> <C> <C>
1998 $ 11,667
1999 11,667
2000 11,378
Thereafter 165,698
</TABLE>
(5) SENIOR EXCHANGEABLE PREFERRED STOCK
The Company has authorized 3,000 shares of Senior Exchangeable Preferred
Stock of which the Company issued 1,200 shares in connection with the
financing of the Acquisition.
The Senior Exchangeable Preferred Stock has an initial liquidation
preference of $25.00 per share (aggregate initial liquidation preference
is $30,000). The Senior Exchangeable Preferred Stock was recorded at the
net proceeds of $17,075 after deducting $12,925 paid to DPCAC for
warrants of DPCAC which were issued in conjunction with the Senior
Exchangeable Preferred Stock. The excess of the liquidation preference
over the carrying value is being accreted quarterly over a twelve year
period ended September 30, 2007 by a direct reduction to retained
earnings.
Dividends on the Senior Exchangeable Preferred Stock are payable
quarterly at the rate of 14.25% per annum per share. Dividends on the
Senior Exchangeable Preferred Stock accrete to the liquidation value of
the Senior Exchangeable Preferred Stock and, at the option of the
holders of a majority of the shares of Senior Exchangeable Preferred
Stock, may be paid through the issuance of additional shares of Senior
Exchangeable Preferred Stock on each dividend payment date through
September 30, 2000. The Company does not expect to pay dividends on the
Senior Exchangeable Preferred Stock in cash for any period prior to
September 30, 2000. Cumulative dividends on Senior Exchangeable
Preferred Stock that have not been paid at December 31, 1996 and 1997
are $5,739 and $11,047, respectively and are included in the carrying
amount of the Senior Exchangeable Preferred Stock. As of December 31,
1997, the cumulative accretion to redemption value and cumulative
dividends on the Senior Exchangeable Preferred Stock are $2,422 and
$11,047, respectively.
(Continued)
F-14
<PAGE> 49
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Prior to September 30, 1998, the Company may, at its option, redeem up
to one-third of the then outstanding Senior Exchangeable Preferred Stock
with the net proceeds of an initial public offering of its common stock
at a redemption price of 114% of the then liquidation value of the
Senior Exchangeable Preferred Stock, plus accrued and unpaid dividends.
On and after September 30, 2000, the Company may, at its option, redeem
the Senior Exchangeable Preferred Stock in whole or in part at
redemption prices per share set forth below, together with accrued and
unpaid dividends:
<TABLE>
<CAPTION>
Year Percent of
Beginning liquidation
September 30, Value
------------- -----------
<S> <C> <C>
2000 107.125%
2001 105.700
2002 104.275
2003 102.850
2004 101.425
2005 100.000
2006 100.000
</TABLE>
The Company will be required to redeem all outstanding shares of Senior
Exchangeable Preferred Stock on September 30, 2007 at 100% of the then
liquidation value, together with accrued and unpaid dividends.
The Senior Exchangeable Preferred Stock will be exchangeable, in whole
or in part, at the option of the Company on any dividend payment date
for 14.25% Junior Subordinated Exchange Debentures.
In the event of a change of control, as defined, the holders of Senior
Exchangeable Preferred Stock have the right to require the Company to
redeem such Senior Exchangeable Preferred Stock, in whole or in part, at
a price equal to 101% of the then liquidation value together with any
unpaid dividends.
The terms of the Senior Exchangeable Preferred Stock prohibit (i) the
payment of dividends on securities ranking on a parity with or junior to
the Senior Exchangeable Preferred Stock and (ii) redemption, repurchase
or acquisition of any Junior Securities with certain exceptions, in each
case, unless full cumulative dividends have been paid on the Senior
Exchangeable Preferred Stock.
Holders of the Senior Exchangeable Preferred Stock have limited voting
rights customary for preferred stock, and the right to elect two
additional directors upon certain events such as the Company failing to
declare and pay dividends on any six consecutive dividend payment dates.
Continued)
F-15
<PAGE> 50
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) MAJOR CUSTOMER
For the nine months ended September 30, 1995, one customer accounted for
approximately 67% of the Predecessor Company's total revenue. For the
three months ended December 31, 1995 and the years ended December 31,
1996 and 1997, the same customer accounted for approximately 67%, 65%,
and 63% respectively, of the Successor Company's total revenue. The
Company does not have a long-term contract with this customer.
(7) INCOME TAXES
The Predecessor had elected under both Federal and certain state income
tax laws to be taxed as an S Corporation. Under this election, the
Company's taxable income was taxed to the stockholders on their
individual income tax returns. The provision for income taxes reflects
the accrual of corporation income taxes due in states which do not
recognize the S Corporation status.
Effective October 1, 1995, concurrent with the Acquisition, the Company
changed from an S Corporation for Federal income tax purposes to a C
Corporation and began applying the provisions of FAS 109.
The Company elected to step up the tax basis in the assets acquired.
Goodwill recorded in the acquisition is deductible for tax purposes over
15 years.
The components of income tax expense (benefit) are:
<TABLE>
<CAPTION>
Three month
period ended Year ended Year ended
December 31, December 31, December 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ (318) $ -- $ --
State (30) -- --
Deferred:
Federal 1,102 (855) 3,084
State -- -- 305
----------- ----------- -----------
Total income tax
provision (benefit) $ 754 $ (855) $ 3,389
=========== =========== ===========
</TABLE>
(Continued)
F-16
<PAGE> 51
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The difference between the statutory rate and the effective tax rate is
a result of nondeductible meals and entertainment expenses and other
miscellaneous expenses.
The tax effects of temporary differences that give rise to the
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1997 are presented below:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
CURRENT DEFERRED
Deferred tax assets:
Accounts receivable $ 19 $ 40
Inventory 286 291
Accruals and provisions 576 921
-------- --------
Current deferred tax asset $ 881 $ 1,252
======== ========
NONCURRENT DEFERRED
Deferred tax assets - net operating loss carryforwards 8,656 10,093
-------- --------
8,656 10,093
Deferred tax liabilities:
Tax over book amortization (4,088) (5,751)
Difference between book and tax basis of
property and equipment (4,977) (8,511)
-------- --------
(9,065) (13,896)
Net noncurrent deferred tax liability (409) (4,169)
-------- --------
Total net deferred tax asset (liability) $ 472 (2,917)
======== ========
</TABLE>
There is no valuation allowance as of fiscal year ended December 31,
1997. It is the opinion of management that future operations will more
likely than not generate taxable income to realize deferred tax assets.
At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $27,000, which are
available to offset future federal income, if any, through 2011.
(8) EMPLOYEE BENEFIT PLANS
The Company has a defined benefit, noncontributory pension plan covering
substantially all non-bargaining employees. Benefits under the plan are
based on the employee's compensation during the five most highly
compensated consecutive years during the ten years preceding normal
retirement date. The Company's funding policy for the plan is to make
the minimum annual contribution required by applicable regulations.
(Continued)
F-17
<PAGE> 52
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net periodic pension cost for the Company's defined benefit pension
plans consisted of the following components for the years ended:
<TABLE>
<CAPTION>
Predecessor Successor
--------------------------- ---------------------------
Nine month Three month
period ended period ended Year ended Year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service cost (benefits)
earned $ 714 $ 237 $ 1,059 $ 1,276
Interest cost on
projected benefit
obligation 515 197 781 903
Actual return on plan
assets (1,509) (377) (906) (1,914)
Net amortization and
deferral 997 180 71 983
----------- ----------- ----------- -----------
Net periodic pension cost $ 717 $ 237 $ 1,005 $ 1,248
=========== =========== =========== ===========
</TABLE>
Assumptions used by the Company in the determination of pension plan
information consisted of the following as of:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.0% 7.0% 7.0%
Rate of increase in compensation levels 5.5% 5.5% 5.5%
Expected long-term rate of return on plan assets 7.5% 7.5% 7.5%
</TABLE>
(Continued)
F-18
<PAGE> 53
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth the plan's funded status and amounts
recognized in the accompanying balance sheets as of:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ (7,940) $ (8,936)
======== ========
Accumulated benefits $ (8,172) $ (9,192)
======== ========
Projected benefits $(13,060) $(14,818)
Plan assets at fair value 12,428 14,557
-------- --------
Projected benefit obligation in
excess of plan assets (632) (261)
Items not yet recognized in earnings:
Unrecognized net loss (gain) (45) (1,144)
Unrecognized net asset at December 31, 1986,
being recognized over 14.49 to 17.95 years 333 313
-------- --------
Pension liability recognized in
the balance sheet $ (344) $ (1,092)
======== ========
</TABLE>
The Company sponsors a defined contribution postretirement plan which
provides medical coverage for eligible retirees and their dependents (as
defined in the plan). On October 1, 1995, the Company adopted SFAS 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
The following sets forth the plans' funded status reconciled with the
amount shown in the Company's consolidated balance sheets and
consolidated statements of income on an accrual basis rather than a
pay-as-you-go (cash) basis as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents $ 825 $ 824
Fully eligible active plan participants 356 382
Other active plan participants 316 363
--------- ---------
Accrued postretirement benefit cost $ 1,497 $ 1,569
========= =========
</TABLE>
(Continued)
F-19
<PAGE> 54
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three month
period ended Year ended Year ended
December 31, December 31, December 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net periodic postretirement benefit cost
included the following components:
Service cost - benefits attributed to
service during the period $ 17 $ 17 $ 18
Interest cost on accumulated
postretirement benefit obligation 100 104 102
---------- ---------- ----------
Net periodic postretirement
benefit cost $ 117 $ 121 $ 120
========== ========== ==========
</TABLE>
For measurement purposes, per capita claims costs for participants over
age 65 were assumed to increase at a 7.07% and 6.50% annual rate for
1996 and 1997, respectively; the rate was assumed to decrease gradually
to 4.0% for 2001 and remain at that level thereafter. The medical cost
trend rate assumption has a significant effect on the amounts reported.
To illustrate, increasing the assumed medical cost trend rates by 1
percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1997 by $214 and
the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended 1997 by $18.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% for December 31, 1996 and
1997.
(9) DEFERRED COMPENSATION AGREEMENTS AND
SALARY CONTINUATION PLAN
The Company has deferred compensation agreements with two individuals
which provide, upon retirement, annual payments to be paid over ten
consecutive years. The liability is approximately $1,190 and $1,150 at
December 31, 1996 and 1997, respectively.
The Company also has a salary continuation plan in which there were
twenty-three and twenty-two participants at December 31, 1996 and 1997,
respectively. Participants in the plan, who reach age fifty-five and
have ten years of service with the Company, become vested as to benefits
which are payable in ten equal annual installments after retirement. The
Company has recorded an expected future liability equal to the present
value of future payments under this plan. The liability is approximately
$1,343 and $1,362 at December 31, 1996 and 1997, respectively.
(Continued)
F-20
<PAGE> 55
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(10) ADDITIONAL CASH FLOW INFORMATION
The following is additional cash flow information for the nine month
period ended September 30, 1995, for the three month period ended
December 31, 1995, and for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
Predecessor Successor
-------------------------- --------------------------
Nine month Three month
period ended period ended Year ended Year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Additional cash payment
information:
Interest paid (net of
amounts
capitalized) $ 5,114 $ 192 $ 21,028 $ 21,924
Income taxes paid
(refunded) 302 (51) 351 --
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
The Company is party, in the ordinary course of business, to certain
claims and litigation. In management's opinion, the resolution of such
matters is not expected to have a material impact on the financial
condition or results of operations of the Company.
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 137,747 $ 132,996 $ 128,301 $ 149,270
Gross margins 15,502 15,163 16,985 20,330
Net income 995 481 1,905 2,853
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 118,404 $ 112,881 $ 124,672 $ 144,751
Gross margins 15,079 12,606 12,364 15,683
Net income (loss) (1,650) (236) (609) 977
</TABLE>
F-21
<PAGE> 56
<PAGE> 57
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger dated as of August 31, 1995 among
Doane Products Company, DPCAC and DPC Subsidiary Acquisition
Corp; list of schedules to such Merger Agreement; Agreement of
Company to furnish such schedules to the Commission upon its
request.
3.1 Certificate of Incorporation of the Company, as amended.
****3.2 Certificate of Amendment to Certificate of Incorporation of
the Company.
3.3 Bylaws of the Company, as amended.
4.1 Form of Trust Indenture between the Company and U.S. Trust
Company of Texas, N.A.
4.2 Revolving Credit and Term Loan Agreement dated as of October
5, 1995 among the Company, Mercantile Bank of St. Louis
National Association, as agent for the Banks named therein,
and the Banks named therein.
4.3 Amended and Restated Revolving Credit and Term Loan Agreement
dated as of February 28, 1996 among the Company, Mercantile
Bank of St. Louis National Association, as agent for the Banks
named therein, and the Banks named therein.
***4.4 First Amendment to Amended and Restated Revolving Credit and
Term Loan Agreement dated as of June 28, 1996 among the
Company, Mercantile Bank of St. Louis National Association, as
agent for the Banks named therein, and the Banks named
therein.
***4.5 Second Amendment to Amended and Restated Revolving Credit and
Term Loan Agreement dated as of March 31, 1997 among the
Company, Mercantile Bank of St. Louis National Association, as
agent for the Banks named therein, and the Banks named
therein.
9.1 Investors' Agreement dated as of October 5, 1995 among DPC
Acquisition Corp., the Company, Summit Capital Inc.,
Summit/DPC Partners, L.P., Chase Manhattan Investment
Holdings, Inc. DLJ Merchant Banking Partners, L.P., DLJ
International Partners, C.V., DLJ Offshore Partners, C.V., DLJ
Merchant Banking Funding, Inc. and certain other persons named
therein.
10.1 Doane Products Company Employee Retirement Plan.
10.2 Employment Agreement dated September 1, 1994, as amended on
August 31, 1995, between the Company and Bob L. Robinson.
**10.3 Employment Agreement dated January 1, 1998 between the Company
and Douglas J. Cahill.
**10.4 Employment Agreement dated January 1, 1998 between the Company
and Thomas R. Heidenthal.
<PAGE> 58
**10.5 Employment Agreement dated January 1, 1998 between the Company
and Terry W. Bechtel.
**10.6 Employment Agreement dated January 1, 1998 between the Company
and Earl R. Clements.
***10.7 DPC Acquisition Corp. 1996 Stock Option Plan.
**10.8 First Amendment to DPC Acquisition Corp. 1996 Stock Option
Plan.
**10.9 Second Amendment to DPC Acquisition Corp. 1997 Stock Option
Plan.
**12.1 Statement regarding Computation of Ratios.
**23.1 Consent of KPMG Peat Marwick LLP
**27.1 Financial Data Schedule
- ----------
* Except as otherwise noted herein, all of the Exhibits hereto are
incorporated by reference from the corresponding Exhibit number in the
Registration Statement on Form S-1, Registration No. 33-98110.
** Filed herewith.
*** Incorporated by reference from the corresponding Exhibit number in the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, or the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997.
**** Incorporated by reference from the corresponding Exhibit number in the
Company's Registration Statement on Form S-4, Registration No.
333-43643.
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
BETWEEN
DOANE PRODUCTS COMPANY
AND
DOUGLAS J. CAHILL
THIS EMPLOYMENT AGREEMENT dated January 1, 1998 is made between Doane
Products Company (the "Company"), a Delaware corporation, and Douglas J. Cahill
(the "Executive"). This Agreement is made with reference to the following
facts and objectives:
R E C I T A L S
A. The Executive shall be the President and Chief Operating
Officer of the Company and has served the Company as an employee continuously
during the past four months;
B. The Executive acknowledges that the services previously
provided by him to the Company and the services to be performed by him under
this Agreement are of a special and unique character; the business of the
Company is currently international in scope and the Company has plans to
continue to expand its business throughout the world; and the Company competes
with other persons that are or could be located in any part of the world; and
in order to assure the Company that the Company will retain its value and the
Company's business as a going concern, it is necessary that the Executive
undertake not to utilize his special knowledge of the Company, its business and
its relationships with customers and suppliers to compete with the Company if
the Executive were to leave the Company.
