<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 1999
REGISTRATION NO. 333-61027
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
DOANE PET CARE ENTERPRISES, INC.
(Exact Name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2047 76-0472875
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
103 POWELL COURT, SUITE 200
BRENTWOOD, TENNESSEE 37027
(615) 373-7774
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
THOMAS R. HEIDENTHAL
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
103 POWELL COURT, SUITE 200
BRENTWOOD, TENNESSEE 37027
(615) 373-7774
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
ALAN P. BADEN DAVID P. OELMAN
VINSON & ELKINS L.L.P. ANDREWS & KURTH L.L.P.
2300 FIRST CITY TOWER 600 TRAVIS, SUITE 4200
1001 FANNIN HOUSTON, TEXAS 77002
HOUSTON, TEXAS 77002 (713) 220-4200
(713) 758-2222
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 8, 1999
PROSPECTUS
, 1999
[LOGO]
16,666,668 SHARES
DOANE PET CARE ENTERPRISES, INC.
COMMON STOCK
Of the 16,666,668 shares of Class A Common Stock, par value $0.0001 per
share, of Doane Pet Care Enterprises, Inc. (the "Company") offered hereby (the
"Offering"), 12,500,000 shares are being sold by the Company and 4,166,668
shares are being sold by certain selling stockholders (the "Selling
Stockholders"). The Company has two classes of common stock, Class A Common
Stock and Class B Common Stock (collectively, the "Common Stock"), that are
identical except that Class B Common Stock, which is convertible into Class A
Common Stock, has no voting rights. The Company will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Stockholders.
See "Principal and Selling Stockholders."
Prior to the Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price of the
Common Stock offered hereby will be between $11.00 and $13.00 per share. For
information relating to the factors considered in determining the initial public
offering price, see "Underwriting."
Application will be made to list the Common Stock on the New York Stock
Exchange ("NYSE") under the symbol "DPC."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO THE DISCOUNTS AND TO THE TO THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
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Per Share......................... $ $ $ $
Total(3).......................... $ $ $ $
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters (as defined below) against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses estimated at $1.6 million which will be paid by
the Company.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 2,500,000 additional shares of
Common Stock at the Price to the Public less Underwriting Discounts and
Commissions, solely to cover over-allotments, if any. If the option is
exercised in full, the total Price to the Public, Underwriting Discounts and
Commissions and Proceeds to the Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock offered hereby are being offered by Donaldson,
Lufkin & Jenrette Securities Corporation, Merrill Lynch & Co., Schroder & Co.
Inc. and Chase Securities Inc. (collectively, the "Underwriters") when, as and
if delivered to and accepted by the Underwriters against payment therefor and
subject to certain prior conditions, including their right to reject orders in
whole or in part. It is expected that delivery of the share certificates
representing the Common Stock will be made in New York, New York, on or about
, 1999.
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
SCHRODER & CO. INC.
CHASE SECURITIES INC.
<PAGE> 3
[A SERIES OF PICTURES REPRESENTING
COMPANY MANUFACTURING FACILITIES
AND PRODUCTS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus (i) assumes an initial public offering price of $12.00 per
share, (ii) assumes that the Underwriters' over-allotment option is not
exercised and (iii) gives effect to the Company's four-for-one stock split
effected immediately prior to the Offering. Unless the context indicates
otherwise, references in this Prospectus to the Company mean Doane Pet Care
Enterprises, Inc. and its subsidiaries. The Company's pro forma financial and
operating data set forth herein gives effect to the acquisition (the "Windy Hill
Acquisition") of Windy Hill Pet Food Holdings, Inc. and its subsidiaries ("Windy
Hill") in August 1998, the acquisition (the "IPES Acquisition") of IPES IBERICA,
S.A. ("IPES") in April 1998 and the Refinancing Transactions (as defined
herein). Investors should carefully consider the information set forth in "Risk
Factors."
THE COMPANY
The Company is the largest manufacturer of dry pet food in the United
States, producing approximately 26% of the total volumes sold in 1997 on a pro
forma basis. The Company manufactures products for store brands owned by retail
customers (also known as private labels), contract manufactures products for
national branded pet food companies and produces and sells under regional brands
owned by the Company.
The Company manufactures for its customers a full range of pet food
products for both dogs and cats, including dry, canned, semi-moist, soft dry,
soft treats and dog biscuits. The Company provides products that meet customer
specifications across all retail channels and price points, from super premium
to value products. Accordingly, the Company manufactures store brands for over
350 customers in the United States, including the three largest mass
merchandisers, the five largest grocery companies and the largest national pet
specialty retailer. The Company also manufactures dry pet food and treats for
four of the six largest national branded pet food companies through
co-manufacturing agreements pursuant to which the Company produces, packages and
ships a portion of such companies' products.
The Company has the most extensive manufacturing and distribution network
in the industry, providing it with certain operational, cost and competitive
advantages. The Company manufactures and distributes its products in the United
States through 32 combination manufacturing and distribution facilities and nine
additional distribution centers. The number and strategic location of the
Company's facilities reduce distribution expenses, which represent a meaningful
portion of the delivered cost of pet food due to its bulk and weight relative to
its selling price. The Company's extensive network can further reduce expenses
by enabling certain of its customers to bypass their distribution centers and
deliver directly to their stores. Direct store delivery service currently
accounts for approximately 45% of the Company's sales by volume.
The Company has achieved strong internal growth. From 1992 to 1997, the
Company increased sales volumes at a compound annual growth rate of 10.3%,
exclusive of acquisitions. The Company believes its growth is primarily due to
an increase in consumer acceptance of store brands and an increase in volume
co-manufactured for national pet food companies. In addition, the Company has
been the primary supplier of store brand pet food to WalMart Stores Inc.
("Wal*Mart") since 1970. The Company manufactures and distributes, under a
direct store delivery program, a variety of products for Wal*Mart including its
store brand, Ol' Roy, which is the largest selling brand of dry pet food in the
United States by volume. In 1997, sales to Wal*Mart, including its Sam's Club
division, accounted for 39% of the Company's sales on a pro forma basis.
THE PET FOOD INDUSTRY
The U.S. pet food industry is a $10 billion industry that has grown at a
compound annual rate of 5% from 1992 to 1997 in terms of volume. Growth in the
dry pet food and the biscuit and treats segments of the industry has exceeded
the growth of the overall pet food industry by capturing market share from other
segments, including canned pet food. Dry pet food sales have grown at a rate of
6.4% per year from 1992 to 1997 and accounted for approximately $5.2 billion of
sales in the industry in 1997. Dry pet food has increased its market share from
49.2% to 52.0% over the same period. The biscuit and treats segment has grown at
a rate
3
<PAGE> 5
of 6.3% per year from 1992 to 1997 and has increased its market share from 12.1%
to 12.8% over the same period.
Improved product quality and increased retailer support have generally
enabled store brands to gain market share from national brands in many
traditional branded categories, including pet food. Sales of store brand pet
food accounted for in excess of 20% of the total pet food market in 1997 and
have grown at a compound annual growth rate in excess of 7.5% over the past five
years. Store brands have increased market share in each of the segments of the
pet food industry over the past five years. In 1997, store brands represented
approximately 29%, 29%, 23%, 18% and 17% of total sales volume of biscuits and
treats, dry dog, dry cat, canned dog and canned cat food, respectively. Store
brands now encompass a full range of pet food products at all price points,
including economy, premium and super premium.
RECENT DEVELOPMENTS
Refinancing Transactions. In November 1998, the Company refinanced its
capital structure pursuant to the following series of transactions collectively
referred to herein as the "Refinancing Transactions:"
-- Windy Hill was merged into Doane Pet Care Company, the Company's
principal operating subsidiary ("Doane");
-- Doane completed a cash tender offer for approximately $97 million
principal amount of its 10 5/8% Senior Notes due 2006 (the "Senior
Notes");
-- Windy Hill completed a cash tender offer for $46 million principal
amount of its 9 3/4% Senior Subordinated Notes due 2007 (the "Windy Hill
Notes"), which tender offer was required by a change of control
provision in the indenture governing such notes;
-- Doane completed an exchange offer (the "Exchange Offer") of $150 million
principal amount of its 9 3/4% Senior Subordinated Notes due 2007 (the
"Senior Subordinated Notes") for the remaining approximately $63 million
principal amount of Senior Notes and the remaining approximately $74
million principal amount of Windy Hill Notes; and
-- Doane entered into a new senior credit facility (the "New Credit
Facility") with a syndicate of financial institutions providing for
total commitments of $345 million. Doane borrowed $292 million under the
New Credit Facility to fund the cash requirements of the Refinancing
Transactions, repay borrowings under and retire its previous credit
facilities, repay other debt and repay a bridge financing incurred in
connection with the tender offer for the Windy Hill Notes.
Windy Hill Acquisition. In August 1998, the Company acquired Windy Hill for
approximately 6.4 million shares of Common Stock and the assumption of $183.5
million of indebtedness. Windy Hill was a leading manufacturer of pet food
products for both dogs and cats, including dry, canned, semi-moist, soft dry,
soft treats and dog biscuits. With Windy Hill, the Company became the largest
manufacturer of dog biscuits in the United States. In 1997, Windy Hill generated
pro forma net sales, EBITDA and a net loss before extraordinary item of $304.0
million, $26.7 million and $1.6 million, respectively.
The Windy Hill Acquisition strengthens the Company's presence in the dry
pet food and dog biscuit market segments, provides revenue synergies and
enhances the Company's position as a low-cost manufacturer and distributor of
pet food products. The Company believes the Windy Hill Acquisition provides the
opportunity for revenue growth by (i) enabling the Company to offer regional
brands, semi-moist, soft dry and canned pet food products to its traditional
customer base and (ii) enabling the Company to offer soft treats and other
specialized dry food products to Windy Hill's traditional customer base. With
the addition of Windy Hill's 19 plants, the Company believes cost savings can be
achieved through optimizing production schedules and lowering distribution costs
by reducing the distance products are shipped. The Windy Hill Acquisition also
provides the Company with the opportunity to achieve cost savings by obtaining
purchasing synergies and eliminating redundant overhead functions.
4
<PAGE> 6
IPES Acquisition. In April 1998, the Company acquired IPES for $26.2
million (net of cash purchased of $1.9 million) and the assumption of
indebtedness of $1.9 million. IPES, located in Spain, is a manufacturer of both
store and regional brands. In fiscal 1997, IPES had net sales, EBITDA and net
income of $21.1 million, $3.8 million and $1.0 million, respectively. The
Company believes that the IPES Acquisition, together with the Company's
investment in the Italian pet food manufacturer, Effeffe, S.p.a., provides the
Company with a platform for growth in Europe.
STRATEGY
The Company's business objective is to increase revenues and earnings and
to enhance its leadership position within the pet food industry. The key
elements of the strategy to achieve the Company's business objective are as
follows:
Continue to be the Low Cost Quality Provider in the Pet Food Industry. The
Company believes it is the low cost provider of quality dry pet food. The
Company believes its position as the largest manufacturer of dry pet food
provides it with certain economies of scale, including production efficiencies
and packaging purchasing leverage. In addition, the number and strategic
location of the Company's facilities enhance the Company's position as the low
cost provider by reducing transportation costs for raw materials and finished
goods. The Company also maintains in-house engineering, machining and
fabrication capabilities that enable the Company to design, construct and
maintain facilities on a cost-effective basis.
Leverage Distribution System. The Company's manufacturing and distribution
network enables it to service customers on a national basis and facilitates the
Company's direct store delivery program, the scope of which the Company believes
is unique in the industry. In addition, the Company has developed capabilities
that allow it to provide vendor managed inventory services ("VMI") to certain
key customers. VMI allows the Company to communicate on-line with its customers,
evaluate their inventory status and place orders on their behalf. The Company
intends to leverage its manufacturing and distribution network by expanding
sales of its full range of pet food products to its existing customers. For
example, the Company recently completed the construction of a soft treat
manufacturing facility, which will enable the Company to offer soft treats to
its traditional customer base, and intends to expand sales of certain products
acquired in the Windy Hill Acquisition including semi-moist, soft dry, canned
and regional brands to its existing customers.
Provide a Full Range of Pet Food Products. The Company offers customers a
full range of pet food products for both dogs and cats, including dry, canned,
semi-moist, soft dry, soft treats and dog biscuits. By offering a full range of
products under a variety of brand formats (store, co-manufactured national and
regional brands) and price points, the Company can be a significant source for
its customers' total pet food requirements. This enables customers to realize
administrative and distribution savings by aggregating a variety of products and
brands into a single shipment.
Focus on Diversified Brand Formats. The Company believes that store,
co-manufactured national and regional brand formats offer significant growth
opportunities. Sales of store brands have exceeded the overall growth in the pet
food industry. The Company believes this growth will continue due to (i) an
increased awareness of retailers concerning the advantages of store brands,
including enhanced margins and customer loyalty, (ii) improved quality,
innovation and variety of store brand products and (iii) increasingly informed
and value-conscious consumers. The Company believes co-manufactured national
brands offer growth opportunities as national branded pet food companies
increasingly take advantage of the Company's low-cost status, quality products,
extensive plant network and logistics capabilities. The Company believes that
the regional brands acquired with the Windy Hill Acquisition complement its
existing product lines and intends to capitalize on demand for such brands
within the Company's existing customer base.
Acquire Additional Pet Food Companies. To supplement its internal growth,
the Company has acquired eight pet food companies over the last three years. The
Company believes that there are substantial opportunities in the United States
and abroad to acquire additional pet food companies. The Company will continue
to seek accretive acquisitions that offer complementary product lines,
geographic scope, additional distribution channels and cost saving
opportunities.
5
<PAGE> 7
Expand International Presence. The Company believes substantial
opportunities exist to increase sales in international markets. The Company
believes that the approximately $9.3 billion European pet food market is
particularly attractive due to the strength and demand for store brand products
and the strong growth of dry pet food products. The Company is currently
expanding its manufacturing and distribution capabilities in Spain and Italy and
intends to pursue acquisitions of additional pet food companies and expand its
product offerings. In addition, the Company believes that an opportunity exists
to expand export sales to the Pacific Rim and South America.
THE OFFERING
Common Stock offered by:
The Company........................... 12,500,000 shares
The Selling Stockholders(1)........... 4,166,668 shares
Total............................ 16,666,668 shares
Common Stock to be outstanding after the
Offering................................... 30,909,840 shares(2)
Use of Proceeds............................ The net proceeds to the Company
from the Offering will be used to
repay borrowings under the New
Credit Facility and to repurchase
the outstanding preferred stock.
See "Use of Proceeds."
Proposed NYSE symbol....................... "DPC"
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(1) Includes 1,616,668 shares of Common Stock to be issued by the Company upon
the exercise by the Underwriters of warrants that were previously held by
certain of the Selling Stockholders. See "Certain Transactions."
(2) Does not include (i) 1,610,548 shares of Common Stock issuable upon exercise
of options outstanding under the Company's stock option plan and (ii)
5,417,912 shares of Common Stock issuable upon exercise of outstanding
warrants with an exercise price of $0.0025 per share. See
"Management -- Stock Option and Stock Purchase Plans" and "Principal and
Selling Stockholders."
RISK FACTORS
Prior to making an investment in the Common Stock offered hereby,
prospective purchasers of the Common Stock should take into account the specific
risks set forth under "Risk Factors" as well as the other information set forth
in this Prospectus.
6
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
The summary historical financial information for the periods ended
September 30, 1995 and December 31, 1995, 1996 and 1997 are derived from the
consolidated financial statements of the Company included elsewhere in this
Prospectus. The summary historical information for the nine-month period ended
September 30, 1997 and as of and for the nine-month period ended September 30,
1998 are derived from the unaudited consolidated financial statements of the
Company that in the opinion of management reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial condition and results of operations as of such dates and for such
periods. The results for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year.
The unaudited condensed pro forma as adjusted income statement data give effect
to the Windy Hill Acquisition, including the pro forma effects of each of the
transactions included in the pro forma financial statements of Windy Hill, the
IPES Acquisition, the Refinancing Transactions and the Offering as if each of
such transactions had occurred on January 1, 1997. The unaudited pro forma as
adjusted balance sheet gives effect to the Refinancing Transactions and the
Offering and the use of proceeds therefrom, in each case as if such transactions
had occurred on September 30, 1998. Such pro forma data are presented for
illustrative purposes only and do not purport to represent the Company's actual
results if such events had occurred at the dates indicated, nor do such data
purport to project the results of operations for any future period. The
information set forth below is qualified in its entirety and should be read in
conjunction with the consolidated financial statements and notes thereto of the
Company, the consolidated financial statements and notes thereto of Windy Hill,
"Unaudited Condensed Pro Forma Financial Statements," "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR(1) THE COMPANY
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YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
NINE MONTHS THREE MONTHS --------------------------------- ---------------------------------
ENDED ENDED PRO FORMA PRO FORMA
SEPTEMBER 30, DECEMBER 31, AS ADJUSTED AS ADJUSTED
1995 1995 1996 1997 1997 1997 1998 1998
-------------- ------------ -------- -------- ----------- -------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $303,633 $114,958 $513,217 $564,741 $885,681 $411,399 $462,991 $641,674
Gross profit............ 56,239 17,774 66,441 81,845 153,425 58,522 84,408 127,748
Unusual items(2)........ 9,440 -- -- -- -- -- -- --
Non-recurring transition
cost(3)............... -- -- -- -- 1,571 -- 4,311 12,767
Income from
operations............ 20,566 7,613 24,911 31,984 49,475 22,219 28,781 33,217
Interest expense, net... 3,611 5,806 22,471 22,463 35,724 16,973 19,444 26,793
Non-recurring finance
charge(4)............. -- -- 4,815 -- 4,486 -- -- --
Income (loss) before
extraordinary
items(5).............. $ 16,746 $ 1,024 $ (1,518) $ 6,234 $ 5,450 $ 3,381 $ 6,340 $ 2,648
Basic earnings (loss)
per share............. $ -- $ (0.03) $ (0.66) $ (0.01) $ 0.23 $ (0.12) $ 0.08 $ 0.10
Basic weighted average
number of shares
outstanding........... -- 11,000 11,006 11,350 23,850 11,301 13,088 25,588
Diluted earnings (loss)
per share............. $ (0.02) $ (0.44) $ (0.01) $ 0.18 $ (0.07) $ 0.05 $ 0.08
Diluted weighted average
number of shares
outstanding........... 16,417 16,620 18,085 30,585 17,958 19,860 32,360
OTHER DATA:
EBITDA(6)............... $ 24,364 $ 10,063 $ 35,264 $ 43,216 $ 68,958 $ 30,290 $ 40,364 $ 51,806
Adjusted EBITDA(6)...... $ 33,804 $ 10,063 $ 40,079 $ 43,216 $ 75,015 $ 30,290 $ 44,675 $ 64,573
Depreciation and
amortization
expense............... 3,694 2,359 15,972 12,141 23,221 8,880 12,392 17,746
Capital
expenditures(7)....... 4,224 1,297 7,901 14,437 18,612 12,933 14,132 18,749
Pet food sold (thousands
of tons).............. 774 288 1,189 1,237 1,829 896 1,025 1,338
</TABLE>
(footnotes
on next page)
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\
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,833 $ 3,833
Working capital........................................... 50,656 60,174
Total assets.............................................. 664,772 670,128
Total debt................................................ 423,666 386,372
Stockholders' equity...................................... 67,276 152,245
</TABLE>
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(1) The Company was formed by a group of investors in 1995 to acquire Doane (the
"1995 Acquisition"). For financial statement purposes, the 1995 Acquisition
was accounted for as a purchase acquisition effective October 1, 1995. The
effects of the 1995 Acquisition have been reflected in the Company's
consolidated assets and liabilities at that date. As a result, the Company's
consolidated financial statements for the periods subsequent to September
30, 1995 are presented on the successor's new basis of accounting, while
financial statements for September 30, 1995 and prior periods are presented
on the predecessor's historical cost basis of accounting. See Note 1 of the
Consolidated Financial Statements of the Company.
