<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
to
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
JUNE 10, 1998
DOANE PRODUCTS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-27818 43-1350515
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER
OF INCORPORATION) (IDENTIFICATION NO.)
103 POWELL COURT, SUITE 200
BRENTWOOD, TENNESSEE 37027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 373-7774
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On June 10, 1998, Doane Products Company (the "Company") and its parent,
DPC Acquisition Corp., entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Windy Hill Pet Food Holdings, Inc. and its subsidiary, Windy
Hill Pet Food Company, Inc. ("Windy Hill") and certain stockholders of Windy
Hill Pet Food Holdings, Inc. Under the terms of the Merger Agreement, Windy Hill
Pet Food Holdings, Inc. will become a wholly-owned subsidiary of DPC Acquisition
Corp. On August 3, 1998, the merger was consummated and Windy Hill became a
wholly owned subsidiary of DPC Acquisition Corp. The merger of the Company and
Windy Hill is anticipated upon the consummation of certain refinancing
transactions.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
INDEX TO FINANCIAL STATEMENTS OF
WINDY HILL PET FOOD HOLDINGS, INC.
Independent Auditors' Report.............................. 4
Consolidated Balance Sheets as of December 28, 1996,
December 27, 1997 and March 28, 1998 (unaudited)....... 5
Consolidated Statements of Operations for the ten months
ended December 30, 1995, for the years ended December
28, 1996 and December 27, 1997, and for the three
months ended March 29, 1997 and March 28, 1998
(unaudited)............................................ 6
Consolidated Statements of Stockholders' Equity for the
ten months ended December 30, 1995, for the years ended
December 28, 1996 and December 27, 1997, and for the
three months ended March 28, 1998 (unaudited).......... 7
Consolidated Statements of Cash Flows for the ten months
ended December 30, 1995, for the years ended December
28, 1996 and December 27, 1997, and for the three
months ended March 29, 1997 and March 28, 1998
(unaudited)............................................ 8
Notes to Consolidated Financial Statements................ 9
(b) Pro forma financial information
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
Unaudited Pro Forma Financial Statements ................. 26
Combined Doane Products Company and Windy Hill Pet Food
Holdings, Inc. Unaudited Pro Forma Financial Statements
and Notes to Unaudited Pro Forma Financial Statements.. 27
Doane Products Company Unaudited Pro Forma Financial
Statements and Notes to Unaudited Pro Forma
Financial Statements................................... 32
Windy Hill Pet Food Holdings, Inc. Unaudited Pro Forma
Financial Statements and Notes to Unaudited Pro Forma
Financial Statements................................... 37
(c) Index to Exhibits ....................................... 42
2
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
DOANE PRODUCTS COMPANY
By: /s/ Thomas R. Heidenthal
----------------------------
Thomas R. Heidenthal
Senior Vice President and
Chief Financial Officer
Dated: August 14, 1998 By: /s/ Charles W. Dunleavy
----------------------------
Charles W. Dunleavy
Vice President-Finance and
Principal Accounting Officer
3
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Windy Hill Pet Food Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Windy Hill
Pet Food Holdings, Inc. as of December 28, 1996 and December 27, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the ten-month period ended December 30, 1995, and for the years ended
December 28, 1996 and December 27, 1997. These consolidated 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. These 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Windy Hill
Pet Food Holdings, Inc. as of December 28, 1996 and December 27, 1997, and the
results of their operations and their cash flows for the years then ended and
for the ten-month period ended December 30, 1995 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
San Francisco, California
March 13, 1998
4
<PAGE> 5
WINDY HILL PET FOOD HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, MARCH 28,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 570 $ 731 $ 1,702
Accounts receivable (net of $48, $372 and $386 allowance,
respectively).......................................... 8,224 19,252 17,843
Accounts receivable -- other.............................. 19 1,694 1,700
Inventories (Note 4)...................................... 5,141 13,312 15,484
Prepaid expenses.......................................... 811 990 2,360
Current deferred tax asset (Note 11)...................... 30 2,335 1,324
------- -------- --------
Total current assets.............................. 14,795 38,314 40,413
Property, plant and equipment, net (Note 5)................. 22,484 60,774 72,097
Investments in joint ventures (Note 6)...................... -- 3,527 2,462
Goodwill and other intangible assets, net (Note 7).......... 51,515 98,465 97,846
Other assets, net (Note 8).................................. 3,431 13,612 14,132
------- -------- --------
Total assets...................................... $92,225 $214,692 $226,950
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 9)................ $ 5,800 $ 1,312 $ 1,500
Senior secured revolving debt facility (Note 9)........... 2,000 2,000 --
Accounts payable.......................................... 9,816 20,178 15,091
Accrued liabilities....................................... 2,699 8,154 11,164
------- -------- --------
Total current liabilities......................... 20,315 31,644 27,755
Accrued interest -- non-current (Note 9).................... 962 2,595 3,020
Deferred tax liability (Note 11)............................ 1,867 12,390 13,059
Senior secured term debt (Note 9)........................... 35,750 13,688 25,812
Senior subordinated notes (Note 9).......................... 7,551 120,000 120,000
PIK A promissory notes (Note 9)............................. 3,750 3,750 3,750
PIK A-1 promissory note (Note 9)............................ -- 417 417
Convertible subordinated promissory note (Note 9)........... 10,500 10,500 10,500
Other liabilities........................................... 325 3,257 5,684
------- -------- --------
Total liabilities................................. 81,020 198,241 209,997
------- -------- --------
Stockholders' equity:
Preferred stock, $1.00 par value; 45,000 shares
authorized, 4,167 shares issued and outstanding,
liquidation preference of $4,163 (Note 16)............. 3,750 4,167 4,167
Class A common stock, $0.01 par value; 5,000 shares
authorized, 2,540 shares issued and outstanding (Note
16).................................................... -- -- --
Class B common stock, $0.01 par value; 2,000 shares
authorized, 569 shares issued and outstanding (Note
16).................................................... -- -- --
Additional paid-in capital (Note 16)...................... 7,681 16,624 16,624
Accumulated deficit....................................... (226) (4,340) (3,838)
------- -------- --------
Total stockholders' equity........................ 11,205 16,451 16,953
------- -------- --------
Commitments and contingent liabilities (Notes 9, 12 and 17)
Total liabilities and stockholders' equity........ $92,225 $214,692 $226,950
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
WINDY HILL PET FOOD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTH
TEN MONTH YEARS ENDED PERIODS ENDED
PERIOD ENDED --------------------------- ---------------------
DECEMBER 30 DECEMBER 28, DECEMBER 27, MARCH 29, MARCH 28,
1995 1996 1997 1997 1998
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $34,481 $82,993 $164,288 $25,937 $61,769
Cost of good sold 22,107 54,379 113,288 16,061 44,737
------- ------- -------- ------- -------
Gross profit.................. 12,374 28,614 51,000 9,876 17,032
------- ------- -------- ------- -------
Operating expenses:
Promotion and distribution......... 8,483 17,165 28,980 5,960 8,018
Selling, general and
administrative................... 1,978 4,934 10,886 1,750 3,993
Non-recurring transition costs
(Note 10)........................ -- -- 1,571 -- 160
------- ------- -------- ------- -------
Total operating expenses...... 10,461 22,099 41,437 7,710 12,171
------- ------- -------- ------- -------
Operating income.............. 1,913 6,515 9,563 2,166 4,861
Interest expense, net................... 1,192 4,981 12,241 1,666 4,123
Equity in earnings of joint ventures.... -- -- (377) -- (266)
Other expenses, net..................... -- 40 93 13 29
------- ------- -------- ------- -------
Income (loss) before income
taxes and extraordinary
item........................ 721 1,494 (2,394) 487 975
Income tax expense (benefit)............ -- 824 (574) 195 473
------- ------- -------- ------- -------
Income (loss) before
extraordinary item.......... 721 670 (1,820) 292 502
Extraordinary loss on early
extinguishment of debt, net of tax of
$0 in 1996 and $1,529 in 1997 (Note
9).................................... -- 604 2,294 -- --
------- ------- -------- ------- -------
Net income (loss)............. $ 721 $ 66 $ (4,114) $ 292 $ 502
======= ======= ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
WINDY HILL PET FOOD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B PREFERRED RETAINED
COMMON STOCK COMMON STOCK STOCK EARNINGS
MEMBERS' --------------- --------------- --------------- PAID-IN (ACCUMULATED
CAPITAL SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
-------- ------ ------ ------ ------ ------ ------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Members' capital contribution,
net of syndication costs of
$109........................ $5,891 -- $ -- -- $ -- -- $ -- $ -- $ -- $ 5,891
Net income.................... -- -- -- -- -- -- -- -- 721 721
------ ----- ----- --- ----- ----- ------ ------- ------- -------
Balance at December 30,
1995........................ 5,891 -- -- -- -- -- -- -- 721 6,612
Contribution of Windy Hill Pet
Food Company, LLC members'
capital to Windy Hill Pet
Food Holdings, Inc. (Note
1).......................... (5,891) 500 -- -- -- 3,750 3,750 2,141 -- --
Deferred tax liability
recognized.................. -- -- -- -- -- -- -- -- (1,013) (1,013)
Capital contribution from
Windy Hill Pet Food
Holdings, Inc., net of
syndication cost of $210.... -- 500 -- 301 -- -- -- 4,540 -- 4,540
Warrants issued (Note 16)..... -- -- -- -- -- -- -- 1,000 -- 1,000
Net income.................... -- -- -- -- -- -- -- -- 66 66
------ ----- ----- --- ----- ----- ------ ------- ------- -------
Balance at December 28,
1996........................ -- 1,000 -- 301 -- 3,750 3,750 7,681 (226) 11,205
Contribution, net of
syndication cost of $224.... -- 1,429 -- 240 -- -- -- 9,776 -- 9,776
Warrants exercised (Note
16)......................... -- 111 -- 28 -- 417 417 (833) -- (416)
Net loss...................... -- -- -- -- -- -- -- -- (4,114) (4,114)
------ ----- ----- --- ----- ----- ------ ------- ------- -------
Balance at December 27,
1997........................ -- 2,540 -- 569 -- 4,167 4,167 16,624 (4,340) 16,451
Net loss (unaudited).......... -- -- -- -- -- -- -- -- 502 502