C. The Executive further acknowledges that, during his employment
to date by the Company, he has occupied a position of trust and confidence with
the Company and, during such employment, the Company has compensated him, among
other purposes, to develop and preserve customer relationships and other
goodwill exclusively for the Company's benefit and that, as a result, he has
developed customer relationships and goodwill that are valuable and important
to the Company, and has become familiar with the Company's trade secrets,
including, without limitation, its profit margins, customer preferences and
requirements, and with other proprietary and confidential information
concerning the Company and its business.
D. The Executive further acknowledges that, throughout his
employment under this Agreement, he is expected to continue to occupy a
position of trust and confidence with the Company. In return, the Company will
continue to compensate him,
<PAGE> 2
among other purposes, to develop and preserve customer relationships and
goodwill exclusively for the Company's benefit, which will be valuable and
important to the Company. Further, he will likely continue to be familiar with
the Company's trade secrets, including, without limitation, its profit margins,
customer preferences and requirements, and with other confidential and
proprietary information concerning the Company and its business.
E. The Executive further acknowledges that the use by him for his
own benefit or that of others of such goodwill, trade secrets or proprietary
and confidential information or the solicitation of and/or doing business with
any of the Company's customers and potential customers would have a material
adverse effect on the Company and its business, and would place the Company at
a substantial competitive disadvantage.
F. The Executive further acknowledges that the agreements and
covenants contained in this Agreement, and, in particular, sections 6
(Non-Competition Covenants) and 7 (Confidentiality and Proprietary
Information), are essential to protect the Company and the goodwill of the
Company's business, are a condition precedent to the Company's willingness to
enter this Agreement and to pay the consideration set forth in this Agreement,
and are necessary and reasonable in light of the particular business of the
Company, his knowledge thereof and the services he has previously performed and
will perform under this Agreement.
THE PARTIES ACCORDINGLY AGREE AS FOLLOWS:
AGREEMENT
1. EMPLOYMENT The Company hereby agrees to employ
the Executive, and the Executive hereby accepts employment by the Company, on
the terms and conditions of this Agreement.
2. EMPLOYMENT TERM
(a) Subject to section 9 (Termination of Employment), the
term of the Executive's employment under this Agreement begins on the date of
this Agreement and ends on the third anniversary of that date; provided,
however, that, commencing on the third anniversary of the date of this
Agreement and each subsequent anniversary, the term shall be extended for an
additional one year period unless either the Executive or the Company gives the
other party written notice at least thirty (30) days before such anniversary
that this Agreement shall terminate on the then scheduled expiration date (the
"non-extension notice"). If such non-extension notice is given, this Agreement
shall automatically terminate on such expiration date.
(b) The actual term of the Executive's employment under
this Agreement, including any extension, continuation or earlier termination of
the original term, is referred to in this Agreement as the "employment term."
<PAGE> 3
3. RESPONSIBILITIES During the employment term,
the Executive shall serve as President and Chief Operating Officer or in any
other position or capacity to which he may from time to time be elected or
appointed, and shall perform such services for the Company as are reasonably
required by the Company, and as may be required by virtue of the offices and
positions held by the Executive. The Executive agrees that, as a part of his
duties under this Agreement, he may be required from time to time to perform
services for affiliates of the Company. The Executive will not be required to
relocate his residence outside the continental United States, but will be
available for such travel as his responsibilities under this Agreement may
reasonably require. The Executive shall devote his full time and best efforts to
the performance of all responsibilities to the Company and its affiliates and to
further their respective businesses and interests.
4. COMPENSATION
(a) The Company agrees to pay the Executive throughout
the employment term an initial base salary at the rate of $275,000.00 per annum
(as adjusted pursuant to the provision of this paragraph 4(a)) (the "base
salary") payable in equal installments in accordance with Company payroll
practices from time to time in effect. Executive's base salary will be
reviewed and may be adjusted annually by the Chief Executive Officer of the
Company or by the board of directors of the Company (or the compensation
committee thereof) (the "board"), after taking into consideration the
recommendations of the Chief Executive Officer of the Company, provided that
Executive's base salary may not be decreased below his initial base salary.
(b) Subject to Section 9 (Termination of Employment), the
Company agrees to pay the Executive throughout the employment term an annual
bonus (the "annual bonus") calculated pursuant to Exhibit A attached hereto.
The amount of the annual bonus payable to the Executive shall be prorated for
the portion of a year the Executive is employed by multiplying the annual bonus
determined pursuant to Exhibit A by a fraction with a numerator equal to the
number of days of the fiscal year during which the Executive was employed, and
with a denominator of 365.
(c) As further consideration for the performance and
observance by the Executive of his obligations under this Agreement and as
additional, special consideration for his signing this Agreement and thereby
binding himself to the covenants enumerated herein, particularly those set
forth in Section 6 (Non-Competition Covenants) and 7 (Confidentiality and
Proprietary Information) the Company has paid a signing bonus of $175,000 to
the Executive, which the Executive does hereby acknowledge as having been
received, and the Company agrees to pay the Executive, subject to Section 9
(Termination of Employment), an additional signing bonus of $175,000 on
September 1, 1998.
(d) If Executive is employed by the Company on September
1, 1998, the Company agrees to issue to Executive on such date a stock option
for 25,000 shares of DPC Acquisition Corp. common stock with an exercise price
equal to the fair market value of such shares at the time of grant and with
other terms consistent with stock options being granted at such time.
<PAGE> 4
5. OTHER EXECUTIVE BENEFITS
(a) The Executive shall, during the employment term, be
eligible to participate in such pension, profit sharing, bonus, life insurance,
hospitalization and major medical and other employee benefit plans of the
Company in effect from time to time, to the extent that he is eligible under
and complies with the terms of those plans, but the allocation of benefits
under any plan that provides that allocations thereunder shall be in the
discretion of the board shall be as determined from time to time solely by the
board in its discretion.
(b) The Executive shall also participate in the Company's
paid vacation plan but in no event shall Executive's annual entitlement be less
than 4 weeks. Vacation not used by the end of a year shall be forfeited and
shall not be eligible to be carried over to another year or eligible for
reimbursement except as otherwise provided by Company policies.
6. NON-COMPETITION COVENANTS Throughout the employment
term and commencing with the date of this Agreement and ending on the later of
the end of the period that Executive receives severance pay from the Company
pursuant to Section 9 or the third anniversary of the date on which the
Executive ceases to be employed by the Company for any reason whatsoever, (the
"Non-Compete Period"), the Executive promises and agrees that he will not: (a)
directly or indirectly assist in, engage in, have any financial interest in, or
participate in any way in, as an owner, partner, employee, agent, board member,
or shareholder, any business that involves, in whole or in part, the design,
manufacture, distribution or sale of dry pet foods (or any other business in
which the Company may engage or begin preparation to engage during the
employment term) or make preparation with any person to do any of the
foregoing; provided, however, that the Executive may own, solely as an
investment, up to 1.0% of any class of securities of any person if such
securities are listed on any national or regional securities exchange; (b) call
upon or have any contact with any person or any successor in interest to any
person who was at any time during the Executive's last three years of
employment with the Company, a customer of the Company, or call upon or have
any contact with any person or any successor in interest to any person who is a
prospective customer of the Company, and with whom the Executive dealt, or on
whose account the Executive worked, at any time during the Executive's last
three years of employment with the Company, for the purpose of (i) diverting
any business of such person from the Company, or (ii) selling or offering to
sell to any such customer any product or service that is of the same general
type or that performs similar functions as any product or service which has
been sold, provided or offered for sale by the Company at any time during the
Executive's last three years of employment with the Company, (c) solicit any
employee of the Company to terminate his or her employment with the Company or
employ any such individual during his or her employment with the Company and
for a period of twelve months after such individual terminates his or her
employment with the Company, or (d) without the prior written consent of the
Company's board of directors, acquire or discuss the acquisition of any
ownership interest in or warrant or right to acquire any such interest, or
acquire any employment or other pecuniary benefit from any person that, at the
time, is a prospective candidate for or was a party to a control transaction.
The term "control transaction"
<PAGE> 5
means any transaction or series of transactions whereby the Company or a
controlling interest in the Company is acquired by another Person (whether by
purchase, merger, consolidation or sale of all or substantially all of the
Company's consolidated assets). The Executive acknowledges and agrees that the
consideration and benefits to be provided to the Executive under this Agreement
have been bargained and negotiated in exchange for, and in consideration of,
Executive's agreement to abide by the terms and provisions of this section 6
and section 7 (Confidentiality and Proprietary Information). The Executive
acknowledges and agrees that all of the Executive's duties and obligations
under this section 6 shall survive the expiration or termination of the
Executive's employment with the Company, regardless of the causes therefor.
7. CONFIDENTIALITY AND PROPRIETARY INFORMATION In
addition to any common-law restriction upon the Executive's use, disclosure or
exploitation of confidential, proprietary or secret information of the Company,
the Executive covenants and agrees that, without prior written consent of the
Company, he will not at any time during or after the employment term use for
himself or disclose to or use for any other person, directly or indirectly, any
secret, confidential or proprietary information of the Company, including,
without limitation, the Company's processes, formulas, techniques, customer
identities, preferences, requirements, reports and other sensitive customer
information, servicing methods, profit margins, analyses, employee, vendor and
supplier information, business or marketing plans or strategies, financial data
and presentation or sales materials, technologies, computer programs, software,
designs and inventions (collectively, the "confidential information");
provided, however, that the term confidential information does not include or
refer to any information that is in the public domain (other than by a breach
of this Agreement). The Executive acknowledges that the confidential
information is vital, sensitive, confidential and proprietary to the Company.
The Executive covenants and agrees that all files, reports, lists, materials,
records, documents, notes, memoranda, specifications, product or other
formulas, equipment and other items, and any originals, copies, recordings,
abstracts or notes thereof, relating to the confidential information or the
Company business that the Executive is or was either provided, prepares or
prepared himself, uses or used or simply acquires or acquired during this
employment with the Company (either before or during the employment term), are
and shall remain the sole and exclusive property of the Company and shall be
immediately returned to the Company at any time upon demand and, in all events,
immediately at the end of the employment term. The Executive acknowledges and
agrees that all of the Executive's duties and obligations under this section 7
shall survive the expiration or termination of the Executive's employment with
the Company, regardless of the cause therefor.
8. REMEDIES FOR BREACH In the event of a
breach or threatened breach of any of the Executive's duties and obligations
under sections 6 (Non-Competition Covenants) or 7 (Confidentiality and
Proprietary Information), the Company shall be entitled, in addition to any
other legal or equitable remedies the Company may have in that connection
(including any right to damages that the Company may suffer), to a temporary,
preliminary, and/or permanent injunction restraining such breach or threatened
breach. The Executive hereby expressly acknowledges that the harm that might
result to the Company's goodwill or its relationships with customers, or as a
result
<PAGE> 6
of the disclosure or use of the confidential information, is largely
irreparable. The Executive specifically agrees that, in the event there is a
question as to the enforceability of sections 6 (Non-Competition Covenants) or
7 (Confidentiality and Proprietary Information), the Executive will not engage
in any conduct inconsistent with or contrary to either of such sections until
after the question has been resolved by a non-appealable final judgement.
9. TERMINATION OF EMPLOYMENT
(a) The employment term and the Executive's employment by
the Company shall terminate: (i) upon the death of the Executive; (ii) upon
the disability of the Executive (as defined in section 9(b)(2)) upon thirty
(30) days prior written notice given by the Company to the Executive; (iii) for
cause (as defined in section 9(b)(1)), immediately upon the giving of written
notice thereof by the Company to the Executive or at such later time as the
notice may specify; (iv) without cause, upon not less than thirty (30) days
prior written notice given by the Company to the Executive, or (v) voluntarily
by the Executive upon not less than thirty (30) days prior written notice given
to the Company by the Executive.
(b) In this section 9:
(1) "Cause" means; (a) the Executive has been
indicted for or convicted of a felony; (b) the
commission of any act by Executive constituting
financial dishonesty against the Company (including
fraud or embezzlement); (c) gross dereliction of duty
to the Company (other than by reason of death or
disability) after Executive has been advised by the
board of directors or the Company's president of any
such dereliction of duty (whether of the same or
similar nature) and has been given an opportunity to
correct his performance; (d) commission of an act
involving moral turpitude which (i) brings the
Company into public disrepute or disgrace, or (ii)
causes material injury to the customer relations,
operations or the business prospects of the Company;
(e) the repeated refusal or failure by Executive to
follow the lawful directives of the board of
directors or the president of the Company; or (f) the
material breach by Executive of the provisions of
this Agreement.
(2) "Disability" refers to any circumstances in
which the Executive, by reason of illness, incapacity
or other disability, has failed to perform his duties
or fulfill his obligations under this Agreement for a
cumulative total of 180 days in any 12-month period.
(c) Upon the termination of the Executive's employment
under the Agreement, the employment term shall end and all rights of the
Executive under this
<PAGE> 7
Agreement shall terminate, except that the Executive shall nonetheless be
entitled to receive the following:
(1) If the termination occurs by reason of the
death or disability of the Executive, the Executive
shall be entitled to receive the base salary accrued
through the date of termination and annual bonus
prorated through the date of termination.
(2) If the termination is made by the Company
without cause, or as a result of the Company
delivering a non-extension notice (but not as a
result of the Executive delivering a non- extension
notice to the Company), the Executive shall be
entitled to receive severance pay equivalent to his
base salary and annual bonus, if and as each would
have been payable if the Executive had not been so
terminated, for the period commencing on the first
day after the date of termination and terminating on
the third anniversary of the date on which Executive
ceases to be employed by the Company. With respect to
the annual bonus, for the year in which the
termination of employment occurred, the Executive
shall receive the annual bonus the Executive would
have been entitled to receive if the Executive had
remained employed for the entire year, and for the
last calendar year in which the Executive is
receiving severance payments, the Executive shall
receive a pro rata portion of the annual bonus the
Executive would have been entitled to receive if the
Executive had remained employed for the entire year
with such pro rata portion being equal to a fraction
with a numerator equal to the number of days of the
fiscal year during which the Executive receives
severance pay and with a denominator of 365.
(3) If the termination is made by the Company for
cause, or voluntarily by Executive, the Executive
shall be entitled to receive his base salary through
the date of termination. If any termination for
cause made by the Company is ever ultimately
determined by an court, agency or other tribunal to
have been without cause, then the Company's sole
liability under the Agreement or otherwise at law or
in equity shall be to pay the Executive those amounts
that would have otherwise been paid to the Executive
under section 9(c)(2) (Termination of Employment,
without cause) and the reasonable attorney's fees and
costs incurred by the Executive in successfully
obtaining this determination from the court, agency
or other tribunal.
(4) To the extent permitted by law or group
insurance plans maintained for the Company's
employees, Executive will be entitled to continue
coverage under any health, disability and life
insurance program during the period Executive is
receiving severance payments in accordance with
paragraphs 9(c)(1), (2) or
<PAGE> 8
(3), at no cost to the Executive. The Executive's
rights will continue under benefit programs that, by
their own terms or by law, extend beyond the date of
termination or continued coverage provided for in the
preceding sentence, including, without limitation,
health care under COBRA, pension, stock purchase or
stock option agreements, and non-qualified salary
continuation agreements.