(2) Represents non-recurring bonus payments to senior management in connection
with the 1995 Acquisition.
(3) Represents certain non-recurring transition expenses in connection with the
Windy Hill Acquisition.
(4) Non-recurring finance charges include $4,815 and $4,486 of interim bridge
debt financing costs that were incurred in conjunction with the issuance of
the Senior Notes in 1996 and the Refinancing Transactions in 1998,
respectively.
(5) Income before extraordinary items of the Company's predecessor does not
include any provision for federal income taxes. Prior to the 1995
Acquisition, Doane was organized as a subchapter S corporation.
Consequently, Doane did not pay federal, state or local income taxes except
in those states that did not recognize subchapter S status or that required
the payment of franchise taxes based on income.
(6) EBITDA for any relevant period presented above is defined as earnings before
interest expense, net, income taxes, depreciation and amortization. Adjusted
EBITDA represents EBITDA as defined plus a non-recurring finance charge and
transition costs. EBITDA is not a measure recognized by generally accepted
accounting principles and should not be considered in isolation or as a
substitute for operating income as an indicator of liquidity or as a
substitute for net cash provided by operating activities, which are
determined in accordance with generally accepted accounting principles.
EBITDA is included because management believes that certain investors may
find it useful. See "Unaudited Condensed Pro Forma Financial Statements" and
the Company's Consolidated Financial Statements and the notes thereto
included elsewhere in this Prospectus.
(7) Capital expenditures exclude payments for acquisitions.
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<PAGE> 10
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Prospectus, including, without limitation, statements under "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" regarding planned capital expenditures,
the availability of capital resources to fund capital expenditures, the
Company's financial position, business strategy and other plans and objectives
for future operations, are forward-looking statements. The words "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "may" and
similar expressions are intended to identify forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. There are numerous uncertainties inherent
in estimating the cost of raw materials and labor, including many factors beyond
the control of the Company. Additional important factors that could cause actual
results to differ materially from the Company's expectations are disclosed below
and elsewhere in this Prospectus. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by such factors.
RISK FACTORS
LEVERAGE; RESTRICTIVE COVENANTS
The Company is highly leveraged and will continue to be highly leveraged
following the consummation of the Offering. At September 30, 1998, on a pro
forma basis, the Company would have had approximately $386.4 million in
aggregate principal amount of outstanding indebtedness (excluding trade payables
and other accrued liabilities). See "Capitalization." Subject to the
restrictions in the New Credit Facility and the indenture governing the Senior
Subordinated Notes (the "Note Indenture"), the Company may incur additional
indebtedness from time to time to finance working capital, capital expenditures,
acquisitions or for other purposes.
The level of the Company's indebtedness will have important consequences to
common stockholders, including: (i) a substantial portion of the Company's cash
flow from operations must be dedicated to debt service and will not be available
for other purposes, (ii) the Company's ability to obtain additional debt
financing in the future for working capital, capital expenditures, general
corporate purposes or other purposes may be impaired, (iii) a portion of the
Company's borrowings under the New Credit Facility will be at a floating rate of
interest, which could result in higher interest expense in the event of an
increase in interest rates, (iv) the New Credit Facility and the Note Indenture
contain financial and other restrictive covenants that could limit the Company's
operating and financial flexibility and, if violated, would result in an event
of default that could preclude the Company's access to credit under the New
Credit Facility or otherwise have a material adverse effect on the Company and
(v) the level of the Company's indebtedness could limit its flexibility in
reacting to changes in its industry and economic conditions generally.
The New Credit Facility and the Note Indenture restrict, among other
things, the Company's ability to incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, merge or consolidate
with, or otherwise acquire, any other person or sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of the assets of the Company.
See "Description of Senior Subordinated Notes" and "Description of New Credit
Facility." The New Credit Facility also requires the Company to maintain
specified financial ratios and satisfy certain financial condition tests. The
Company's ability to meet such financial ratios and tests can be affected by
events beyond its control, and there can be no assurance that the Company will
meet such tests. A breach of any of these covenants could result in a default
under the New Credit Facility or the Note Indenture. Upon the occurrence of an
event of default under the New Credit Facility, the lenders could elect to
declare all amounts outstanding under the New Credit Facility, together with
accrued interest, to be immediately due and payable. If the Company were unable
to repay those amounts, the lenders could proceed against the collateral granted
to them to secure that indebtedness. If the Senior Subordinated Notes and the
indebtedness under the New Credit Facility were to be accelerated, there can be
no assurance that the assets of the
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Company would be sufficient to repay in full that indebtedness. See "Description
of New Credit Facility" and "Description of Senior Subordinated Notes." In
connection with the New Credit Facility, the Company has pledged to the lenders
substantially all of its assets. If an event of default occurs under the New
Credit Facility, the lenders have the right to foreclose upon such collateral.
These restrictions could limit the ability of the Company to effect future
financings or may otherwise restrict corporate activities.
Future acquisition or development activities may require the Company to
alter its capitalization significantly. These changes in capitalization may
significantly increase the leverage of the Company. The Company's ability to
meet its debt service obligations and to reduce its total indebtedness will be
dependent upon the Company's future performance, which will be subject to
general economic conditions and to financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.
If the Company is unable to generate sufficient cash flow from operations in the
future to service its indebtedness and to meet its other commitments, the
Company will be required to adopt one or more alternatives, such as refinancing
or restructuring its indebtedness, selling material assets or operations or
seeking to raise additional debt or equity capital. There can be no assurance
that any of these actions could be effected on a timely basis or on satisfactory
terms or that these actions would enable the Company to continue to satisfy its
capital requirements. The terms of the Company's indebtedness, including the New
Credit Facility and the Note Indenture, also may prohibit the Company from
taking such actions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DEPENDENCE ON CERTAIN CUSTOMERS
For the years ended December 31, 1996 and 1997 and the nine months ended
September 30, 1998, sales to Wal*Mart and Sam's Club accounted for approximately
63%, 61% and 57%, respectively, of the Company's net sales. For the year ended
December 31, 1997 on a pro forma basis, sales to Wal*Mart and Sam's Club
accounted for an aggregate of 39.0% of the Company's net sales. A portion (3.8%)
of the Company's sales to Wal*Mart and Sam's Club for the year ended December
31, 1997 on a pro forma basis was attributable to branded pet food products
manufactured and distributed by the Company for national pet food companies. The
Company does not have a long-term contract with Wal*Mart, Sam's Club or any
other customer. A significant decrease in business from either Wal*Mart or Sam's
Club would have a material adverse effect on the Company's results of
operations, financial condition and cash flows. In addition, the Company's
results of operations would be negatively impacted to the extent that Wal*Mart
or Sam's Club is unable to make payments on outstanding accounts receivable. See
"Business -- Customers."
RAW MATERIALS AND PACKAGING COSTS
The Company's financial results depend to a large extent on the cost of raw
materials and packaging and the ability of the Company to pass along to its
customers increases in these costs. Historically, market prices for commodity
grains and food stocks have fluctuated in response to a number of factors,
including changes in United States government farm support programs, changes in
international agricultural and trading policies and weather conditions during
the growing and harvesting seasons. Fluctuations in paper prices have resulted
from changes in supply and demand, general economic conditions and other
factors. In the event of any increases in raw materials costs, the Company would
be required to increase sales prices for its products in order to avoid margin
deterioration. There can be no assurance as to the timing or extent of the
Company's ability to implement future price adjustments in the event of
increased raw material costs or as to whether any price increases implemented by
the Company may affect the volumes of future shipments. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Raw Materials and Packaging." Although
the Company manages the price risk created by market fluctuations by hedging
portions of its primary commodity product purchases, there can be no assurance
that the Company's results of operations will not be exposed to volatility in
the commodity markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "-- Inflation and Changes
in Prices."
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HEDGING
The Company manages price risk created by market fluctuations by hedging
portions of its primary commodity products purchases, principally through
exchange traded futures and options contracts that are designated as hedges. The
terms of such contracts are generally less than one year. Settlement of
positions are either through financial settlement with the exchanges or via
exchange for the physical commodity in which case the Company delivers the
contract against the acquisition of the physical commodity.
The Company's policy does not permit speculative commodity trading. Futures
and options contracts are accounted for as hedges, and gains and losses are
recognized in the period realized as part of the cost of products sold and in
the cash flows. Although the Company manages the price risk of market
fluctuations by hedging portions of its primary commodity product purchases,
there can be no assurance that the Company's results of operations will not be
exposed to volatility in the commodity markets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and
"-- Inflation and Changes in Prices."
ACQUISITION STRATEGY
The Company's acquisition strategy is based on identifying and acquiring
businesses engaged in manufacturing and distributing pet food products in
markets where the Company currently does not operate or businesses with products
that would complement the Company's product mix. The Company will evaluate
specific acquisition opportunities based on prevailing market and economic
conditions. The Company's lack of experience in new markets it may enter through
future acquisitions could have an adverse effect on the Company's results of
operations and financial condition. Acquisitions may require investment of
operational and financial resources and could require integration of dissimilar
operations, assimilation of new employees, diversion of management time and
resources, increases in administrative costs, potential loss of key employees of
the acquired company and additional costs associated with debt or equity
financing. Any future acquisition by the Company could have an adverse effect on
the Company's results of operations or could result in dilution to existing
shareholders, including those purchasing shares of Common Stock in this
Offering. The Company may encounter increased competition for acquisitions in
the future, which could result in acquisition prices the Company does not
consider acceptable. There can be no assurance that the Company will find
suitable acquisition candidates at acceptable prices or succeed in integrating
any acquired business into the Company's existing business or in retaining key
customers of acquired businesses. There can be no assurance that the Company
will have sufficient available capital resources to execute its acquisition
strategy. See "Business -- Business Strategy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
INTEGRATION OF RECENT ACQUISITIONS
There can be no assurance that the Company will succeed in integrating
Windy Hill into the Company's existing business. In addition, the Company may
experience a loss of certain customers as a result of the Windy Hill
Acquisition. If the expected operating efficiencies from the Windy Hill
Acquisition do not materialize, if the Company fails to integrate the Windy Hill
Acquisition into its existing operations, if the costs of such integration
exceed expectations or if the Company experiences unexpected costs or
liabilities at Windy Hill, the Company's operating results and financial
condition could be materially and adversely affected. There can also be no
assurance that the Company will succeed in integrating other recent
acquisitions, including acquisitions made by Windy Hill, into the Company's
existing operations. See "Unaudited Condensed Pro Forma Financial Statements"
and "Business -- Recent Developments."
GOODWILL FROM ACQUISITIONS
The Company has an aggregate $200 million of goodwill on its balance sheet
as of September 30, 1998 on a pro forma basis. Goodwill has been recorded under
purchase accounting to represent the excess of the amount paid over the book
value of the assets acquired. No assurance can be given that the amount of such
goodwill will be realized in the future. Goodwill represented 30% of total
assets as of September 30, 1998. The Company is amortizing such goodwill over a
40-year life. No assurance can be given that this amortization rate approximates
the time period over which these businesses will be valuable to the Company.
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The Company's earnings in future periods would be reduced if such amortization
period were shortened or the amount of such goodwill were to be written off
prior to amortization.
COMPETITION
The pet food industry is highly competitive. The companies that produce and
market the major national branded pet foods are national or international
conglomerates that are substantially larger than the Company and possess
significantly greater financial and marketing resources than the Company. The
store brand pet food products sold by the Company's customers compete for access
to shelf space with national branded products on the basis of quality and price.
National branded products compete principally through advertising to create
brand awareness and loyalty, and, increasingly, on price. The Company
experiences price competition from national branded manufacturers. To the extent
that there is significant price competition from the national branded
manufacturers or such manufacturers significantly increase their presence in the
store brand market, the Company's operating results and cash flow could be
adversely affected. The Company also competes with regional branded
manufacturers and other store brand manufacturers. See "Business --
Competition."
INTERNATIONAL OPERATIONS
The Company operates a portion of its business and markets products
internationally and plans to increase its international marketing and business
activities. The Company is, therefore, subject to and will increasingly become
subject to, the risks customarily attendant to international operations and
investments in foreign countries. These risks include nationalization,
expropriation, war and civil disturbance, restrictive action by local
governments, limitation on repatriation of earnings, change in foreign tax laws
and change in currency exchange rates, any of which could have an adverse effect
on the Company's operations in such countries. Interruption of the Company's
international operations could have a material adverse effect on its financial
condition and results of operations.
The Company may, from time to time, conduct a portion of its business in
currencies other than the United States dollar, thus subjecting the Company's
results to fluctuations in foreign currency exchange rates. There can be no
assurance that the Company will be able to protect itself against such
fluctuations in the future.
CONTROL OF THE BOARD OF DIRECTORS
In connection with the Windy Hill Acquisition, the Company, Doane,
Summit/DPC Partners, L.P. ("Summit"), Summit Capital Inc. ("SCI"), Chase
Manhattan Investment Holdings, Inc. ("CMIHI") and an affiliate thereof, DLJ
Merchant Banking Partners, L.P. ("DLJMB") and certain of its affiliates, all of
Windy Hill's former stockholders and certain other stockholders of the Company
(collectively, the "Stockholders") entered into an Investors' Agreement (the
"Investors' Agreement"). The Investors' Agreement provides that the Board of
Directors of the Company (the "Board" or "Board of Directors") will consist of
eight members, one being the Chief Executive Officer of the Company. Other than
the Chief Executive Officer, each of the remaining seven directors will be
designated by one or a combination of the Stockholders, subject to certain
percentage ownership requirements. Through their control of the Board of
Directors, the Stockholders will be in a position to control the policies,
management and affairs of the Company and to effectively prevent or cause a
change in control of the Company. The Stockholders will not have the right to
designate individuals to the Board of Directors if their Percentage Ownership
(as defined in the Investors' Agreement) of Common Stock is reduced below 5%.
Immediately after the Offering, the Stockholders will own in the aggregate
approximately 52.2% of the outstanding Common Stock. See "Certain
Transactions -- Investors' Agreement." It is expected that the Board of
Directors will be expanded to ten members after the consummation of the
Offering.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends in part upon the continued services of its
highly skilled personnel involved in management, production and distribution,
and, in particular, upon the efforts and abilities of its executive management
group. The loss of service of any of the members of its executive management
group could have a material adverse effect on the Company's business, financial
condition and results of operations.
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The Company has entered into employment agreements with members of its executive
management group. The Company does not have key-person life insurance covering
any of its employees. The success of the Company also depends upon its ability
to attract and retain additional highly qualified employees. See "Management."
ENVIRONMENTAL, REGULATORY AND SAFETY MATTERS; PRODUCT RECALL
The Company is subject to a broad range of federal, state and local laws
and regulations intended to protect the public health and the environment,
including those governing discharges to the air and water, the storage of
petroleum substances and chemicals, the handling and disposal of solid or
hazardous wastes and the remediation of contamination associated with releases
of hazardous substances. The Company is also subject to regulation by the
Occupational Safety and Health Administration ("OSHA"), the Food and Drug
Administration ("FDA") and the United States Department of Agriculture ("DOA")
and by various state and local authorities. Violations of these regulatory
requirements can result in administrative, civil or criminal penalties being
levied against the Company or in a cease and desist order against operations
that are not in compliance.
On October 30, 1998 the Company initiated a product recall for certain dry
dog food manufactured at its Temple, Texas plant. The recall covers dry dog food
manufactured at its Temple plant between July 1 and August 31, 1998 and does not
apply to dry dog food manufactured at other plants or the Company's dry cat
food, biscuits, treats or canned products. The recall resulted from reported
sickness and death of dogs in the State of Texas. These conditions were
attributed to elevated aflatoxins in corn, which is an ingredient in dry dog
food. Aflatoxins are compounds produced from certain kinds of crop molds that
can be caused by extreme weather conditions such as drought and heat. The
Company has an extensive corn testing program for the detection of aflatoxins
and that program has been intensified since the problems were reported. The
Company maintains insurance against losses from illness or death of animals;
however, the cost of the product recall is not covered by insurance. The Company
estimates the cost of the product recall to be $3.0 million, net of insurance
recoveries, and has recorded a charge to non-recurring costs in the fourth
quarter of fiscal 1998.
The Company believes that its operations are in material compliance with
environmental, safety and other regulatory requirements; however, there can be
no assurance that such requirements will not change in the future or that the
Company will not incur significant costs in the future (i) to comply with such
requirements, (ii) to effect future recalls or (iii) in connection with the
effect on the Company's business of such matters. See
"Business -- Environmental, Regulatory and Safety Matters; Product Recall."
INTERESTS OF UNDERWRITERS
DLJMB, an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJSC"), will receive approximately $19.4 million in proceeds of the Offering
as a Selling Stockholder (assuming an initial public offering price of $12.00
per share). CMIHI, an affiliate of CSI, will receive approximately $8.5 million
in proceeds of the Offering as payment for the repurchase of 200,000 shares of
preferred stock (based upon the liquidation value of such preferred stock as of
September 30, 1998). Affiliates of CMIHI and DLJSC will receive proceeds from
the Offering in connection with the repayment of the New Credit Facility. Each
of CSI and DLJSC will receive underwriting discounts and commissions in
connection with the Offering. See "Certain Transactions" and "Underwriting."
Pursuant to the Investors' Agreement, DLJMB has the right to designate one
representative to the Board of Directors (the "DLJMB Designee"), and CMIHI has
the right to designate one representative to the Board of Directors (the "Chase
Designee"). In addition, one representative to the Board of Directors shall be
designated by the mutual agreement of the DLJMB Designee (so long as a DLJMB
Designee then serves on the Board) and George B. Kelly (so long as Mr. Kelly is
one of the two Summit-Investor Designees (as defined herein)) or, if Mr. Kelly
is not then one of the two Summit-Investor Designees, by any of the
Summit-Investor Designees. See "Certain Transactions -- Investors' Agreement."
Under Rule 2720 of the Conduct Rules ("Rule 2720") of the National
Association of Securities Dealers, Inc. ("NASD"), DLJSC may be deemed to be an
"affiliate" of the Company and to have a "conflict of interest" with the Company
by virtue of the fact that affiliates of DLJSC may be deemed to beneficially own
greater than 10% of the voting stock of the Company. Under Rule 2720, when a
member of the NASD
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proposes to underwrite or otherwise assist in the distribution of an affiliate's
securities in a public offering, the price to public at which such securities
are to be distributed to the public must not be lower than that recommended by a
"qualified independent underwriter," who must participate in the preparation of
the registration statement and the prospectus and who must exercise the usual
standards of due diligence with respect thereto. A "qualified independent
underwriter" within the meaning of such rules will assume the responsibilities
of acting as such in pricing the Offering and conducting due diligence. See
"Underwriting."
ABSENCE OF PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common
Stock. Although the Company intends to list the Common Stock on the NYSE, there
can be no assurance that an active trading market will develop or continue upon
completion of the Offering. The initial public offering price of the Common
Stock will be determined by negotiations among the Company, the Selling
Stockholders and the representatives of the Underwriters (including the
qualified independent underwriter) and may not be indicative of the market price
of the Common Stock after the Offering. For a discussion of the factors to be
considered in determining the initial public offering price, see "Underwriting."