------ ----- ----- --- ----- ----- ------ ------- ------- -------
Balance at March 28, 1998
(unaudited)................. $ -- 2,540 $ -- 569 $ -- 4,167 $4,167 $16,624 $(3,838) $16,953
====== ===== ===== === ===== ===== ====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
WINDY HILL PET FOOD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTH
TEN MONTH YEARS ENDED PERIODS ENDED
PERIOD ENDED --------------------------- ---------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27, MARCH 29, MARCH 28,
1995 1996 1997 1997 1998
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ 721 $ 66 $ (4,114) $ 292 $ 502
Adjustments to reconcile net income
(loss) to cash provided by
operating activities:
Depreciation and amortization...... 787 2,719 6,882 953 2,337
Interest expense -- non-current.... -- 962 1,633 375 425
Deferred income taxes.............. -- 824 2,582 195 643
Early extinguishment of debt, net
of tax........................... -- 604 2,294 -- --
Gain on sale of fixed assets....... -- -- 4 -- --
Equity in earnings of joint
ventures......................... -- -- (377) -- (266)
Operating advances from joint
ventures......................... -- -- 1,015 -- 358
Change in assets and liabilities,
net of effects of businesses
acquired:
(Increase) decrease in accounts
receivable.................... (960) (3,941) (4,650) 1,272 2,140
(Increase) decrease in
inventories................... 352 (454) (1,726) 81 1,390
Increase in prepaid expenses..... (34) (412) (50) (3) (263)
Increase (decrease) in accounts
payable....................... 847 6,250 313 (238) (5,654)
Increase (decrease) in accrued
liabilities................... -- 1,063 4,436 (1,421) 2,780
-------- -------- --------- ------- --------
Net cash provided by operating
activities.................. 1,713 7,681 8,242 1,506 4,392
-------- -------- --------- ------- --------
Cash flows from investing activities:
Additions to property, plant and
equipment.......................... (1,120) (1,091) (4,175) (287) (1,362)
Change to other non-current assets and
liabilities........................ (321) (357) (1,087) (234) 1,625
Proceeds from sale of assets.......... -- -- 51,704 -- --
Payment for acquisition of businesses,
net of cash acquired............... (22,165) (56,768) (135,350) -- (13,972)
-------- -------- --------- ------- --------
Net cash used in investing
activities.................. (23,606) (58,216) (88,908) (521) (13,709)
-------- -------- --------- ------- --------
Cash flows from financing activities:
Proceeds from senior secured term and
revolving debt..................... 17,000 48,000 71,500 2,000 12,500
Proceeds from senior subordinated
notes.............................. -- 8,500 120,000 -- --
Proceeds from PIK A promissory
notes.............................. -- 3,750 -- -- --
Proceeds from convertible subordinated
promissory note.................... -- 10,500 -- -- --
Repayment of borrowings............... -- (21,450) (109,952) (3,450) (2,188)
Capital contributions................. 6,000 4,750 10,000 -- --
Debt issuance and syndication costs... (780) (3,272) (10,721) -- (24)
-------- -------- --------- ------- --------
Net cash provided by (used in)
financing activities........ 22,220 50,778 80,827 (1,450) 10,288
-------- -------- --------- ------- --------
Increase (decrease) in cash and cash
equivalents........................... 327 243 161 (465) 971
Cash and cash equivalents, beginning of
period................................ -- 327 570 570 731
-------- -------- --------- ------- --------
Cash and cash equivalents, end of
period................................ $ 327 $ 570 $ 731 $ 105 $ 1,702
======== ======== ========= ======= ========
Supplemental cash flow disclosure:
Cash paid for interest................ $ 1,179 $ 3,759 $ 6,660 $ 1,745 $ 428
Income taxes paid..................... $ -- $ -- $ 8,806 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All information related to the three-month period ended March 28, 1998 is
unaudited.
NOTE 1 -- THE COMPANY
Organization
Windy Hill Pet Food Holdings, Inc. ("Holdings"), a Delaware corporation, is
a private holding company formed in April 1996 to invest in pet food processing
operations. Holdings owns 100% of its indirect subsidiary, Windy Hill Pet Food
Company, Inc. (the "Company"), which is a Minnesota corporation. The Company
commenced operations March 1, 1995, under its previous ownership structure as
Windy Hill Pet Food Company, L.L.C. ("LLC"). In connection with the Company's
acquisition of certain brands from Heinz Pet Products ("Heinz") in April 1996,
as further described in Note 3, LLC's net assets were contributed at net book
value to Holdings.
On May 21, 1997, Windy Hill Pet Food Acquisition Co., a newly formed
indirect subsidiary of Holdings, merged with and into Hubbard Milling Company
("Hubbard"), and Windy Hill Pet Food Company, Inc. ("Old Windy Hill") purchased
all of the stock of Armour Corporation. Concurrently, Hubbard, the surviving
corporation in the merger, was renamed Windy Hill Pet Food Company, Inc., and
Holdings transferred all of the operating assets and liabilities of Old Windy
Hill to the Company (Note 3). The Company was capitalized with a senior secured
term debt facility and senior subordinated notes (Note 9).
Operations
The Company manufactures and sells dog and cat food products and treats,
which are sold throughout the United States. The products are manufactured out
of thirteen plants, nine of which are wholly-owned and four of which are managed
under joint venture agreements in which the Company owns a 50% equity interest.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by Holdings in the preparation of the consolidated
financial statements conform to generally accepted accounting principles and
require management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. Actual amounts could differ from these
estimates and assumptions. The accompanying consolidated financial statements
include the accounts of Holdings and its subsidiaries. All significant
intercompany balances have been eliminated in consolidation.
Fiscal Year
Holdings' fiscal year ends on the last Saturday of December. Certain prior
year amounts have been reclassified to conform to the current year's
presentation.
Cash and Cash Equivalents
Holdings considers all highly liquid financial instruments with a maturity
of three months or less to be cash equivalents.
9
<PAGE> 10
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in first-out (FIFO) method. Inventories include the
cost of raw materials, packaging, labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the individual assets ranging from four to thirty
years. Costs which improve an asset or extend its useful life are capitalized,
while repairs and maintenance costs are expensed as incurred. Leasehold
improvements are amortized over the estimated useful life of the property or
over the terms of the leases, whichever is shorter.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets include goodwill, trademarks and
certain identifiable intangible assets. Trademarks and goodwill are being
amortized over four to forty years using the straight-line method. Other
intangible assets are being amortized using the straight-line method over
periods ranging from four to five years. Amortization of goodwill and other
intangible assets charged against income during the ten-month period ended
December 30, 1995, the years ended December 28, 1996 and December 27, 1997 and
for the unaudited three-month periods ended March 29, 1997 and March 28, 1998
was $0.3 million, $1.1 million, $2.9 million, $0.4 million and $0.8 million,
respectively.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
establishes the accounting and reporting requirements for recognizing and
measuring impairment of long-lived assets to be either held and used or held for
disposal. Holdings has evaluated the carrying value for evidence of impairment,
and management believes at December 27, 1997, there were no indications of
impairment.
Holdings assesses the recoverability of long-lived assets by determining
whether the recorded balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of impairment, if any, is measured based upon projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of the asset will be impacted if
estimated future operating cash flows are not achieved.
Other Assets
Other assets consist of debt issuance costs, packaging design costs, and
other miscellaneous assets. Debt issuance costs of the senior subordinated notes
are being amortized using the interest method over the term of the respective
notes. Debt issuance costs of the senior secured debt are being amortized using
the straight-line method over the terms of the related debt. Aggregate
amortization of debt issuance costs and other assets charged against income in
the ten-month period ended December 30, 1995, the years ended December 28, 1996
and December 27, 1997, and the unaudited three-month periods ended March 29,
1997 and March 28, 1998 was $67,000, $259,000, $715,000, $98,000, and $241,000,
respectively. Amortization of packaging design costs charged against income was
$158,000, $205,000, $283,000, $57,000 and $99,000, for the same periods
respectively.
10
<PAGE> 11
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Disclosure About Fair Value of Financial Instruments
For purposes of financial reporting, Holdings has determined that the fair
value of its financial instruments approximates book value at December 28, 1996,
December 27, 1997, and March 28, 1998 (unaudited) based on terms currently
available to the Company in financial markets for similar instruments.
Concentration of Credit Risk
The Company sells its products to supermarkets, wholesalers and other
retailers. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and had no significant concentration of credit risk at
December 28, 1996, December 27, 1997, and March 28, 1998 (unaudited).
Income Taxes
Holdings records income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. This method of accounting for income taxes uses an asset and liability
approach which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between he
carrying amounts and the tax bases of assets and liabilities.
NOTE 3 -- BUSINESS ACQUISITIONS
On April 29, 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of the Kozy Kitten(R) and Tuffy's(R) dry pet food
brands (the "Heinz Business") from Heinz Pet Products ("Heinz"), a division of
Heinz, Inc. The purchase price was $52.5 million, which included a contractually
agreed upon amount of working capital (as defined in the agreement). In
conjunction with the acquisition, the Company and Heinz entered into a
royalty-free licensing agreement, which entitles the Company to use the Kozy
Kitten trademark and trade name for dry cat food until April 29, 2006. The
Trademark License and Option Agreement gives the Company the irrevocable right
to purchase the trademark and trade name from Heinz no earlier than April 29,
2001 and no later than April 29, 2006 for a cash payment of $2.5 million. The
acquired assets also included a manufacturing facility in Perham, Minnesota. The
acquisition was accounted for using the purchase method of accounting and the
results of operations have been included since the date of acquisition.