10. NOTICE Any notice required or permitted to be given
under this agreement must be in writing and is effectively given:
(1) To the Company, when signed by the Executive and delivered in
person to the chairman of the board, president, or secretary
(excluding the Executive) of the Company, or, one day after the
date sent by national commercial courier for next day delivery, or
two days after the date mailed, by certified or registered mail,
postage prepaid, in either case to the address set forth below, or
at such other address as the Company may designate for this
purpose in a notice given to the Executive.
Attn: Chief Executive Officer
Doane Products Company
P.O. Box 879
West 20th & State Line Road
Joplin, MO 64802
(2) To the Executive, when signed by an officer of the Company
(excluding the Executive) and delivered to the Executive in
person, or, one day after the date sent by national commercial
courier for next day delivery, or two days after the date mailed,
by certified or registered mail, postage prepaid, in either case
to the address set forth under the Executive's signature at the
end of this Agreement or at such other address as the Executive
may designate for this purpose in a notice given to the Company.
11. INVALIDITY OF PROVISIONS If any provision of this
Agreement is adjudicated to be invalid or unenforceable under applicable law,
the validity or enforceability of the remaining provisions shall be unaffected.
To the extent that any provision of this agreement is adjudicated to be invalid
or unenforceable because it is over broad, that provision shall not be void but
rather shall be limited only to the extent required by applicable law and
enforced as so limited.
12. ENTIRE AGREEMENT; WRITTEN MODIFICATIONS This
Agreement contains the entire agreement between the parties and supersedes all
prior or contemporaneous representations, promises, understandings and
agreements between the Executive and the Company. This Agreement may not be
changed except by written agreement of the parties.
<PAGE> 9
13. GOVERNING LAW In light of the Company's contacts with the
state of Missouri and its significant interest in insuring that disputes as to
the validity and enforceability of section 6 (Non- Competition Covenants) and 7
(Confidentiality and Proprietary Information) of this Agreement are resolved on
a uniform basis, the Executive and the Company agree that any litigation
involving noncompliance with or alleged breach of sections 6 (Non-Competition
Covenants) or 7 (Confidentiality and Proprietary Information) must be filed and
conducted in Missouri and the Executive and the Company consent to the personal
jurisdiction of the federal and state courts sitting in Missouri for purposes
of any such litigation. This Agreement shall be governed by the internal laws
of the State of Missouri without regard to Missouri conflict of laws
principles.
14. CERTAIN DEFINED TERMS In this agreement:
(1) "Affiliate" of the Company means any person
controlling, controlled by or under common control
with the Company.
(2) "Annual bonus" is defined in section 4(b).
(3) "Base salary" is defined in section 4(a).
(4) "Board" is defined in section 4(a).
(5) "Company" as used in sections 6
(Non-Competition Covenants) and 7 (Confidentiality
and Proprietary Information), includes each affiliate
of the Company for which the Executive performs
services at any time during his employment if the
affiliate is engaged in any business that involves,
in whole or in part, the design, manufacture,
distribution or sale of dry pet foods (or any other
business in which the Company may engage or begin
preparation to engage during the employment term).
(6) "Control transaction" is defined in section
6(d).
(7) "Employment term" is defined in section 2(b).
(8) "Non-extension notice" is defined in section
2(a).
(9) "Person" includes any individual, trust,
estate, business trust, partnership, corporation,
unincorporated association, governmental entity,
limited liability company and any other juridical
person.
15. COMPANY'S AND EXECUTIVE'S RIGHT TO RECOVER COSTS The
Company and the Executive undertake and agree that, if either party breaches or
threatens to breach any provision of this Agreement, the breaching party shall
be liable for
<PAGE> 10
reasonable attorneys' fees and costs incurred by the other party in enforcing
its rights under this Agreement.
16. RULE OF CONSTRUCTION The rule of construction to
the effect that ambiguities are to be resolved against the drafting party shall
not be employed in interpreting this Agreement.
17. TOLLING In view of the parties' recognition and
agreement that the Company is entitled after the expiration or termination of
the employment term to certain limited protection from competition by the
Executive, the Executive and the Company agree that the running of the period
set forth in section 6 (Non-Competition Covenants) shall be tolled during any
period of time in which the Executive violates that section.
18. SUCCESSORS AND ASSIGNS The Company may assign this
Agreement or any right or interest under this Agreement to any person that
hereafter becomes an affiliate of the Company or to any person to which the
Company sells all or any substantial part of its assets and, in such event, the
Company shall, automatically upon the assignee's assumption of the Company's
obligations hereunder, be released from any such obligations. This Agreement
shall inure to the benefit of the Company, and its successors and assigns.
19. NONWAIVER OF RIGHTS The Company's or the
Executive's failure to enforce at any time any of the provisions of this
Agreement or to require at any time performance by the other party of any of
the provisions hereof shall in no way be construed to be a waiver of such
provisions or to affect either the validity of this Agreement, or any part
hereof, or the right of the Company or the Executive thereafter to enforce each
and every provision in accordance with the terms of this Agreement.
- The remainder of this page is intentionally left blank -
<PAGE> 11
PLEASE NOTE: BY SIGNING THIS AGREEMENT, THE EXECUTIVE IS HEREBY CERTIFYING
THAT THE EXECUTIVE (A) RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW AND STUDY
BEFORE EXECUTING IT; (B) READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C)
HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THIS AGREEMENT TO ASK ANY QUESTIONS
THE EXECUTIVE HAD ABOUT THIS AGREEMENT AND RECEIVED SATISFACTORY ANSWERS TO ALL
SUCH QUESTIONS; (D) UNDERSTANDS THE EXECUTIVE'S RIGHTS AND OBLIGATIONS UNDER
THIS AGREEMENT; AND (E) EXECUTED AND DELIVERED THIS AGREEMENT AT THE OFFICES OF
THE COMPANY IN JOPLIN, MISSOURI.
EXECUTED AND EFFECTIVE as of the date first written above.
WITNESS: DOANE PRODUCTS COMPANY
/s/ BOB L. ROBINSON
- ---------------------------- --------------------------------
Bob L. Robinson
Chief Executive Officer
WITNESS: EXECUTIVE:
/s/ DOUGLAS J. CAHILL
- ---------------------------- --------------------------------
--------------------------------
Street Address
--------------------------------
City, State, Zip Code
<PAGE> 12
EXHIBIT A
DOANE PRODUCTS COMPANY
ANNUAL BONUS PROGRAM
1. For each fiscal year of the Company during the employment
term, the board, after taking into consideration the recommendations of the
president of the Company, will establish objectives comprised of both corporate
and individual goals (each goal will be referred to herein as a "Target"), as
well as the percentage weighting (the "weight") that will apply to each Target,
wherein the sum of the weights shall equal 100%.
2. For the Company's 1998 fiscal year, the board will set an
EBITDA Target for the Company and its subsidiaries which will be weighted at
100% for the calculation of the bonus payable under this program for the 1998
fiscal year. The term "EBITDA" will have the same meaning as set forth in the
DPC Acquisition Corp. Option Agreements granted under the DPC Acquisition Corp.
1996 Stock Option Plan.
3. For purposes of computing the Executive's annual bonus, the
bonus will be equal to 100% of his base salary in effect at the end of the
fiscal year (the "base bonus") and the annual bonus will be computed by summing
the percentages earned for each Target, as determined by computing the sum of
paragraphs in 3(a) through 3(d) below for each Target that has been assigned a
weight, and then multiplying that sum times the base bonus.
(a) Where the actual performance exceeds 85% of
the Target for such fiscal year, Executive will receive 55% of
the weight assigned for the Target.
<PAGE> 13
(b) For each of the first full 15 percentage
points by which actual performance exceeds 85% of the Target,
Executive will receive 3% of the weight assigned for the
Target. The maximum which Executive may receive under this
paragraph 3(b) cannot exceed 45% of the weight assigned for
the Target.
(c) For each of the first full 15 percentage
points by which the actual performance exceeds 100% of the
Target, Executive will receive 6% of the weight assigned for
the Target. The maximum which Executive may receive under
this paragraph 3(c) cannot exceed 90% of the weight assigned
for the Target.
(d) For each full percentage point by which the
actual performance exceeds 115% of the Target, Executive will
receive 9% of the weight assigned for the target.
For illustrative purposes, assume the Executive's base bonus is
$30,000 and his weighting is as follows:
<TABLE>
<CAPTION>
Target Weight Description of Target
------ ------ ---------------------
<S> <C> <C>
1 50% Corporate EBITDA
2 35% Territory Margin Contribution
3 15% Expense Control
</TABLE>
Bonus Calculation:
<TABLE>
<CAPTION>
Assumed % Earned Weighted
Target Performance for Target Weight % Earned
------ ----------- ---------- ------ --------
<S> <C> <C> <C> <C>
1 95% 85% x 50% = 42.5%
2 120% 235% x 35% = 82.3%
3 80% 0 x 15% = 0
--------
% of base bonus earned 124.8%
Base bonus $30,000
Bonus earned $37,440
</TABLE>
<PAGE> 14
4. In the event that, after the setting of the Targets, the
Company or any of its subsidiaries acquires additional assets, entities or
subsidiaries that produce the same or similar products, which acquisition,
either singly or together with one or more other acquisitions, the board
determines in good faith may significantly affect the Targets for the fiscal
year, the board may, in good faith, either (a) adjust such Targets to reflect
the projected effect of such acquisition or acquisitions on any Targets or (b)
exclude the effects of such acquisition or acquisitions on the Targets for
purposes of determining Executive's annual bonus by calculating the Targets for
such fiscal year on a pro forma basis as though such acquisition or
acquisitions had not been consummated. Similarly, in the event that, after
setting the Targets, the Company is acquired by another Person (whether by
purchase, merger, consolidation or sale of all or substantially all of the
Company's consolidated assets) and the board determines in good faith that such
acquisition may significantly affect the Targets for the fiscal year, the board
may, in good faith, either (x) adjust such Targets to reflect the projected
effect of such acquisition on any Target or (y) exclude the effects of such
acquisition on the Targets for purposes of determining Executive's annual bonus
by calculating the Targets for such fiscal year on a pro forma basis as though
such acquisition had not been consummated.
5. The annual bonus payable for any fiscal year will be paid
within 30 days after the delivery of the Company's audited financial statements
for such fiscal year. In the event of any dispute between the Company and
Executive as to the amount of the bonus for any fiscal year, such dispute will
be resolved by the
<PAGE> 15
Company's auditors or any one of Price Waterhouse, Arthur Andersen, or Ernst &
Young, or their successors, as selected by the board, by having such accounting
firm calculate the amount of the bonus for such fiscal year utilizing the
Company's audited financial statements for such fiscal year. The decision of
such accounting firm will be final and binding on the Company and Executive.
6. Except as otherwise provided herein, capitalized terms used
herein which are not defined herein have the meanings given to such terms under
the Employment Agreement to which this Annual Bonus Program is attached.
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
BETWEEN
DOANE PRODUCTS COMPANY
AND
THOMAS R. HEIDENTHAL
THIS EMPLOYMENT AGREEMENT dated January 1, 1998 is made between Doane
Products Company (the "Company"), a Delaware corporation, and Thomas R.
Heidenthal (the "Executive"). This Agreement is made with reference to the
following facts and objectives:
R E C I T A L S
A. The Executive shall be the Senior Vice President, Chief
Financial Officer, and Secretary of the Company and has served the Company as
an employee continuously during the past eight months;
B. The Executive acknowledges that the services previously
provided by him to the Company and the services to be performed by him under
this Agreement are of a special and unique character; the business of the
Company is currently international in scope and the Company has plans to
continue to expand its business throughout the world; and the Company competes
with other persons that are or could be located in any part of the world; and
in order to assure the Company that the Company will retain its value and the
Company's business as a going concern, it is necessary that the Executive
undertake not to utilize his special knowledge of the Company, its business and
its relationships with customers and suppliers to compete with the Company if
the Executive were to leave the Company.
C. The Executive further acknowledges that, during his employment
to date by the Company, he has occupied a position of trust and confidence with
the Company and, during such employment, the Company has compensated him, among
other purposes, to develop and preserve customer relationships and other
goodwill exclusively for the Company's benefit and that, as a result, he has
developed customer relationships and goodwill that are valuable and important
to the Company, and has become familiar with the Company's trade secrets,
including, without limitation, its profit margins, customer preferences and
requirements, and with other proprietary and confidential information
concerning the Company and its business.
<PAGE> 2
D. The Executive further acknowledges that, throughout his
employment under this Agreement, he is expected to continue to occupy a
position of trust and confidence with the Company. In return, the Company will
continue to compensate him, among other purposes, to develop and preserve
customer relationships and goodwill exclusively for the Company's benefit,
which will be valuable and important to the Company. Further, he will likely
continue to be familiar with the Company's trade secrets, including, without
limitation, its profit margins, customer preferences and requirements, and with
other confidential and proprietary information concerning the Company and its
business.
E. The Executive further acknowledges that the use by him for his
own benefit or that of others of such goodwill, trade secrets or proprietary
and confidential information or the solicitation of and/or doing business with
any of the Company's customers and potential customers would have a material
adverse effect on the Company and its business, and would place the Company at
a substantial competitive disadvantage.
F. The Executive further acknowledges that the agreements and
covenants contained in this Agreement, and, in particular, sections 6
(Non-Competition Covenants) and 7 (Confidentiality and Proprietary
Information), are essential to protect the Company and the goodwill of the
Company's business, are a condition precedent to the Company's willingness to
enter this Agreement and to pay the consideration set forth in this Agreement,
and are necessary and reasonable in light of the particular business of the
Company, his knowledge thereof and the services he has previously performed and
will perform under this Agreement.
THE PARTIES ACCORDINGLY AGREE AS FOLLOWS:
AGREEMENT
1. EMPLOYMENT The Company hereby agrees to
employ the Executive, and the Executive hereby accepts employment by the
Company, on the terms and conditions of this Agreement.
2. EMPLOYMENT TERM
(a) Subject to section 9 (Termination of Employment), the
term of the Executive's employment under this Agreement begins on the date of
this Agreement and ends on the third anniversary of that date; provided,
however, that, commencing on the third anniversary of the date of this
Agreement and each subsequent anniversary, the term shall be extended for an
additional one year period unless either the Executive or the Company gives the
other party written notice at least thirty (30) days before such anniversary
that this Agreement shall terminate on the then scheduled expiration date (the
"non-extension notice"). If such non-extension notice is given, this Agreement
shall automatically terminate on such expiration date.
<PAGE> 3
(b) The actual term of the Executive's employment under
this Agreement, including any extension, continuation or earlier termination of
the original term, is referred to in this Agreement as the "employment term."
3. RESPONSIBILITIES During the employment term,
the Executive shall serve as Senior Vice President, Chief Financial Officer,
and Secretary or in any other position or capacity to which he may from time to
time be elected or appointed, and shall perform such services for the Company
as are reasonably required by the Company, and as may be required by virtue of
the offices and positions held by the Executive. The Executive agrees that, as
a part of his duties under this Agreement, he may be required from time to time
to perform services for affiliates of the Company. The Executive will not be
required to relocate his residence outside the continental United States, but
will be available for such travel as his responsibilities under this Agreement
may reasonably require. The Executive shall devote his full time and best
efforts to the performance of all responsibilities to the Company and its
affiliates and to further their respective businesses and interests.
4. COMPENSATION
(a) The Company agrees to pay the Executive throughout
the employment term an initial base salary at the rate of $175,000.00 per annum
(as adjusted pursuant to the provision of this paragraph 4(a)) (the "base
salary") payable in equal installments in accordance with Company payroll
practices from time to time in effect. Executive's base salary will be
reviewed and may be adjusted annually by the president of the Company or by the
board of directors of the Company (or the compensation committee thereof) (the
"board"), after taking into consideration the recommendations of the president
of the Company, provided that Executive's base salary may not be decreased
below his initial base salary.