The market price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly and yearly operating
results, the success of the Company's business strategy, general trends in the
pet food industry, cost of raw materials, competition and other factors. In
addition, stock markets experience extreme price and volume fluctuations that
are unrelated or disproportionate to the operating performance of affected
companies. A broad fluctuation in the market in which the Company's securities
is traded may adversely affect the market price of the Common Stock.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market
subsequent to the Offering, or the perception that such sales may occur, could
adversely affect the market price of the Common Stock. Upon consummation of the
Offering, the Company will have 30,909,840 shares of Common Stock outstanding
(33,409,840 shares if the Underwriters' over-allotment option is exercised in
full). Of these shares, the 14,243,172 shares of Common Stock outstanding not
being registered in the Offering will be "restricted securities" within the
meaning of Rule 144 under the Securities Act and will be eligible for resale
subject to the volume, manner of sale, holding period and other limitations of
Rule 144. Certain stockholders of the Company have been granted registration
rights. See "Certain Transactions -- Investors' Agreement." In addition, options
and warrants to purchase 7,028,460 shares of Common Stock are exercisable prior
to or upon consummation of the Offering. The Company, the executive officers and
directors of the Company, certain other stockholders and the Selling
Stockholders have agreed not to sell any shares of Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock for a period of
180 days from the date of this Prospectus without the prior written consent of
DLJSC. See "Shares Eligible for Future Sale" and "Underwriting."
ANTITAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation and Bylaws, each as
amended, contain various provisions, including certain notice provisions,
provisions prohibiting the taking of stockholder action by written consent and
provisions authorizing the Company to issue preferred stock, that may make it
more difficult for a third party to acquire, or may discourage acquisition bids
for, control of the Company and could limit the price that certain investors
might be willing to pay in the future for shares of Common Stock. After the
Offering, the ownership by Summit, DLJMB and CMIHI, together with the beneficial
ownership of Common Stock of the Company's officers, directors and their
affiliates, of a substantial number of shares of Common Stock could also
discourage such bids. See "Description of Capital Stock -- Antitakeover
Provisions" and "Principal and Selling Stockholders."
The Company's Board of Directors is authorized to issue, from time to time,
without any action on the part of the Company's stockholders, up to 10,000,000
shares of preferred stock in one or more series, with such relative rights,
powers, preferences, limitations and restrictions as are determined by the Board
of Directors at the time of issuance. Accordingly, the Board of Directors is
empowered to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of
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the holders of Common Stock. In the event of such issuance, the preferred stock
could be utilized, under either circumstance, as a method of discouraging,
delaying or preventing a change in control of the Company. See "Description of
Capital Stock -- Preferred Stock" and "-- Antitakeover Provisions."
NO ANTICIPATED DIVIDENDS
The Company expects to retain cash generated from future operations to
support its cash needs and does not anticipate the payment of any dividends on
the Common Stock for the foreseeable future. In addition, dividends or
distributions by the Company may be restricted by the New Credit Facility, the
Note Indenture and other indebtedness that may be incurred by the Company. See
"Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DILUTION
Investors in the Common Stock offered hereby will experience immediate and
substantial dilution in net tangible book value per share of $15.60 (based on an
initial public offering price of $12.00 per share). See "Dilution."
YEAR 2000
The Company has conducted a comprehensive review of its computer software
to identify the systems that could be affected by the "year 2000" issue. The
year 2000 issue results from computer programs being written using two digits
(rather than four) to define the applicable year. As a result, certain of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This calculation could result
in a major system failure or miscalculations.
The Company has made an assessment of year 2000 compliance and reviewed its
business application software which resulted in plans to either replace or
upgrade all essential business software at an estimated cost of $3.5 million.
The Company is currently reviewing its administrative hardware and software
(networks, communications and security systems) and the software related to
manufacturing equipment. The Company has implemented a program to confirm year
2000 compliance with all third parties with which the Company has material
relationships.
As of September 30, 1998, the Company had incurred costs of approximately
$2.4 million in connection with year 2000 compliance. The Company intends to
test and verify its year 2000 compliance by July 1999, including third party
compliance. Management believes that a failure to complete its year 2000
compliance, or a failure by parties with whom the Company has material
relationships to complete year 2000 compliance by such date could have a
material adverse effect on the Company's financial condition and results of
operations. The Company believes that it can provide the resources necessary to
ensure year 2000 compliance prior to the year 2000. However, should the Company
be delayed in its compliance with year 2000, the Company may experience a
decrease in efficiency that could have a material adverse effect on results of
operations. The Company also believes that a sufficient number of suppliers
exist if the Company's current suppliers are delayed in their efforts to achieve
year 2000 compliance, thereby minimizing risk to the Company. The Company has
developed contingency plans that include moving production within its plant
network, securing additional ingredient storage facilities and transferring
procurement to year 2000 compliant suppliers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000."
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THE COMPANY
The Company was formed in 1995 by a group of investors led by SCI, DLJMB,
CMIHI and certain members of existing management to acquire Doane for an
aggregate purchase price of $249.1 million, including existing indebtedness. Bob
L. Robinson, a director of the Company and Doane, Terry W. Bechtel, a Vice
President of Doane, Dick Weber, Managing Director of Field Sales of Doane, and
Earl Clements, Central Regional Director -- Production of Doane, are the only
four persons from such existing management who are still affiliated with the
Company. Doane had previously been a manufacturer of dry pet food for 37 years.
In April 1998, the Company acquired IPES for $26.2 million (net of cash
purchased of $1.9 million) and the assumption of indebtedness of $1.9 million.
In August 1998, the Company acquired Windy Hill for approximately 6.4 million
shares of Common Stock and the assumption of $183.5 million of indebtedness.
Windy Hill was a manufacturer of pet food products based in Tennessee. In
November 1998, Windy Hill was merged into Doane.
Windy Hill was formed in February 1995 by a group of investors led by
Dartford Partnership, L.L.C. to acquire substantially all of the assets and
liabilities of the pet food division of Martha White Foods, Inc. for $21.0
million. In April 1996, Windy Hill acquired the assets and liabilities
associated with certain pet food product lines of Heinz Inc. for a purchase
price of $52.5 million. In May 1997, Windy Hill acquired Hubbard Milling Company
("Hubbard") for a net purchase price of $131.1 million. Subsequent to such
acquisition, Windy Hill sold the animal feed division of Hubbard for a sales
price of approximately $50.0 million, net of taxes. In February 1998, Windy Hill
acquired all of the assets of the AGP pet food division ("AGP") of Consolidated
Nutrition, L.C. for a purchase price of approximately $12.4 million. In April
1998, Windy Hill acquired certain pet food assets and certain liabilities
associated with the NuPet division of Nulaid Foods, Inc. ("NuPet") for a
purchase price of approximately $3.1 million. In June 1998, Windy Hill acquired
Deep Run Packing Company, Inc. ("Deep Run") for a net purchase price of
approximately $16.4 million.
The Company is incorporated under the laws of the State of Delaware. The
Company's principal executive offices are located at 103 Powell Court, Suite
200, Brentwood, Tennessee 37027, and its telephone number at such offices is
(615) 373-7774.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated at
approximately $139.0 million (or $167.1 million if the Underwriters'
over-allotment option is exercised), assuming an initial public offering price
of $12.00 per share.
The Company intends to use the proceeds of the Offering to repay
approximately $81.3 million of borrowings under the New Credit Facility and
$57.8 million to repurchase the preferred stock of Doane. The remainder of the
proceeds will be used for general corporate purposes. Borrowings under the New
Credit Facility carry floating rates of interest that, as of January 31, 1999,
equaled a weighted average of 8.5% per annum, and are due as follows: (i)
borrowings of $75 million under the Tranche A Facility have a final maturity of
March 31, 2005, (ii) borrowings of $85 million under the Tranche B Facility have
a final maturity of December 31, 2005, (iii) borrowings of $85 million under the
Tranche C Facility have a final maturity of December 31, 2006 and (iv)
borrowings under the revolver have a final maturity of March 31, 2005.
Borrowings under the New Credit Facility to be repaid with the proceeds of
this Offering were incurred in November 1998 in order to fund the cash
requirements of the Refinancing Transactions, repay borrowings under and retire
the Company's previous credit facilities, repay other debt and repay a bridge
financing incurred in connection with the tender offer for the Windy Hill Notes.
DIVIDEND POLICY
The Company does not intend to pay cash dividends on the Common Stock in
the foreseeable future. The Company currently intends to retain its cash for the
continued growth of its business. In addition, the New Credit Facility and the
Note Indenture restrict the ability of Doane to pay dividends to the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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<PAGE> 19
DILUTION
The deficit in pro forma net tangible book value of the Company as of
September 30, 1998 was $(12.35) per share of Common Stock. The deficit in net
tangible book value per share is determined by dividing the tangible net worth
of the Company (tangible assets less total liabilities) by the total number of
outstanding shares of Common Stock. After giving effect to the sale of the
shares offered hereby and the receipt of the estimated net proceeds (after
deducting estimated underwriting discounts and commissions and estimated
expenses of the Offering), the deficit in pro forma net tangible book value of
the Company at September 30, 1998 would have been $(3.60) per share. This
represents an immediate increase in the net tangible book value of $8.75 per
share to existing stockholders and an immediate dilution (i.e., the difference
between the initial public offering price and the pro forma net tangible book
value after the Offering) to new investors purchasing Common Stock in the
Offering. The following table illustrates the per share dilution to new
investors purchasing Common Stock in the Offering of $15.60 per share:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.............................. $12.00
Pro forma deficit in net tangible book value per share
at September 30, 1998................................. $(12.35)
Increase per share attributable to new investors....... 8.75
Pro forma deficit in net tangible book value per share after the
Offering........................................................... (3.60)
------
Dilution per share to new investors.................................. $15.60
======
</TABLE>
The following table sets forth, as of September 30, 1998, the number of
shares of Common Stock purchased from the Company, the total consideration paid
therefor and the average price per share paid by existing stockholders
(including the stockholders that received shares of Common Stock in the Windy
Hill Acquisition) and by new investors:
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION(1) AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 18,409,840 60% $ 36,033,000 19% $ 1.96
New investors.................... 12,500,000 40 150,000,000 81 12.00
---------- ------ ------------ ------
Total.................. 30,909,840 100.0% $186,033,000 $100.0%
========== ====== ============ ======
</TABLE>
The foregoing computations assume no exercise of outstanding (i) stock
options under the Company's stock option plans or (ii) warrants held by certain
of the Selling Stockholders. Options covering a total of 1,610,548 shares of
Common Stock are currently outstanding under the 1996 Stock Option Plan, and
have a weighted average exercise price of $3.47 per share. See
"Management -- Stock Option and Stock Purchase Plans." Warrants covering a total
of 5,417,912 shares of Common Stock with an exercise price of $0.0025 per share
are currently outstanding. See "Principal and Selling Stockholders." In the
event the 7,028,460 shares currently subject to outstanding options under the
1996 Stock Option Plan and outstanding warrants were included in the foregoing
calculations, the pro forma deficit in net tangible book value per share before
the Offering would be $(8.94), the pro forma deficit in net tangible book value
per share after the Offering would be $(2.93) and the dilution per share to new
investors would be $14.93. In addition, the average price per share paid by
existing stockholders would increase to $1.64 per share.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth, as of September 30, 1998, (i) the
historical capitalization of the Company, (ii) the pro forma capitalization of
the Company after giving effect to the Refinancing Transactions and (iii) the
pro forma as adjusted capitalization of the Company after giving effect to the
Offering. See "Description of New Credit Facility" and "Description of Senior
Subordinated Notes." This table should be read in conjunction with "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the Company
and Windy Hill and the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED(2)
---------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total debt(3):
Existing credit facilities......................... $ 96,557 $ -- $ --
New Credit Facility................................ 286,867 205,607
IPES Debt.......................................... 25,318 25,318 25,318
Industrial Revenue Bonds........................... 8,496 8,496 8,496
Senior Notes....................................... 160,000 -- --
Senior Subordinated Notes(4)....................... 146,951 146,951
Windy Hill Notes................................... 120,000 -- --
Other.............................................. 13,295 -- --
-------- -------- --------
Total debt(3)................................. 423,666 467,632 386,372
Senior Preferred Stock, 3,000,000 shares authorized;
1,200,000 shares issued and outstanding; no shares
issued and outstanding, pro forma as adjusted(5)...... 35,898 35,898 --
Stockholders' equity:
Common Stock, par value $0.0001 per share,
70,000,000 shares authorized; 18,409,840 shares
issued and outstanding; 18,409,840 shares issued
and outstanding, pro forma; 30,909,840 shares
issued and outstanding, pro forma as
adjusted(6)(7)................................... 2 2 2
Additional paid-in capital......................... 73,544 73,544 212,544
Accumulated other comprehensive income............. 472 472 472
Accumulated deficit................................ (6,742) (37,985) (60,773)
-------- -------- --------
Total stockholders' equity.................... 67,276 36,033 152,245
-------- -------- --------
Total capitalization........................ $526,840 $539,563 $538,617
======== ======== ========
</TABLE>
- ------------------------------
(1) To give effect to the Refinancing Transactions and the application of the
proceeds therefrom.
(2) As adjusted to give effect to the Offering and the application of the
proceeds therefrom.
(3) Total debt includes current portion of long-term debt.
(4) The Senior Subordinated Notes have an aggregate principal amount of $150
million and have been recorded at their principal amount less unamortized
discounts of approximately $3.0 million.
(5) The preferred stock had an initial liquidation preference of $30.0 million
(accreted liquidation value of $45.6 million at September 30, 1998) and was
sold as a unit with warrants to purchase shares of Common Stock of the
Company for aggregate consideration of $30.0 million. Approximately $12.9
million of such consideration was allocated to the value of the warrants and
is recorded as stockholders' equity.
(6) The Company has two classes of Common Stock, Class A Common Stock and Class
B Common Stock. As of January 31, 1999, there were approximately 16.1
million shares of Class A Common Stock outstanding and approximately 2.3
million shares of Class B Common Stock outstanding. Class A and Class B
Common Stock are identical except that Class B Common Stock has no voting
rights. All of the shares of Class B Common Stock are owned by CMIHI and are
convertible into Class A Common Stock at the holder's election. References
to shares of Common Stock in the table above and throughout this Prospectus
are to the Company's Class A Common Stock and Class B Common Stock on a
combined basis.
(7) Does not include warrants convertible into approximately 5.4 million shares
of Common Stock and approximately 1.6 million shares of Common Stock
issuable upon exercise of options outstanding under the Company's 1996 Stock
Option Plan. See "Management -- Stock Option and Stock Purchase Plans."
19
<PAGE> 21
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited condensed consolidated pro forma financial
statements consist of (i) the unaudited pro forma condensed combined statements
of operations of the Company and Windy Hill for the fiscal year ended December
31, 1997 and for the nine months ended September 30, 1998 and related notes,
(ii) the unaudited pro forma condensed consolidated balance sheet of the Company
as of September 30, 1998 and related notes, (iii) the unaudited pro forma
condensed consolidated statements of operations of the Company for the fiscal
year ended December 31, 1997 and for the nine months ended September 30, 1998,
and related notes and (iv) the unaudited pro forma condensed consolidated
statements of operations of Windy Hill for the fiscal year ended December 27,
1997 and for the seven months ended August 2, 1998. The unaudited pro forma
financial statements of the Company give effect to the IPES Acquisition as if
such transaction 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 condensed 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 as if the Refinancing Transactions and the Offering had
occurred on January 1, 1997. The combined unaudited pro forma balance sheet
gives effect to the Refinancing Transactions, the Offering and the use of
proceeds therefrom, in each case as if such transactions had occurred on
September 30, 1998.
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 nine months ended September 30, 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
consolidated financial statements for the year ended December 27, 1997 and the
historical data for the seven months ended August 2, 1998 have been derived from
Windy Hill's unaudited interim financial statements.
The unaudited condensed consolidated pro forma financial statements are
based on assumptions and include adjustments as explained in the notes thereto.
The unaudited condensed consolidated 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. The unaudited condensed consolidated pro forma financial
statements should be read in conjunction with the notes thereto and the
historical audited and unaudited consolidated financial statements of the
Company, Windy Hill and Hubbard and the notes thereto included elsewhere in this
Prospectus.
20
<PAGE> 22
CONDENSED COMBINED DOANE PET CARE ENTERPRISES, INC.
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 PRO FORMA ADJUSTMENTS ADJUSTMENTS COMBINED
COMPANY WINDY FOR COMBINED FOR REFINANCING COMPANY
(SEE HILL (SEE WINDY HILL COMPANY TRANSACTIONS PRO FORMA
TABLE 1-A) TABLE 2-A) ACQUISITION PRO FORMA AND OFFERING AS ADJUSTED(G)
---------- ---------- ----------- --------- --------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $585,837 $304,041 $(4,197)(a) $885,681 $ -- $885,681
Cost of goods sold............... 500,815 231,441 -- 732,256 -- 732,256
-------- -------- ------- -------- ------- --------
Gross profit..................... 85,022 72,600 (4,197) 153,425 -- 153,425
Operating expenses:
Promotion and distribution... 32,956 37,377 (4,197)(a) 66,136 -- 66,136
Selling, general and
administrative............. 19,240 16,507 496(b) 36,243 -- 36,243
Non-recurring transition costs... -- 1,571 -- 1,571 -- 1,571
-------- -------- ------- -------- ------- --------
Income from operations....... 32,826 17,145 (496) 49,475 -- 49,475
Interest expense, net............ 24,457 19,183 -- 43,640 (7,916)(c) 35,724
Non-recurring finance charge..... -- -- -- -- 4,486(e) 4,486
Equity in earnings of joint
ventures....................... (186) (480) -- (666) -- (666)
Other (income) expense, net...... (148) 66 -- (82) -- (82)
-------- -------- ------- -------- ------- --------
Income (loss) before taxes... 8,703 (1,624) (496) 6,583 3,430 10,013
Income tax expense (benefit)..... 3,242 18 -- 3,260 1,303(d) 4,563
-------- -------- ------- -------- ------- --------
Income (loss) before
extraordinary items........ $ 5,461 $ (1,642) $ (496) $ 3,323 $ 2,127 $ 5,450
======== ======== ======= ======== ======= ========
Basic earnings per share......... $ 0.23
Basic weighted average number of
shares outstanding............. 23,850
Diluted earnings per share....... $ 0.18
Diluted weighted average number
of shares outstanding.......... 30,585
EBITDA(f)........................ $ 68,958
========
Adjusted EBITDA(f)............... $ 75,015
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
21
<PAGE> 23
CONDENSED COMBINED DOANE PET CARE ENTERPRISES, INC.
AND WINDY HILL PET FOOD HOLDINGS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS
PRO FORMA PRO FORMA ADJUSTMENTS FOR COMBINED
COMPANY WINDY HILL FOR COMBINED REFINANCING COMPANY
(SEE (SEE WINDY HILL COMPANY TRANSACTIONS PRO FORMA
TABLE 1-B) TABLE 2-B) ACQUISITION PRO FORMA AND OFFERING AS ADJUSTED(G)
---------- ---------- ----------- --------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $468,977 $175,111 $(2,414)(a) $641,674 $ -- $641,674
Cost of goods sold............ 383,131 130,795 513,926 -- 513,926
-------- -------- ------- -------- ------- --------
Gross profit.................. 85,846 44,316 (2,414) 127,748 -- 127,748
Operating expenses:
Promotion and
distribution........... 30,688 19,874 (2,414)(a) 48,148 -- 48,148
Selling, general and
administrative......... 21,230 12,014 372(b) 33,616 -- 33,616
Non-recurring transition
costs....................... 4,311 8,456 12,767 -- 12,767
-------- -------- ------- -------- ------- --------
Income from operations... 29,617 3,972 (372) 33,217 -- 33,217
Interest expense, net......... 19,920 11,194 31,114 (4,321)(c) 26,793
Equity in earnings of joint
ventures.................... (111) (463) (574) (574)
Other income, net............. (182) (87) (269) (269)
-------- -------- ------- -------- ------- --------
Income before taxes...... 9,990 (6,672) (372) 2,946 4,321 7,267
Income tax expense
(benefit)................... 3,397 (420) -- 2,977 1,642(d) 4,619
-------- -------- ------- -------- ------- --------
Income before
extraordinary items.... $ 6,593 $ (6,252) $ (372) $ (31) $ 2,679 $ 2,648
======== ======== ======= ======== ======= ========
Basic earnings per share...... $ 0.10
Basic weighted average number
of shares outstanding....... 25,588
Diluted earnings per share.... $ 0.08
Diluted weighted average
number of shares
outstanding................. 32,360
EBITDA(f)..................... $ 51,806
========
Adjusted EBITDA(f)............ $ 64,573
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
22
<PAGE> 24
CONDENSED COMBINED DOANE PET CARE ENTERPRISES, INC.