In order to effect the Heinz Business acquisition and to refinance the
$17.0 million of existing debt of LLC at April 29, 1996, the Company entered
into a series of financings, as further described in Note 9. The financings
included (i) a capital contribution of $19.8 million from Holdings, (ii) senior
secured term debt of $43.0 million and a senior secured revolving debt facility
of $9.0 million, and (iii) issuance of a senior subordinated note in the amount
of $8.5 million.
The purchase price of the acquired Heinz Business has been allocated to
tangible and intangible assets as follows (dollars in thousands):
<TABLE>
<S> <C>
Cash paid to acquire assets................................. $ 52,500
Other acquisition costs..................................... 4,257
--------
56,757
Cost assigned to net tangible assets........................ (19,282)
--------
Cost assigned to intangible assets.......................... $ 37,475
========
</TABLE>
Concurrent with the 1996 purchase of assets, the Company and Heinz entered
into a five year co-packing agreement in which the Company will manufacture
certain pet food products for Heinz. The agreement
11
<PAGE> 12
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requires Heinz to meet a minimum supply amount at a co-packing rate which covers
the variable costs of the pet food products as well as an amount to cover a
specified rate of fixed costs at the Perham facility where the products are
manufactured.
On May 21, 1997, Windy Hill Pet Food Acquisition Co. merged with and into
Hubbard, and Old Windy Hill purchased all of the capital stock of Armour
Corporation, a holding company which prior to the closing of the transaction
owned 5% of the capital stock of Hubbard and after the consummation of the
transaction owned 39% of the capital stock of Hubbard. Concurrently, Hubbard,
the surviving corporation in the merger, was renamed Windy Hill Pet Food
Company, Inc., and Old Windy Hill transferred all the operating assets and
liabilities, including $27.0 million of equity and $51.0 million of indebtedness
(the "Existing Indebtedness") of Old Windy Hill to the Company. The net combined
purchase price of Hubbard and the Armour Corporation stock was approximately
$131.1 million (net of cash acquired). For financial reporting purposes, these
transactions were accounted for as a purchase of Hubbard by Old Windy Hill and
the results of operations of Hubbard have been included since the date of
acquisition. The allocation of the purchase price has been finalized.
The acquisition and the repayment of Existing Indebtedness was financed
with (i) a $9.8 million net capital contribution from Holdings, (ii) term debt
of $20.0 million and revolving debt of $45.0 million under a $65.0 million
senior secured debt facility, and (iii) proceeds from the issuance of $120.0
million of senior subordinated notes. Immediately following the merger, the
Company sold its animal feed business to Feed-Rite (US) Animal Feeds, Inc., a
subsidiary of the Ridley Group. The net after tax proceeds, subject to certain
adjustments, were approximately $50.0 million. The net proceeds were used to
repay $5.0 million of the senior secured term debt and $45.0 million of net
senior secured revolving debt facility.
12
<PAGE> 13
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price of the acquisitions have been allocated to tangible and
intangible assets as follows (in thousands):
<TABLE>
<CAPTION>
HUBBARD
--------
<S> <C>
Cash paid to acquire business, net of cash acquired... $131,052
Other acquisition costs............................... 5,438
--------
136,490
Cost assigned to net tangible assets and assets held
for sale............................................ (86,305)
--------
Cost assigned to intangible assets.................... $ 50,185
========
</TABLE>
The unaudited pro forma information below has been prepared assuming the
businesses were acquired December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Net sales.......................................... $208,100 $216,709
======== ========
Income before taxes and extraordinary item......... 882 4,465
======== ========
Net (loss) income.................................. $ (1,625) $ 2,679
======== ========
</TABLE>
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which would
have resulted had the acquisitions occurred on the date indicated. The pro forma
results reflect certain adjustments for amortization, interest expense, fixed
overhead and general and administrative expenses.
NOTE 4 -- INVENTORIES
Inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, MARCH 28,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................ $ 1,253 $ 3,004 $ 3,392
Packaging supplies....................... 2,339 5,536 7,036
Finished goods........................... 1,549 4,772 5,056
------- ------- -------
$ 5,141 $13,312 $15,484
======= ======= =======
</TABLE>
At December 27, 1997, the Company had commitments to purchase raw materials
aggregating approximately $13.2 million.
13
<PAGE> 14
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, MARCH 28,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Land.......................................... $ 203 $ 2,663 $ 2,750
Machinery and equipment....................... 17,043 42,882 18,620
Buildings and improvements.................... 6,266 16,328 51,211
Furniture and fixtures........................ 238 1,390 1,476
Computer equipment............................ 70 127 127
Construction-in-progress...................... 11 1,626 3,269
------- ------- -------
23,831 65,016 77,453
Less accumulated depreciation............... 1,347 4,242 5,356
------- ------- -------
$22,484 $60,774 $72,097
======= ======= =======
</TABLE>
At December 27, 1997, the Company had commitments for facility construction
and related machinery and equipment purchases aggregating approximately
$332,000.
NOTE 6 -- INVESTMENTS IN JOINT VENTURES
The Company has a 50% equity interest in each of four manufacturing joint
ventures with each of the following joint venture partners, none of which are
affiliates of the Company or Holdings: Merrick PetFoods, Inc., MFA, Inc., J.R.
Simplot Company, and Flint River Mills, Inc. See Note 3. The Company accounts
for the joint ventures using the equity method of accounting.
NOTE 7 -- GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, MARCH 28,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill...................................... $ 7,588 $ 35,122 $ 35,122
Trademarks.................................... 45,000 66,807 66,807
Other intangibles............................. 332 852 852
------- -------- --------
52,920 102,781 102,781
Less accumulated amortization............... 1,405 4,316 4,935
------- -------- --------
$51,515 $ 98,465 $ 97,846
======= ======== ========
</TABLE>
14
<PAGE> 15
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- OTHER ASSETS
Other assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, MARCH 28,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Debt issuance costs........................... $2,978 $10,464 $10,464
Defined benefit pension plan asset............ -- 2,474 2,688
Packaging, plate cost and other costs......... 1,059 1,899 2,809
------ ------- -------
4,037 14,837 15,961
Less accumulated amortization............... 606 1,225 1,829
------ ------- -------
$3,431 $13,612 $14,132
====== ======= =======
</TABLE>
NOTE 9 -- LONG TERM DEBT
Long term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, MARCH 28,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
SENIOR SECURED DEBT
Senior secured tranche A-1 debt; interest rate of
8.29% at December 28, 1996.......................... $27,550 $ -- $ --
Senior secured tranche A-2 debt; interest rate of
8.29% at December 28, 1996.......................... 14,000 -- --
Senior secured revolving debt facility -- interest
rate of 8.37% at December 28, 1996.................. 2,000 -- --
Senior secured term debt -- interest rate of 8.38% at
December 27, 1997; principal due in quarterly
installments through November 21, 2003; floating
interest rate at the prime rate plus 1.5% or,
alternatively, the one, three or six month
Eurodollar rate plus 2.5% payable quarterly at the
termination of the Eurodollar contract period....... -- 15,000 27,312
Senior secured revolving debt facility -- interest
rate of 10.0% at December 27, 1997; principal due
November 21, 2003; floating interest rate at the
prime rate plus 1.50% or alternatively, the one,
three, or six month Eurodollar rate plus 2.50%;
payable quarterly or at the termination of the
Eurodollar contract period.......................... -- 2,000 --
SENIOR SUBORDINATED NOTES
Senior subordinated note issued April 29, 1996; coupon
interest rate of 12.0% with interest payable
quarterly; net of original issue discount of
$949,000............................................ 7,551 -- --
Senior subordinated notes issued May 15, 1997 at par
value of $120,000; coupon interest rate of 9.75%
with interest payable each May 15 and November 15;
matures on May 15, 2007............................. -- 120,000 120,000
</TABLE>
15
<PAGE> 16
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, MARCH 28,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
PROMISSORY NOTES
PIK A promissory notes issued April 29, 1996; coupon
interest rate of (i) 10% per annum through April 29,
2003 and (ii) interest payable at 12.0% per annum
from April 30, 2003 through December 31, 2005;
compounded semi-annually with interest payable
annually beginning April 29, 2004; matures on
December 31, 2005, with original principal and
accrued interest through April 29, 2003............. 3,750 3,750 3,750
PIK A-1 promissory note issued May 21, 1997, effective
April 29, 1996; coupon interest rate of (i) 10% per
annum through April 29, 2003 and (ii) interest
payable at 12.0% per annum from April 30, 2003
through December 31, 2005; compounded semi-annually
with interest payable annually beginning April 29,
2004; matures on December 31, 2005, with original
principal and accrued interest through April 29,
2003................................................ -- 417 417
Convertible subordinated promissory note issued April
29, 1996; coupon interest rate of (i) 10% per annum
through April 29, 2003 and (ii) interest payable at
12.0% per annum from April 30, 2003 through April
29, 2006; compounded semi-annually with interest
payable annually beginning April 29, 2004; matures
on April 29, 2006, with original principal and
accrued interest through April 29, 2003............. 10,500 10,500 10,500
------- -------- --------
65,351 151,667 161,979
Less: current portion of senior secured debt.......... 5,800 1,312 1,500
current portion of senior secured revolving debt
facility........................................ 2,000 2,000 --
------- -------- --------
Long term debt........................................ $57,551 $148,355 $160,479
======= ======== ========
</TABLE>
Annual principal payments for the next five years and thereafter consist of
the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 27,
1997
------------
<S> <C>
1998........................................................ $ 3,312
1999........................................................ 1,781
2000........................................................ 2,156
2001........................................................ 2,531
2002........................................................ 2,906
Thereafter.................................................. 138,981
--------
$151,667
========
</TABLE>
Senior Secured Debt
Old Windy Hill and Holdings entered into a Credit and Guarantee Agreement,
dated April 29, 1996 (the "Agreement"), with several banks for $43.0 million of
senior secured term debt and a senior secured revolving debt facility. The
proceeds from the debt were used to acquire certain assets and brands from
Heinz, pay fees
16
<PAGE> 17
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and expenses and fund working capital. The debt was guaranteed by Holdings and
Old Windy Hill. The Agreement contained optional prepayment provisions with no
premium. Substantially all of the assets of Old Windy Hill were pledged as
collateral for the debt.