(b) Subject to Section 9 (Termination of Employment), the
Company agrees to pay the Executive throughout the employment term an annual
bonus (the "annual bonus") calculated pursuant to Exhibit A attached hereto.
The amount of the annual bonus payable to the Executive shall be prorated for
the portion of a year the Executive is employed by multiplying the annual bonus
determined pursuant to Exhibit A by a fraction with a numerator equal to the
number of days of the fiscal year during which the Executive was employed, and
with a denominator of 365.
5. OTHER EXECUTIVE BENEFITS
(a) The Executive shall, during the employment term, be
eligible to participate in such pension, profit sharing, bonus, life insurance,
hospitalization and major medical and other employee benefit plans of the
Company in effect from time to time, to the extent that he is eligible under
and complies with the terms of those plans, but the allocation of benefits
under any plan that provides that allocations thereunder shall be in the
discretion of the board shall be as determined from time to time solely by the
board in its discretion.
<PAGE> 4
(b) The Executive shall also participate in the Company's
paid vacation plan but in no event shall Executive's annual entitlement be less
than 4 weeks. Vacation not used by the end of a year shall be forfeited and
shall not be eligible to be carried over to another year or eligible for
reimbursement except as otherwise provided by Company policies.
6. NON-COMPETITION COVENANTS Throughout the employment
term and commencing with the date of this Agreement and ending on the later of
the end of the period that Executive receives severance pay from the Company
pursuant to Section 9 or the second anniversary of the date on which the
Executive ceases to be employed by the Company for any reason whatsoever, (the
"Non-Compete Period"), the Executive promises and agrees that he will not: (a)
directly or indirectly assist in, engage in, have any financial interest in, or
participate in any way in, as an owner, partner, employee, agent, board member,
or shareholder, any business that involves, in whole or in part, the design,
manufacture, distribution or sale of dry pet foods (or any other business in
which the Company may engage or begin preparation to engage during the
employment term) or make preparation with any person to do any of the
foregoing; provided, however, that the Executive may own, solely as an
investment, up to 1.0% of any class of securities of any person if such
securities are listed on any national or regional securities exchange; (b) call
upon or have any contact with any person or any successor in interest to any
person who was at any time during the Executive's last three years of
employment with the Company, a customer of the Company, or call upon or have
any contact with any person or any successor in interest to any person who is a
prospective customer of the Company, and with whom the Executive dealt, or on
whose account the Executive worked, at any time during the Executive's last
three years of employment with the Company, for the purpose of (i) diverting
any business of such person from the Company, or (ii) selling or offering to
sell to any such customer any product or service that is of the same general
type or that performs similar functions as any product or service which has
been sold, provided or offered for sale by the Company at any time during the
Executive's last three years of employment with the Company, (c) solicit any
employee of the Company to terminate his or her employment with the Company or
employ any such individual during his or her employment with the Company and
for a period of twelve months after such individual terminates his or her
employment with the Company, or (d) without the prior written consent of the
Company's board of directors, acquire or discuss the acquisition of any
ownership interest in or warrant or right to acquire any such interest, or
acquire any employment or other pecuniary benefit from any person that, at the
time, is a prospective candidate for or was a party to a control transaction.
The term "control transaction" means any transaction or series of transactions
whereby the Company or a controlling interest in the Company is acquired by
another Person (whether by purchase, merger, consolidation or sale of all or
substantially all of the Company's consolidated assets). The Executive
acknowledges and agrees that the consideration and benefits to be provided to
the Executive under this Agreement have been bargained and negotiated in
exchange for, and in consideration of, Executive's agreement to abide by the
terms and provisions of this section 6 and section 7 (Confidentiality and
Proprietary Information). The Executive acknowledges and agrees that all of
the Executive's duties and obligations under this section 6 shall survive the
expiration or termination of the Executive's employment with the Company,
regardless of the causes therefor.
<PAGE> 5
7. CONFIDENTIALITY AND PROPRIETARY INFORMATION In
addition to any common-law restriction upon the Executive's use, disclosure or
exploitation of confidential, proprietary or secret information of the Company,
the Executive covenants and agrees that, without prior written consent of the
Company, he will not at any time during or after the employment term use for
himself or disclose to or use for any other person, directly or indirectly, any
secret, confidential or proprietary information of the Company, including,
without limitation, the Company's processes, formulas, techniques, customer
identities, preferences, requirements, reports and other sensitive customer
information, servicing methods, profit margins, analyses, employee, vendor and
supplier information, business or marketing plans or strategies, financial data
and presentation or sales materials, technologies, computer programs, software,
designs and inventions (collectively, the "confidential information");
provided, however, that the term confidential information does not include or
refer to any information that is in the public domain (other than by a breach
of this Agreement). The Executive acknowledges that the confidential
information is vital, sensitive, confidential and proprietary to the Company.
The Executive covenants and agrees that all files, reports, lists, materials,
records, documents, notes, memoranda, specifications, product or other
formulas, equipment and other items, and any originals, copies, recordings,
abstracts or notes thereof, relating to the confidential information or the
Company business that the Executive is or was either provided, prepares or
prepared himself, uses or used or simply acquires or acquired during this
employment with the Company (either before or during the employment term), are
and shall remain the sole and exclusive property of the Company and shall be
immediately returned to the Company at any time upon demand and, in all events,
immediately at the end of the employment term. The Executive acknowledges and
agrees that all of the Executive's duties and obligations under this section 7
shall survive the expiration or termination of the Executive's employment with
the Company, regardless of the cause therefor.
8. REMEDIES FOR BREACH In the event of a
breach or threatened breach of any of the Executive's duties and obligations
under sections 6 (Non-Competition Covenants) or 7 (Confidentiality and
Proprietary Information), the Company shall be entitled, in addition to any
other legal or equitable remedies the Company may have in that connection
(including any right to damages that the Company may suffer), to a temporary,
preliminary, and/or permanent injunction restraining such breach or threatened
breach. The Executive hereby expressly acknowledges that the harm that might
result to the Company's goodwill or its relationships with customers, or as a
result of the disclosure or use of the confidential information, is largely
irreparable. The Executive specifically agrees that, in the event there is a
question as to the enforceability of sections 6 (Non-Competition Covenants) or
7 (Confidentiality and Proprietary Information), the Executive will not engage
in any conduct inconsistent with or contrary to either of such sections until
after the question has been resolved by a non-appealable final judgement.
<PAGE> 6
9. TERMINATION OF EMPLOYMENT
(a) The employment term and the Executive's employment by the
Company shall terminate: (i) upon the death of the Executive; (ii) upon the
disability of the Executive (as defined in section 9(b)(2)) upon thirty (30)
days prior written notice given by the Company to the Executive; (iii) for
cause (as defined in section 9(b)(1)), immediately upon the giving of written
notice thereof by the Company to the Executive or at such later time as the
notice may specify; (iv) without cause, upon not less than thirty (30) days
prior written notice given by the Company to the Executive, or (v) voluntarily
by the Executive upon not less than thirty (30) days prior written notice given
to the Company by the Executive.
(b) In this section 9:
(1) "Cause" means; (a) the Executive has been
indicted for or convicted of a felony; (b) the
commission of any act by Executive constituting
financial dishonesty against the Company (including
fraud or embezzlement); (c) gross dereliction of duty
to the Company (other than by reason of death or
disability) after Executive has been advised by the
board of directors or the Company's president of any
such dereliction of duty (whether of the same or
similar nature) and has been given an opportunity to
correct his performance; (d) commission of an act
involving moral turpitude which (i) brings the
Company into public disrepute or disgrace, or (ii)
causes material injury to the customer relations,
operations or the business prospects of the Company;
(e) the repeated refusal or failure by Executive to
follow the lawful directives of the board of
directors or the president of the Company; or (f) the
material breach by Executive of the provisions of
this Agreement.
(2) "Disability" refers to any circumstances in
which the Executive, by reason of illness, incapacity
or other disability, has failed to perform his duties
or fulfill his obligations under this Agreement for a
cumulative total of 180 days in any 12-month period.
(c) Upon the termination of the Executive's employment
under the Agreement, the employment term shall end and all rights of the
Executive under this Agreement shall terminate, except that the Executive shall
nonetheless be entitled to receive the following:
(1) If the termination occurs by reason of the
death or disability of the Executive, the Executive
shall be entitled to receive the base salary accrued
through the date of termination and annual bonus
prorated through the date of termination.
<PAGE> 7
(2) If the termination is made by the Company
without cause, or as a result of the Company
delivering a non-extension notice (but not as a
result of the Executive delivering a non- extension
notice to the Company), the Executive shall be
entitled to receive severance pay equivalent to his
base salary and annual bonus, if and as each would
have been payable if the Executive had not been so
terminated, for the period commencing on the first
day after the date of termination and terminating on
the second anniversary of the date on which Executive
ceases to be employed by the Company. With respect to
the annual bonus, for the year in which the
termination of employment occurred, the Executive
shall receive the annual bonus the Executive would
have been entitled to receive if the Executive had
remained employed for the entire year, and for the
last calendar year in which the Executive is
receiving severance payments, the Executive shall
receive a pro rata portion of the annual bonus the
Executive would have been entitled to receive if the
Executive had remained employed for the entire year
with such pro rata portion being equal to a fraction
with a numerator equal to the number of days of the
fiscal year during which the Executive receives
severance pay and with a denominator of 365.
(3) If the termination is made by the Company for
cause, or voluntarily by Executive, the Executive
shall be entitled to receive his base salary through
the date of termination. If any termination for
cause made by the Company is ever ultimately
determined by an court, agency or other tribunal to
have been without cause, then the Company's sole
liability under the Agreement or otherwise at law or
in equity shall be to pay the Executive those amounts
that would have otherwise been paid to the Executive
under section 9(c)(2) (Termination of Employment,
without cause) and the reasonable attorney's fees and
costs incurred by the Executive in successfully
obtaining this determination from the court, agency
or other tribunal.
(4) To the extent permitted by law or group
insurance plans maintained for the Company's
employees, Executive will be entitled to continue
coverage under any health, disability and life
insurance program during the period Executive is
receiving severance payments in accordance with
paragraphs 9(c)(1), (2) or (3), at no cost to the
Executive. The Executive's rights will continue
under benefit programs that, by their own terms or by
law, extend beyond the date of termination or
continued coverage provided for in the preceding
sentence, including, without limitation, health care
under COBRA, pension, stock purchase or stock option
agreements, and non-qualified salary continuation
agreements.
<PAGE> 8
10. NOTICE Any notice required or permitted to be given
under this agreement must be in writing and is effectively given:
(1) To the Company, when signed by the Executive and delivered in
person to the chairman of the board, president, or secretary
(excluding the Executive) of the Company, or, one day after the
date sent by national commercial courier for next day delivery, or
two days after the date mailed, by certified or registered mail,
postage prepaid, in either case to the address set forth below, or
at such other address as the Company may designate for this
purpose in a notice given to the Executive.
Attn: Chief Executive Officer
Doane Products Company
P.O. Box 879
West 20th & State Line Road
Joplin, MO 64802
(2) To the Executive, when signed by an officer of the Company
(excluding the Executive) and delivered to the Executive in
person, or, one day after the date sent by national commercial
courier for next day delivery, or two days after the date mailed,
by certified or registered mail, postage prepaid, in either case
to the address set forth under the Executive's signature at the
end of this Agreement or at such other address as the Executive
may designate for this purpose in a notice given to the Company.
11. INVALIDITY OF PROVISIONS If any provision of this
Agreement is adjudicated to be invalid or unenforceable under applicable law,
the validity or enforceability of the remaining provisions shall be unaffected.
To the extent that any provision of this agreement is adjudicated to be invalid
or unenforceable because it is over broad, that provision shall not be void but
rather shall be limited only to the extent required by applicable law and
enforced as so limited.
12. ENTIRE AGREEMENT; WRITTEN MODIFICATIONS This
Agreement contains the entire agreement between the parties and supersedes all
prior or contemporaneous representations, promises, understandings and
agreements between the Executive and the Company. This Agreement may not be
changed except by written agreement of the parties and specifically rescinds
and replaces the employment agreement between the Company and the Executive
dated March 3, 1997.
13. GOVERNING LAW In light of the Company's contacts with the
state of Missouri and its significant interest in insuring that disputes as to
the validity and enforceability of section 6 (Non- Competition Covenants) and 7
(Confidentiality and Proprietary Information) of this Agreement are resolved on
a uniform basis, the Executive and the Company agree that any litigation
involving noncompliance with or alleged breach of sections 6 (Non-Competition
Covenants) or 7 (Confidentiality and Proprietary Information) must be filed and
conducted in Missouri and the Executive and
<PAGE> 9
the Company consent to the personal jurisdiction of the federal and state
courts sitting in Missouri for purposes of any such litigation. This Agreement
shall be governed by the internal laws of the State of Missouri without regard
to Missouri conflict of laws principles.
14. CERTAIN DEFINED TERMS In this agreement:
(1) "Affiliate" of the Company means any person
controlling, controlled by or under common control
with the Company.
(2) "Annual bonus" is defined in section 4(b).
(3) "Base salary" is defined in section 4(a).
(4) "Board" is defined in section 4(a).
(5) "Company" as used in sections 6
(Non-Competition Covenants) and 7 (Confidentiality
and Proprietary Information), includes each affiliate
of the Company for which the Executive performs
services at any time during his employment if the
affiliate is engaged in any business that involves,
in whole or in part, the design, manufacture,
distribution or sale of dry pet foods (or any other
business in which the Company may engage or begin
preparation to engage during the employment term).
(6) "Control transaction" is defined in section
6(d).
(7) "Employment term" is defined in section 2(b).
(8) "Non-extension notice" is defined in section
2(a).
(9) "Person" includes any individual, trust,
estate, business trust, partnership, corporation,
unincorporated association, governmental entity,
limited liability company and any other juridical
person.
15. COMPANY'S AND EXECUTIVE'S RIGHT TO RECOVER COSTS
The Company and the Executive undertake and agree that, if either party
breaches or threatens to breach any provision of this Agreement, the breaching
party shall be liable for reasonable attorneys' fees and costs incurred by the
other party in enforcing its rights under this Agreement.
16. RULE OF CONSTRUCTION The rule of construction to
the effect that ambiguities are to be resolved against the drafting party shall
not be employed in interpreting this Agreement.
<PAGE> 10
17. TOLLING In view of the parties' recognition and
agreement that the Company is entitled after the expiration or termination of
the employment term to certain limited protection from competition by the
Executive, the Executive and the Company agree that the running of the period
set forth in section 6 (Non-Competition Covenants) shall be tolled during any
period of time in which the Executive violates that section.
18. SUCCESSORS AND ASSIGNS The Company may assign this
Agreement or any right or interest under this Agreement to any person that
hereafter becomes an affiliate of the Company or to any person to which the
Company sells all or any substantial part of its assets and, in such event, the
Company shall, automatically upon the assignee's assumption of the Company's
obligations hereunder, be released from any such obligations. This Agreement
shall inure to the benefit of the Company, and its successors and assigns.
19. NONWAIVER OF RIGHTS The Company's or the
Executive's failure to enforce at any time any of the provisions of this
Agreement or to require at any time performance by the other party of any of
the provisions hereof shall in no way be construed to be a waiver of such
provisions or to affect either the validity of this Agreement, or any part
hereof, or the right of the Company or the Executive thereafter to enforce each
and every provision in accordance with the terms of this Agreement.