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 31, 1997 and
$2,414 for the seven months ended August 2, 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) Adjustment to selling, general and administrative expenses to recognize
additional amortization of goodwill resulting from the Windy Hill
Acquisition. In the allocation of the purchase price to Windy Hill's assets
and liabilities, the Company did not increase the value previously
allocated to trademarks and treated the incremental excess purchase price
as goodwill. Windy Hill was created over the past three years with the
majority of its operations having been acquired in four transactions that
were consummated in the 12 months preceding the announcement of the Windy
Hill Acquisition. As a result, Windy Hill recorded assets and liabilities
at their fair value, which values the Company believes have not changed
since they were acquired by Windy Hill. In such previous acquisitions,
$45.5 and $66.8 million were allocated to goodwill and trademarks,
respectively. In effect, the values ascribed to trademarks by Windy Hill
were used by the Company in its allocation of purchase price.
(c) Pro forma as adjusted interest expense, which includes amortization of
deferred financing costs, has been calculated on pro forma debt levels and
applicable interest rates after giving effect to the Refinancing
Transactions and the Offering and the application of the net proceeds to
the Company therefrom. The table below presents pro forma as adjusted
interest expense noted with the respective interest rates:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
New Credit Facility ($205.6 million estimated at
8.35%)............................................... $ 17,226 $12,919
Senior Subordinated Notes ($150.0 million at 9.75%)... 14,984 11,238
IPES Debt ($25.3 million at 6.50%).................... 1,646 1,234
Industrial Revenue Bonds ($8.5 million at a blended
rate of 6.70%)....................................... 602 452
Amortization of deferred financing costs ($9.7 million
amortized over seven to ten years)................... 1,266 950
-------- -------
$ 35,724 $26,793
Less historical interest expense...................... 43,640 31,114
-------- -------
Adjustment............................................ $ (7,916) $(4,321)
======== =======
</TABLE>
The effect of a 0.25% change in the annual interest rate of the New Credit
Facility would change pro forma interest expense by $514 for the year ended
December 31, 1997 and $386 for the nine months ended September 30, 1998.
23
<PAGE> 25
(d) Reflects an adjustment to income tax expense to tax effect the pro forma
adjustments at the combined state and federal statutory rate of 38% for the
year ended December 31, 1997 and for the nine months ended September 30,
1998. 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.
(e) Represents non-recurring interim bridge debt financing costs that were
expensed concurrently with the issuance of the New Credit Facility.
(f) EBITDA for any relevant period presented above is defined as earnings
before interest expense, net, income taxes, depreciation and amortization.
Adjusted EBITDA represents EBITDA as defined plus a non-recurring finance
charge and transition costs. EBITDA is not a measure recognized by
generally accepted accounting principles and should not be considered in
isolation or as a substitute for operating income, as an indicator of
liquidity or as a substitute (or net cash) provided by operating
activities, which are determined in accordance with generally accepted
accounting principles. EBITDA is included because management believes that
certain investors may find it useful.
(g) The Windy Hill Acquisition provides the Company with the opportunity to
achieve cost savings in the following areas that have not been reflected in
the Pro Forma Statement of Operations:
(i)Selling, general and administrative expense primarily due to headcount
reductions not reflected in footnote (b);
(ii)
Purchasing cost savings through economies of scale and raw material
cost savings through formula rationalizations; and
(iii)
Distribution cost savings, improved efficiencies and reduced overtime
through optimizing production schedules at the network of 32 domestic
manufacturing facilities.
24
<PAGE> 26
DOANE PET CARE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR PRO FORMA COMPANY
COMPANY REFINANCING COMPANY ADJUSTMENTS PRO FORMA
HISTORICAL TRANSACTIONS PRO FORMA FOR OFFERING AS ADJUSTED
---------- ------------ --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 3,833 $ -- $ 3,833 $ $ 3,833
Trade and other accounts receivable, net......... 86,759 -- 86,759 86,759
Inventories...................................... 52,901 -- 52,901 52,901
Deferred income tax benefits..................... 6,562 7,470(a) 16,964 509(d) 17,473
2,932(b)
Prepaid expenses and other assets................ 16,333 -- 16,333 16,333
-------- -------- -------- -------- --------
Total current assets......................... 166,388 10,402 176,790 509 177,299
Property, plant and equipment, net................... 201,665 -- 201,665 201,665
Goodwill and other intangible assets, net............ 263,368 -- 263,368 263,368
Other assets......................................... 33,351 11,126(a) 29,251 (1,455)(d) 27,796
(15,226)(b)
-------- -------- -------- -------- --------
Total assets................................. $664,772 $ 6,302 $671,074 $ (946) $670,128
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt........... $ 8,859 $ 1,393(a) $ 10,252 $ 10,252
Accounts payable................................. 64,782 -- 64,782 64,782
Accrued liabilities.............................. 42,091 -- 42,091 42,091
-------- -------- -------- -------- --------
Total current liabilities.................... 115,732 1,393 117,125 117,125
Long-term debt, excluding current installments....... 414,807 42,573(a) 457,380 (81,260)(c) 376,120
Post-retirement benefit liability.................... 6,562 -- 6,562 6,562
Other long term liabilities.......................... 1,753 -- 1,753 1,753
Deferred income tax liability........................ 22,744 (4,024)(a) 16,323 16,323
(2,397)(b)
-------- -------- -------- -------- --------
Total liabilities............................ 561,598 37,545 599,143 (81,260) 517,883
Preferred Stock...................................... 35,898 -- 35,898 (35,898)(c) --
Stockholders' equity
Common Stock..................................... 2 -- 2 2
Additional paid-in capital....................... 73,544 73,544 139,000(c) 212,544
Accumulated other comprehensive income............... 472 -- 472 472
Accumulated deficit.............................. (6,742) (21,346)(a) (37,985) (21,842)(c) (60,773)
(9,897)(b) (946)(d)
-------- -------- -------- -------- --------
Total stockholders' equity................... 67,276 (31,243) 36,033 116,212 152,245
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity... $664,772 $ 6,302 $671,074 $ (946) $670,128
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
25
<PAGE> 27
DOANE PET CARE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
(a) Reflects the proceeds to the Company from the Refinancing Transactions and
the application of proceeds therefrom:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Sources:
New Credit Facility.................................. $286,867
Senior Subordinated Notes............................ 146,951
--------
Total sources..................................... $433,818
========
Uses:
Repayment of existing credit facilities.............. $ 96,557
Repayment of Senior Notes............................ 160,000
Repayment of Windy Hill Notes........................ 120,000
Repayment of other debt.............................. 13,295
Deferred debt financing costs........................ 11,126
Costs of early extinguishment of debt................ 28,354
Non-recurring finance charge......................... 4,486
--------
Total uses........................................ $433,818
========
</TABLE>
The costs of early extinguishment of debt ($28,354) and the non-recurring
finance charge ($4,486) have been reflected as a charge to retained
earnings of $32,840, net of a tax benefit of $11,494, and will be charged
to operations upon the consummation of the Refinancing Transactions.
(b) Reflects the impact on retained earnings of the write-off of financing
costs of $15,226, net of a tax benefit of $5,329 associated with existing
credit facilities, the Senior Notes and the Windy Hill Notes. 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
Transactions.
(c) Reflects the assumed proceeds to the Company from the Offering and the
application of proceeds therefrom:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Sources:
The Offering......................................... $150,000
--------
Total sources..................................... $150,000
========
Uses:
Repayment of New Credit Facility..................... $ 81,260
Repurchase of preferred stock........................ 35,898
Underwriting discounts and related expenses.......... 11,000
Costs of early extinguishment of debt................ 21,842
--------
Total uses........................................ $150,000
========
</TABLE>
The preferred stock will be repurchased on the open market at the
prevailing market prices.
The costs of early extinguishment of debt has been reflected as a charge to
retained earnings of $21,842 and will be charged to operations upon the
consummation of the Offering.
(d) Reflects the impact on retained earnings of the write-off of financing
costs of $1,455, net of a tax benefit of $509, associated with the New
Credit Facility. The adjustment has not been reflected in the Pro Forma
Statement of Operations and will be charged to operations upon the
consummation of the Offering.
26
<PAGE> 28
TABLE 1-A
DOANE PET CARE ENTERPRISES, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMPANY IPES ADJUSTMENTS FOR PRO FORMA
HISTORICAL(A) HISTORICAL(B) IPES ACQUISITION COMPANY
------------- ------------- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.............................. $564,741 $21,096 $ -- $585,837
Cost of goods sold..................... 482,896 17,636 283(c) 500,815
-------- ------- ------- --------
Gross profit........................... 81,845 3,460 (283) 85,022
Operating expenses:
Promotion and distribution........... 31,876 1,080 -- 32,956
Selling, general and
administrative.................... 17,985 788 467(d) 19,240
-------- ------- ------- --------
Income from operations............ 31,984 1,592 (750) 32,826
Interest expense, net.................. 22,463 117 1,877(e) 24,457
Equity in earnings of joint venture.... (186) -- -- (186)
Other (income) expense, net............ 84 (232) -- (148)
-------- ------- ------- --------
Income before taxes............... 9,623 1,707 (2,627)(f) 8,703
Income tax expense..................... 3,389 674 (821) 3,242
-------- ------- ------- --------
Income before extraordinary
items........................... $ 6,234 $ 1,033 $(1,806) $ 5,461
======== ======= ======= ========
EBITDA(g).............................. $ 46,784
========
Adjusted EBITDA(g)..................... $ 46,784
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
27
<PAGE> 29
TABLE 1-B
DOANE PET CARE ENTERPRISES, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
COMPANY IPES ADJUSTMENTS FOR PRO FORMA
HISTORICAL(A) HISTORICAL(B) IPES ACQUISITION COMPANY
------------- ------------- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................. $462,991 $5,986 $ -- $468,977
Cost of goods sold........................ 378,583 4,480 68(c) 383,131
-------- ------ ----- --------
Gross profit.............................. 84,408 1,506 (68) 85,846
Operating expenses:
Promotion and distribution.............. 30,381 307 -- 30,688
Selling, general and administrative..... 20,935 184 111(d) 21,230
Non-recurring transition costs.......... 4,311 -- -- 4,311
-------- ------ ----- --------
Income from operations.................. 28,781 1,015 (179) 29,617
Interest expense, net..................... 19,444 28 448(e) 19,920
Equity in earnings of joint venture....... (111) -- -- (111)
Other income, net......................... (118) (64) -- (182)
-------- ------ ----- --------
Income before taxes.................. 9,566 1,051 (627) 9,990
Income tax expense........................ 3,226 367 (196)(f) 3,397
-------- ------ ----- --------
Income before extraordinary items.... $ 6,340 $ 684 $(431) $ 6,593
======== ====== ===== ========
EBITDA(g)................................. $ 41,690
========
Adjusted EBITDA(g)........................ $ 46,001
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
28
<PAGE> 30
DOANE PET CARE ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
(a) The Company's historical financial statements for the nine months ended
September 30, 1998 include the results of Windy Hill for the period from
August 4, 1998 to September 30, 1998 and the results of IPES for the period
from April 18, 1998 to September 30, 1998.
(b) Includes results for IPES for the entire year for the year ended December
31, 1997 and for the period January 1, 1998 to April 17, 1998 (the date of
acquisition) for the nine-month period ended September 30, 1998.
(c) Adjustment to reflect $283 for the year ended December 31, 1997 and $68 for
the nine months ended September 30, 1998 of additional depreciation
resulting from the write-up of property, plant and equipment to fair value
related to the IPES Acquisition.
(d) Adjustment to reflect $467 for the year ended December 31, 1997 and $111
for the nine months ended September 30, 1998 of additional goodwill and
intangible amortization resulting from the IPES Acquisition.
(e) Adjustments to interest expense to reflect the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Effect of additional financing incurred in connection with
the IPES Acquisition ($25.3 million at a blended rate of
6.5%)..................................................... $1,803 $430
Additional amortization of deferred financing cost resulting
from the IPES Acquisition................................. 74 18
------ ----
$1,877 $448
====== ====
</TABLE>
(f) Reflects an adjustment to income tax expense to tax effect the pro forma
adjustments at the combined federal and state statutory rate of 38% for the
year ended December 31, 1997 and for the nine months ended September 30,
1998. In calculating the tax adjustment, the goodwill amortization as
calculated in (d) above has not been tax effected as it is non-deductible
for tax purposes.
(g) EBITDA for any relevant period presented above is defined as earnings
before interest expense, net, income taxes, depreciation and amortization.
Adjusted EBITDA represents EBITDA as defined plus a non-recurring finance
charge and transition costs. EBITDA is not a measure recognized by
generally accepted accounting principles and should not be considered in
isolation or as a substitute for operating income, as an indicator of
liquidity or as a substitute for net cash provided by operating activities,
which are determined in accordance with generally accepted accounting
principles. EBITDA is included because management believes that certain
investors may find it useful.
29
<PAGE> 31
TABLE 2-A
WINDY HILL PET FOOD HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED 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(C) HISTORICAL(D) TIONS(E) 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)(f) 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(g) 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(h) 19,183
Equity in earnings of
joint ventures.......... (377) (467) -- -- -- 364(i) (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) -- -- -- -- 592(j) 18
-------- ------- ------- ------- -------- ------- --------
Income (loss) before
extraordinary items..... $ (1,820) $ 4,898 $ (237) $ 2,319 $ 751 $(7,553) $ (1,642)
======== ======= ======= ======= ======== ======= ========
EBITDA(k)................. $ 26,660
========
Adjusted EBITDA(k)........ $ 28,231
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
30
<PAGE> 32
TABLE 2-B
WINDY HILL PET FOOD HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SEVEN MONTHS ENDED AUGUST 2, 1998
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR WINDY HILL
WINDY HILL AGP DEEP RUN OTHER RECLASSIFICATIONS PRO FORMA
HISTORICAL(A) HISTORICAL(C) HISTORICAL(D) ACQUISITIONS(E) AND ACQUISITIONS COMBINED
------------- ------------- ------------- --------------- --------------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. $151,460 $5,651 $13,740 $4,260 $ -- $175,111
Cost of goods sold......... 110,367 5,419 11,782 3,418 (191)(f) 130,795
-------- ------ ------- ------ ------- --------
Gross profit............... 41,093 232 1,958 842 191 44,316
Operating expenses:
Promotion and
distribution......... 18,934 30 673 237 -- 19,874
Selling, general and
administrative....... 10,857 302 590 164 101(g) 12,014
Non-recurring transition
costs.................... 8,456 -- -- -- -- 8,456
-------- ------ ------- ------ ------- --------
Income from
operations........... 2,846 (100) 695 441 90 3,972
Interest expense, net...... 10,226 5 2 (3) 964(h) 11,194
Equity in earnings of joint
ventures................. (568) -- -- -- 105(i) (463)
Other expense, net......... -- 15 (102) -- -- (87)
-------- ------ ------- ------ ------- --------
Income before taxes.... (6,812) (120) 795 444 (979) (6,672)
Income tax expense
(benefit)................ (331) -- -- -- (89)(j) (420)
-------- ------ ------- ------ ------- --------
Income (loss) before
extraordinary
items................ $ (6,481) $ (120) $ 795 $ 444 $ (890) $ (6,252)
======== ====== ======= ====== ======= ========
EBITDA(k).................. $ 10,116
========
Adjusted EBITDA(k)......... $ 18,572
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
31
<PAGE> 33
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(a) Windy Hill Pet Food Holdings, Inc. ("Windy Hill") was a private holding
company that 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.
(c) Includes results for AGP for the entire year for the fiscal year ended
December 27, 1997, and for the period from January 1, 1998 to February 23,
1998 (the date of acquisition) for the seven-month period ended August 2,
1998.
(d) Includes results for Deep Run for the entire year for the year ended
December 27, 1997 and for the period January 1, 1998 to June 1, 1998 (the
date of acquisition) for the seven-month period ended August 2, 1998.
(e) 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 seven-month period ended August 2, 1998, results of
NuPet are included for the period January 1, 1998 to March 30, 1998 (the
date of acquisition) and results of Cartersville are included from January
1, 1998 to February 28, 1998 (the date of acquisition).
(f) Adjustment to cost of goods sold to reflect $1,084 for the year ended
December 27, 1997 and $191 for the seven months ended August 2, 1998 of
reductions in depreciation expense resulting from the Hubbard, AGP, Deep
Run, NuPet, Cartersville and Maumee acquisitions (the "WH Acquisitions").
(g) Adjustments to selling, general and administrative expense reflect $797 for
the year ended December 27, 1997 and $101 for the seven months ended August
2, 1998 of additional amortization of goodwill resulting from the WH
Acquisitions.
(h) Adjustment to interest expense to reflect the following:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 27, 1997 AUGUST 2, 1998
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Windy Hill Notes ($84 million at 9.75%)................. $3,231 $ --
Credit facility ($12.5 million at 8.17%)................ 1,021 162
Credit facility ($20.5 million at 10%).................. 2,050 801
Additional amortization of deferred financing cost
resulting from the WH Acquisitions.................... 582 1
------ ----
$6,884 $964
====== ====
</TABLE>
For the fiscal year ended December 31, 1997, the interest adjustment for
the Windy Hill Notes associated with the Hubbard acquisition includes
interest for the period January 1, 1997 to May 21, 1997 (the date of
acquisition). The interest adjustment for the credit facility associated
with the AGP, NuPet and Deep Run acquisitions includes interest for the
entire period.
For the seven months ended August 2, 1998, the interest adjustment for the
credit facility includes interest for AGP, NuPet and Deep Run from the
beginning of the year through their dates of acquisition.
(i) To eliminate equity in earning of joint ventures for the months prior to
acquisition.
(j) Reflects an adjustment to income tax expense (benefit) to tax effect the
pro forma adjustments at the combined state and federal rate of 39% for
Windy Hill for the year ended December 27, 1997 and for the seven months
ended August 2, 1998. In calculating the tax adjustment, approximately $740
and $90 of the goodwill as calculated in (g) above for the year ended
December 27, 1997 and for the seven months ended August 2, 1998,
respectively, has not been tax effected as it is non-deductible for tax
purposes.
(k) EBITDA for any relevant period presented above is defined as earnings before
interest expense, net, income taxes, depreciation and amortization. Adjusted
EBITDA represents EBITDA as defined plus a non-recurring finance charge and
transition costs. EBITDA is not a measure recognized by generally accepted
accounting principles and should not be considered in isolation or as a
substitute for operating income, as an indicator of liquidity or as a
substitute for net cash provided by operating activities, which are
determined in accordance with generally accepted accounting principles.
EBITDA is included because management believes that certain investors may
find it useful.
32
<PAGE> 34
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data, except for pet food sold, as of
December 31, 1995, 1996 and 1997 and for the years ended December 31, 1996 and
1997, for the nine months ended September 30, 1995 and for the three months
ended December 31, 1995 are derived from the audited consolidated financial
statements of the Company included elsewhere in this Prospectus. The selected
financial data presented below as of December 31, 1993 and 1994 and for the
years ended December 31, 1993 and 1994 are derived from consolidated financial
statements of the Company not included in this Prospectus. The selected
consolidated financial data as of and for the nine months ended September 30,
1997 and 1998 are derived from the unaudited financial statements of the Company
that in the opinion of management reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
condition and results of operations of the Company as of such dates and for such
periods. The results for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year.