The Agreement included $9.0 million of available borrowing under a senior
secured revolving debt facility, of which $2.5 million was reserved to support
the Trademark License and Option Agreement (Note 3). The available borrowings
were also subject to limitations related to aggregate inventory and accounts
receivable levels. The Agreement required a commitment fee of 0.50% per annum
payable quarterly on the unused portions of the revolving debt facility.
In conjunction with the acquisition of Hubbard, the Company entered into a
Credit Agreement, dated May 21, 1997 (the "Credit Agreement"), among Windy Hill
Pet Food Acquisition Co., Credit Suisse First Boston, The Chase Manhattan Bank
and the several banks and other financial institutions parties thereto, which
provided the Company with senior secured debt facilities (the "Senior Bank
Facilities") in the aggregate principal amount of $85.0 million. The proceeds
from the Senior Bank Facilities and the $120.0 million senior subordinated notes
were used to retire the senior secured term debt and the senior secured
revolving debt facility under the Agreement.
The Senior Bank Facilities consist of (i) a senior secured term loan
facility providing for term loans to the Company in a principal amount of $20.0
million (the "Term Loan Facility"), (ii) an acquisition debt facility (the
"Acquisition Facility") providing revolving loans to the Company for permitted
acquisitions in a principal amount of $45.0 million, and (iii) a working capital
revolving debt facility providing for revolving loans to the Company and the
issuance of letters of credit for the account of the Company as well as swing
line loans in an aggregate principal amount of $20.0 million. The senior secured
working capital debt facility is subject to a commitment fee of 0.5% per annum
payable quarterly on the unused portions of the facility.
As a result of the Hubbard and Heinz acquisitions, the Existing
Indebtedness and the $17.0 million of existing debt of LLC were refinanced and
in conjunction with the retirement of those debt facilities, $604,000 (together
with unamortized note discounts and other charges totaling $1.2 million in
fiscal 1997) and $2.6 million of debt issuance costs were written off as
extraordinary items in the statements of operations for the years ended December
28, 1996 and December 27, 1997, respectively. The effective tax rate was applied
to the write-off for the year ended December 27, 1997, while no income tax
effect was reflected to the write-off for the year ended December 28, 1996, as
the write-off was attributable to the members of LLC.
The Credit Agreement includes restrictive covenants, which limit
borrowings, cash dividends, and capital expenditures, while also requiring the
Company to maintain certain financial ratios. The Company was in compliance with
these covenants at December 27, 1997.
Senior Subordinated Notes
On April 29, 1996, Old Windy Hill issued a senior subordinated note (the
"Old Note") in the amount of $8.5 million to a bank. The Old Note could be
prepaid at any time, subject to a prepayment penalty of 4% in the first year, 3%
in the second year, 2% in the third year, and 1% in the fourth year, and no
prepayment penalty thereafter.
The Old Note included a provision for warrants for 10% of the stock of
Holdings with a nominal exercise price. The warrants were subject to
anti-dilution covenants. The warrants would have expired the later of ten years
from the date of issuance or four years after the Old Note has been repaid. The
warrants were freely assignable and detachable. The holder of the Old Note also
had the right to "put" the warrants or stock to Holdings, beginning after the
earlier of five years from the closing, a sale or merger of the Company, or an
event of default on the Old Note. The value assigned to the warrants as of the
issuance date was $1.0 million and was recorded at Holdings and contributed to
Old Windy Hill as paid in capital. The capital contribution was recorded by Old
Windy Hill with a corresponding discount to the value of the Old Note. The
discount was
17
<PAGE> 18
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
being amortized over eight years, or the life of the Old Note. Accumulated
amortization as of December 28, 1996 was $51,000. In conjunction with the
acquisition of Hubbard, the holder of the Old Note exercised its warrants for
common and preferred stock of Holdings and a note due from Holdings for
$416,667.
In conjunction with the acquisition of Hubbard on May 21, 1997, the Company
issued $120.0 million of senior subordinated notes (the New Notes). The proceeds
from the New Notes, along with the proceeds from the Senior Bank Facilities and
a capital contribution from Holdings (Note 3), were used to (i) retire the
senior secured term debt and the senior secured revolving debt facility financed
under the Agreement, (ii) retire the Old Note and (iii) acquire Hubbard. In
connection with the retirement of the Old Note, $606,000 of debt issuance costs
were written off as an extraordinary item in the statement of operations for the
year ended December 27, 1997. The effective tax rate was applied to the
extraordinary item.
The Company may redeem the New Notes at any time after May 15, 2002, at the
redemption price together with accrued and unpaid interest. In addition, the
Company may redeem up to $42.0 million of the New Notes at any time prior to May
15, 2002, subject to certain requirements, with the cash proceeds received from
one or more equity offerings (as defined), at a redemption price of 109.750%
together with accrued and unpaid interest. Upon a change of control (as
defined), the Company has an option at any time prior to May 15, 2002, to redeem
the New Notes at a redemption price of 100% plus the applicable premium (as
defined), together with accrued and unpaid interest. If the Company does not
redeem the New Notes or if the change of control occurs after May 15, 2002, the
Company is required to offer to repurchase the New Notes at a price equal to
101% together with accrued and unpaid interest.
The New Notes include restrictive covenants, which limit additional
borrowings, cash dividends, sale of assets, mergers and the sale of stock. The
Company was in compliance with these covenants at December 27, 1997.
PIK A Promissory Notes
On April 29, 1996, Holdings issued $3,750,000 in PIK A promissory notes
("PIK A Notes") to shareholders of Holdings. The PIK A Notes can be prepaid at
any time without penalty. The PIK A Notes include restrictive covenants, which
limit cash dividends and distributions.
PIK A-1 Promissory Note
On May 21, 1997, in conjunction with the exercise of the warrants by the
holder of the Old Note, Holdings issued a $416,667 PIK A-1 Note ("PIK A-1
Note"). The PIK A-1 Note can be prepaid at any time without penalty. The PIK A-1
Note includes restrictive covenants, which limit cash dividends and
distributions.
Convertible Subordinated Promissory Note
On April 29, 1996, Holdings issued a $10.5 million convertible subordinated
promissory note ("Promissory Note") to Heinz. The Promissory Note can be prepaid
at any time without penalty. The Promissory Note includes restrictive covenants,
which limit cash dividends and distributions.
Interest Rate Hedge Agreements
The Company uses interest rate collar agreements (the "Agreements") to
reduce the impact of changes in interest rates on its floating rate term debt.
Premiums paid for such Agreements are being amortized to debt issuance costs
over the terms of the Agreements. Unamortized premiums are included in other
assets in the balance sheets. Amounts to be paid or received, if any, under the
Agreements are recognized as an increase or decrease, respectively, in interest
expense. The counterparty to the Company's Agreements is a major financial
institution.
18
<PAGE> 19
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The current effective cap rate is set at 7.50% (plus the applicable
margin). The effective floor rate is set at 5.50% (plus the applicable margin).
The notional principal under the Agreements is $25.0 million. As of December 28,
1996, and December 27, 1997, the Company had total variable rate debt
outstanding in the amount of $43.6 million and $17.0 million, respectively. The
aggregate premiums paid for the Agreements was $103,000.
Under the Agreements, the Company would receive payments from the
counterparty if the three-month LIBOR rate exceeds the cap rate and make payment
to the counterparties if the three-month LIBOR rate falls below the floor rates.
The payments would be calculated based upon the respective notional principal
amount. During fiscal 1996 and 1997 the Company made no payments under the
Agreements. At December 27, 1997, the three-month LIBOR rate was 5.91%.
Risk associated with the Agreements include those associated with changes
in market value and interest rates. At December 27, 1997, the fair value of the
Company's interest rate collars was immaterial and management considers the
potential loss in future earnings and cash flows attributable to such Agreements
to be immaterial.
NOTE 10 -- TRANSITION RELATED COSTS
Transition related expenses represent one time costs incurred to integrate
the Hubbard acquisition. These costs include transitional employee compensation,
relocation expenses, recruiting fees, training costs, system conversion costs
and other unique transitional expenses. Transition related costs for the year
ended December 27, 1997 were approximately $1.6 million.
NOTE 11 -- INCOME TAXES
Holdings files a federal income tax return on a consolidated basis with its
wholly-owned subsidiaries. State income tax returns are filed by Holdings and
the Company on a separate company basis or on a combined basis depending on the
particular laws in each state. Holdings' income tax provision is computed as if
all income tax returns were filed on a consolidated basis.
The income tax expense (benefit) is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
TEN MONTH YEARS ENDED
PERIOD ENDED ---------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current tax expense:
Federal.......................................... $ -- $ -- $ 7,763
State............................................ -- -- 1,443
---- ---- -------
Total current provision.................. -- -- 9,206
---- ---- -------
Deferred tax expense (benefit):
Federal.......................................... -- 641 (8,249)
State............................................ -- 183 (1,531)
---- ---- -------
Total deferred expense (benefit)......... -- 824 (9,780)
---- ---- -------
Total income tax expense (benefit)....... -- $824 $ (574)
==== ==== =======
</TABLE>
Holdings' tax provision in 1997 reflects taxes paid on the gain for tax
purposes on the sale of the animal feed business as well as the recognition of a
$12.3 million reduction in deferred taxes established for the gain at the time
of the acquisition of Hubbard.