- The remainder of this page is intentionally left blank -
<PAGE> 11
PLEASE NOTE: BY SIGNING THIS AGREEMENT, THE EXECUTIVE IS HEREBY
CERTIFYING THAT THE EXECUTIVE (A) RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW
AND STUDY BEFORE EXECUTING IT; (B) READ THIS AGREEMENT CAREFULLY BEFORE SIGNING
IT; (C) HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THIS AGREEMENT TO ASK ANY
QUESTIONS THE EXECUTIVE HAD ABOUT THIS AGREEMENT AND RECEIVED SATISFACTORY
ANSWERS TO ALL SUCH QUESTIONS; (D) UNDERSTANDS THE EXECUTIVE'S RIGHTS AND
OBLIGATIONS UNDER THIS AGREEMENT; AND (E) EXECUTED AND DELIVERED THIS AGREEMENT
AT THE OFFICES OF THE COMPANY IN JOPLIN, MISSOURI.
EXECUTED AND EFFECTIVE as of the date first written above.
WITNESS: DOANE PRODUCTS COMPANY
/s/ BOB L. ROBINSON
- ------------------------- --------------------------------
Bob L. Robinson
President and CEO
WITNESS: EXECUTIVE:
/s/ THOMAS R. HEIDENTHAL
- ------------------------- --------------------------------
--------------------------------
Street Address
--------------------------------
City, State, Zip Code
<PAGE> 12
EXHIBIT A
DOANE PRODUCTS COMPANY
ANNUAL BONUS PROGRAM
1. For each fiscal year of the Company during the employment
term, the board, after taking into consideration the recommendations of the
president of the Company, will establish objectives comprised of both
corporate and individual goals (each goal will be referred to herein as a
"Target"), as well as the percentage weighting (the "weight") that will apply
to each Target, wherein the sum of the weights shall equal 100%.
2. For the Company's 1998 fiscal year, the board will set an
EBITDA Target for the Company and its subsidiaries which will be weighted at
100% for the calculation of the bonus payable under this program for the 1998
fiscal year. The term "EBITDA" will have the same meaning as set forth in the
DPC Acquisition Corp. Option Agreements granted under the DPC Acquisition Corp.
1996 Stock Option Plan.
3. For purposes of computing the Executive's annual bonus, the
bonus will be equal to 50% of his base salary in effect at the end of the
fiscal year (the "base bonus") and the annual bonus will be computed by summing
the percentages earned for each Target, as determined by computing the sum of
paragraphs in 3(a) through 3(d) below for each Target that has been assigned a
weight, and then multiplying that sum times the base bonus.
(a) Where the actual performance exceeds 85% of
the Target for such fiscal year, Executive will receive 55% of
the weight assigned for the Target.
<PAGE> 13
(b) For each of the first full 15 percentage
points by which actual performance exceeds 85% of the Target,
Executive will receive 3% of the weight assigned for the
Target. The maximum which Executive may receive under this
paragraph 3(b) cannot exceed 45% of the weight assigned for
the Target.
(c) For each of the first full 15 percentage
points by which the actual performance exceeds 100% of the
Target, Executive will receive 6% of the weight assigned for
the Target. The maximum which Executive may receive under
this paragraph 3(c) cannot exceed 90% of the weight assigned
for the Target.
(d) For each full percentage point by which the
actual performance exceeds 115% of the Target, Executive will
receive 9% of the weight assigned for the target. For
illustrative purposes, assume the Executive's base bonus is
$30,000 and his weighting is as follows:
<TABLE>
<CAPTION>
Target Weight Description of Target
------ ------ ---------------------
<S> <C> <C>
1 50% Corporate EBITDA
2 35% Territory Margin Contribution
3 15% Expense Control
</TABLE>
Bonus Calculation:
<TABLE>
<CAPTION>
Assumed % Earned Weighted
Target Performance for Target Weight % Earned
------ ----------- ---------- ------ --------
<S> <C> <C> <C> <C>
1 95% 85% x 50% = 42.5%
2 120% 235% x 35% = 82.3%
3 80% 0 x 15% = 0
--------
% of base bonus earned 124.8%
Base bonus $30,000
Bonus earned $37,440
</TABLE>
<PAGE> 14
4. In the event that, after the setting of the Targets, the
Company or any of its subsidiaries acquires additional assets, entities or
subsidiaries that produce the same or similar products, which acquisition,
either singly or together with one or more other acquisitions, the board
determines in good faith may significantly affect the Targets for the fiscal
year, the board may, in good faith, either (a) adjust such Targets to reflect
the projected effect of such acquisition or acquisitions on any Targets or (b)
exclude the effects of such acquisition or acquisitions on the Targets for
purposes of determining Executive's annual bonus by calculating the Targets for
such fiscal year on a pro forma basis as though such acquisition or acquisitions
had not been consummated. Similarly, in the event that, after setting the
Targets, the Company is acquired by another Person (whether by purchase, merger,
consolidation or sale of all or substantially all of the Company's consolidated
assets) and the board determines in good faith that such acquisition may
significantly affect the Targets for the fiscal year, the board may, in good
faith, either (x) adjust such Targets to reflect the projected effect of such
acquisition on any Target or (y) exclude the effects of such acquisition on the
Targets for purposes of determining Executive's annual bonus by calculating the
Targets for such fiscal year on a pro forma basis as though such acquisition had
not been consummated.
5. The annual bonus payable for any fiscal year will be paid
within 30 days after the delivery of the Company's audited financial statements
for such fiscal year. In the event of any dispute between the Company and
Executive as to the amount of the bonus for any fiscal year, such dispute will
be resolved by the
<PAGE> 15
Company's auditors or any one of Price Waterhouse, Arthur Andersen, or Ernst &
Young, or their successors, as selected by the board, by having such accounting
firm calculate the amount of the bonus for such fiscal year utilizing the
Company's audited financial statements for such fiscal year. The decision of
such accounting firm will be final and binding on the Company and Executive.
6. Except as otherwise provided herein, capitalized terms used
herein which are not defined herein have the meanings given to such terms under
the Employment Agreement to which this Annual Bonus Program is attached.
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
BETWEEN
DOANE PRODUCTS COMPANY
AND
TERRY W. BECHTEL
THIS EMPLOYMENT AGREEMENT dated January 1, 1998 is made
between Doane Products Company (the "Company"), a Delaware corporation, and
Terry W. Bechtel (the "Executive"). This Agreement is made with reference to
the following facts and objectives:
R E C I T A L S
A. The Executive shall be the Vice President - Co-Pack
Business Development of the Company and has served the Company as an employee
continuously during the past twenty-four years;
B. The Executive acknowledges that the services
previously provided by him to the Company and the services to be performed by
him under this Agreement are of a special and unique character; the business of
the Company is currently international in scope and the Company has plans to
continue to expand its business throughout the world; and the Company competes
with other persons that are or could be located in any part of the world; and
in order to assure the Company that the Company will retain its value and the
Company's business as a going concern, it is necessary that the Executive
undertake not to utilize his special knowledge of the Company, its business and
its relationships with customers and suppliers to compete with the Company if
the Executive were to leave the Company.
C. The Executive further acknowledges that, during his
employment to date by the Company, he has occupied a position of trust and
confidence with the Company and, during such employment, the Company has
compensated him, among other purposes, to develop and preserve customer
relationships and other goodwill exclusively for the Company's benefit and
that, as a result, he has developed customer relationships and goodwill that
are valuable and important to the Company, and has become familiar with the
Company's trade secrets, including, without limitation, its profit margins,
customer preferences and requirements, and with other proprietary and
confidential information concerning the Company and its business.
<PAGE> 2
D. The Executive further acknowledges that, throughout
his employment under this Agreement, he is expected to continue to occupy a
position of trust and confidence with the Company. In return, the Company will
continue to compensate him, among other purposes, to develop and preserve
customer relationships and goodwill exclusively for the Company's benefit,
which will be valuable and important to the Company. Further, he will likely
continue to be familiar with the Company's trade secrets, including, without
limitation, its profit margins, customer preferences and requirements, and with
other confidential and proprietary information concerning the Company and its
business.
E. The Executive further acknowledges that the use by
him for his own benefit or that of others of such goodwill, trade secrets or
proprietary and confidential information or the solicitation of and/or doing
business with any of the Company's customers and potential customers would have
a material adverse effect on the Company and its business, and would place the
Company at a substantial competitive disadvantage.
F. The Executive further acknowledges that the
agreements and covenants contained in this Agreement, and, in particular,
sections 6 (Non-Competition Covenants) and 7 (Confidentiality and Proprietary
Information), are essential to protect the Company and the goodwill of the
Company's business, are a condition precedent to the Company's willingness to
enter this Agreement and to pay the consideration set forth in this Agreement,
and are necessary and reasonable in light of the particular business of the
Company, his knowledge thereof and the services he has previously performed and
will perform under this Agreement.
THE PARTIES ACCORDINGLY AGREE AS FOLLOWS:
AGREEMENT
1. EMPLOYMENT The Company hereby
agrees to employ the Executive, and the Executive hereby accepts employment by
the Company, on the terms and conditions of this Agreement.
2. EMPLOYMENT TERM
(a) Subject to section 9 (Termination of
Employment), the term of the Executive's employment under this Agreement begins
on the date of this Agreement and ends on the third anniversary of that date;
provided, however, that, commencing on the third anniversary of the date of
this Agreement and each subsequent anniversary, the term shall be extended for
an additional one year period unless either the Executive or the Company gives
the other party written notice at least thirty (30) days before such
anniversary that this Agreement shall terminate on the then scheduled
expiration date (the "non-extension notice"). If such non-extension notice is
given, this Agreement shall automatically terminate on such expiration date.
<PAGE> 3
(b) The actual term of the Executive's employment
under this Agreement, including any extension, continuation or earlier
termination of the original term, is referred to in this Agreement as the
"employment term."
3. RESPONSIBILITIES During the
employment term, the Executive shall serve as Vice President - Co-Pack Business
Development or in any other position or capacity to which he may from time to
time be elected or appointed, and shall perform such services for the Company
as are reasonably required by the Company, and as may be required by virtue of
the offices and positions held by the Executive. The Executive agrees that, as
a part of his duties under this Agreement, he may be required from time to time
to perform services for affiliates of the Company. The Executive will not be
required to relocate his residence outside the continental United States, but
will be available for such travel as his responsibilities under this Agreement
may reasonably require. The Executive shall devote his full time and best
efforts to the performance of all responsibilities to the Company and its
affiliates and to further their respective businesses and interests.
4. COMPENSATION
(a) The Company agrees to pay the Executive
throughout the employment term an initial base salary at the rate of
$168,000.00 per annum (as adjusted pursuant to the provision of this paragraph
4(a)) (the "base salary") payable in equal installments in accordance with
Company payroll practices from time to time in effect. Executive's base salary
will be reviewed and may be adjusted annually by the president of the Company
or by the board of directors of the Company (or the compensation committee
thereof) (the "board"), after taking into consideration the recommendations of
the president of the Company, provided that Executive's base salary may not be
decreased below his initial base salary.
(b) Subject to Section 9 (Termination of
Employment), the Company agrees to pay the Executive throughout the employment
term an annual bonus (the "annual bonus") calculated pursuant to Exhibit A
attached hereto. The amount of the annual bonus payable to the Executive shall
be prorated for the portion of a year the Executive is employed by multiplying
the annual bonus determined pursuant to Exhibit A by a fraction with a
numerator equal to the number of days of the fiscal year during which the
Executive was employed, and with a denominator of 365.
5. OTHER EXECUTIVE BENEFITS
(a) The Executive shall, during the employment
term, be eligible to participate in such pension, profit sharing, bonus, life
insurance, hospitalization and major medical and other employee benefit plans
of the Company in effect from time to time, to the extent that he is eligible
under and complies with the terms of those plans, but the allocation of
benefits under any plan that provides that allocations thereunder shall be in
the discretion of the board shall be as determined from time to time solely by
the board in its discretion.
<PAGE> 4
(b) The Executive shall also participate in the
Company's paid vacation plan but in no event shall Executive's annual
entitlement be less than 4 weeks. Vacation not used by the end of a year shall
be forfeited and shall not be eligible to be carried over to another year or
eligible for reimbursement except as otherwise provided by Company policies.
6. NON-COMPETITION COVENANTS Throughout the
employment term and commencing with the date of this Agreement and ending on
the later of the end of the period that Executive receives severance pay from
the Company pursuant to Section 9 or the first anniversary of the date on which
the Executive ceases to be employed by the Company for any reason whatsoever,
(the "Non-Compete Period"), the Executive promises and agrees that he will not:
(a) directly or indirectly assist in, engage in, have any financial interest
in, or participate in any way in, as an owner, partner, employee, agent, board
member, or shareholder, any business that involves, in whole or in part, the
design, manufacture, distribution or sale of dry pet foods (or any other
business in which the Company may engage or begin preparation to engage during
the employment term) or make preparation with any person to do any of the
foregoing; provided, however, that the Executive may own, solely as an
investment, up to 1.0% of any class of securities of any person if such
securities are listed on any national or regional securities exchange; (b) call
upon or have any contact with any person or any successor in interest to any
person who was at any time during the Executive's last three years of
employment with the Company, a customer of the Company, or call upon or have
any contact with any person or any successor in interest to any person who is a
prospective customer of the Company, and with whom the Executive dealt, or on
whose account the Executive worked, at any time during the Executive's last
three years of employment with the Company, for the purpose of (i) diverting
any business of such person from the Company, or (ii) selling or offering to
sell to any such customer any product or service that is of the same general
type or that performs similar functions as any product or service which has
been sold, provided or offered for sale by the Company at any time during the
Executive's last three years of employment with the Company, (c) solicit any
employee of the Company to terminate his or her employment with the Company or
employ any such individual during his or her employment with the Company and
for a period of twelve months after such individual terminates his or her
employment with the Company, or (d) without the prior written consent of the
Company's board of directors, acquire or discuss the acquisition of any
ownership interest in or warrant or right to acquire any such interest, or
acquire any employment or other pecuniary benefit from any person that, at the
time, is a prospective candidate for or was a party to a control transaction.
The term "control transaction" means any transaction or series of transactions
whereby the Company or a controlling interest in the Company is acquired by
another Person (whether by purchase, merger, consolidation or sale of all or
substantially all of the Company's consolidated assets). The Executive
acknowledges and agrees that the consideration and benefits to be provided to
the Executive under this Agreement have been bargained and negotiated in
exchange for, and in consideration of, Executive's agreement to abide by the
terms and provisions of this section 6 and section 7 (Confidentiality and
Proprietary Information). The Executive acknowledges and agrees that all of
the Executive's duties and obligations under this section 6 shall survive the
expiration or termination of the Executive's employment with the Company,
regardless of the causes therefor.
<PAGE> 5
7. CONFIDENTIALITY AND PROPRIETARY INFORMATION
In addition to any common-law restriction upon the Executive's use, disclosure
or exploitation of confidential, proprietary or secret information of the
Company, the Executive covenants and agrees that, without prior written consent
of the Company, he will not at any time during or after the employment term use
for himself or disclose to or use for any other person, directly or indirectly,
any secret, confidential or proprietary information of the Company, including,
without limitation, the Company's processes, formulas, techniques, customer
identities, preferences, requirements, reports and other sensitive customer
information, servicing methods, profit margins, analyses, employee, vendor and
supplier information, business or marketing plans or strategies, financial data
and presentation or sales materials, technologies, computer programs, software,
designs and inventions (collectively, the "confidential information");
provided, however, that the term confidential information does not include or
refer to any information that is in the public domain (other than by a breach
of this Agreement). The Executive acknowledges that the confidential
information is vital, sensitive, confidential and proprietary to the Company.