The information set forth below is qualified in its entirety and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements of the Company
and notes thereto, the consolidated financial statements of Windy Hill and notes
thereto and the financial statements of Hubbard and notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR(1) THE COMPANY
----------------------------------- --------------------------------------------------------
THREE NINE MONTHS
YEAR ENDED NINE MONTHS MONTHS YEAR ENDED ENDED
DECEMBER 31, ENDED ENDED DECEMBER 31, SEPTEMBER 30,
------------------- SEPTEMBER 30, DECEMBER 31, ------------------- -------------------
1993 1994 1995 1995 1996 1997 1997 1998
-------- -------- ------------- ------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales..................... $345,804 $377,018 $303,633 $ 114,958 $513,217 $564,741 $411,399 $462,991
Cost of goods sold............ 280,498 308,622 247,394 97,184 446,776 482,896 352,877 378,583
-------- -------- -------- --------- -------- -------- -------- --------
Gross profit.................. 65,306 68,396 56,239 17,774 66,441 81,845 58,522 84,408
Operating Expenses:
Promotion and
distribution.............. 23,566 23,007 17,675 6,484 26,480 31,876 23,798 30,381
Selling, general and
administrative............ 11,296 11,550 8,558 3,677 15,050 17,985 12,505 20,935
Unusual items(2)............ -- -- 9,440 -- -- -- -- --
Non-recurring transition
cost(3)................... -- -- -- -- -- -- -- 4,311
-------- -------- -------- --------- -------- -------- -------- --------
Income from operations.... 30,444 33,839 20,566 7,613 24,911 31,984 22,219 28,781
Interest expense, net......... 1,707 2,494 3,611 5,806 22,471 22,463 16,973 19,444
Non-recurring finance
charge(4)................... -- -- -- -- 4,815 -- -- --
Equity in earnings of joint
venture..................... -- -- -- -- -- (186) (117) (111)
Other expense, net............ (67) (11) (8) 29 (2) 84 65 (118)
-------- -------- -------- --------- -------- -------- -------- --------
Income before taxes....... 28,804 31,356 16,963 1,778 (2,373) 9,623 5,298 9,566
Income tax expense
(benefit)................... 276 356 217 754 (855) 3,389 1,917 3,226
-------- -------- -------- --------- -------- -------- -------- --------
Income (loss) before
extraordinary item(5)....... $ 28,528 $ 31,000 $ 16,746 $ 1,024 $ (1,518) $ 6,234 $ 3,381 $ 6,340
======== ======== ======== ========= ======== ======== ======== ========
Basic earnings (loss) per
share....................... $ -- -- -- (0.03) (0.66) (0.01) (0.12) 0.08
Basic weighted average number
of shares outstanding....... -- -- -- 11,000 11,006 11,350 11,301 13,088
Diluted earnings (loss) per
share....................... $ -- -- -- (0.02) (0.44) (0.01) (0.07) 0.05
Diluted weighted average
number of shares
outstanding................. -- -- -- 16,417 16,620 18,085 17,958 19,860
OTHER DATA:
Cash flows provided by (used
in) operating activities.... $ 25,820 $ 39,250 $ 12,954 $ 2,711 $ 18,583 $ 20,972 $ 9,603 $ 16,017
Cash flows provided by (used
in) investing activities.... 4,070 12,368 (3,677) (209,346) (11,489) (15,161) (13,192) (51,973)
Cash flows provided by (used
in) financing activities.... (17,768) (16,808) (20,568) 204,635 (8,644) (5,811) 3,589 39,564
</TABLE>
<TABLE>
EBITDA(6). 35,103 38,613 24,364 10,063 35,264 43,216 30,290 40,364
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjusted EBITDA(6)............ 35,103 38,613 33,804 10,063 40,079 43,216 30,290 44,675
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
PREDECESSOR(1) THE COMPANY
----------------------------------- --------------------------------------------------------
THREE NINE MONTHS
YEAR ENDED NINE MONTHS MONTHS YEAR ENDED ENDED
DECEMBER 31, ENDED ENDED DECEMBER 31, SEPTEMBER 30,
------------------- SEPTEMBER 30, DECEMBER 31, ------------------- -------------------
1993 1994 1995 1995 1996 1997 1997 1998
-------- -------- ------------- ------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Depreciation and amortization
expense..................... 4,526 4,660 3,694 2,359 15,972 12,141 8,880 12,392
Capital expenditures(7)....... 4,119 12,159 4,224 1,297 7,901 14,437 12,933 14,132
Pet food sold (thousands of
tons)....................... 897 942 774 288 1,189 1,237 896 1,025
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 31,194 $ 35,410 $ 38,894 $ 26,123 $ 25,645 $ 50,656
Total assets................................ 117,962 142,710 309,584 338,293 338,184 664,772
Total debt.................................. 32,776 68,436 209,738 206,603 200,410 423,666
Preferred stock............................. -- -- 18,414 24,160 30,545 35,898
Stockholders' equity........................ 50,148 31,759 40,111 33,247 33,946 67,276
</TABLE>
- ---------------
(1) The Company was formed by a group of investors in 1995 to acquire Doane (the
"1995 Acquisition"). For financial statement purposes, the 1995 Acquisition
was accounted for as a purchase acquisition effective October 1, 1995. The
effects of the 1995 Acquisition have been reflected in the Company's
consolidated assets and liabilities at that date. As a result, the Company's
consolidated financial statements for the periods subsequent to September
30, 1995 are presented on the successor's new basis of accounting, while
financial statements for September 30, 1995 and prior periods are presented
on the predecessor's historical cost basis of accounting. See Note 1 of the
Consolidated Financial Statements of the Company.
(2) Represents non-recurring bonus payments to senior management in connection
with the 1995 Acquisition.
(3) Represents certain non-recurring transition expenses in connection with the
Windy Hill Acquisition.
(4) Non-recurring finance charge includes $4,815 of interim bridge debt
financing costs that were incurred in conjunction with the issuance of the
Senior Notes in 1996.
(5) Income before extraordinary items of the Company's predecessor does not
include any provision for federal income taxes. Prior to the 1995
Acquisition, Doane was organized as a subchapter S corporation.
Consequently, Doane did not pay federal, state or local income taxes except
in those states that did not recognize subchapter S status or that required
the payment of franchise taxes based on income.
(6) EBITDA for any relevant period presented above is defined as net income plus
interest expense, net, income taxes, depreciation and amortization. Adjusted
EBITDA represents EBITDA as defined plus unusual items, a non-recurring
finance charge and transition costs. EBITDA is not a measure recognized by
generally accepted accounting principles and should not be considered in
isolation or as a substitute for operating income, as an indicator of
liquidity or as a substitute for net cash provided by operating activities,
which are determined in accordance with generally accepted accounting
principles. EBITDA is included because management believes that certain
investors may find it useful. See "Unaudited Condensed Pro Forma Financial
Statements" and the Company's Consolidated Financial Statements and the
notes thereto included elsewhere in this Prospectus.
(7) Capital expenditures exclude payments for acquisitions.
34
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HISTORY OF THE COMPANY
The Company was formed in 1995 by a group of investors led by SCI, DLJMB,
CMIHI and certain members of existing management to acquire Doane for an
aggregate purchase price of $249.1 million, including existing indebtedness.
Doane had previously been a manufacturer of dry pet food for 37 years. The
Company's sole asset and activities are its ownership of the common stock of
Doane. The Company has no other operations.
In April 1998, the Company acquired IPES for $26.2 million (net of cash
purchased of $1.9 million) and the assumption of indebtedness of $1.9 million.
In August 1998, the Company acquired Windy Hill for approximately 6.4 million
shares of Common Stock and the assumption of $183.5 million of indebtedness.
Windy Hill was a manufacturer of pet food products based in Tennessee. Windy
Hill was merged into Doane in November 1998.
Windy Hill was formed in February 1995 by a group of investors led by
Dartford Partnership, L.L.C. to acquire substantially all of the assets and
liabilities of the pet food division of Martha White Foods, Inc. for $21.0
million. In April 1996, Windy Hill acquired the assets and liabilities
associated with certain pet food product lines of Heinz Inc. for a purchase
price of $52.5 million. In May 1997, Windy Hill acquired Hubbard for a net
purchase price of $131.1 million. Subsequent to such acquisition, Windy Hill
sold the animal feed division of Hubbard for a sales price of approximately
$50.0 million, net of taxes. In February 1998, Windy Hill acquired all of the
assets of AGP for a purchase price of approximately $12.4 million. In April
1998, Windy Hill acquired certain pet food assets and certain liabilities
associated with NuPet for a purchase price of approximately $3.1 million. In
June 1998, Windy Hill acquired Deep Run for a net purchase price of
approximately $16.4 million.
THE REFINANCING TRANSACTIONS
In November 1998, the Company refinanced its capital structure pursuant to
the following Refinancing Transactions:
-- Windy Hill was merged into Doane;
-- Doane completed a cash tender offer for approximately $97 million
principal amount of its Senior Notes;
-- Windy Hill completed a cash tender offer for $46 million principal
amount of Windy Hill Notes, which tender offer was required by a change
of control provision in the indenture governing such notes;
-- Doane completed the Exchange Offer of $150 million principal amount of
its Senior Subordinated Notes for the remaining approximately $63
million principal amount of Senior Notes and the remaining approximately
$74 million principal amount of Windy Hill Notes; and
-- Doane entered into the New Credit Facility with a syndicate of financial
institutions providing for total commitments of $345 million. Doane
borrowed $292 million under the New Credit Facility to fund the cash
requirements of the Refinancing Transactions, repay borrowings under and
retire its previous credit facilities, repay other debt and repay bridge
financing incurred in connection with the tender offer for the Windy
Hill Notes.
OVERVIEW
The Company is the largest manufacturer of dry pet food in the United
States, producing approximately 26% of the total volumes sold in 1997 on a pro
forma basis. The Company manufactures products for store brands owned by retail
customers (also known as private labels), contract manufactures products for
national branded pet food companies and produces and sells under regional brands
owned by the Company.
35
<PAGE> 37
The Company manufactures for its customers a full range of pet food
products for both dogs and cats, including dry, canned, semi-moist, soft dry,
soft treats and dog biscuits. The Company provides products that meet customer
specifications across all retail channels and price points, from super premium
to value products. Accordingly, the Company manufactures store brands for over
350 customers in the United States, including the three largest mass
merchandisers, the five largest grocery companies and the largest national pet
specialty retailer. The Company also manufactures dry pet food and treats for
four of the six largest national branded pet food companies through
co-manufacturing agreements pursuant to which the Company produces, packages and
ships a portion of such companies' products. The Company's engineering services
group designs and builds extruders, conveyors, dryers and other parts and
equipment, including replacement parts, for pet food manufacturing facilities of
the Company and third parties.
The Company derives substantially all of its revenue from the sale of dry
pet food products. Historically, approximately 85% to 90% of pet food cost of
goods sold has been comprised of raw material and packaging costs with labor,
insurance, utilities and depreciation comprising the remainder. Historically,
market prices for commodity grains and food stocks have fluctuated in response
to a number of factors, including changes in United States government farm
support programs, changes in international agricultural and trading policies and
weather conditions during the growing and harvesting seasons.
The Company manages the price risk created by market fluctuations by
hedging portions of its primary commodity products purchases on an on-going and
continuous basis, principally through exchange traded futures and options
contracts. The Company implemented a hedging policy in 1996 that does not permit
trading in commodities not utilized by the Company. All futures and options
activity is based on the projected requirements of the Company. The term of such
contracts is generally less than one year. Settlement of positions are either
through financial settlement with the exchanges or via exchange for the physical
commodity in which case the Company delivers the contract against the
acquisition of the physical commodity.
The Company accounts for its futures and options contracts as hedges and
gains and losses are recognized in the period realized as part of the cost of
products sold. The Company's deferred net futures and options position is
reported on the balance sheet as a current asset for net loss positions and as a
deferred credit for net gain positions. In addition to futures and options, the
Company also contracts for future physical procurement, in which case unrealized
gains and losses are deferred to the applicable accounting period. Typically,
maturities vary and do not exceed twelve months. The Company has hedged over
half of its corn and soybean meal requirements through June 30, 1999. Corn and
soybean meal are the two principal commodities used by the Company in the
manufacture of pet food. Unrealized losses of $2.6 million were deferred on
outstanding hedging contracts at September 30, 1998. See "Business -- Raw
Materials and Packaging."
The sales and expenses of two of the Company's subsidiaries are denominated
in foreign currencies. The Company may encounter exchange rate risk to the
extent that the values of such currencies fluctuate. The Company does not
currently hedge, and does not anticipate hedging, against adverse foreign
currency fluctuations.
Operating expenses consist of promotion and distribution expenses and
selling, general and administrative expenses. Promotion and distribution
expenses are primarily (i) brokerage fees, (ii) promotions, volume incentive
discounts and rebates paid to customers and (iii) freight and distribution
expenses. The Company's selling, general and administrative expenses represent
salaries and related expenses, amortization expense and other corporate overhead
costs. These expenses typically do not increase proportionately with increases
in volume and product sales.
The Company's sales are somewhat seasonal. The Company typically
experiences an increase in net sales during the first and fourth quarters of
each year, as is typical in the pet food industry. The seasonality of the pet
food business is generally attributable to cooler weather, which results in
increased dog food consumption.
36
<PAGE> 38
RESULTS OF OPERATIONS
The following discussion is based on the historical financial statements of
the Company and the notes thereto included elsewhere in this Prospectus. The
results for the three-month period ended December 31, 1995, the years ended
December 31, 1996 and 1997 and the nine months ended September 30, 1998 and
September 30, 1997 reflect the 1995 Acquisition, which was accounted for using
the purchase method of accounting. The total purchase price of $249.1 million,
including existing indebtedness (exclusive of fees and expenses of approximately
$13.0 million), was allocated to the assets and liabilities acquired based upon
their respective fair values. As a result, beginning October 1, 1995, the
Company recorded expenses for depreciation and amortization significantly in
excess of historical levels recorded by the predecessor. In addition, the
results of operations of the Company have been significantly affected by the
impact of the financing of the 1995 Acquisition, including interest expense on
the indebtedness incurred in connection with a credit facility and the Senior
Notes. Net income for Doane prior to the 1995 Acquisition does not include any
provision for federal income taxes. Prior to the 1995 Acquisition, predecessor
was organized as a subchapter S corporation. Consequently, predecessor did not
pay federal, state or local income taxes except in those states that did not
recognize subchapter S status or that required the payment of franchise taxes
based on income.
The historical combined results of operations of the Company for the
twelve-month period ended December 31, 1995, the years ended December 31, 1996
and December 31, 1997 and the nine-month periods ended September 30, 1997 and
September 30, 1998 are not directly comparable to the results of operations of
predecessor due to the effects of the 1995 Acquisition.
<TABLE>
<CAPTION>
COMBINED
TWELVE-MONTH NINE MONTHS NINE MONTHS
PERIOD ENDED YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 1998
---------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......................... $418,591 100.0% $513,217 100.0% $564,741 100.0% $411,399 100.0% $462,991 100.0%
Cost of goods sold................ 344,578 82.3 446,776 87.1 482,896 85.5 352,877 85.8 378,583 81.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross profit...................... 74,013 17.7 66,441 12.9 81,845 14.5 58,522 14.2 84,408 18.2
Operating expenses:
Promotion and distribution....... 24,159 5.8 26,480 5.2 31,876 5.6 23.798 5.8 30,381 6.6
Selling, general and
administrative................. 12,235 2.9 15,050 2.9 17,985 3.2 12,505 3.0 20,935 4.5
Unusual items.................... 9,440 2.3 -- -- -- -- -- -- --
Non-recurring transition costs... -- -- -- -- -- -- -- -- 4,311 0.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Income from operations......... 28,179 6.7 24,911 4.8 31,984 5.7 22,219 5.4 28,781 6.2
Interest expense, net............. 9,417 2.2 22,471 4.4 22,463 4.0 16,973 4.1 19,444 4.2
Non-recurring finance charge...... -- -- 4,815 0.9 -- -- -- -- -- --
Equity in earnings of joint
ventures......................... -- -- -- -- (186) (0.0) (117) 0.0 (111) (0.0)
Other expense, net................ 21 0.0 (2) (0.0) 84 0.0 65 0.0 (118) (0.0)
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Income before (loss) taxes..... 18,741 4.5 (2,373) (0.5) 9,623 1.7 5,298 1.3 9,566 2.0
Income tax expense (benefit)...... 971 0.2 (855) (0.2) 3,389 0.6 1,917 0.5 3,226 0.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net income (loss).............. $ 17,770 4.3% $ (1,518) (0.3)% $ 6,234 1.1% $ 3,381 0.8 $ 6,340 1.3%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Net Sales. Net sales for the nine-month period ended September 30, 1998
increased 12.5% to $463.0 million from $411.4 million in the same period in
1997. Included in this increase are $51.6 million in sales attributable to the
Windy Hill Acquisition and the IPES Acquisition (collectively, the
"Acquisitions"). Excluding the Acquisitions, pet food net sales increased 1.9%
to $386.8 million from $379.6 for the same period in 1997. Of this increase, the
volume-related increases of 3.9% were offset by price declines of 1.9%
attributable to the pass-through of certain raw material cost decreases to
customers. Non-manufactured product revenues declined as a percentage of total
revenues from 6.5% to 4.2%.
Gross profit. Gross profit for the nine-month period ended September 30,
1998 increased 44.5% (21.7% of which was attributable to the Acquisitions) to
$84.4 million from $58.5 million for the same period in 1997. Approximately
19.7% resulted from improvements in pet food margins due to reductions in
certain raw
37
<PAGE> 39
material costs, and approximately 4.2% was due to increased pet food tons sold.
Promotion and distribution expenses. Promotion and distribution expenses
increased 27.7% (20.6% of which was attributable to the Acquisitions) to $30.4
million for the nine-month period ended September 30, 1998 from $23.8 million
for the same period in 1997. The balance of the increase resulted from increases
in variable sales promotions, incentive discounts and brokerage costs on
increased pet food tons sold.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 67.2% (30.2% of which was attributable to the
Acquisitions) to $20.9 million for the nine-month period ended September 30,
1998 from $12.5 million for the same period in 1997. The balance of the increase
resulted from increases in (i) salaries and related fringe benefits, (ii)
professional fees and (iii) amortization and depreciation. These increases are
primarily due to additional staffing and infrastructure required as a result of
growth in the Company's business and the acquisition of Windy Hill.
Non-recurring transition costs. Non-recurring transition costs represent
expenses incurred in connection with the merger and integration of Windy Hill
with the Company. These costs include compensation for transitional personnel,
severance and bonus expense, relocation expenses, recruiting and training
expenses, systems conversion and other unique transition expenses.
Income from operations. Income from operations for the nine-month period
ended September 30, 1998 increased 29.7% (17.1% of which was attributable to the
Acquisitions) to $28.8 million (6.2% of net sales) from $22.2 million (5.4% of
net sales) in the same period in 1997. The balance of the increase was
principally due to improved pet food margins and volume gains, which were offset
in part by the increase in non-recurring transition costs.
Interest expense, net. Net interest expense for the nine-month period ended
September 30, 1998 increased 14.1% to $19.4 million from $17.0 million in the
same period in 1997 primarily due to $208.8 million of debt incurred in
connection with the Acquisitions.
Net income. Net income for the nine-month period ended September 30, 1998
increased to $6.3 million from $3.4 million in the same period in 1997. The
Acquisitions represented $0.4 million of this increase, and the balance was
principally due to improved pet food margins and increased pet food tons sold.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales. Net sales for 1997 increased 10.0% to $564.7 million from $513.2
million in 1996. Pet food net sales increased 9.1% to $524.7 million for 1997
from $480.8 million in 1996. Of this amount, approximately 4.3% was due to
increases in tons sold, and the balance was principally the result of price
increases implemented in late 1996 to mitigate increases in raw material costs
that occurred throughout 1996. Net sales of non-manufactured products increased
in 1997 due to distribution of additional products that was partially offset by
a decrease in net sales of engineering products due to the focusing of the
Company's efforts on internal engineering projects at Everson, Pennsylvania,
Washington Court House, Ohio and Miami, Oklahoma.