19
<PAGE> 20
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets -- current:
Post-retirement benefits.................................. $ -- $ 1,006
Accrued expenses.......................................... -- 502
Package design costs...................................... -- 323
Other..................................................... 30 504
------- --------
Total deferred tax assets -- current.............. 30 2,335
------- --------
Deferred tax assets -- non-current:
Loss carryforwards........................................ 1,078 --
State taxes............................................... -- 666
------- --------
Total deferred tax assets -- non-current.......... 1,078 666
------- --------
Deferred tax liabilities -- non-current:
Depreciation.............................................. (202) (7,805)
Goodwill.................................................. (2,743) (4,144)
Prepaid pension........................................... -- (981)
Other..................................................... -- (126)
------- --------
Total deferred tax liabilities -- non-current..... (2,945) (13,056)
------- --------
Net deferred tax liability........................ $(1,837) $(10,055)
======= ========
</TABLE>
Holdings has not recorded a valuation allowance for its deferred tax
assets. Management believes that Holdings' deferred tax assets are more likely
than not to be realized.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
(Benefit) provision for income taxes at U.S.
statutory rate..................................... $638 $(814)
(Decrease) increase in tax resulting from:
Nondeductible expenses............................. 65 314
State taxes, net of federal benefit................ 121 (74)
---- -----
$824 $(574)
==== =====
</TABLE>
NOTE 12 -- LEASES
The Company leases certain facilities, machinery and equipment under
operating lease agreements with varying terms and conditions. The leases are
noncancellable operating leases which expire on various dates through 2012.
20
<PAGE> 21
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future annual minimum lease payments under these leases at December 27,
1997 are summarized as follows (dollars in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 890
1999........................................................ 850
2000........................................................ 748
2001........................................................ 607
2002........................................................ 604
Thereafter.................................................. 2,037
------
$5,736
======
</TABLE>
Rent expense was $159,000, $248,000, $669,000, $160,000, and $412,000 for
the ten-month period ended December 30, 1995, the years ended December 28, 1996
and December 27, 1997, and for the unaudited three-month periods ended March 29,
1997 and March 28, 1998, respectively.
NOTE 13 -- SAVINGS AND BENEFIT PLANS
The Company maintains a defined contribution plan for all employees with
eligibility conditioned upon full time employment. The Company makes annual
contributions based upon a percent of the employee's annual taxable wages.
Vesting in the plan is according to a graduated scale of one third per year with
full vesting at the end of the third year of employment. The employer
contribution for the ten-month period ended December 30, 1995, the years ended
December 28, 1996 and December 27, 1997, and the unaudited three-month periods
ended March 29, 1997 and March 28, 1998 was $72,000, $206,000 and $369,000, $0,
and $0, respectively. Eligible employees are also given the opportunity to make
their own contributions to the plan on a tax deferred basis.
Employee Benefit Plans
In connection with the acquisition of Hubbard, the Company succeeded in
interest to two noncontributory, defined benefit pension plans covering hourly
and salaried employees. The following tables set forth the funded status of the
pension plans and the amount recognized in the Company's balance sheet as of
December 27, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
HOURLY SALARIED
PLAN PLAN TOTAL
------- -------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested.............................................. $ 5,382 $ 9,739 $15,122
Nonvested........................................... 325 311 636
------- ------- -------
Accumulated benefit obligation.............. 5,707 10,050 15,758
Effect of projected future salary increases........... 1 939 940
------- ------- -------
Projected benefit obligation................ 5,708 10,989 16,698
Market value of plan assets........................... 5,894 15,323 21,217
------- ------- -------
Plan assets in excess of projected benefit
obligation................................ 186 4,334 4,519
Unrecognized net gain................................. (596) (1,449) (2,045)
------- ------- -------
(Pension liability) prepaid pension cost.... $ (410) $ 2,885 $ 2,474
======= ======= =======
</TABLE>
21
<PAGE> 22
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
HOURLY SALARIED
PLAN PLAN TOTAL
------- -------- -------
<S> <C> <C> <C>
The net periodic pension cost (benefit) components
were as follows for the year ended December 27, 1997
(dollars in thousands):
Service cost earned during the year................. $ 54 $ 148 $ 202
Interest cost on projected benefit obligation....... 277 531 808
Actual return on plan assets........................ (1,340) (2,775) (4,115)
Deferred gain....................................... 987 1,882 2,869
------- ------- -------
Pension (benefit)........................... $ (22) $ (214) $ (236)
======= ======= =======
</TABLE>
The principal actuarial assumptions used for December 27, 1997 were:
<TABLE>
<CAPTION>
HOURLY SALARIED
PLAN PLAN
------ --------
<S> <C> <C>
Discount rate............................................... 7.25% 7.25%
Long-term rate of compensation increase..................... 5.0% 5.0%
Long-term rate of return on plan assets..................... 8.0% 8.0%
</TABLE>
Other Benefits
In connection with the acquisition of Hubbard, the Company acquired a
retiree medical payment plan, which provides health care benefits for eligible
retired associates and their covered dependents and spouses. Employees must be
55 years or older with 10 years of service upon retirement to be eligible for
coverage under the current plan. Depending on the date of retirement, the
retiree must pay the premium cost associated with health care coverage. The plan
is not funded.
The accumulated post-retirement obligation included the following
components (dollars in thousands):
<TABLE>
<S> <C>
Retirees.................................................... $2,046
Eligible active plan participants........................... 114
Other active plan participants.............................. 672
------
Accumulated post-retirement benefit obligation.... 2,832
Unrecognized loss........................................... 318
------
Accrued post-retirement benefit obligation........ $2,514
======
</TABLE>
Under Statement of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, postretirement
benefit expense included the following components (dollars in thousands):
<TABLE>
<S> <C>
Current service............................................. $ 27
Interest on accumulated benefits obligation................. 111
----
Total postretirement benefit expense.............. $138
====
</TABLE>
The discount rate used to determine the accumulated post-retirement benefit
obligation was 7.25%. The assumed health care cost trend rate used to measure
the obligation was 9.7% for 1997. A one-percentage point increase in the assumed
health care cost trend rate would have increased the 1997 accumulated post-
retirement obligation by $341,000.
22
<PAGE> 23
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- RELATED PARTY TRANSACTIONS
The Company is party to an Amended and Restated Management Services
Agreement, dated as of May 2, 1997, with Dartford Partnership, L.L.C.
("Dartford") pursuant to which Dartford provides management oversight to the
Company. Management services provided by Dartford include, but are not limited
to, operations oversight, corporate and financial planning, identification of
possible acquisitions and advice on the financing thereof and definition and
development of business opportunities. In the ten-month period ended December
30, 1995, and the years ended December 28, 1996 and December 27, 1997, the
Company paid a total of $250,000, $458,000 and $807,000, respectively, in
management fees to Dartford, a member of LLC, who is also a shareholder of
Holdings. The annual management fee was $250,000 prior to the acquisition of the
Heinz Pet Food Brands, $500,000 prior to the merger of Old Windy Hill and
Hubbard, and $1.0 million after the merger of Old Windy Hill and Hubbard. The
terms of the Amended and Restated Management Services Agreement were negotiated
among the equity investors of Holdings.
In connection with the acquisitions of the Heinz pet food brands and
Hubbard, the Company paid to certain members of LLC and shareholders of
Holdings, who are also represented on the Board of Directors or officers of the
Company and beneficial owners, fees for services rendered in connection with the
acquisitions of Heinz pet food brands and Hubbard and related financing of
acquisitions. The aggregate amount paid to certain members of LLC and
shareholders of Holdings was $2.5 million and was funded by the proceeds of the
financings. Of this $2.5 million, $1.8 million was paid to Dartford and $0.7
million was paid to Bruckmann, Rosser, Sherrill & Co. The fee amounts were
negotiated among the equity investors of Holdings.
The Company paid certain members of LLC fees totaling $420,000 during the
ten-month period ended December 30, 1995 and $525,000 during the year ended
December 28, 1996. The fees were paid for services provided in identifying,
negotiating and consummating the Company's acquisitions. The fees were included
in the costs of the acquisitions.
NOTE 15 -- INCENTIVE COMPENSATION PLAN
The Windy Hill Pet Food Holdings, Inc. Stockholders Agreement
("Stockholders Agreement") dated as of April 29, 1996 and amended as of May 21,
1997, contains an incentive compensation arrangement (the "Incentive Plan") a
means by which certain key employees and other specifically designated persons
("Key Personnel") of the Company, and/or affiliated with the Company, may be
given an opportunity to benefit from the appreciation in value of the Company.
Under the Incentive Plan, Key Personnel were issued non-voting Class B Common
Stock of Holdings ("Class B Stock"), at a $.01 per share, as a means to
participate in the appreciation of the Company. The Class B Stock is subject to
vesting requirements based on terms of employment or other factors. A portion of
the vesting period was deemed achieved at date of issuance of the Class B Stock.
The holders of vested Class B Stock will be entitled to receive certain
payments or distributions based on the amounts paid or distributed to investors
in Holdings. In general, there will be no payments to holders of vested Class B
Stock until the Preferred Series A and B Stock of Holdings ("Preferred Stock")
and associated accrued and unpaid dividends on the Preferred Stock, and Class A
Common Stock of Holdings ("Class A Stock") have received their respective return
of capital. The type of payment will be cash or non-cash consideration,
depending on the type of distribution to the Holdings' investors. Shares of
Class B Stock are convertible into an equal number of shares of Class A Stock
once the Preferred Stock and Class A Stock have received their priority
distribution.
Based on management's assessment of the valuation of the Company at the
date of issuance of the Class B Stock, there was no excess value attributable to
the Class B stock and therefore, no accrual for compensation expense was
necessary.
23
<PAGE> 24
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- STOCKHOLDERS' EQUITY
On February 28, 1995, under Old Windy Hill's previous ownership structure,
LLC was initially capitalized with a capital contribution from its members in
the gross amount of $6.0 million. Offering costs associated with this capital
contribution were $109,000. In connection with the acquisition of the Heinz
Business (Note 3), LLC contributed its capital in the net amount of $5.9 million
to Holdings. In exchange for the net capital contribution, LLC was issued Series
B preferred stock and 500 shares of Class A common stock.
On April 29, 1996, Holdings was capitalized with LLC's net capital
contribution and an additional capital contribution from its shareholders in the
gross amount of approximately $4.8 million. Offering costs associated with this
capital contribution were $210,000. The aggregate equity capital along with the
PIK A Notes and the Promissory Note were contributed to the Company and used to
fund the Company's acquisition of certain assets from Heinz.