The Executive covenants and agrees that all files, reports, lists, materials,
records, documents, notes, memoranda, specifications, product or other
formulas, equipment and other items, and any originals, copies, recordings,
abstracts or notes thereof, relating to the confidential information or the
Company business that the Executive is or was either provided, prepares or
prepared himself, uses or used or simply acquires or acquired during this
employment with the Company (either before or during the employment term), are
and shall remain the sole and exclusive property of the Company and shall be
immediately returned to the Company at any time upon demand and, in all events,
immediately at the end of the employment term. The Executive acknowledges and
agrees that all of the Executive's duties and obligations under this section 7
shall survive the expiration or termination of the Executive's employment with
the Company, regardless of the cause therefor.
8. REMEDIES FOR BREACH In the
event of a breach or threatened breach of any of the Executive's duties and
obligations under sections 6 (Non-Competition Covenants) or 7 (Confidentiality
and Proprietary Information), the Company shall be entitled, in addition to any
other legal or equitable remedies the Company may have in that connection
(including any right to damages that the Company may suffer), to a temporary,
preliminary, and/or permanent injunction restraining such breach or threatened
breach. The Executive hereby expressly acknowledges that the harm that might
result to the Company's goodwill or its relationships with customers, or as a
result of the disclosure or use of the confidential information, is largely
irreparable. The Executive specifically agrees that, in the event there is a
question as to the enforceability of sections 6 (Non-Competition Covenants) or
7 (Confidentiality and Proprietary Information), the Executive will not engage
in any conduct inconsistent with or contrary to either of such sections until
after the question has been resolved by a non-appealable final judgement.
<PAGE> 6
9. TERMINATION OF EMPLOYMENT
(a) The employment term and the Executive's
employment by the Company shall terminate: (i) upon the death of the
Executive; (ii) upon the disability of the Executive (as defined in section
9(b)(2)) upon thirty (30) days prior written notice given by the Company to the
Executive; (iii) for cause (as defined in section 9(b)(1)), immediately upon
the giving of written notice thereof by the Company to the Executive or at such
later time as the notice may specify; (iv) without cause, upon not less than
thirty (30) days prior written notice given by the Company to the Executive, or
(v) voluntarily by the Executive upon not less than thirty (30) days prior
written notice given to the Company by the Executive.
(b) In this section 9:
(1) "Cause" means; (a) the Executive has
been indicted for or convicted of a felony; (b)
the commission of any act by Executive
constituting financial dishonesty against the
Company (including fraud or embezzlement); (c)
gross dereliction of duty to the Company (other
than by reason of death or disability) after
Executive has been advised by the board of
directors or the Company's president of any such
dereliction of duty (whether of the same or
similar nature) and has been given an
opportunity to correct his performance; (d)
commission of an act involving moral turpitude
which (i) brings the Company into public
disrepute or disgrace, or (ii) causes material
injury to the customer relations, operations or
the business prospects of the Company; (e) the
repeated refusal or failure by Executive to
follow the lawful directives of the board of
directors or the president of the Company; or
(f) the material breach by Executive of the
provisions of this Agreement.
(2) "Disability" refers to any
circumstances in which the Executive, by reason
of illness, incapacity or other disability, has
failed to perform his duties or fulfill his
obligations under this Agreement for a
cumulative total of 180 days in any 12- month
period.
(c) Upon the termination of the Executive's
employment under the Agreement, the employment term shall end and all rights of
the Executive under this Agreement shall terminate, except that the Executive
shall nonetheless be entitled to receive the following:
(1) If the termination occurs by reason of
the death or disability of the Executive, the
Executive shall be entitled to receive the base
salary accrued through the date of termination
and annual bonus prorated through the date of
termination.
<PAGE> 7
(2) If the termination is made by the
Company without cause, or as a result of the
Company delivering a non-extension notice (but
not as a result of the Executive delivering a
non-extension notice to the Company), the
Executive shall be entitled to receive severance
pay equivalent to his base salary and annual
bonus, if and as each would have been payable if
the Executive had not been so terminated, for
the period commencing on the first day after the
date of termination and terminating on the first
anniversary of the date on which Executive
ceases to be employed by the Company. With
respect to the annual bonus, for the year in
which the termination of employment occurred,
the Executive shall receive the annual bonus the
Executive would have been entitled to receive if
the Executive had remained employed for the
entire year, and for the last calendar year in
which the Executive is receiving severance
payments, the Executive shall receive a pro rata
portion of the annual bonus the Executive would
have been entitled to receive if the Executive
had remained employed for the entire year with
such pro rata portion being equal to a fraction
with a numerator equal to the number of days of
the fiscal year during which the Executive
receives severance pay and with a denominator of
365.
(3) If the termination is made by the
Company for cause, or voluntarily by Executive,
the Executive shall be entitled to receive his
base salary through the date of termination. If
any termination for cause made by the Company is
ever ultimately determined by an court, agency
or other tribunal to have been without cause,
then the Company's sole liability under the
Agreement or otherwise at law or in equity shall
be to pay the Executive those amounts that would
have otherwise been paid to the Executive under
section 9(c)(2) (Termination of Employment,
without cause) and the reasonable attorney's
fees and costs incurred by the Executive in
successfully obtaining this determination from
the court, agency or other tribunal.
(4) To the extent permitted by law or group
insurance plans maintained for the Company's
employees, Executive will be entitled to
continue coverage under any health, disability
and life insurance program during the period
Executive is receiving severance payments in
accordance with paragraphs 9(c)(1), (2) or (3),
at no cost to the Executive. The Executive's
rights will continue under benefit programs
that, by their own terms or by law, extend
beyond the date of termination or continued
coverage provided for in the preceding sentence,
including, without limitation, health care under
COBRA, pension, stock purchase or stock option
agreements, and non-qualified salary
continuation agreements.
<PAGE> 8
10. NOTICE Any notice required or permitted to
be given under this agreement must be in writing and is effectively given:
(1) To the Company, when signed by the Executive and delivered
in person to the chairman of the board, president, or
secretary (excluding the Executive) of the Company, or, one
day after the date sent by national commercial courier for
next day delivery, or two days after the date mailed, by
certified or registered mail, postage prepaid, in either
case to the address set forth below, or at such other
address as the Company may designate for this purpose in a
notice given to the Executive.
Attn: Chief Executive Officer
Doane Products Company
P.O. Box 879
West 20th & State Line Road
Joplin, MO 64802
(2) To the Executive, when signed by an officer of the Company
(excluding the Executive) and delivered to the Executive in
person, or, one day after the date sent by national
commercial courier for next day delivery, or two days after
the date mailed, by certified or registered mail, postage
prepaid, in either case to the address set forth under the
Executive's signature at the end of this Agreement or at
such other address as the Executive may designate for this
purpose in a notice given to the Company.
11. INVALIDITY OF PROVISIONS If any provision of this
Agreement is adjudicated to be invalid or unenforceable under applicable law,
the validity or enforceability of the remaining provisions shall be unaffected.
To the extent that any provision of this agreement is adjudicated to be invalid
or unenforceable because it is over broad, that provision shall not be void but
rather shall be limited only to the extent required by applicable law and
enforced as so limited.
12. ENTIRE AGREEMENT; WRITTEN MODIFICATIONS This
Agreement contains the entire agreement between the parties and supersedes all
prior or contemporaneous representations, promises, understandings and
agreements between the Executive and the Company. This Agreement may not be
changed except by written agreement of the parties and specifically rescinds
and replaces the employment agreement between the Company and the Executive
dated June 1, 1994.
13. GOVERNING LAW In light of the Company's contacts with the
state of Missouri and its significant interest in insuring that disputes as to
the validity and enforceability of section 6 (Non- Competition Covenants) and 7
(Confidentiality and Proprietary Information) of this Agreement are resolved on
a uniform basis, the Executive and the Company agree that any litigation
involving noncompliance with or alleged breach of sections 6 (Non-Competition
Covenants) or 7 (Confidentiality and Proprietary Information) must be filed and
conducted in Missouri and the Executive and the Company consent to the personal
jurisdiction of the federal and state courts sitting in
<PAGE> 9
Missouri for purposes of any such litigation. This Agreement shall be governed
by the internal laws of the State of Missouri without regard to Missouri
conflict of laws principles.
14. CERTAIN DEFINED TERMS In this agreement:
(1) "Affiliate" of the Company means any person
controlling, controlled by or under common control
with the Company.
(2) "Annual bonus" is defined in section 4(b).
(3) "Base salary" is defined in section 4(a).
(4) "Board" is defined in section 4(a).
(5) "Company" as used in sections 6
(Non-Competition Covenants) and 7 (Confidentiality
and Proprietary Information), includes each affiliate
of the Company for which the Executive performs
services at any time during his employment if the
affiliate is engaged in any business that involves,
in whole or in part, the design, manufacture,
distribution or sale of dry pet foods (or any other
business in which the Company may engage or begin
preparation to engage during the employment term).
(6) "Control transaction" is defined in section
6(d).
(7) "Employment term" is defined in section 2(b).
(8) "Non-extension notice" is defined in section
2(a).
(9) "Person" includes any individual, trust,
estate, business trust, partnership, corporation,
unincorporated association, governmental entity,
limited liability company and any other juridical
person.
15. COMPANY'S AND EXECUTIVE'S RIGHT TO RECOVER COSTS
The Company and the Executive undertake and agree that, if either party
breaches or threatens to breach any provision of this Agreement, the breaching
party shall be liable for reasonable attorneys' fees and costs incurred by the
other party in enforcing its rights under this Agreement.
16. RULE OF CONSTRUCTION The rule of construction to
the effect that ambiguities are to be resolved against the drafting party shall
not be employed in interpreting this Agreement.
17. TOLLING In view of the parties' recognition and
agreement that the Company is entitled after the expiration or termination of
the employment term to
<PAGE> 10
certain limited protection from competition by the Executive, the Executive and
the Company agree that the running of the period set forth in section 6
(Non-Competition Covenants) shall be tolled during any period of time in which
the Executive violates that section.
18. SUCCESSORS AND ASSIGNS The Company may assign this
Agreement or any right or interest under this Agreement to any person that
hereafter becomes an affiliate of the Company or to any person to which the
Company sells all or any substantial part of its assets and, in such event, the
Company shall, automatically upon the assignee's assumption of the Company's
obligations hereunder, be released from any such obligations. This Agreement
shall inure to the benefit of the Company, and its successors and assigns.
19. NONWAIVER OF RIGHTS The Company's or the
Executive's failure to enforce at any time any of the provisions of this
Agreement or to require at any time performance by the other party of any of
the provisions hereof shall in no way be construed to be a waiver of such
provisions or to affect either the validity of this Agreement, or any part
hereof, or the right of the Company or the Executive thereafter to enforce each
and every provision in accordance with the terms of this Agreement.
- The remainder of this page is intentionally left blank -
<PAGE> 11
PLEASE NOTE: BY SIGNING THIS AGREEMENT, THE EXECUTIVE IS HEREBY
CERTIFYING THAT THE EXECUTIVE (A) RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW
AND STUDY BEFORE EXECUTING IT; (B) READ THIS AGREEMENT CAREFULLY BEFORE SIGNING
IT; (C) HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THIS AGREEMENT TO ASK ANY
QUESTIONS THE EXECUTIVE HAD ABOUT THIS AGREEMENT AND RECEIVED SATISFACTORY
ANSWERS TO ALL SUCH QUESTIONS; (D) UNDERSTANDS THE EXECUTIVE'S RIGHTS AND
OBLIGATIONS UNDER THIS AGREEMENT; AND (E) EXECUTED AND DELIVERED THIS AGREEMENT
AT THE OFFICES OF THE COMPANY IN JOPLIN, MISSOURI.
EXECUTED AND EFFECTIVE as of the date first written above.
WITNESS: DOANE PRODUCTS COMPANY
/s/ BOB L. ROBINSON
- ------------------------ --------------------------------
Bob L. Robinson
President and CEO
WITNESS: EXECUTIVE:
/s/ TERRY W. BECHTEL
- ------------------------ --------------------------------
--------------------------------
Street Address
--------------------------------
City, State, Zip Code
<PAGE> 12
EXHIBIT A
DOANE PRODUCTS COMPANY
ANNUAL BONUS PROGRAM
1. For each fiscal year of the Company during the employment
term, the board, after taking into consideration the recommendations of the
president of the Company, will establish objectives comprised of both
corporate and individual goals (each goal will be referred to herein as a
"Target"), as well as the percentage weighting (the "weight") that will apply
to each Target, wherein the sum of the weights shall equal 100%.
2. For the Company's 1998 fiscal year, the board will set an
EBITDA Target for the Company and its subsidiaries which will be weighted at
100% for the calculation of the bonus payable under this program for the 1998
fiscal year. The term "EBITDA" will have the same meaning as set forth in the
DPC Acquisition Corp. Option Agreements granted under the DPC Acquisition Corp.
1996 Stock Option Plan.
3. For purposes of computing the Executive's annual bonus, the
bonus will be equal to 50% of his base salary in effect at the end of the
fiscal year (the "base bonus") and the annual bonus will be computed by summing
the percentages earned for each Target, as determined by computing the sum of
paragraphs in 3(a) through 3(d) below for each Target that has been assigned a
weight, and then multiplying that sum times the base bonus.
(a) Where the actual performance exceeds 85% of
the Target for such fiscal year, Executive will receive 55% of
the weight assigned for the Target.
<PAGE> 13
(b) For each of the first full 15 percentage
points by which actual performance exceeds 85% of the Target,
Executive will receive 3% of the weight assigned for the
Target. The maximum which Executive may receive under this
paragraph 3(b) cannot exceed 45% of the weight assigned for
the Target.
(c) For each of the first full 15 percentage
points by which the actual performance exceeds 100% of the
Target, Executive will receive 6% of the weight assigned for
the Target. The maximum which Executive may receive under
this paragraph 3(c) cannot exceed 90% of the weight assigned
for the Target.
(d) For each full percentage point by which the
actual performance exceeds 115% of the Target, Executive will
receive 9% of the weight assigned for the target. For
illustrative purposes, assume the Executive's base bonus is
$30,000 and his weighting is as follows:
<TABLE>
<CAPTION>
Target Weight Description of Target
------ ------ ---------------------
<S> <C> <C>
1 50% Corporate EBITDA
2 35% Territory Margin Contribution
3 15% Expense Control
</TABLE>
Bonus Calculation:
<TABLE>
<CAPTION>
Assumed % Earned Weighted
Target Performance for Target Weight % Earned
------ ----------- ---------- ------ --------
<S> <C> <C> <C> <C>
1 95% 85% x 50% = 42.5%
2 120% 235% x 35% = 82.3%
3 80% 0 x 15% = 0
--------
% of base bonus earned 124.8%
Base bonus $30,000
Bonus earned $37,440
</TABLE>
<PAGE> 14
4. In the event that, after the setting of the Targets, the
Company or any of its subsidiaries acquires additional assets, entities or
subsidiaries that produce the same or similar products, which acquisition,
either singly or together with one or more other acquisitions, the board
determines in good faith may significantly affect the Targets for the fiscal
year, the board may, in good faith, either (a) adjust such Targets to reflect
the projected effect of such acquisition or acquisitions on any Targets or (b)
exclude the effects of such acquisition or acquisitions on the Targets for
purposes of determining Executive's annual bonus by calculating the Targets for
such fiscal year on a pro forma basis as though such acquisition or acquisitions
had not been consummated. Similarly, in the event that, after setting the
Targets, the Company is acquired by another Person (whether by purchase, merger,
consolidation or sale of all or substantially all of the Company's consolidated
assets) and the board determines in good faith that such acquisition may
significantly affect the Targets for the fiscal year, the board may, in good
faith, either (x) adjust such Targets to reflect the projected effect of such
acquisition on any Target or (y) exclude the effects of such acquisition on the
Targets for purposes of determining Executive's annual bonus by calculating the
Targets for such fiscal year on a pro forma basis as though such acquisition had
not been consummated.