Gross profit. Gross profit for 1997 increased 23.2% to $81.8 million from
$66.4 million in 1996. Of this amount, 16.8% represents improvements in pet food
margins due to the aforementioned price increases and reductions in the cost of
certain raw materials in the latter part of 1997. The balance of the gross
profit improvement is largely due to the additional non-manufactured products.
Gross profit increased as a percentage of net sales to 14.5% for 1997 from 12.9%
in 1996.
Promotion and distribution expense. Promotion and distribution expense
increased to $31.9 million in 1997 from $26.5 million in 1996 due to increases
in sales promotions, volume incentive discounts and brokerage costs resulting
from increased pet food tons sold.
Selling, general and administrative expense. Selling, general and
administrative expense increased to $18.0 million in 1997 from $15.1 million in
1996 due to (i) increases in salaries and related fringe benefits associated
with annual wage increases, additional personnel and increased bonuses due to
improved
38
<PAGE> 40
performance, (ii) increases in property taxes on new and expanded facilities and
(iii) increases in expenses associated with the installation of new information
systems.
Income from operations. Income from operations for 1997 increased 28.4% to
$32.0 million from $24.9 million in 1996. Income from operations as a percentage
of net sales increased to 5.7% for 1997 from 4.8% in 1996, due to improved pet
food margins and additional non-manufactured products sales.
Interest expense, net. Net interest expense remained unchanged at $22.5
million for 1997 and 1996. Interest expense reductions resulting from payments
on the Term Loan Facility (as defined below) were largely offset by additional
interest expense on proceeds from the Industrial Development Bonds that were
used to finance the construction of the new Miami, Oklahoma facility. Interest
expense as a percentage of net sales decreased to 4.0% from 4.4% in 1996.
Net income. Net income for 1997 increased to $6.2 million from a net loss
of $1.5 million in 1996, primarily as a result of increased pet food margins and
additional non-manufactured products sales.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO COMBINED TWELVE-MONTH PERIOD ENDED
DECEMBER 31, 1995
Net sales. Net sales for 1996 increased 22.6% to $513.2 million from $418.6
million in the twelve-month period ended December 31, 1995. Pet food net sales
increased 24.0% to $480.8 million for 1996 from $387.6 million in the
twelve-month period ended December 31, 1995, primarily due to increased pet food
tonnage sold and price increases implemented throughout the year in response to
higher raw material costs. Net sales of non-manufactured products increased due
to distribution of additional items.
Gross profit. Gross profit for 1996 was negatively impacted by increases in
the costs of most raw materials. The cost increases were partially offset by an
increase in pet food tonnage sold and price increases implemented throughout the
year. Gross profit for 1996 was also negatively impacted by $1.9 million due to
increased depreciation resulting from the write-up of assets in connection with
the 1995 Acquisition. Gross profit as a percentage of net sales for the periods
declined from 17.7% in 1995 to 12.9% for 1996, primarily due to decreased
margins on pet food sales.
Promotion and distribution expense. Promotion and distribution expense
increased to $26.5 million in 1996 from $24.2 million in the twelve-month period
ended December 31, 1995. This increase was primarily attributable to increases
in promotions, volume incentive discounts, rebates and brokerage fees resulting
from increased pet food tons sold.
Selling, general and administrative expense. Selling, general and
administrative expense increased to $15.1 million in 1996 from $12.2 million for
the twelve-month period ended December 31, 1995, primarily due to additional
depreciation and amortization expenses in the amount of $2.6 million incurred in
connection with the 1995 Acquisition.
Income from operations. Income from operations decreased 11.6%, or $3.3
million, to $24.9 million for 1996 from $28.2 million in the twelve-month period
ended December 31, 1995. Income from operations as a percentage of net sales
decreased to 4.8% for 1996 from 6.7% in the twelve-month period ended December
31, 1995, primarily as a result of lower pet food margins and increased
depreciation and amortization expense.
Non-recurring finance charge. In the year ended December 31, 1996, $4.8
million in non-recurring interim debt financing costs were written off
concurrent with the issuance of the Senior Notes.
Interest expense, net. Net interest expense increased to $22.5 million for
1996 from $9.4 million in the twelve-month period ended December 31, 1995 due to
the debt incurred to finance the 1995 Acquisition.
Net income. Net income (loss) decreased to ($1.5) million for 1996 from
$17.8 million in the twelve-month period ended December 31, 1995, as a result of
lower pet food margins, increased interest, depreciation and amortization
expenses and non-recurring financing fees.
39
<PAGE> 41
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, capital expenditures
and working capital requirements from cash flow from operations, bank borrowings
and bonds. The Acquisitions were funded through bank borrowings and the issuance
of Common Stock. The Company had working capital of $50.7 million at September
30, 1998. Net cash provided by operating activities was $9.6 million and $16.0
million for the nine months ended September 30, 1997 and 1998, respectively, and
$15.7 million, $18.6 million and $21.0 million for the twelve-month period ended
December 31, 1995, and for the years ended December 31, 1996 and 1997,
respectively. Net cash provided by (used for) borrowings was approximately $2.7
million, $38.2 million, $139.7 million, $(9.0) million and $(6.7) million,
respectively, for such periods.
During the three-year period ended December 31, 1997, the Company spent
$27.9 million on capital expenditures, of which $21.6 million was used to
acquire and construct additional manufacturing capacity, including a new
manufacturing facility, a renovated manufacturing facility and five new
production lines in existing facilities and $6.3 million was used to maintain
existing manufacturing facilities. During the nine months ended September 30,
1998, the Company spent $14.1 million on capital expenditures, of which $12.4
million was used for expansion.
It is expected that existing manufacturing facilities will not be
sufficient to meet the Company's anticipated volume growth. The Company has
continued to examine alternatives for expanding its business either through
construction of additional manufacturing capacity or acquisition of
manufacturing assets. Such potential acquisitions could include acquisitions of
operating companies. The Company intends to finance such expansions or
acquisitions with borrowings under existing or expanded credit facilities, or
the issuance of additional equity.
On April 17, 1998, the Company acquired IPES for $26.2 million (net of cash
purchased of $1.9 million) and the assumption of indebtedness of $1.9 million.
The Company financed the IPES Acquisition through non-recourse borrowings in
Spain for $21.3 million of the purchase price and borrowings under a credit
facility for the remainder.
On August 3, 1998, the Company acquired Windy Hill for approximately 6.4
million shares of Common Stock and the assumption of $183.5 million of
indebtedness.
On November 12, 1998, the Company completed the Refinancing Transactions.
As part of the Refinancing Transactions, the Company entered into the New Credit
Facility, which provides for total commitments of $345.0 million. As of January
31, 1999, the Company had outstanding borrowings of $245.0 million under the
Term Loan Facility, $28.0 million under the Revolving Credit Facility and $6.7
million under the swingline facility. In addition, at such date there were $2.4
million of outstanding letters of credit under the New Credit Facility.
The Company is highly leveraged and has significant cash requirements for
debt service relating to the New Credit Facility, the Senior Subordinated Notes,
the IPES debt and industrial development bonds. The Company's ability to borrow
is limited by the New Credit Facility and the limitations on the incurrence of
indebtedness in the Note Indenture. The Company anticipates that its operating
cash flow, together with amounts available to it under the New Credit Facility
and new industrial development bonds, will be sufficient to finance working
capital requirements, debt service requirements and capital expenditures through
the 1999 fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate
40
<PAGE> 42
a derivative instrument as a hedge of exposures to changes in fair values, cash
flows, or foreign currencies. If the hedged exposure is a fair value exposure,
the gain or loss on the derivative instrument is recognized in earnings in the
period of change together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative instrument
is reported initially as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from the assessment of hedge
effectiveness, as well as the ineffective portion of the gain or loss, is
reported in earnings immediately. Accounting for foreign currency hedges is
similar to the accounting for fair value and cash flow hedges. If the derivative
instrument is not designated as a hedge, the gain or loss is recognized in
earnings in the period of change.
The Company will adopt SFAS 133 beginning in fiscal 1999. The Company has
not determined the impact that SFAS 133 will have on its financial statements
and believes that such determination will not be meaningful until closer to the
date of initial adoption.
YEAR 2000
The Company has conducted a comprehensive review of its computer software
to identify the systems that could be affected by the "year 2000" issue. The
year 2000 issue results from computer programs being written using two digits
(rather than four) to define the applicable year. As a result, certain of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This calculation could result
in a major system failure or miscalculations.
The Company has made an assessment of year 2000 compliance and reviewed its
business application software which resulted in plans to either replace or
upgrade all essential business software at an estimated cost of $3.5 million.
The Company is currently reviewing its administrative hardware and software
(networks, communications and security systems) and the software related to
manufacturing equipment. The Company has implemented a program to confirm year
2000 compliance with all third parties with which the Company has material
relationships.
As of September 30, 1998, the Company had incurred costs of approximately
$2.4 million in connection with year 2000 compliance. The Company intends to
test and verify its year 2000 compliance projects by July 1999, including third
party compliance. Management believes that a failure to complete its year 2000
compliance, or a failure by parties with whom the Company has material
relationships to complete year 2000 compliance by such date, could have a
material adverse effect on the Company's financial condition and results of
operations. The Company believes that it can provide the resources necessary to
ensure year 2000 compliance prior to the year 2000. However, should the Company
be delayed in its compliance with year 2000, the Company may experience a
decrease in efficiency that could have a material adverse effect on results of
operations. The Company also believes that a sufficient number of suppliers
exist if the Company's current suppliers are delayed in their efforts to achieve
year 2000 compliance thereby minimizing risk to the Company. The Company has
developed contingency plans that include moving production within its plant
network, securing additional ingredient storage facilities and transferring
procurement to year 2000 compliant suppliers.
COMMITMENTS AND CONTINGENCIES
On October 30, 1998 the Company initiated a product recall for certain dry
dog food manufactured at its Temple, Texas plant between July 1 and August 31,
1998. The recall covers dry dog food manufactured at its Temple plant and does
not apply to dry dog food manufactured at other plants or the Company's dry cat
food, biscuits, treats or canned products. The recall resulted from reported
sickness and death of dogs in the State of Texas. These conditions were
attributed to elevated aflatoxins in corn, which is an ingredient in dry dog
food. Aflatoxins are compounds produced from certain kinds of crop molds that
can be caused by extreme weather conditions such as drought and heat. The
Company has an extensive corn testing program for the detection of aflatoxins
and that program has been intensified since the problems were reported. The
Company maintains insurance against losses from illness or death of animals;
however, the cost of the product recall is not covered by insurance. The Company
estimates the cost of the product recall to be $3.0 million, net of insurance
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<PAGE> 43
recoveries, and has recorded a charge to non-recurring costs in the fourth
quarter of fiscal 1998. See "Risk Factors -- Environmental, Regulatory and
Safety Matters; Product Recall."
The Company believes that its operations are in material compliance with
environmental, safety and other regulatory requirements; however, there can be
no assurance that such requirements will not change in the future or that the
Company will not incur significant costs in the future to comply with such
requirements or to effect future recalls. See "Business -- Environmental,
Regulatory and Safety Matters; Product Recall."
EURO
Effective January 1, 1999, eleven of the fifteen countries comprising the
European Union began a transition to a single monetary unit, the "Euro," which
is scheduled to be completed by July 1, 2002. The Company is currently
considering options to ensure that its European subsidiaries can operate
effectively in the Euro. The Company's subsidiaries in Italy and Spain may incur
significant costs in conversion of their systems to the Euro. The Company is
unable to predict whether such costs can be passed on to customers. The
customers of these subsidiaries may also begin conducting operations using the
Euro prior to the completion of the conversion of the systems of such
subsidiaries. Delays in conversion could have a material adverse effect on the
results of the operations of these subsidiaries. In addition, the introduction
of the Euro may increase competition, as manufacturers in other European
countries become able to compete more easily in the Company's markets.
Management does not believe that the implementation of the Euro will have a
material effect on the Company's operations or financial condition taken as a
whole.
INFLATION AND CHANGES IN PRICES
The Company's financial results depend to a large extent on the cost of raw
materials and packaging and the ability of the Company to pass along to its
customers increases in these costs. Historically, market prices for commodity
grains and food stocks have fluctuated in response to a number of factors,
including changes in United States government farm support programs, changes in
international agricultural and trading policies and weather conditions during
the growing and harvesting seasons. Fluctuations in paper prices have resulted
from changes in supply and demand, general economic conditions and other
factors. In the event of any increases in raw materials costs, the Company may
be required to increase sales prices for its products in order to avoid margin
deterioration. There can be no assurance as to the timing or extent of the
Company's ability to implement future price adjustments in the event of
increased raw material costs or as to whether any price increases implemented by
the Company may affect the volumes of future shipments.
The Company manages the price risk created by market fluctuations by
hedging portions of its primary commodity product purchases, principally through
exchange traded futures and options contracts that are designated as hedges. The
terms of such contracts are generally less than one year. Settlement of
positions are either through financial settlement with the exchanges or via
exchange for the physical commodity in which case the Company delivers the
contract against the acquisition of the physical commodity. The Company's policy
does not permit speculative commodity trading. Although the Company manages the
price risk of market fluctuations by hedging portions of its primary commodity
product purchases, there can by no assurance that the Company's results of
operations will not be exposed to volatility in the commodity market. See
"-- Overview" and "Business -- Raw Materials and Packaging."
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<PAGE> 44
BUSINESS
OVERVIEW
The Company is the largest manufacturer of dry pet food in the United
States, producing approximately 26% of the total volumes sold in 1997 on a pro
forma basis. The Company manufactures products for store brands owned by retail
customers (also known as private labels), contract manufactures products for
national branded pet food companies and produces and sells under regional brands
owned by the Company.
The Company manufactures for its customers a full range of pet food
products for both dogs and cats, including dry, canned, semi-moist, soft dry,
soft treats and dog biscuits. The Company provides products that meet customer
specifications across all retail channels and price points, from super premium
to value products. Accordingly, the Company manufactures store brands for over
350 customers in the United States, including the three largest mass
merchandisers, the five largest grocery companies and the largest national pet
specialty retailer. The Company also manufactures dry pet food and treats for
four of the six largest national branded pet food companies through
co-manufacturing agreements pursuant to which the Company produces, packages and
ships a portion of such companies' products.
The Company has the most extensive manufacturing and distribution network
in the industry, providing it with certain operational, cost and competitive
advantages. The Company manufactures and distributes its products in the United
States through 32 combination manufacturing and distribution facilities and nine
additional distribution centers. The number and strategic location of the
Company's facilities reduce distribution expenses, which represent a meaningful
portion of the delivered cost of pet food due to its bulk and weight relative to
its selling price. The Company's extensive network can further reduce expenses
by enabling certain of its customers to bypass their distribution centers and
deliver directly to their stores. Direct store delivery service currently
accounts for approximately 45% of the Company's sales by volume.
The Company has achieved strong internal growth. From 1992 to 1997, the
Company increased sales volumes at a compound annual growth rate of 10.3%,
exclusive of acquisitions. The Company believes its growth is primarily due to
an increase in consumer acceptance of store brands and an increase in volume co-
manufactured for national pet food companies. In addition, the Company has been
the primary supplier of store brand pet food to Wal*Mart since 1970. The Company
manufactures and distributes, under a direct store delivery program, a variety
of products for Wal*Mart including its store brand, Ol' Roy, which is the
largest selling brand of dry pet food in the United States by volume. In 1997,
sales to Wal*Mart, including its Sam's Club division, accounted for 39% of the
Company's sales on a pro forma basis.
THE PET FOOD INDUSTRY
The U.S. pet food industry is a $10 billion industry that has grown at a
compound annual rate of 5% from 1992 to 1997 in terms of volume. Growth in the
dry pet food and the biscuit and treats segments of the industry has exceeded
the growth of the overall pet food industry by capturing market share from other
segments, including canned pet food. Dry pet food sales have grown at a rate of
6.4% per year from 1992 to 1997 and accounted for approximately $5.2 billion of
sales in the industry in 1997. Dry pet food has increased its market share from
49.2% to 52.0% over the same period. The biscuit and treats segment has grown at
a rate of 6.3% per year from 1992 to 1997 and has increased its market share
from 12.1% to 12.8% over the same period.
Improved product quality and increased retailer support have generally
enabled store brands to gain market share from national brands in many
traditional branded categories, including pet food. Sales of store brand pet
food accounted for in excess of 20% of the total pet food market in 1997 and
have grown at a compound annual growth rate in excess of 7.5% over the past five
years. Store brands have increased market share in each of the segments of the
pet food industry over the past five years. In 1997, store brands represented
approximately 29%, 29%, 23%, 18% and 17% of total sales volume of biscuits and
treats, dry dog, dry cat, canned dog and canned cat food, respectively. Store
brand volume share of canned dog and cat food increased from 10% to 18% and from
9% to 17% from 1992 to 1997, respectively. Store brands now encompass a full
range of pet food products at all price points, including economy, premium and
super premium.
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<PAGE> 45
RECENT DEVELOPMENTS
Refinancing Transactions. In November 1998, the Company refinanced its
capital structure pursuant to the following Refinancing Transactions:
-- Windy Hill was merged into Doane;
-- Doane completed a cash tender offer for approximately $97 million
principal amount of its Senior Notes;
-- Windy Hill completed a cash tender offer for $46 million principal
amount of Windy Hill Notes, which tender offer was required by a change
of control provision in the indenture governing such notes;
-- Doane completed the Exchange Offer of $150 million principal amount of
its Senior Subordinated Notes for the remaining approximately $63
million principal amount of Senior Notes and the remaining approximately
$74 million principal amount of Windy Hill Notes; and
-- Doane entered into the New Credit Facility with a syndicate of financial
institutions providing for total commitments of $345 million. Doane
borrowed $292 million under the New Credit Facility to fund the cash
requirements of the Refinancing Transactions, repay borrowings under and
retire its previous credit facilities, repay other debt and repay bridge
financing incurred in connection with the tender offer for the Windy
Hill Notes.
Windy Hill Acquisition. In August 1998, the Company acquired Windy Hill for
approximately 6.4 million shares of Common Stock and the assumption of $183.5
million of indebtedness. Windy Hill was a leading manufacturer of pet food
products for both dogs and cats, including dry, canned, semi-moist, soft dry,
soft treats and dog biscuits. With Windy Hill, the Company became the largest
manufacturer of dog biscuits in the United States. In 1997, Windy Hill generated
pro forma net sales, EBITDA and a net loss before extraordinary item of $304.0
million, $26.7 million and $1.6 million, respectively.
The Windy Hill Acquisition strengthens the Company's presence in the dry
pet food and dog biscuit market segments, provides revenue synergies and
enhances the Company's position as a low-cost manufacturer and distributer of
pet food products. The Company believes the Windy Hill Acquisition provides the
opportunity for revenue growth by (i) enabling the Company to offer regional
brands, semi-moist, soft dry and canned pet food products to its traditional
customer base and (ii) enabling the Company to offer soft treats and other
specialized dry food products to Windy Hill's traditional customer base. With
the addition of Windy Hill's 19 plants, the Company believes cost savings can be
achieved through optimizing production schedules and lowering distribution costs
by reducing the distance products are shipped. The Windy Hill Acquisition also
provides the Company with the opportunity to achieve cost savings by obtaining
purchasing synergies and eliminating redundant overhead functions.
IPES Acquisition. In April 1998, the Company acquired IPES for $26.2
million (net of cash purchased of $1.9 million) and the assumption of
indebtedness of $1.9 million. IPES, located in Spain, is a manufacturer of both
store and regional brands. In fiscal 1997, IPES had net sales, EBITDA and net
income of $21.1 million, $3.8 million and $1.0 million, respectively. The
Company believes that the IPES Acquisition, together with the Company's
investment in the Italian manufacturer, Effeffe, S.p.a., provides the Company
with a platform for growth in Europe.