On May 21, 1997, the shareholders of Holdings contributed an additional
gross capital contribution of $10.0 million. Offering costs associated with this
capital contribution were $224,000. In connection with the acquisition of
Hubbard (Note 3), Holdings contributed its additional capital in the net amount
of approximately $9.8 million to the Company. In exchange for the net capital
contribution, the shareholders were issued 1,428.6 shares of Class A common
stock.
Preferred Stock
Each holder of preferred stock is entitled to a cumulative 10% annual stock
dividend on the stated value through April 29, 2003. Thereafter, each holder is
entitled to a cumulative 12% annual return on the stated value. Each share of
preferred stock (i) is not entitled to vote, with few exceptions, (ii) can be
redeemed at the option of Holdings, and (iii) possess anti-dilution privileges.
The stock dividend is payable upon the Board of Directors' approval and payment
is also restricted by the Credit Agreement. In addition, when the holder of the
Old Note exercised its warrants, the holder was issued 416.667 shares of Series
B preferred stock of Holdings. The Company also has authorized 45,000 shares of
Series A preferred stock with no shares issued.
Common Stock
In addition to the Company's issued and outstanding Class A common stock,
the Company has also authorized 2,000 shares of Class B common stock, with 569
shares issued and outstanding. Under the securities purchase agreements dated
April 29, 1996 and May 21, 1997, certain officers and Dartford were issued Class
B common stock, par value $0.01 per share. In addition, when the holder of the
Old Note exercised its stock warrants, the holder was issued 111.11 shares of
Class A common stock of Holdings and 27.77 shares of Class B common stock of
Holdings.
Warrants
On April 28, 1996, warrants were issued to a bank affiliate (Note 9), which
entitled the holder to purchase up to 10% of the stock of Holdings at a nominal
exercise price. The holder of the warrants was also the holder of the Old Note.
The warrants were subject to anti-dilution covenants. The warrants expired the
later of ten years from closing or four years after the Old Note was repaid. The
holder of the warrants also had the right to "put" the warrants or stock to
Holdings at a price as specified in the agreement, beginning after the earlier
of five years from the closing, a sale or merger of the Company, or an event of
default on the Old Note.
On May 21, 1997, in conjunction with the merger of Hubbard and Old Windy
Hill and payment of the Old Note, the holder of the warrants exercised the
warrants in exchange for 416.667 shares of Series B preferred stock of Holdings,
111.11 shares of Class A common stock of Holdings, 27.77 shares of Class B
24
<PAGE> 25
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock of Holdings and was issued a PIK A-1 Promissory Note of Holdings in
the principal amount of $416,667.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to litigation in the ordinary course of business. In
the opinion of management, the ultimate outcome of any existing litigation will
not have a material adverse effect on the Company's financial condition or
results of operations.
NOTE 18 -- SUBSEQUENT EVENT (UNAUDITED)
On February 23, 1998, the Company acquired all of the assets of the pet
food division (the "AGP Business") of Consolidated Nutrition, L.C. The assets
acquired by the Company include four plants located in the states of Alabama,
Kansas, Missouri and Nebraska. The Company intends to use the acquired assets to
produce its current products. The purchase price was approximately $12.4
million. The acquisition was accounted for using the purchase method of
accounting. The Company financed the acquisition of the AGP Business and related
costs with a $12.5 million borrowing under the terms of its Acquisition
Facility.
25
<PAGE> 26
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited condensed pro forma financial statements consist of
(i) the unaudited pro forma statements of operations of Doane Products Company
(the "Company") for the fiscal year ended December 31, 1997 and for the three
months ended March 31, 1998 and the unaudited pro forma balance sheet as of
March 31, 1998 and related notes, (ii) the unaudited pro forma statements of
operations of Windy Hill for the fiscal year ended December 27, 1997 and for the
three months ended March 28, 1998 and the unaudited pro forma balance sheet as
of March 28, 1998 and related notes, and (iii) the unaudited pro forma
statements of operations of the Company and Windy Hill on a combined basis for
the fiscal year ended December 31, 1997 and for the three months ended March 31,
1998 and the unaudited pro forma balance sheet as of March 31, 1998 and related
notes. The unaudited pro forma financial statements of the Company give effect
to the IPES Acquisition as if such transactions had occurred on January 1, 1997.
The unaudited pro forma financial statements of Windy Hill give effect to the
acquisitions of Hubbard, AGP, NuPet, Deep Run and the purchase by Windy Hill of
certain joint venture interests held by third parties as if such transactions
had occurred on January 1, 1997. The combined unaudited pro forma statements of
operations give effect to the pro forma results of the Company and Windy Hill
for the entire periods indicated and the combined unaudited pro forma balance
sheet gives effect to the IPES Acquisition and Windy Hill Merger, including the
pro forma effects of each of the transactions included in the pro forma
financial statements of Windy Hill, in each case as if such transactions had
occurred on March 31, 1998. The merger of the Company and Windy Hill is
anticipated upon the consummation of certain refinancing transactions.
The historical data of the Company for the fiscal year ended December 31,
1997 have been derived from the Company's audited consolidated financial
statements and the historical data for the three months ended March 31, 1998
have been derived from the unaudited interim financial statements of the
Company. The historical data of Windy Hill have been derived from its audited
financial statements for the year ended December 27, 1997 and for the unaudited
three-month period ended March 28, 1998.
The unaudited condensed pro forma financial statements are based
on assumptions and include adjustments as explained in the notes thereto. The
unaudited condensed pro forma financial statements are not necessarily
indicative of the actual financial results if the transactions described in the
preceding paragraph had been effective on and as of the dates indicated and
should not be indicative of operations in future periods or as of future dates.
26
<PAGE> 27
COMBINED DOANE PRODUCTS COMPANY AND WINDY HILL PET FOOD HOLDINGS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS
COMPANY WINDY HILL FOR COMBINED
(See (See WINDY HILL COMPANY
Table 1-A) Table 2-A) MERGER PRO FORMA
---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales..................................... $585,837 $304,041 $(4,197)(a) $885,681
Cost of goods sold............................ 500,384 231,441 -- 731,825
-------- -------- ------- --------
Gross profit.................................. 85,453 72,600 (4,197) 153,856
Operating expenses:
Promotion and distribution............... 32,956 37,377 (4,197)(a) 66,136
Selling, general and administrative...... 19,231 16,507 (1,774)(b) 33,964
Non-recurring transition costs................ -- 1,571 -- 1,571
-------- -------- ------- --------
Income from operations................... 33,266 17,145 1,774 52,185
Interest expense, net......................... 24,414 19,183 -- 43,597
Equity in earnings of joint ventures.......... (186) (480) -- (666)
Other expense, net............................ (45) 66 -- 21
-------- -------- ------- --------
Income (loss) before taxes............... 9,083 (1,624) 1,774 9,233
Income tax expense (benefit).................. 3,197 (388) 804(c) 3,613
-------- -------- ------- --------
Income (loss) before extraordinary
items.................................. $ 5,886 $ (1,236) $ 970 $ 5,620
======== ======== ======= ========
Basic and diluted earnings per share.......... $ 5,620
Basic and diluted weighted average number of
shares outstanding.......................... 1,000
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
27
<PAGE> 28
COMBINED DOANE PRODUCTS COMPANY AND WINDY HILL PET FOOD HOLDINGS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS
COMPANY WINDY HILL FOR COMBINED
(See (See WINDY HILL COMPANY
Table 1-B) Table 2-B) MERGER PRO FORMA
---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales...................................... $150,565 $ 80,283 $(1,046)(a) $229,802
Cost of goods sold............................. 124,715 60,677 -- 185,392
-------- -------- ------- --------
Gross profit................................... 25,850 19,606 (1,046) 44,410
Operating expenses:
Promotion and distribution................ 8,594 8,729 (1,046)(a) 16,277
Selling, general and administrative....... 5,905 4,656 (732)(b) 9,829
Non-recurring transition costs................. -- 160 -- 160
-------- -------- ------- --------
Income from operations.................... 11,351 6,061 732 18,144
Interest expense, net.......................... 5,942 4,809 -- 10,751
Equity in earnings of joint ventures........... (27) (161) -- (188)
Other expense, net............................. (45) (50) -- (95)
-------- -------- ------- --------
Income before taxes....................... 5,481 1,463 732 7,676
Income tax expense............................. 1,924 631 302(c) 2,857
-------- -------- ------- --------
Income before extraordinary items......... $ 3,557 $ 832 $ 430 $ 4,819
======== ======== ======= ========
Basic and diluted earnings per share........... $ 4,819
Basic and diluted weighted average number of
shares outstanding........................... 1,000
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
28
<PAGE> 29
COMBINED DOANE PRODUCTS COMPANY AND WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(a) Adjustment to reclassify $4,197 for the year ended December 27, 1997 and
$1,046 for the three months ended March 28, 1998 of Windy Hill's cash
discounts to net sales from promotion and distribution expenses to conform
the accounting policies of Windy Hill to those of the Company.
(b) Adjustments to selling, general and administrative expenses to eliminate
certain nonrecurring fees and expenses and recognize additional
amortization of goodwill resulting from the Windy Hill Merger are set forth
below:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Headcount reductions.................................. $1,177 $ 535
Advisory fees......................................... 1,107 325
Amortization of goodwill ($20.4 million amortized over
40 years)............................................ (510) (128)
------ -----
$1,774 $ 732
====== =====
</TABLE>
The Company has determined that the services performed by certain former
employees of Windy Hill will no longer be required and those services will
be performed by existing employees of the Company.
(c) Reflects an adjustment to income tax expense at the effective rate of 35.2%
for the year ended December 31, 1997 and 35.1% for the three months ended
March 31, 1998 based on the Company's effective rate for such periods. In
calculating the tax adjustment, the goodwill amortization as calculated in
(b) above has not been tax effected as it is non-deductible for tax
purposes.