5. The annual bonus payable for any fiscal year will be paid
within 30 days after the delivery of the Company's audited financial statements
for such fiscal year. In the event of any dispute between the Company and
Executive as to the amount of the bonus for any fiscal year, such dispute will
be resolved by the
<PAGE> 15
Company's auditors or any one of Price Waterhouse, Arthur Andersen, or Ernst &
Young, or their successors, as selected by the board, by having such accounting
firm calculate the amount of the bonus for such fiscal year utilizing the
Company's audited financial statements for such fiscal year. The decision of
such accounting firm will be final and binding on the Company and Executive.
6. Except as otherwise provided herein, capitalized terms used
herein which are not defined herein have the meanings given to such terms under
the Employment Agreement to which this Annual Bonus Program is attached.
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
BETWEEN
DOANE PRODUCTS COMPANY
AND
EARL R. CLEMENTS
THIS EMPLOYMENT AGREEMENT dated January 1, 1998 is made
between Doane Products Company (the "Company"), a Delaware corporation, and
Earl R. Clements (the "Executive"). This Agreement is made with reference to
the following facts and objectives:
R E C I T A L S
A. The Executive shall be the Vice President -
Production of the Company and has served the Company as an employee
continuously during the past twenty-nine years;
B. The Executive acknowledges that the services
previously provided by him to the Company and the services to be performed by
him under this Agreement are of a special and unique character; the business of
the Company is currently international in scope and the Company has plans to
continue to expand its business throughout the world; and the Company competes
with other persons that are or could be located in any part of the world; and
in order to assure the Company that the Company will retain its value and the
Company's business as a going concern, it is necessary that the Executive
undertake not to utilize his special knowledge of the Company, its business and
its relationships with customers and suppliers to compete with the Company if
the Executive were to leave the Company.
C. The Executive further acknowledges that, during his
employment to date by the Company, he has occupied a position of trust and
confidence with the Company and, during such employment, the Company has
compensated him, among other purposes, to develop and preserve customer
relationships and other goodwill exclusively for the Company's benefit and
that, as a result, he has developed customer relationships and goodwill that
are valuable and important to the Company, and has become familiar with the
Company's trade secrets, including, without limitation, its profit margins,
customer preferences and requirements, and with other proprietary and
confidential information concerning the Company and its business.
<PAGE> 2
D. The Executive further acknowledges that, throughout
his employment under this Agreement, he is expected to continue to occupy a
position of trust and confidence with the Company. In return, the Company will
continue to compensate him, among other purposes, to develop and preserve
customer relationships and goodwill exclusively for the Company's benefit,
which will be valuable and important to the Company. Further, he will likely
continue to be familiar with the Company's trade secrets, including, without
limitation, its profit margins, customer preferences and requirements, and with
other confidential and proprietary information concerning the Company and its
business.
E. The Executive further acknowledges that the use by
him for his own benefit or that of others of such goodwill, trade secrets or
proprietary and confidential information or the solicitation of and/or doing
business with any of the Company's customers and potential customers would have
a material adverse effect on the Company and its business, and would place the
Company at a substantial competitive disadvantage.
F. The Executive further acknowledges that the
agreements and covenants contained in this Agreement, and, in particular,
sections 6 (Non-Competition Covenants) and 7 (Confidentiality and Proprietary
Information), are essential to protect the Company and the goodwill of the
Company's business, are a condition precedent to the Company's willingness to
enter this Agreement and to pay the consideration set forth in this Agreement,
and are necessary and reasonable in light of the particular business of the
Company, his knowledge thereof and the services he has previously performed and
will perform under this Agreement.
THE PARTIES ACCORDINGLY AGREE AS FOLLOWS:
AGREEMENT
1. EMPLOYMENT The Company hereby
agrees to employ the Executive, and the Executive hereby accepts employment by
the Company, on the terms and conditions of this Agreement.
2. EMPLOYMENT TERM
(a) Subject to section 9 (Termination of
Employment), the term of the Executive's employment under this Agreement begins
on the date of this Agreement and ends on the third anniversary of that date;
provided, however, that, commencing on the third anniversary of the date of
this Agreement and each subsequent anniversary, the term shall be extended for
an additional one year period unless either the Executive or the Company gives
the other party written notice at least thirty (30) days before such
anniversary that this Agreement shall terminate on the then scheduled
expiration date (the "non-extension notice"). If such non-extension notice is
given, this Agreement shall automatically terminate on such expiration date.
<PAGE> 3
(b) The actual term of the Executive's employment
under this Agreement, including any extension, continuation or earlier
termination of the original term, is referred to in this Agreement as the
"employment term."
3. RESPONSIBILITIES During the
employment term, the Executive shall serve as Vice President - Production or in
any other position or capacity to which he may from time to time be elected or
appointed, and shall perform such services for the Company as are reasonably
required by the Company, and as may be required by virtue of the offices and
positions held by the Executive. The Executive agrees that, as a part of his
duties under this Agreement, he may be required from time to time to perform
services for affiliates of the Company. The Executive will not be required to
relocate his residence outside the continental United States, but will be
available for such travel as his responsibilities under this Agreement may
reasonably require. The Executive shall devote his full time and best efforts
to the performance of all responsibilities to the Company and its affiliates
and to further their respective businesses and interests.
4. COMPENSATION
(a) The Company agrees to pay the Executive
throughout the employment term an initial base salary at the rate of
$168,000.00 per annum (as adjusted pursuant to the provision of this paragraph
4(a)) (the "base salary") payable in equal installments in accordance with
Company payroll practices from time to time in effect. Executive's base salary
will be reviewed and may be adjusted annually by the president of the Company
or by the board of directors of the Company (or the compensation committee
thereof) (the "board"), after taking into consideration the recommendations of
the president of the Company, provided that Executive's base salary may not be
decreased below his initial base salary.
(b) Subject to Section 9 (Termination of
Employment), the Company agrees to pay the Executive throughout the employment
term an annual bonus (the "annual bonus") calculated pursuant to Exhibit A
attached hereto. The amount of the annual bonus payable to the Executive shall
be prorated for the portion of a year the Executive is employed by multiplying
the annual bonus determined pursuant to Exhibit A by a fraction with a
numerator equal to the number of days of the fiscal year during which the
Executive was employed, and with a denominator of 365.
5. OTHER EXECUTIVE BENEFITS
(a) The Executive shall, during the employment
term, be eligible to participate in such pension, profit sharing, bonus, life
insurance, hospitalization and major medical and other employee benefit plans
of the Company in effect from time to time, to the extent that he is eligible
under and complies with the terms of those plans, but the allocation of
benefits under any plan that provides that allocations thereunder shall be in
the discretion of the board shall be as determined from time to time solely by
the board in its discretion.
<PAGE> 4
(b) The Executive shall also participate in the
Company's paid vacation plan but in no event shall Executive's annual
entitlement be less than 4 weeks. Vacation not used by the end of a year shall
be forfeited and shall not be eligible to be carried over to another year or
eligible for reimbursement except as otherwise provided by Company policies.
6. NON-COMPETITION COVENANTS Throughout the
employment term and commencing with the date of this Agreement and ending on
the later of the end of the period that Executive receives severance pay from
the Company pursuant to Section 9 or the first anniversary of the date on which
the Executive ceases to be employed by the Company for any reason whatsoever,
(the "Non-Compete Period"), the Executive promises and agrees that he will not:
(a) directly or indirectly assist in, engage in, have any financial interest
in, or participate in any way in, as an owner, partner, employee, agent, board
member, or shareholder, any business that involves, in whole or in part, the
design, manufacture, distribution or sale of dry pet foods (or any other
business in which the Company may engage or begin preparation to engage during
the employment term) or make preparation with any person to do any of the
foregoing; provided, however, that the Executive may own, solely as an
investment, up to 1.0% of any class of securities of any person if such
securities are listed on any national or regional securities exchange; (b) call
upon or have any contact with any person or any successor in interest to any
person who was at any time during the Executive's last three years of
employment with the Company, a customer of the Company, or call upon or have
any contact with any person or any successor in interest to any person who is a
prospective customer of the Company, and with whom the Executive dealt, or on
whose account the Executive worked, at any time during the Executive's last
three years of employment with the Company, for the purpose of (i) diverting
any business of such person from the Company, or (ii) selling or offering to
sell to any such customer any product or service that is of the same general
type or that performs similar functions as any product or service which has
been sold, provided or offered for sale by the Company at any time during the
Executive's last three years of employment with the Company, (c) solicit any
employee of the Company to terminate his or her employment with the Company or
employ any such individual during his or her employment with the Company and
for a period of twelve months after such individual terminates his or her
employment with the Company, or (d) without the prior written consent of the
Company's board of directors, acquire or discuss the acquisition of any
ownership interest in or warrant or right to acquire any such interest, or
acquire any employment or other pecuniary benefit from any person that, at the
time, is a prospective candidate for or was a party to a control transaction.
The term "control transaction" means any transaction or series of transactions
whereby the Company or a controlling interest in the Company is acquired by
another Person (whether by purchase, merger, consolidation or sale of all or
substantially all of the Company's consolidated assets). The Executive
acknowledges and agrees that the consideration and benefits to be provided to
the Executive under this Agreement have been bargained and negotiated in
exchange for, and in consideration of, Executive's agreement to abide by the
terms and provisions of this section 6 and section 7 (Confidentiality and
Proprietary Information). The Executive acknowledges and agrees that all of
the Executive's duties and obligations under this section 6 shall survive the
expiration or termination of the Executive's employment with the Company,
regardless of the causes therefor.
<PAGE> 5
7. CONFIDENTIALITY AND PROPRIETARY INFORMATION
In addition to any common-law restriction upon the Executive's use, disclosure
or exploitation of confidential, proprietary or secret information of the
Company, the Executive covenants and agrees that, without prior written consent
of the Company, he will not at any time during or after the employment term use
for himself or disclose to or use for any other person, directly or indirectly,
any secret, confidential or proprietary information of the Company, including,
without limitation, the Company's processes, formulas, techniques, customer
identities, preferences, requirements, reports and other sensitive customer
information, servicing methods, profit margins, analyses, employee, vendor and
supplier information, business or marketing plans or strategies, financial data
and presentation or sales materials, technologies, computer programs, software,
designs and inventions (collectively, the "confidential information");
provided, however, that the term confidential information does not include or
refer to any information that is in the public domain (other than by a breach
of this Agreement). The Executive acknowledges that the confidential
information is vital, sensitive, confidential and proprietary to the Company.
The Executive covenants and agrees that all files, reports, lists, materials,
records, documents, notes, memoranda, specifications, product or other
formulas, equipment and other items, and any originals, copies, recordings,
abstracts or notes thereof, relating to the confidential information or the
Company business that the Executive is or was either provided, prepares or
prepared himself, uses or used or simply acquires or acquired during this
employment with the Company (either before or during the employment term), are
and shall remain the sole and exclusive property of the Company and shall be
immediately returned to the Company at any time upon demand and, in all events,
immediately at the end of the employment term. The Executive acknowledges and
agrees that all of the Executive's duties and obligations under this section 7
shall survive the expiration or termination of the Executive's employment with
the Company, regardless of the cause therefor.
8. REMEDIES FOR BREACH In the
event of a breach or threatened breach of any of the Executive's duties and
obligations under sections 6 (Non-Competition Covenants) or 7 (Confidentiality
and Proprietary Information), the Company shall be entitled, in addition to any
other legal or equitable remedies the Company may have in that connection
(including any right to damages that the Company may suffer), to a temporary,
preliminary, and/or permanent injunction restraining such breach or threatened
breach. The Executive hereby expressly acknowledges that the harm that might
result to the Company's goodwill or its relationships with customers, or as a
result of the disclosure or use of the confidential information, is largely
irreparable. The Executive specifically agrees that, in the event there is a
question as to the enforceability of sections 6 (Non-Competition Covenants) or
7 (Confidentiality and Proprietary Information), the Executive will not engage
in any conduct inconsistent with or contrary to either of such sections until
after the question has been resolved by a non-appealable final judgement.
<PAGE> 6
9. TERMINATION OF EMPLOYMENT
(a) The employment term and the Executive's
employment by the Company shall terminate: (i) upon the death of the Executive;
(ii) upon the disability of the Executive (as defined in section 9(b)(2)) upon
thirty (30) days prior written notice given by the Company to the Executive;
(iii) for cause (as defined in section 9(b)(1)), immediately upon the giving of
written notice thereof by the Company to the Executive or at such later time as
the notice may specify; (iv) without cause, upon not less than thirty (30) days
prior written notice given by the Company to the Executive, or (v) voluntarily
by the Executive upon not less than thirty (30) days prior written notice given
to the Company by the Executive.
(b) In this section 9:
(1) "Cause" means; (a) the Executive has
been indicted for or convicted of a felony;
(b) the commission of any act by Executive
constituting financial dishonesty against the
Company (including fraud or embezzlement);
(c) gross dereliction of duty to the Company
(other than by reason of death or disability)
after Executive has been advised by the board
of directors or the Company's president of
any such dereliction of duty (whether of the
same or similar nature) and has been given an
opportunity to correct his performance; (d)
commission of an act involving moral
turpitude which (i) brings the Company into
public disrepute or disgrace, or (ii) causes
material injury to the customer relations,
operations or the business prospects of the
Company; (e) the repeated refusal or failure
by Executive to follow the lawful directives
of the board of directors or the president of
the Company; or (f) the material breach by
Executive of the provisions of this
Agreement.
(2) "Disability" refers to any
circumstances in which the Executive, by
reason of illness, incapacity or other
disability, has failed to perform his duties
or fulfill his obligations under this
Agreement for a cumulative total of 180 days
in any 12- month period.
(c) Upon the termination of the Executive's
employment under the Agreement, the employment term shall end and all rights of
the Executive under this Agreement shall terminate, except that the Executive
shall nonetheless be entitled to receive the following:
(1) If the termination occurs by reason
of the death or disability of the Executive,
the Executive shall be entitled to receive
the base salary accrued through the date of
termination and annual bonus prorated through
the date of termination.
(2) If the termination is made by the
Company without cause, or as a result of the
Company delivering a non-extension notice
<PAGE> 7
(but not as a result of the Executive
delivering a non-extension notice to the
Company), the Executive shall be entitled to
receive severance pay equivalent to his base
salary and annual bonus, if and as each would
have been payable if the Executive had not
been so terminated, for the period commencing
on the first day after the date of
termination and terminating on the first
anniversary of the date on which Executive
ceases to be employed by the Company. With
respect to the annual bonus, for the year in
which the termination of employment occurred,
the Executive shall receive the annual bonus
the Executive would have been entitled to
receive if the Executive had remained
employed for the entire year, and for the
last calendar year in which the Executive is
receiving severance payment, the Executive
shall receive a pro rata portion of the
annual bonus the Executive would have been
entitled to receive if the Executive had
remained employed for the entire year with
such pro rata portion being equal to a
fraction with a numerator equal to the number
of days of the fiscal year during which the
Executive receives severance pay and with a
denominator of 365.
(3) If the termination is made by the
Company for cause, or voluntarily by
Executive, the Executive shall be entitled to
receive his base salary through the date of
termination. If any termination for cause
made by the Company is ever ultimately
determined by an court, agency or other
tribunal to have been without cause, then the
Company's sole liability under the Agreement
or otherwise at law or in equity shall be to
pay the Executive those amounts that would
have otherwise been paid to the Executive
under section 9(c)(2) (Termination of
Employment, without cause) and the reasonable
attorney's fees and costs incurred by the
Executive in successfully obtaining this
determination from the court, agency or other
tribunal.