STRATEGY
The Company's business objective is to increase revenues and earnings and
to enhance its leadership position within the pet food industry. The key
elements of the strategy to achieve the Company's business objective are as
follows:
Continue to be the Low Cost Quality Provider in the Pet Food Industry. The
Company believes it is the low cost provider of quality dry pet food. The
Company believes its position as the largest manufacturer of dry pet food
provides it with certain economies of scale, including production efficiencies
and packaging
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<PAGE> 46
purchasing leverage. In addition, the number and strategic location of the
Company's facilities enhances the Company's position as the low cost provider by
reducing transportation costs for raw materials and finished goods. The Company
also maintains in-house engineering, machining and fabrication capabilities that
enable the Company to design, construct and maintain facilities on a
cost-effective basis.
Leverage Distribution System. The Company's manufacturing and distribution
network enables it to service customers on a national basis and facilitates the
Company's direct store delivery program, the scope of which the Company believes
is unique in the industry. In addition, the Company has developed capabilities
that allow it to provide VMI to certain key customers. VMI allows the Company to
communicate on-line with its customers, evaluate their inventory status and
place orders on their behalf. The Company intends to leverage its manufacturing
and distribution network by expanding sales of its full range of pet food
products to its existing customers. For example, the Company recently completed
the construction of a soft treat manufacturing facility, which will enable the
Company to offer soft treats to its traditional customer base, and intends to
expand sales of certain products acquired in the Windy Hill Acquisition
including semi-moist, soft dry, canned and regional brands to its existing
customers.
Provide a Full Range of Pet Food Products. The Company offers customers a
full range of pet food products for both dogs and cats, including dry, canned,
semi-moist, soft dry, soft treats and dog biscuits. By offering a full range of
products under a variety of brand formats (store, co-manufactured national and
regional brands) and price points, the Company can be a significant source for
its customers' total pet food requirements. This enables customers to realize
administrative and distribution savings by aggregating a variety of products and
brands into a single shipment.
Focus on Diversified Brand Formats. The Company believes that store,
co-manufactured national and regional brand formats offer significant growth
opportunities. Sales of store brands have exceeded the overall growth in the pet
food industry. The Company believes this growth will continue due to (i) an
increased awareness of retailers concerning the advantages of store brands,
including enhanced margins and customer loyalty, (ii) improved quality,
innovation and variety of store brand products and (iii) increasingly informed
and value-conscious consumers. The Company believes co-manufactured national
brands offer growth opportunities as national branded pet food companies
increasingly take advantage of the Company's low-cost status, quality products,
extensive plant network and logistics capabilities. The Company believes that
the regional brands acquired with the Windy Hill Acquisition complement its
existing product lines and intends to capitalize on demand for such brands
within the Company's existing customer base.
Acquire Additional Pet Food Companies. To supplement its internal growth,
the Company has acquired eight pet food companies over the last three years. The
Company believes that there are substantial opportunities in the United States
and abroad to acquire additional pet food companies. The Company will continue
to seek accretive acquisitions that offer complementary product lines,
geographic scope, additional distribution channels and cost saving
opportunities.
Expand International Presence. The Company believes substantial
opportunities exist to increase sales in international markets. The Company
believes that the approximately $9.3 billion European pet food market is
particularly attractive due to the strength and demand for store brand products
and the strong growth of dry pet food products. The Company is currently
expanding its manufacturing and distribution capabilities in Spain and Italy and
intends to pursue acquisitions of additional pet food companies and expand its
product offerings. In addition, the Company believes that an opportunity exists
to expand export sales to the Pacific Rim and South America.
PRODUCTS AND SERVICES
The Company provides its customers with comprehensive pet food category
management services designed to expand each customer's pet food product lines
and to improve the category's profitability. Category management services
include product development and testing, packaging design services and
assistance in formulating pricing and marketing strategies in connection with
their store brand programs. The Company sells its products as store brands owned
by customers (also known as private labels) and regional brands owned by the
Company and contract manufactures products for national pet food companies. The
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Company's store brand program involves the formulation and supply of a wide
variety of high quality pet food products, including dry, canned, semi-moist,
soft dry and soft treats, as well as dog biscuits, that are comparable in
quality to, but lower in cost than, competing branded pet food products. For
national brand customers, the Company manufactures dry pet food and biscuits to
such customers' specifications and standards. The regional brands are used for
economy priced products that are generally marketed as a complement to
customers' store brand programs. Accordingly, the Company is able to provide
customers with a single source for store brands, certain co-manufactured
national brands and regional brands. The Company is able to ship all such
product offerings together, giving customers the ability to address a
substantial portion of their pet food requirements from one source.
The Company manufactures dry pet food under approximately 350 store brands,
including Kirkland Signature, Retriever, Dura Life, Great Choice, Hy Vee, Ol'
Roy, Exceed, Maxximum Nutrition, Remarkable, Pathmark, Pet Club, PMI-Nutrition,
Special Kitty and Sportsman's Choice. The Company also co-manufactures branded
pet food products for national pet food companies in accordance with such
companies' specifications and standards. The Company's regional brands include
Kozy Kitten(R), G. Whiskers(R), Trail Blazer(R), and Tuffy's(R), which are sold
to allow the Company's customers to broaden their product offerings and to
provide them with a single source for their pet food requirements.
In addition to its pet food products, the Company sells products
manufactured by third parties and maintains an engineering group. A description
of each of the Company's product lines is set forth below:
Dry Pet Food Products (82.0% of 1997 Pro Forma Net Sales)
The Company is the largest manufacturer of dry pet food products in the
United States. The Company produces, markets and distributes a wide selection of
high quality dry pet food products predominantly for dogs and cats. The dog food
product line includes high protein, chunk style, premium blended, puppy food and
gravy style products. The dog food product line has accounted for the largest
portion of the Company's dry pet food shipments over the past three years, with
such products representing approximately 84.1% of the Company's dry pet food
shipments (tonnage) in 1997 on a pro forma basis. The Company's cat food lines
accounted for approximately 15.9% of the Company's dry pet food shipments
(tonnage) in 1997 on a pro forma basis.
Biscuits and Treats (9.6% of 1997 Pro Forma Net Sales)
The Company is the largest manufacturer of dog biscuits in the United
States and is also a leading supplier of soft treats. Biscuits undergo a
different manufacturing process from dry pet food that primarily involves baking
rather than the use of extruders.
Semi-Moist, Soft Dry and Canned Pet Food (4.0% of 1997 Pro Forma Net Sales)
In connection with the Windy Hill Acquisition, the Company has expanded its
operations into the semi-moist, soft dry and canned pet food segments.
Semi-moist, soft dry and canned products are distinguishable from dry pet food
based on their higher moisture levels, the manufacturing technology used to
process such products and their higher costs of packaging.
Non-Manufactured Products (3.7% of 1997 Pro Forma Net Sales)
Sales of non-manufactured products include sales of cat litter, canned pet
products and pet treats produced by third parties. The Company receives these
items at its manufacturing facilities and warehouses and aggregates them with
the Company's products into truckload quantities for combined shipment to
certain customers. The Company provides this service as a part of its direct
shipment program and receives a handling fee for this service.
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Engineering Services Group
The Company's engineering services group designs and builds extruders,
conveyors, dryers and other parts and equipment, including replacement parts,
for pet food manufacturing facilities of the Company and third parties. The
engineering services group also includes a repair staff that is available to
service and repair machinery and equipment at the Company's production
facilities, giving the Company the ability to make timely repairs, thereby
minimizing downtime. The Company's in-house engineers generally design and
supervise plant construction, thereby reducing plant construction costs and
ensuring consistent manufacturing processes and quality control. The Company
believes that its engineering services group provides it services at a lower
cost and more efficiently than could be obtained from third parties.
SALES AND DISTRIBUTION
The Company's direct sales force seeks new accounts and works directly with
mass merchandisers, membership clubs, feed stores and specialty pet stores. The
Company also uses independent food brokers. The Company also generates new
business through the expansion of its product line and the development of new
marketing programs to existing customers.
Most of the Company's products are distributed utilizing its customers'
transportation networks. Several of the Company's largest customers utilize the
Company as a "just-in-time" supplier and maintain trailers at the Company's
manufacturing and distribution facilities. The trailers are loaded and shipped
either directly to individual stores or to customers' distribution centers.
Those customers that ship product directly from the Company's manufacturing
facilities to their retail outlets are able to reduce their inventory, freight
and handling costs by avoiding shipment to a customer distribution center. Those
customers that use their own transportation fleet are able to utilize their
trucks that would otherwise be empty to backhaul a load of pet food on return to
their distribution center or directly to another store. The ability of the
Company to ship directly to certain of its customers is a key consideration in
locating the Company's manufacturing facilities and is a significant competitive
advantage.
The Company's customers not utilizing their own fleet either arrange their
own transportation or have the Company arrange transportation on a contract
basis through common carriers. The Company does not own or operate any
transportation equipment.
The Company has developed capabilities that allow it to provide VMI service
to certain key customers. VMI allows the Company to communicate on-line with its
customers, evaluate their inventory status then place the order for the
customer. The Company utilizes VMI for both direct store and warehouse
deliveries. VMI's benefits include shorter lead-time, higher inventory turns,
and reduced out-of-stock positions.
CUSTOMERS
The Company manufactures store brands for over 350 customers. Store brand
customers include mass merchandisers such as Wal*Mart and Costco, specialty pet
stores such as PetsMart and grocery chains such as Safeway, Food Lion, Kroger,
Publix and Lucky's. In addition, the Company manufactures products for farm and
feed stores including Tractor Supply and Purina Mills and national branded pet
food companies such as Iams, Heinz, Kal-Kan and Nestle.
For the year ended December 31, 1997 on a pro forma basis, sales to
Wal*Mart and Sam's Club accounted for an aggregate of 39.0% of the Company's net
sales. A portion (3.8%) of the Company's sales to Wal*Mart and Sam's Club for
the year ended December 31, 1997 on a pro forma basis was attributable to
branded pet food products manufactured and distributed by the Company for
national pet food companies. The Company has been the primary supplier of
private label dry pet food products to Wal*Mart since 1970 and to Sam's Club
since 1990. The Company utilizes a computerized order and distribution system to
ship product directly to virtually all domestic Wal*Mart stores, a majority of
which are located within 250 miles of the Company's facilities. The direct ship
program, which reduces customer inventory, handling and warehouse expenses, is
enhanced by the number and strategic locations of the Company's facilities. The
Company also offers direct shipment programs and electronic data interchange
systems to its other larger customers.
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The loss of any significant customer or customers, who in the aggregate
represent a significant portion of the Company's sales, would have an adverse
impact on the Company's operating results and cash flows. See "Risk
Factors -- Dependence on Certain Customers."
COMPETITION
The pet food business is highly competitive. The companies that produce and
market the major national branded pet foods are national or international
conglomerates that are substantially larger than the Company and possess
significantly greater financial and marketing resources than the Company. The
store brand pet food products sold by the Company's customers compete for access
to shelf space with national branded products on the basis of quality and price.
National branded products compete principally through advertising to create
brand awareness and loyalty. The Company could experience price competition from
national branded manufacturers. To the extent that there is significant price
competition from the national branded manufacturers or such manufacturers
significantly increase their presence in the store brand segment, the Company's
operating results and cash flow could be adversely affected. The Company also
competes with regional branded manufacturers and other store brand
manufacturers.
The Company believes that it differentiates itself from the national
branded dry pet food manufacturers by offering comparable products at lower
prices giving retailers the opportunity for greater pet food category
profitability. The Company believes that it differentiates itself from other
store brand dry pet food manufacturers by offering higher quality products,
national production and distribution capabilities and a reputation for
increasing customers' store brand dry pet food sales.
RAW MATERIALS AND PACKAGING
The principal raw materials required for the Company's manufacturing
operations are bulk commodity grains and foodstocks, including corn, soybean
meal, wheat middlings, meat and bone meal, and corn gluten meal. The Company
generally purchases raw materials one to three months in advance. The Company
purchases the raw material requirements of each of its manufacturing facilities
locally due to the high freight cost of transporting bulk commodity products. As
a result, raw material costs may vary substantially among manufacturing
facilities due to local supply and demand and varying freight costs. Raw
materials are generally purchased from large national commodity companies and
local grain cooperatives. The Company does not maintain long-term contracts with
any of its suppliers; however, the Company believes that alternative sources of
supply are readily available.
The Company manages the price risk created by market fluctuations by
hedging portions of its primary commodity products purchases, principally
through exchange traded futures and options contracts that are designated as
hedges. The terms of such contracts are generally less than one year. Settlement
of positions are either through financial settlement with the exchanges or via
exchange for the physical commodity in which case the Company delivers the
contract against the acquisition of the physical commodity. The Company's
hedging policy does not permit speculative commodity trading. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
Packaging is a material component of the Company's raw material costs. The
Company has five main suppliers of packaging and believes that additional
suppliers of packaging are available. A majority of the Company's requirements
are not covered by long term contracts with any of its packaging suppliers.
The Company generally prices its pet food products based on the cost of raw
materials, packaging and certain other costs plus a conversion charge (which
includes a profit factor). The Company periodically adjusts prices based on
fluctuations in raw material and packaging costs. There can be no assurance that
future price increases will be obtained in the event of increased raw material
costs. See "Risk Factors -- Raw Materials and Packaging Costs" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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RESEARCH AND DEVELOPMENT
The Company's research and development department consists of a staff of
chemists and nutritionists, a central laboratory used for research and
development and laboratories at each of the Company's production facilities used
for quality control. The Company is continually developing new products. The
research and development department formulates the mix of raw materials and
vitamins and minerals and tests the nutritional content of new products.
Independent commercial kennels and catteries are used for comparison taste tests
to nationally branded products to assure digestibility and palatability as well
as to substantiate the nutritional content of new products.
Quality control is an integral part of the Company's research and
development. The Company maintains a program of testing raw materials to ensure
nutritional adequacy and to test for the presence of bacteria and other harmful
substances. The Company continuously tests pet food production at each of its
plants by analyzing the finished pet food product against formulas and
regulatory requirements. Packaging is inspected to ensure print quality, proper
dimensions and compliance with labeling regulations.
FACILITIES
The Company's corporate headquarters are located in Brentwood, Tennessee.
The Company owns combination manufacturing and distribution facilities in the
following states: one each in New York, Virginia, Indiana, Tennessee, South
Carolina, Georgia, Iowa, Oklahoma, Nebraska, Colorado and Texas; two each in
Ohio, Wisconsin, Minnesota, Missouri, Alabama and Kansas; and three each in
Pennsylvania and California. The Company also has a 50% joint interest in
facilities located in Butler, Missouri; Caldwell, Idaho; Hereford, Texas; and
Italy. The Company is in the process of building a state of the art facility in
Clinton, Oklahoma. The Company also owns a facility in Spain. In addition, the
Company owns or leases nine warehouses.
The manufacturing facilities are generally located in rural areas in
proximity to customers, raw materials and transportation networks, including
rail transportation. Management believes the number and strategic locations of
its manufacturing facilities enhance its position as the low cost producer by
reducing freight costs for raw material and finished goods and facilitating
direct store delivery programs. The rural locations also minimize land and labor
costs. Management believes it is able to construct new manufacturing facilities
at a lower cost than competitors due to the Company's engineering services group
which designs and constructs most of the necessary production equipment.
ENVIRONMENTAL, REGULATORY AND SAFETY MATTERS; PRODUCT RECALL
The Company is subject to a wide range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, the storage of petroleum substances and chemicals, the handling
and disposal of solid or hazardous wastes, and the remediation of contamination
arising from spills and releases. Failure to comply with these laws and
regulations may result in the assessment of administrative, civil, and even
criminal penalties as well as, in certain instances, the issuance of
injunctions. The Company has not been subject to any material environmental
liabilities and compliance of its business and operations with environmental
laws and regulations has not had a material adverse effect on the Company's
capital expenditures, earnings, or competitive position. Environmental laws and
regulations have changed substantially in recent years and the Company believes
that the trend of more expansive and more strict environmental legislation and
regulations will continue. While the Company believes it is in substantial
compliance with applicable environmental and worker safety laws, there can be no
assurance that additional costs for compliance will not be incurred in the
future or that such costs will not be material.
The Company's business involves the use of aboveground and underground
storage tanks. Under applicable laws and regulations, the Company is responsible
for the proper use, maintenance and abandonment of regulated storage tanks owned
or operated by it, and for remediation of subsurface soils and groundwater
impacted by releases from such existing or abandoned aboveground or underground
storage tanks. The Company is also subject to laws and regulations governing
remediation, recycling, or disposal. The Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), also known as the "Superfund"
law, and analogous state laws impose liability, without regard to fault or the
legality
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of the original conduct, on certain classes of persons who are considered
statutorily responsible for the release of a "hazardous substance" into the
environment. These persons include the owner or operator of a facility where a
hazardous substance release occurred and companies that disposed or arranged for
the disposal of hazardous substances. Persons who are or were responsible for
the releases of hazardous substances under CERCLA may be subject to joint,
several and retroactive liability for the costs of environmental response
measures. While there can be no assurance of the position that may be taken by
any environmental agency with respect to the Company's past operations in
connection with any CERCLA site, the Company has not received, nor does it
expect to receive, any notice that it is or will be designated a potentially
responsible party to any CERCLA site.
The Company currently owns or leases, and in connection with its
acquisition program will in the future own or lease, properties that in some
instances have been used for pet food manufacturing or feed mill operations for
many years. Although the Company has utilized operating and disposal practices
that were standard in the industry at the time, it is possible that
environmentally sensitive materials such as new and used oils, solvents,
petroleum substances, and raw chemical ingredients may have been spilled or
released on or under the properties owned or leased by the Company or on or
under other locations where such materials were taken for disposal. In addition,
many of these properties have been operated by third parties whose use, handling
and disposal of such environmentally sensitive materials or similar wastes were
not under the Company's control. These properties and the waste materials
spilled, released or otherwise found thereon may be subject to CERCLA, the
federal Resource Conservation and Recovery Act, and analogous state laws. Under
such laws, the Company could be required to remove or remediate previously
spilled or released waste materials (including such materials spilled or
released by prior owners or operators), or property contamination (including
groundwater contamination caused by prior owners or operators), or to perform
monitoring or remedial activities to prevent future contamination (including
releases from underground storage tanks or aboveground bulk petroleum storage
facilities). Moreover, some of the Company's manufacturing facilities are
located within industrial areas. In the past, nearby industries have suffered
releases of hazardous substances to the environment that are the subject of
CERCLA investigations. It is possible that these neighboring environmental
activities may have impacted some of the Company's properties. The Company has
not been advised, nor does it expect to be advised, by any environmental agency
that it is considered a potentially responsible party for the neighboring
environmental conditions, and the Company has no reason to believe that such
conditions would have a material adverse effect on the Company.
The manufacturing and marketing of the Company's products are subject to
regulation by federal regulatory agencies, including the Occupational Safety and
Health Administration ("OSHA"), the Food and Drug Administration ("FDA") and the
United States Department of Agriculture ("DOA"), and by various state and local
authorities. The FDA also regulates the labeling of the Company's products.
Substantial administrative, civil, and criminal penalties may be imposed for
violations of OSHA, FDA, and DOA regulations, and violations may be restrained
through injunction proceedings. The Company procures and maintains the necessary
permits and licenses in order to operate its facilities and considers itself to
be in material compliance with applicable OSHA, DOA, and FDA requirements.
On October 30, 1998 the Company initiated a product recall for certain dry
dog food manufactured at its Temple, Texas plant. The recall covers dry dog food
manufactured at its Temple plant between July 1 and August 31, 1998 and does not
apply to dry dog food manufactured at other plants or the Company's dry cat
food, biscuits, treats or canned products. The recall resulted from reported
sickness and death of dogs in the State of Texas. These conditions were
attributed to elevated aflatoxins in corn, which is an ingredient in dry dog
food. Aflatoxins are compounds produced from certain kinds of crop molds that
can be caused by extreme weather conditions such as drought and heat. The
Company has an extensive corn testing program for the detection of aflatoxins
and that program has been intensified since the problems were reported. The
Company maintains insurance against losses from illness or death of animals;
however, the cost of the product recall is not covered by insurance. The Company
estimates the cost of the product recall to be $3.0 million, net of insurance
recoveries, and has recorded a charge to non-recurring costs in the fourth
quarter of fiscal 1998.