29
<PAGE> 30
COMBINED DOANE PRODUCTS COMPANY AND WINDY HILL PET FOOD HOLDINGS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA ADJUSTMENTS
COMPANY WINDY HILL FOR COMBINED
(See (See WINDY HILL COMPANY
Table 1-C) Table 2-C) MERGER PRO FORMA
------------ ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 2,699 $ 1,945 -- $ 4,644
Trade and other accounts receivable,
net.................................... 63,366 21,856 -- 85,222
Inventories.............................. 35,054 18,314 -- 53,368
Deferred income tax benefits............. -- 2,360 $ 2,800(c) 5,160
Prepaid expenses and other assets........ 5,496 2,176 -- 7,672
-------- -------- ------- --------
Total current assets................ 106,615 46,651 2,800 156,066
Property, plant and equipment, net............ 115,379 78,275 -- 193,654
Goodwill, net................................. 135,339 108,518 20,355(a) 264,212
Other assets.................................. 13,716 16,724 -- 30,440
-------- -------- ------- --------
Total assets........................ $371,049 $250,168 $23,155 $644,372
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt... $ 12,846 $ 1,910 -- $ 14,756
Accounts payable......................... 37,678 17,027 -- 54,705
Accrued liabilities...................... 17,606 11,424 $17,500(a)(c) 46,530
-------- -------- ------- --------
Total current liabilities........... 68,130 30,361 17,500 115,991
Long-term debt, excluding current
installments................................ 224,559 179,719 -- 404,278
Post-retirement benefit liability............. 4,065 2,641 -- 6,706
Deferred income tax liability................. 6,275 13,059 -- 19,334
Other long term liabilities -- 3,043 -- 3,043
-------- -------- ------- --------
Total liabilities................... 303,029 228,823 17,500 549,352
Preferred Stock............................... 32,277 -- -- 32,277
Stockholders' equity
Common Stock............................. -- -- --
Additional paid-in capital............... 41,925 25,183 32,200(a) 74,125
(25,183)(b)
Retained earnings (deficit).............. (6,182) (3,838) 3,838(b) (11,382)
(5,200)(c)
-------- -------- ------- --------
Total stockholders' equity.......... 35,743 21,345 5,655 62,743
-------- -------- ------- --------
Total liabilities and stockholders'
equity............................ $371,049 $250,168 $23,155 $644,372
======== ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
30
<PAGE> 31
COMBINED DOANE PRODUCTS COMPANY AND WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(a) To record the purchase of all of the issued and outstanding common stock of
Windy Hill for approximately eight million shares valued at approximately
$32,200. The transaction was accounted for as a purchase with the purchase
price and direct acquisition costs of $9,500 allocated based on fair value
of assets acquired and liabilities assumed. Goodwill of approximately
$20,355, was recorded in connection with the transaction.
(b) To record equity adjustments associated with the Windy Hill Merger.
(c) To accrue estimated severance and other transition expenses directly
related to the Windy Hill Merger in the amount of $8,000 net of a tax
benefit of $2,800. The adjustment has not been reflected in the Pro Forma
Statement of Operations and will be charged to operations upon the
consummation of the refinancing transaction.
31
<PAGE> 32
TABLE 1-A
DOANE PRODUCTS COMPANY
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMPANY IPES ADJUSTMENTS FOR PRO FORMA
HISTORICAL HISTORICAL IPES ACQUISITION COMPANY
---------- ---------- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.................................. $564,741 $21,096 $ -- $585,837
Cost of goods sold......................... 482,896 17,205 283(a) 500,384
-------- ------- ------- --------
Gross profit............................... 81,845 3,891 (283) 85,453
Operating expenses:
Promotion and distribution............... 31,876 1,080 -- 32,956
Selling, general and administrative...... 17,985 788 458(b) 19,231
-------- ------- ------- --------
Income from operations................ 31,984 2,023 (741) 33,266
Interest expense, net...................... 22,463 117 1,834(c) 24,414
Equity in earnings of joint venture........ (186) -- -- (186)
Other expense, net......................... 84 (129) -- (45)
-------- ------- ------- --------
Income before taxes................... 9,623 2,035 (2,575) 9,083
Income tax expense......................... 3,389 674 (866)(d) 3,197
-------- ------- ------- --------
Income before extraordinary items..... $ 6,234 $ 1,361 $(1,709) $ 5,886
======== ======= ======= ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
32
<PAGE> 33
TABLE 1-B
DOANE PRODUCTS COMPANY
UNAUDITED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMPANY IPES ADJUSTMENTS FOR PRO FORMA
HISTORICAL HISTORICAL IPES ACQUISITION COMPANY
---------- ---------- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales..................................... $144,497 $6,068 $ -- $150,565
Cost of goods sold............................ 119,967 4,681 67(a) 124,715
-------- ------ ----- --------
Gross profit.................................. 24,530 1,387 (67) 25,850
Operating expenses:
Promotion and distribution.................. 8,434 160 -- 8,594
Selling, general and administrative......... 5,650 145 110(b) 5,905
-------- ------ ----- --------
Income from operations................... 10,446 1,082 (177) 11,351
Interest expense, net......................... 5,422 74 446(c) 5,942
Equity in earnings of joint venture........... (27) -- -- (27)
Other expense, net............................ (4) (41) -- (45)
-------- ------ ----- --------
Income before taxes...................... 5,055 1,049 (623) 5,481
Income tax expense............................ 1,776 335 (187)(d) 1,924
-------- ------ ----- --------
Income before extraordinary items........ $ 3,279 $ 714 $(436) $ 3,557
======== ====== ===== ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
33
<PAGE> 34
DOANE PRODUCTS COMPANY
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
(a) Adjustment to reflect $283 for the year ended December 31, 1997 and $67 for
the three months ended March 31, 1998 of additional depreciation resulting
from the write-up of property, plant and equipment to fair value related to
the IPES Acquisition.
(b) Adjustment to reflect $458 for the year ended December 31, 1997 and $110
for the three months ended March 31, 1998 of additional goodwill and
intangible amortization resulting from the IPES Acquisition.
(c) Adjustments to interest expense to reflect the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Effect of additional financing incurred in connection with
the IPES Acquisition ($28.3 million at 6.2%).............. $1,760 $428
Additional amortization of deferred financing cost resulting
from the IPES Acquisition................................. 74 18
------ ----
$1,834 $446
====== ====
</TABLE>
(d) Reflects an adjustment to income tax expense at the effective rate of 35.2%
for the year ended December 31, 1997 and 35.1% for the three months ended
March 31, 1998 based on the Company's effective rate for such periods.
34
<PAGE> 35
TABLE 1-C
DOANE PRODUCTS COMPANY
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
ADJUSTMENTS
COMPANY IPES FOR IPES PRO FORMA
HISTORICAL HISTORICAL ACQUISITION COMPANY
---------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ -- $ 1,743 $ 956(d) $ 2,699
Trade accounts receivable, net............ 59,703 3,663 -- 63,366
Inventories............................... 33,048 1,878 128(a) 35,054
Prepaid expenses and other assets......... 4,863 633 -- 5,496
-------- ------- -------- --------
Total current assets................. 97,614 7,917 1,084 106,615
Property, plant and equipment, net............. 101,337 11,269 2,773(a) 115,379
Goodwill, net.................................. 122,068 -- 13,271(b) 135,339
Other assets, net.............................. 12,709 34 973(c) 13,716
-------- ------- -------- --------
Total assets......................... $333,728 $19,220 $ 18,101 $371,049
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.... $ 11,667 $ -- $ 1,179(d) $ 12,846
Accounts payable.......................... 32,886 4,792 -- 37,678
Accrued liabilities....................... 15,859 701 1,046(e) 17,606
-------- ------- -------- --------
Total current liabilities............ 60,412 5,493 2,225 68,130
Long-term debt, excluding current
installments................................. 195,286 2,113 27,160(d) 224,559
Post-retirement benefit liability.............. 4,065 -- -- 4,065
Deferred income tax liability.................. 5,945 330 -- 6,275
-------- ------- -------- --------
Total liabilities.................... 265,708 7,936 29,385 303,029
Preferred Stock................................ 32,277 -- -- 32,277
Stockholders' equity:
Common Stock.............................. -- 1,809 (1,809)(f) --
Additional paid-in capital................ 41,925 3,884 (3,884)(f) 41,925
Retained earnings (deficit)............... (6,182) 5,591 (5,591)(f) (6,182)
-------- ------- -------- --------
Total stockholders' equity........... 35,743 11,284 (11,284) 35,743
-------- ------- -------- --------
Total liabilities and stockholders'
equity............................. $333,728 $19,220 $ 18,101 $371,049
======== ======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
35
<PAGE> 36
DOANE PRODUCTS COMPANY
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1998
(a) Adjustment to reflect the write-up of inventory and property, plant and
equipment to fair value.
(b) Adjustment to reflect the excess of cost over the fair value of net assets
purchased in the IPES Acquisition. Goodwill is being amortized on a
straight-line basis over a forty-year period.
(c) Adjustment to reflect deferred financing costs and other intangibles
resulting from the IPES Acquisition. Deferred financing costs and other
intangibles are being amortized over 7 years and 5 years, respectively.
(d) Reflects the adjustment to record the debt incurred to fund the IPES
Acquisition and related transaction expenses.
(e) Adjustment to reflect accruals for costs associated with the IPES
Acquisition.
(f) Represents the equity adjustments associated with the IPES Acquisition.