(4) To the extent permitted by law or
group insurance plans maintained for the
Company's employees, Executive will be
entitled to continue coverage under any
health, disability and life insurance program
during the period Executive is receiving
severance payments in accordance with
paragraphs 9(c)(1), (2) or (3), at no cost to
the Executive. The Executive's rights will
continue under benefit programs that, by
their own terms or by law, extend beyond the
date of termination or continued coverage
provided for in the preceding sentence,
including, without limitation, health care
under COBRA, pension, stock purchase or stock
option agreements, and non-qualified salary
continuation agreements.
10. NOTICE Any notice required or permitted to
be given under this agreement must be in writing and is effectively given:
<PAGE> 8
(1) To the Company, when signed by the Executive and
delivered in person to the chairman of the board,
president, or secretary (excluding the Executive) of
the Company, or, one day after the date sent by
national commercial courier for next day delivery, or
two days after the date mailed, by certified or
registered mail, postage prepaid, in either case to
the address set forth below, or at such other address
as the Company may designate for this purpose in a
notice given to the Executive.
Attn: Chief Executive Officer
Doane Products Company
P.O. Box 879
West 20th & State Line Road
Joplin, MO 64802
(2) To the Executive, when signed by an officer of the
Company (excluding the Executive) and delivered to
the Executive in person, or, one day after the date
sent by national commercial courier for next day
delivery, or two days after the date mailed, by
certified or registered mail, postage prepaid, in
either case to the address set forth under the
Executive's signature at the end of this Agreement or
at such other address as the Executive may designate
for this purpose in a notice given to the Company.
11. INVALIDITY OF PROVISIONS If any provision of this
Agreement is adjudicated to be invalid or unenforceable under applicable law,
the validity or enforceability of the remaining provisions shall be unaffected.
To the extent that any provision of this agreement is adjudicated to be invalid
or unenforceable because it is over broad, that provision shall not be void but
rather shall be limited only to the extent required by applicable law and
enforced as so limited.
12. ENTIRE AGREEMENT; WRITTEN MODIFICATIONS This
Agreement contains the entire agreement between the parties and supersedes all
prior or contemporaneous representations, promises, understandings and
agreements between the Executive and the Company. This Agreement may not be
changed except by written agreement of the parties and specifically rescinds
and replaces the employment agreement between the Company and the Executive
dated June 1, 1994.
13. GOVERNING LAW In light of the Company's contacts with the
state of Missouri and its significant interest in insuring that disputes as to
the validity and enforceability of section 6 (Non- Competition Covenants) and 7
(Confidentiality and Proprietary Information) of this Agreement are resolved on
a uniform basis, the Executive and the Company agree that any litigation
involving noncompliance with or alleged breach of sections 6 (Non-Competition
Covenants) or 7 (Confidentiality and Proprietary Information) must be filed and
conducted in Missouri and the Executive and the Company consent to the personal
jurisdiction of the federal and state courts sitting in Missouri for purposes of
any such litigation. This Agreement shall be governed by the internal laws of
the State of Missouri without regard to Missouri conflict of laws principles.
<PAGE> 9
14. CERTAIN DEFINED TERMS In this agreement:
(1) "Affiliate" of the Company means any person
controlling, controlled by or under common control
with the Company.
(2) "Annual bonus" is defined in section 4(b).
(3) "Base salary" is defined in section 4(a).
(4) "Board" is defined in section 4(a).
(5) "Company" as used in sections 6
(Non-Competition Covenants) and 7 (Confidentiality
and Proprietary Information), includes each affiliate
of the Company for which the Executive performs
services at any time during his employment if the
affiliate is engaged in any business that involves,
in whole or in part, the design, manufacture,
distribution or sale of dry pet foods (or any other
business in which the Company may engage or begin
preparation to engage during the employment term).
(6) "Control transaction" is defined in section
6(d).
(7) "Employment term" is defined in section 2(b).
(8) "Non-extension notice" is defined in section
2(a).
(9) "Person" includes any individual, trust,
estate, business trust, partnership, corporation,
unincorporated association, governmental entity,
limited liability company and any other juridical
person.
15. COMPANY'S AND EXECUTIVE'S RIGHT TO RECOVER COSTS The
Company and the Executive undertake and agree that, if either party breaches or
threatens to breach any provision of this Agreement, the breaching party shall
be liable for reasonable attorneys' fees and costs incurred by the other party
in enforcing its rights under this Agreement.
16. RULE OF CONSTRUCTION The rule of construction to
the effect that ambiguities are to be resolved against the drafting party shall
not be employed in interpreting this Agreement.
17. TOLLING In view of the parties' recognition and
agreement that the Company is entitled after the expiration or termination of
the employment term to certain limited protection from competition by the
Executive, the Executive and the
<PAGE> 10
Company agree that the running of the period set forth in section 6
(Non-Competition Covenants) shall be tolled during any period of time in which
the Executive violates that section.
18. SUCCESSORS AND ASSIGNS The Company may assign this
Agreement or any right or interest under this Agreement to any person that
hereafter becomes an affiliate of the Company or to any person to which the
Company sells all or any substantial part of its assets and, in such event, the
Company shall, automatically upon the assignee's assumption of the Company's
obligations hereunder, be released from any such obligations. This Agreement
shall inure to the benefit of the Company, and its successors and assigns.
19. NONWAIVER OF RIGHTS The Company's or the
Executive's failure to enforce at any time any of the provisions of this
Agreement or to require at any time performance by the other party of any of
the provisions hereof shall in no way be construed to be a waiver of such
provisions or to affect either the validity of this Agreement, or any part
hereof, or the right of the Company or the Executive thereafter to enforce each
and every provision in accordance with the terms of this Agreement.
- The remainder of this page is intentionally left blank -
<PAGE> 11
PLEASE NOTE: BY SIGNING THIS AGREEMENT, THE EXECUTIVE IS HEREBY
CERTIFYING THAT THE EXECUTIVE (A) RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW
AND STUDY BEFORE EXECUTING IT; (B) READ THIS AGREEMENT CAREFULLY BEFORE SIGNING
IT; (C) HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THIS AGREEMENT TO ASK ANY
QUESTIONS THE EXECUTIVE HAD ABOUT THIS AGREEMENT AND RECEIVED SATISFACTORY
ANSWERS TO ALL SUCH QUESTIONS; (D) UNDERSTANDS THE EXECUTIVE'S RIGHTS AND
OBLIGATIONS UNDER THIS AGREEMENT; AND (E) EXECUTED AND DELIVERED THIS AGREEMENT
AT THE OFFICES OF THE COMPANY IN JOPLIN, MISSOURI.
EXECUTED AND EFFECTIVE as of the date first written above.
WITNESS: DOANE PRODUCTS COMPANY
/s/ Bob L. Robinson
- ---------------------------- ---------------------------------
Bob L. Robinson
President and CEO
WITNESS: EXECUTIVE:
/s/ Earl R. Clements
- ---------------------------- ---------------------------------
---------------------------------
Street Address
---------------------------------
City, State, Zip Code
<PAGE> 12
EXHIBIT A
DOANE PRODUCTS COMPANY
ANNUAL BONUS PROGRAM
1. For each fiscal year of the Company during the employment
term, the board, after taking into consideration the recommendations of the
president of the Company, will establish objectives comprised of both
corporate and individual goals (each goal will be referred to herein as a
"Target"), as well as the percentage weighting (the "weight") that will apply
to each Target, wherein the sum of the weights shall equal 100%.
2. For the Company's 1998 fiscal year, the board will set an
EBITDA Target for the Company and its subsidiaries which will be weighted at
100% for the calculation of the bonus payable under this program for the 1998
fiscal year. The term "EBITDA" will have the same meaning as set forth in the
DPC Acquisition Corp. Option Agreements granted under the DPC Acquisition Corp.
1996 Stock Option Plan.
3. For purposes of computing the Executive's annual bonus, the
bonus will be equal to 50% of his base salary in effect at the end of the
fiscal year (the "base bonus") and the annual bonus will be computed by summing
the percentages earned for each Target, as determined by computing the sum of
paragraphs in 3(a) through 3(d) below for each Target that has been assigned a
weight, and then multiplying that sum times the base bonus.
(a) Where the actual performance exceeds 85% of
the Target for such fiscal year, Executive will receive 55% of
the weight assigned for the Target.
<PAGE> 13
(b) For each of the first full 15 percentage
points by which actual performance exceeds 85% of the Target,
Executive will receive 3% of the weight assigned for the
Target. The maximum which Executive may receive under this
paragraph 3(b) cannot exceed 45% of the weight assigned for
the Target.
(c) For each of the first full 15 percentage
points by which the actual performance exceeds 100% of the
Target, Executive will receive 6% of the weight assigned for
the Target. The maximum which Executive may receive under
this paragraph 3(c) cannot exceed 90% of the weight assigned
for the Target.
(d) For each full percentage point by which the
actual performance exceeds 115% of the Target, Executive will
receive 9% of the weight assigned for the target. For
illustrative purposes, assume the Executive's base bonus is
$30,000 and his weighting is as follows:
<TABLE>
<CAPTION>
Target Weight Description of Target
------ ------ ---------------------
<S> <C> <C>
1 50% Corporate EBITDA
2 35% Territory Margin Contribution
3 15% Expense Control
</TABLE>
Bonus Calculation:
<TABLE>
<CAPTION>
Assumed % Earned Weighted
Target Performance for Target Weight % Earned
------ ----------- ---------- ------ --------
<S> <C> <C> <C> <C>
1 95% 85% x 50% = 42.5%
2 120% 235% x 35% = 82.3%
3 80% 0 x 15% = 0
--------
% of base bonus earned 124.8%
Base bonus $30,000
Bonus earned $37,440
</TABLE>
<PAGE> 14
4. In the event that, after the setting of the Targets, the
Company or any of its subsidiaries acquires additional assets, entities or
subsidiaries that produce the same or similar products, which acquisition,
either singly or together with one or more other acquisitions, the board
determines in good faith may significantly affect the Targets for the fiscal
year, the board may, in good faith, either (a) adjust such Targets to reflect
the projected effect of such acquisition or acquisitions on any Targets or (b)
exclude the effects of such acquisition or acquisitions on the Targets for
purposes of determining Executive's annual bonus by calculating the Targets for
such fiscal year on a pro forma basis as though such acquisition or acquisitions
had not been consummated. Similarly, in the event that, after setting the
Targets, the Company is acquired by another Person (whether by purchase, merger,
consolidation or sale of all or substantially all of the Company's consolidated
assets) and the board determines in good faith that such acquisition may
significantly affect the Targets for the fiscal year, the board may, in good
faith, either (x) adjust such Targets to reflect the projected effect of such
acquisition on any Target or (y) exclude the effects of such acquisition on the
Targets for purposes of determining Executive's annual bonus by calculating the
Targets for such fiscal year on a pro forma basis as though such acquisition had
not been consummated.
5. The annual bonus payable for any fiscal year will be paid
within 30 days after the delivery of the Company's audited financial statements
for such fiscal year. In the event of any dispute between the Company and
Executive as to the amount of the bonus for any fiscal year, such dispute will
be resolved by the
<PAGE> 15
Company's auditors or any one of Price Waterhouse, Arthur Andersen, or Ernst &
Young, or their successors, as selected by the board, by having such accounting
firm calculate the amount of the bonus for such fiscal year utilizing the
Company's audited financial statements for such fiscal year. The decision of
such accounting firm will be final and binding on the Company and Executive.
6. Except as otherwise provided herein, capitalized terms used
herein which are not defined herein have the meanings given to such terms under
the Employment Agreement to which this Annual Bonus Program is attached.
<PAGE> 1
EXHIBIT 10.8
FIRST AMENDMENT TO
DPC ACQUISITION CORP.
1996 STOCK OPTION PLAN
WHEREAS, DPC Acquisition Corp. (the "Company") has heretofore
adopted and maintains the DPC Acquisition Corp. 1996 Stock Option Plan (the
"Plan") for the benefit of its eligible employees; and
WHEREAS, the Company desires to amend the Plan;
NOW, THEREFORE, the Plan shall be amended as follows effective
September 16, 1997:
1. The first sentence of Paragraph V of the Plan shall
be deleted and the following shall be substituted therefor:
"The aggregate number of shares which may be issued under
Options granted under the Plan shall not exceed 750,000 shares
of stock."
2. As amended hereby, the Plan is specifically ratified
and reaffirmed.
Executed this 16th day of September, 1997.
DPC Acquisition Corp.
By: /s/ Thomas R. Heidenthal
------------------------------
<PAGE> 1
EXHIBIT 10.9
SECOND AMENDMENT TO
DPC ACQUISITION CORP.
1996 STOCK OPTION PLAN
WHEREAS, DPC Acquisition Corp. (the "Company") has heretofore
adopted and maintains the DPC Acquisition Corp. 1996 Stock Option Plan (the
"Plan") for the benefit of its eligible employees; and
WHEREAS, the Company desires to amend the Plan;
NOW, THEREFORE, the Plan shall be amended as follows effective
January 29, 1998:
1. The following new sentence shall be added to
Paragraph VIII(c) of the Plan:
"Prior provisions of this Subparagraph notwithstanding, in the
event of a Corporate Change which results in the owners of at
least 50% of the outstanding shares of Stock before such
Corporate Change no longer owning such Stock after such
Corporate Change and such transfer is to a person or persons
who were not owners of Stock before such Corporate Change, all
Options then outstanding shall be exercisable in full."
2. As amended hereby, the Plan is specifically ratified
and reaffirmed.
Executed this 29th day of January, 1998.
DPC Acquisition Corp.
By: /s/ Thomas R. Heidenthal
------------------------------
<PAGE> 1
EXHIBIT 12.1
STATEMENT REGARDING COMPUTATION OF RATIOS
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------- --------------------------------------
Nine Three
Months Months
Ended Ended
September 30, December 31,
1993 1994 1995 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNINGS BEFORE INCOME TAXES 28,804 31,356 16,963 1,778 (2,373) 9,623
FIXED CHARGES (EXCLUDING 1,773 2,597 3,707 5,926 27,502 22,621
---------- ---------- ---------- ---------- ---------- ----------
CAPITALIZED INTEREST) 30,577 33,953 20,670 7,704 25,129 32,244
DIVIDED BY: 1,773 2,597 3,707 5,926 27,627 22,931
FIXED CHARGES 17.2x 13.1x 5.6x 1.3x .9x 1.4x
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Doane Products Company:
We consent to incorporation by reference in the registration statements (No.
33-98110 on Form S-3 and No. 333-43643 on Form S-4) of Doane Products Company of
our report dated February 13, 1998, relating to the consolidated balance sheets
of Doane Products Company-Successor as of December 31, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity and cash flows
of Doane Products Company-Successor for the years ended December 31, 1997 and
1996 and for the three month period ended December 31, 1995 and the consolidated
statements of income, stockholders' equity and cash flows of Doane Products
Company-Predecessor for the nine months ended September 30, 1995, which report
appears in the March 27, 1998, annual report on Form 10-K of Doane Products
Company and subsidiary.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Houston, Texas
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOANE
PRODUCTS COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 66,369
<ALLOWANCES> 0
<INVENTORY> 32,426
<CURRENT-ASSETS> 102,345
<PP&E> 115,442
<DEPRECIATION> (15,448)
<TOTAL-ASSETS> 338,184
<CURRENT-LIABILITIES> 76,700
<BONDS> 165,698
0
30,545
<COMMON> 0
<OTHER-SE> 41,675
<TOTAL-LIABILITY-AND-EQUITY> 338,184
<SALES> 548,314
<TOTAL-REVENUES> 548,314
<CGS> 480,334
<TOTAL-COSTS> 516,330
<OTHER-EXPENSES> 35,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,621
<INCOME-PRETAX> 9,623
<INCOME-TAX> 3,389
<INCOME-CONTINUING> 6,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,234
<EPS-PRIMARY> (151)
<EPS-DILUTED> 0
</TABLE>