36
<PAGE> 37
TABLE 2-A
WINDY HILL PET FOOD HOLDINGS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
<TABLE>
<CAPTION>
PRO FORMA
OTHER ADJUSTMENTS
WINDY HILL HUBBARD AGP DEEP RUN ACQUISI- FOR PRO FORMA
HISTORICAL(a) HISTORICAL(b) HISTORICAL HISTORICAL TIONS(c) ACQUISITIONS WINDY HILL
------------- ------------- ---------- ---------- -------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $164,288 $42,332 $46,194 $28,667 $ 22,560 $ -- $304,041
Cost of goods sold.............. 113,288 32,222 43,809 23,400 19,806 (1,084)(d) 231,441
-------- ------- ------- ------- -------- ------- --------
Gross profit.................... 51,000 10,110 2,385 5,267 2,754 1,084 72,600
Operating expenses:
Promotion and
distribution.............. 28,980 4,583 749 1,548 1,517 -- 37,377
Selling, general and
administrative............ 10,886 1,156 1,832 1,340 496 797(e) 16,507
Non-recurring transition
costs......................... 1,571 -- -- -- -- -- 1,571
-------- ------- ------- ------- -------- ------- --------
Income from operations...... 9,563 4,371 (196) 2,379 741 287 17,145
Interest expense, net........... 12,241 -- -- 58 -- 6,884(f) 19,183
Equity in earnings of joint
ventures...................... (377) (467) -- -- -- 364(g) (480)
Other expense, net.............. 93 (60) 41 2 (10) -- 66
-------- ------- ------- ------- -------- ------- --------
Income before taxes......... (2,394) 4,898 (237) 2,319 751 (6,961) (1,624)
Income tax expense (benefit).... (574) -- -- -- -- 186(h) (388)
-------- ------- ------- ------- -------- ------- --------
Income (loss) before
extraordinary items........... $ (1,820) $ 4,898 $ (237) $ 2,319 $ 751 $(7,147) $ (1,236)
======== ======= ======= ======= ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
37
<PAGE> 38
TABLE 2-B
WINDY HILL PET FOOD HOLDINGS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 28, 1998
<TABLE>
<CAPTION>
PRO FORMA
OTHER ADJUSTMENTS
WINDY HILL DEEP RUN ACQUISI- FOR PRO FORMA
HISTORICAL(a) AGP(b) HISTORICAL TIONS(c) ACQUISITIONS WINDY HILL
------------- ------ ---------- -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales......................................... $61,769 $5,703 $8,551 $4,260 $ -- $80,283
Cost of goods sold................................ 44,737 5,378 7,293 3,418 (149)(d) 60,677
------- ------ ------ ------ ----- -------
Gross profit...................................... 17,032 325 1,258 842 149 19,606
Operating expenses:
Promotion and distribution.................... 8,018 83 390 238 -- 8,729
Selling, general and administrative........... 3,993 133 303 161 66(e) 4,656
Non-recurring transition costs.................... 160 -- -- -- -- 160
------- ------ ------ ------ ----- -------
Income from operations........................ 4,861 109 565 443 83 6,061
Interest expense, net............................. 4,123 5 -- -- 681(f) 4,809
Equity in earnings of joint ventures.............. (266) -- -- -- 105(g) (161)
Other expense, net................................ 29 14 (92) (1) -- (50)
------- ------ ------ ------ ----- -------
Income before taxes........................... 975 90 657 444 (703) 1,463
Income tax expense (benefit)...................... 473 -- -- -- 158(h) 631
------- ------ ------ ------ ----- -------
Income (loss) before extraordinary items...... $ 502 $ 90 $ 657 $ 444 $(861) $ 832
======= ====== ====== ====== ===== =======
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
38
<PAGE> 39
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(a) Windy Hill was a private holding company which owned 100% of its
subsidiary, Windy Hill Pet Food Company, Inc.
(b) Includes results of Hubbard for the period from January 1, 1997 to May 21,
1997 (the date of acquisition) for the fiscal year ended December 27, 1997.
Includes results for AGP for the period from January 1, 1998 to February
23, 1998 (the date of acquisition) for the three month period ended March
28, 1998.
(c) Other acquisitions include the purchase of NuPet and the remaining 50%
interest not previously owned in the Cartersville, Georgia and the Maumee,
Ohio joint ventures. For the fiscal year ended December 27, 1997, results
of NuPet and Cartersville are included for the entire year and results of
Maumee are included from January 1, 1997 to August 31, 1997 (the date of
acquisition). For the three month period ended March 28, 1998, results of
NuPet are included for the entire period and results of Cartersville are
included from January 1, 1998 to February 28, 1998 (the date of
acquisition).
(d) Adjustment to cost of goods sold to reflect $1,084 for the year ended
December 27, 1997 and $149 for the three months ended March 28, 1998 of
reductions in depreciation expense resulting from the Hubbard, AGP, NuPet,
Cartersville and Maumee acquisitions (the "1998 Acquisitions")
Acquisitions.
(e) Adjustments to selling, general and administrative expense reflect $797 for
the year ended December 27, 1997 and $66 for the three months ended March
28, 1998 of additional amortization of goodwill resulting from the 1997
Acquisitions.
(f) Adjustment to interest expense to reflect the following:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 27, 1997 MARCH 28, 1998
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Effect of additional financing incurred in
connection with the 1997 Acquisitions ($66.1
million at 9.5% for the year and $28.4 million at
9.5% for the quarter)............................ $6,302 $680
Additional amortization of deferred financing cost
resulting from the 1997 Acquisitions............. 582 1
------ ----
$6,884 $681
====== ====
</TABLE>
(g) To eliminate equity in earning of joint ventures for the months prior to
acquisition.
(h) Reflects an adjustment to income tax benefit (expense) at the effective
rate of 23.9% for the year ended December 27, 1997 and 43.2% for the three
months ended March 28, 1998 based on Windy Hill's effective rate for such
periods.
39
<PAGE> 40
TABLE 2-C
WINDY HILL
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 28, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENT
WINDY HILL NUPET DEEP RUN FOR FOR DEBT PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS CONVERSION WINDY HILL
---------- ---------- ---------- ------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 1,702 $ -- $ 243 $ -- $ -- $ 1,945
Trade and other accounts receivable,
net................................. 19,543 -- 2,313 -- -- 21,856
Inventories........................... 15,484 461 2,369 -- -- 18,314
Deferred income tax benefits.......... 2,360 -- -- -- -- 2,360
Prepaid expenses...................... 1,324 -- 852 -- -- 2,176
-------- ------ ------- -------- ------- --------
Total current assets.............. 40,413 461 5,777 -- -- 46,651
Property, plant and equipment, net........ 72,097 1,311 4,867 -- -- 78,275
Goodwill, net............................. 97,846 -- -- 10,672(a) -- 108,518
Other assets.............................. 16,594 -- 130 -- -- 16,724
-------- ------ ------- -------- ------- --------
Total assets...................... $226,950 $1,772 $10,774 $ 10,672 $ -- $250,168
======== ====== ======= ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
debt................................ $ 1,500 $ -- $ 410 $ -- $ -- $ 1,910
Accounts payable...................... 15,091 -- 1,936 -- -- 17,027
Accrued liabilities................... 11,164 55 205 -- -- 11,424
-------- ------ ------- -------- ------- --------
Total current liabilities......... 27,755 55 2,551 -- -- 30,361
Long-term debt, excluding current
installments............................ 160,479 -- 112 20,500(b) (1,372)(d)(e) 179,719
Post-retirement benefit liability......... 2,641 -- -- -- -- 2,641
Other long term liabilities............... 6,063 -- -- -- (3,020)(d)(e) 3,043
Deferred income tax liability............. 13,059 -- -- -- -- 13,059
-------- ------ ------- -------- ------- --------
Total liabilities................. 209,997 55 2,663 20,500 (4,392) 228,823
Stockholders' equity:
Common Stock.......................... -- -- 1 (1)(c) -- --
Preferred Stock....................... 4,167 -- -- -- (4,167)(d) --
Additional paid-in capital............ 16,624 -- 29 (29)(c) 8,559(d) 25,183
Treasury stock........................ -- -- (234) 234(c) -- --
Retained earnings (deficit)........... (3,838) 1,717 8,315 (10,032)(c) -- (3,838)
-------- ------ ------- -------- ------- --------
Total stockholders' equity........ 16,953 1,717 8,111 (9,828) 4,392 21,345
-------- ------ ------- -------- ------- --------
Total liabilities and
stockholders' equity............ $226,950 $1,772 $10,774 $ 10,672 $ -- $250,168
======== ====== ======= ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
40
<PAGE> 41
WINDY HILL
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 28, 1998
(IN THOUSANDS)
(A) Adjustments to reflect the excess of cost over the fair value of net assets
purchased in the 1997 Acquisitions. Goodwill is being amortized on a
straight-line basis over a 40-year period.
(b) Represents debt incurred to acquire NuPet and Deep Run.
(c) Represents the elimination of equity associated with the 1997 Acquisitions.
(d) To reclassify Windy Hill preferred stock of $4,167, PIK A and A-1 notes of
$4,167 (included in long-term debt), and $225 of accrued interest on the
notes (included in other long term liabilities) to additional paid in
capital to reflect the conversion to common stock just prior to the Windy
Hill Acquisition.
(e) To reclassify $2,795 of accrued PIK interest on the Seller Notes to
long-term debt from other long term liabilities.
41
<PAGE> 42
INDEX TO EXHIBITS
EXHIBIT
NUMBER
------
23.1 Consent of KPMG Peat Marwick LLP
4.1 Amended and Restated Investors' Agreement dated as of
August 3, 1998 among the Company, DPC Acquisition Corp.,
Summit Capital Inc., Summit/DPC Partners, L.P., Chase
Manhattan Investment Holdings, Inc., Baseball Partners,
DLJ Merchant Banking Partners, L.P., DLJ International
Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant
Banking Funding, Inc., DLJ First Esc, L.L.C., Dartford
Partnership, L.L.C., Bruckman, Rosser, Sherrill & Co.,
L.P., PNC Capital Corp., Windy Hill Pet Food Company,
L.L.C., and certain other persons named therein
(incorporated by reference to Exhibit 9.1 to the
Company's Registration Statement on Form S-1,
Registration No. 333-61031).
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Windy Hill Pet Food Holdings, Inc.
We consent to the inclusion of our report dated March 13, 1998, with respect to
the consolidated balance sheets of Windy Hill Pet Food Holdings, Inc. and
subsidiaries, as of December 27, 1997 and December 28, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended and for the ten-month period ended December 30, 1995, which
report appears in Amendment No. 1 to Form 8-K of Doane Products Company dated
August 14, 1998.
/s/ KPMG Peat Marwick LLP
San Francisco, California
August 13, 1998