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The Company believes that its operations are in material compliance with
environmental, safety and other regulatory requirements; however, there can be
no assurance that such requirements will not change in the future or that the
Company will not incur significant costs in the future (i) to comply with such
requirements, (ii) to effect future recalls or (iii) in connection with the
effect on the Company's business of such matters.
TRADEMARKS
Certain of the Company's brands are protected by trademark registrations in
the United States and in certain foreign markets. The Company believes that its
registered trademarks are adequate to protect such brand names.
EMPLOYEES
As of January 31, 1999, the Company had approximately 2,453 employees, of
which approximately 272 were management and administrative personnel and
approximately 2,181 were manufacturing personnel. Of this number, 462 employees
in five of the Company's plants are represented by labor unions. The collective
bargaining agreement with respect to the Birmingham, Alabama plant covers 109
employees and expires on January 20, 2001. The collective bargaining agreement
with the Joplin, Missouri plant covers 220 employees and expires on January 31,
2003. The collective bargaining agreement with the Muscatine, Iowa plant covers
53 employees and expires in December 1999. The collective bargaining agreement
with respect to the NuPet plant in Ripon, California covers 27 employees and
expires in October 2000, subject to renewal for subsequent one year terms. The
collective bargaining agreement with respect to the AGP plant in Lincoln,
Nebraska covers 53 employees and expires in July 1999. The Company considers its
relations with its employees to be satisfactory.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to its business that management
believes would not have a material adverse effect on its financial condition or
results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and titles of the current
directors of the Company and executive officers of the Company and Doane. The
Board of Directors is currently composed of eight members, and it is expected to
be expanded to ten members after the consummation of the Offering. The Board of
Directors is expected to be divided into three classes in connection with the
consummation of the Offering, with the terms of the directors of each class
expiring at the Company's Annual Meeting of Stockholders as follows: 2000 (Class
I), 2001 (Class II) and 2002 (Class III). Certain of the Company's directors are
designated pursuant to an Investors' Agreement. See "Certain
Transactions -- Investors' Agreement." Officers serve at the discretion of the
Board of Directors. For information regarding employment agreements with the
executive officers of the Company and Doane, see "-- Employment and Termination
Agreements."
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
George B. Kelly(1).......... 49 Chairman of the Board and Director
Douglas J. Cahill........... 39 Chief Executive Officer, President and Director
Thomas R. Heidenthal........ 47 Senior Vice President and Chief Financial Officer
F. Donald Cowan, Jr......... 53 Senior Vice President, Business Development and
Quality of Doane
Richard A. Hannasch......... 45 Vice President, Fulfillment of Doane
Richard D. Wohlschlaeger.... 46 Vice President, Sales and Marketing of Doane
David L. Horton............. 38 Vice President, Manufacturing and Engineering of
Doane
Terry W. Bechtel............ 56 Vice President, Co-Manufacturing (Sales) of Doane
Charles W. Dunleavy......... 54 Vice President, Finance of Doane
Joseph J. Meyers............ 37 Vice President and Chief Information Officer of
Doane
Peter T. Grauer(1).......... 53 Director
M. Walid Mansur(2).......... 39 Director
Bob L. Robinson............. 61 Director
Jeffrey C. Walker(1)(2)..... 43 Director
Ray Chung(2)................ 49 Director
Stephen C. Sherrill......... 45 Director
</TABLE>
- ------------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Set forth below is a brief description of the business experience of the
directors and executive officers of the Company and Doane.
George B. Kelly has been Chairman of the Board of the Company since June
1995. Mr. Kelly has been the Chairman of the Board of SCI since July 1990. Mr.
Kelly currently is a director of Alegis Group, Inc., Billboard Acquisition
Company, LLC, Independent Gas Company Holdings and Sevenday International, Inc.
Douglas J. Cahill became Chief Operating Officer of the Company in
September 1997, began serving as President of the Company in January 1998 and
began serving as Chief Executive Officer of the Company in July 1998. He has
been a director of the Company since September 1998. Prior to joining the
Company, Mr. Cahill served as President of Olin Corporation's Winchester
Division, Corporate Vice President of Olin
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Corporation and held various other positions with Olin Corporation during the
period from July 1984 through September 1997.
Thomas R. Heidenthal became Senior Vice President and Chief Financial
Officer of the Company in March 1997. Prior to joining the Company, Mr.
Heidenthal served as Vice President Finance and Administration of TA
Instruments, Inc. from August 1990 to February 1997.
F. Donald Cowan, Jr. began serving as Senior Vice President, Business
Development and Quality of Doane in January 1999. Before joining the Company in
August 1998 as Senior Vice President, Operations of Doane, he served as Vice
President of Operations for Windy Hill. Prior to joining Windy Hill in 1995, Mr.
Cowan was Vice President of Operations for Martha White Foods, Inc. From 1987 to
1995, Mr. Cowan held various positions at Martha White Foods, Inc. including
Vice President of Operations.
Richard A. Hannasch joined the Company in October 1996, has served as Vice
President, Fulfillment of Doane since January 1999 and served as Vice President,
Strategic Planning of Doane from June 1998 to January 1999 and Vice President of
Marketing of Doane from November 1997 to January 1999. Prior to joining the
Company, Mr. Hannasch served as Director, Business Development for Ralston
Purina Company's International Division and held various other positions at
Ralston Purina Company from September 1978 to October 1996.
Richard D. Wohlschlaeger joined the Company in April 1993, has served as
Vice President, Sales and Marketing of Doane since January 1999 and served as
Vice President, Customer Development of Doane from November 1997 to January
1999. Prior to joining the Company, Mr. Wohlschlaeger held various other
positions at Ralston Purina Company from March 1976 to April 1993, including
Group Director, Trade Marketing and Eastern Division Sales Director.
David L. Horton joined the Company in November 1997, has served as Vice
President, Manufacturing and Engineering of Doane since January 1999 and served
as Vice President, Fulfillment of Doane from November 1997 to January 1999.
Prior to joining the Company, Mr. Horton served as Vice President of
Manufacturing and Engineering of Olin Corporation's Winchester Division and held
various other positions with Olin Corporation from January 1984 to November
1997.
Terry W. Bechtel has served as Vice President, Co-Manufacturing (Sales) of
Doane since November 1997. Mr. Bechtel joined the Company in June 1973 and
served as Vice President, Administration of Doane from March 1990 until October
1997, and as Vice President, Sales of Doane from September 1976 through February
1990.
Charles W. Dunleavy served as Vice President of Finance for Windy Hill
before joining the Company in August 1998 as Vice President, Finance of Doane.
Prior to joining Windy Hill in September 1997, Mr. Dunleavy was Vice President
of Operations for Hudson Technologies, Inc. from 1993 to 1997. From 1989 to
1993, Mr. Dunleavy was the Managing Partner of the Detroit office of BDO
Seidman, LLP, a public accounting firm.
Joseph J. Meyers became Chief Information Officer of Doane in August 1998
and began serving as Vice President of Doane in January 1999. Prior to joining
us, Mr. Meyers held various information technology positions at Realtime
Consulting, PricewaterhouseCoopers and Olin Corporation from 1992 to 1998.
Peter T. Grauer has been a director of the Company since October 5, 1995
and has been a Managing Director of DLJ Merchant Banking, Inc. since September
1992. Mr. Grauer is a director of Total Renal Care Holdings Inc., Decision One
Holdings, Inc., Nebco Evans Holdings, Inc., Bloomberg L.P., Thermadyne Holdings,
LLC and Formica Corporation.
M. Walid Mansur has been a director of the Company since October 5, 1995.
Mr. Mansur has served as the president of Drafil Investments Inc. since 1990 and
has been a managing director of Aspen Venture Partners since 1993.
Bob L. Robinson joined the Company in August 1960 and served as President
and Chief Executive Officer of the Company until his resignation effective June
30, 1998. Mr. Robinson became a director of the
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Company on October 5, 1995. Prior to being named President and Chief Executive
Officer, Mr. Robinson served as Executive Vice President from January 1976
through February 1992.
Jeffrey C. Walker has been a director of the Company since April 1996. Mr.
Walker has been Managing General Partner of Chase Capital Partners, the private
equity investment arm of The Chase Manhattan Corporation, since 1988, and a
General Partner thereof since 1984. Mr. Walker is a director of the Monet Group,
Inc., 800-Flowers, Guitar Center, House of Blues and Domaine.
Ray Chung became a director of the Company in August 1998. He is a partner
in Dartford Partnership, L.L.C. ("Dartford") and an Executive Vice President of
Aurora Foods Inc. Mr. Chung previously served as Executive Vice President and a
director of Windy Hill. Mr. Chung served as a director, Executive Vice President
and Chief Financial Officer of Windmill Corporation from 1989 to 1995 and as a
director, Executive Vice President and Chief Financial Officer of Wyndham Foods
Inc. from 1985 to 1990. From May 1984 to September 1985, Mr. Chung served as
Vice President -- Finance for the Kendall Company. Between 1981 and 1984, Mr.
Chung served as Vice President -- Finance for Riviana Foods, Inc. Both the
Kendall Company and Riviana Foods, Inc. were subsidiaries of the
Colgate-Palmolive Company at the time.
Stephen C. Sherrill became a director of the Company in August 1998. He has
been a Principal of Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS") since its
formation in 1995. Mr. Sherrill previously served as a director of Windy Hill.
Mr. Sherrill was an officer of Citicorp Venture Capital from 1983 through 1994.
Previously, he was an associate at the New York law firm of Paul, Weiss,
Rifkind, Wharton & Garrison. Mr. Sherrill is a director of Galey & Lord, Inc.,
Jitney-Jungle Stores of America, Inc., Restaurant Associates Corp., and Bloch &
Guggenheimer/Burns & Ricker, Inc.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief
Executive Officer of the Company and certain other persons serving as executive
officers for the fiscal year ended December 31, 1998 who earned $100,000 or more
in combined salary and bonus during such year (collectively, the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION(1) UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL ---------------------- OPTIONS/SARS ALL OTHER
AT THE COMPANY YEAR SALARY BONUS (#) COMPENSATION
<S> <C> <C> <C> <C> <C>
Douglas J. Cahill(2)........ 1998 $ 327,082 (3) 100,000 $1,278,538(4)(5)(7)(11)
President and Chief 1997 91,667 $100,000 400,000 305,717(6)(7)
Executive Officer
Thomas R. Heidenthal........ 1998 199,583 (3) -- 303,198(4)(5)
Senior Vice President and 1997 145,833 93,000 200,000 47,023(6)
Chief Financial Officer
Bob L. Robinson(8).......... 1998 183,000 (3) -- 299,300(9)(10)
1997 366,000 569,294 -- 38,712(10)
1996 366,000 420,289 500,000 37,052(10)
Richard D. Wohlschlaeger.... 1998 152,361 (3) 38,000 161,282(4)(5)
Vice President, Sales 1997 116,616 40,000 -- 794
and Marketing 1996 109,853 22,380 38,000 --
Richard A. Hannasch......... 1998 147,917 (3) -- 186,327(4)(5)
Vice President, 1997 108,627 40,000 -- 794
Fulfillment
1996 22,222 -- 72,000 30,000(7)
David L. Horton............. 1998 154,583 (3) 60,000 154,711(4)(5)
Vice President, 1997 14,071 -- -- 80,794(7)
Manufacturing
and Engineering
</TABLE>
54
<PAGE> 56
- ---------------
(1) All amounts shown were paid by Doane, the Company's operating subsidiary.
Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus reported for each executive officer.
(2) Mr. Cahill served as the Company's Chief Operating Officer from September
1997 to January 1998, became the Company's President in January 1998 and
became the Company's Chief Executive Officer in July 1998. Annual
compensation amounts for 1997 represent compensation for the portion of
1997 of which Mr. Cahill was employed by the Company.
(3) A determination of the amount of bonus earned for 1998 cannot be made until
the Company's audited financial statements as of and for December 31, 1998
have been finalized. However, pursuant to Mr. Robinson's retirement
agreement, Doane will pay Mr. Robinson an annual bonus for 1998 in the
amount of $800,000, which bonus will be in lieu of any bonus he would be
entitled to under the terms of his employment agreement.
(4) Includes bonuses received in connection with the Windy Hill Acquisition as
follows: Mr. Cahill -- $750,000; Mr. Heidenthal -- $250,000; Mr.
Wohlschlaeger -- $100,000; Mr. Hannasch -- $150,000; and Mr.
Horton -- $100,000.
(5) Includes relocation expenses and gross up for taxes as follows: Mr.
Cahill -- $94,010; Mr. Heidenthal -- $43,670; Mr. Wohlschlaeger -- $61,282;
Mr. Hannasch -- $26,798; and Mr. Horton -- $45,183.
(6) Includes relocation expenses and gross up for taxes of $128,335 for Mr.
Cahill and $44,641 for Mr. Heidenthal.
(7) Includes sign-on bonuses as follows: Mr. Cahill -- $175,000 (in each of
1997 and 1998); Mr. Hannasch -- $30,000; and Mr. Horton -- $80,000.
(8) Mr. Robinson served as the Company's Chief Executive Officer until his
resignation effective June 30, 1998. Upon his resignation, options for
202,000 shares of Common Stock were terminated. See "-- Stock Option
Exercises" and "-- Employment and Termination Agreements."
(9) Includes compensation of $183,000 under Mr. Robinson's retirement agreement
dated June 30, 1998, supplemental retirement benefits of $60,745 under Mr.
Robinson's employment agreement and amounts vested under the Company's
Deferred Compensation Plan set forth in footnote 10 below.
(10) Includes the following amounts vested under the Company's Deferred
Compensation Plan: 1998 -- $53,950; 1997 -- $34,860; and 1996 -- $33,200.
(11) Includes compensation of $250,000, which is the difference between the fair
market value and the exercise price of options for 100,000 shares of Common
Stock that Mr. Cahill received and exercised in fiscal 1998.
EMPLOYMENT AND RETIREMENT AGREEMENTS
The Company entered into employment agreements with Messrs. Cahill,
Heidenthal, Wohlschlaeger, Hannasch and Horton, effective January 1, 1998. The
terms of such employment agreements are substantially similar except for salary
and bonus amounts. Mr. Cahill's current base salary is $400,000 with a base
bonus of 100% of base salary. Mr. Heidenthal's current base salary is $225,000
with a base bonus of 70% of base salary and Messrs. Wohlschlaeger, Hannasch and
Horton's current base salary is $175,000 with a base bonus of 50% of base
salary. Earnings targets are established annually by the Company's Board of
Directors under the Company's Annual Bonus Program. The base bonus is linked to
achievement of targeted earnings. There is no cap on additional bonuses in such
employment agreements. Each employment agreement provides for a term of two to
three years with automatic one year extensions. Such agreements are subject to
early termination by the Company for cause without severance. The employment
agreements for Messrs. Wohlschlaeger, Hannasch and Horton provide (i) that
terminations without cause entitle the executive to receive severance payments
equal to one year's base salary and bonus and (ii) for a one year
non-competition agreement commencing upon termination for any reason. The
employment agreements of Messrs. Heidenthal and Cahill contain similar
provisions except that the severance and non-competition terms are two years and
three years,
55
<PAGE> 57
respectively. Pursuant to his employment agreement Mr. Cahill was paid a sign-on
bonus of $175,000 and an additional $175,000 at the first anniversary of his
date of hire.
The Company entered into an Early Retirement Agreement and Release (the
"Retirement Agreement") with Mr. Robinson effective June 30, 1998 pursuant to
which Mr. Robinson resigned from employment with the Company and Doane. Pursuant
to the Retirement Agreement, the Company paid Mr. Robinson his base salary, at
the rate in effect on the Retirement Date (June 30, 1998), through December 31,
1998. The Company will also pay Mr. Robinson an annual bonus for 1998 in the
amount of $800,000, which bonus will be in lieu of any bonus Mr. Robinson would
be entitled to receive under the terms of his employment agreement with the
Company effective as of September 1, 1994. Effective as of the Retirement Date,
options for 72,000 shares of Common Stock issued under the terms of two stock
option agreements dated November 1, 1996 became fully vested.
COMPENSATION OF DIRECTORS
No compensation has been paid by the Company to its directors prior to the
Offering. Upon completion of the Offering, directors who are not employees of
the Company will receive directors fees to be determined by the Board of
Directors.
Certain directors of the Company are partners or directors of entities that
received fees in connection with the Windy Hill Acquisition, the Exchange Offer,
the tender offer for the Senior Notes and the repayment of bridge financing
incurred in connection with the tender offer for the Windy Hill Notes and will
receive underwriting discounts and commissions in connection with this Offering.
See "Certain Transactions" and "Principal and Selling Stockholders."
COMMITTEES
The Company's Board of Directors has recently established Audit and
Compensation Committees. The Audit Committee consists of Messrs. Mansur, Chung
and Walker, each of whom is a non-employee director of the Company. The Audit
Committee meets separately with representatives of the Company's independent
auditors and with representatives of senior management in performing its
functions. The Audit Committee reviews the general scope of audit coverages, the
fees charged by the independent auditors, matters relating to the Company's
internal control systems, and other matters related to audit functions.
The Compensation Committee consists of Messrs. Grauer, Kelly and Walker,
each of whom is a non-employee director of the Company. The Compensation
Committee administers the Company's Stock Option Plan, and in this capacity
makes all option grants or awards to Company employees, including executive
officers, under the plan. In addition, the Compensation Committee is responsible
for making recommendations to the Board of Directors with respect to the
compensation of the Company's Chief Executive Officer and its other executive
officers, and is responsible for the establishment of policies dealing with
various compensation and employee benefit matters for the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For transactions with Compensation Committee members Grauer and Kelly, see
"Certain Transactions -- Transactions with DLJMB and its Affiliates" and
"-- Transactions with SCI."
STOCK OPTION AND STOCK PURCHASE PLANS
Effective as of November 1, 1996, the Company adopted the Company's 1996
Management Stock Purchase Plan (the "1996 Management Stock Purchase Plan") and
the Company's 1996 Stock Option Plan, as amended (the "1996 Stock Option Plan").
The Company plans to adopt the 1999 Stock Option Plan (the "1999 Stock Option
Plan") in connection with the Offering. The Company's stock option plans are
intended to encourage certain employees of the Company to develop a sense of
proprietorship and personal involvement in the development and financial success
of the Company.
56
<PAGE> 58
Effective as of June 19, 1997, the Company adopted the 1997 Management
Stock Purchase Plan (the "1997 Management Stock Purchase Plan"). Pursuant to the
1996 Management Stock Purchase Plan and the 1997 Management Stock Purchase Plan,
500,000 shares of Common Stock of the Company were sold for $2.50 per share to
certain key employees, including sales of 200,000 shares to Mr. Heidenthal,
46,000 shares to Mr. Wohlschlaeger and 46,000 shares to Mr. Hannasch.
STOCK OPTION GRANTS
The following table sets forth, as of December 31, 1998, certain
information as to options granted in 1998 under the 1996 Stock Option Plan to
the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
------------------------------------------------------- -----------------
NUMBER OF % OF TOTAL EXERCISE
SECURITIES OPTIONS PRICE
UNDERLYING OPTIONS GRANTED TO PER EXPIRATION
NAME GRANTED(#) EMPLOYEES SHARE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Douglas J. Cahill........... 100,000 27.3% $2.50 1999(1) -- --
Richard D. Wohlschlaeger.... 38,000 10.4 5.00 2008 119,320 302,860
David L. Horton............. 60,000 16.4 5.00 2008 188,400 478,200
</TABLE>
- ---------------
(1) Mr. Cahill was issued 100,000 options on May 1, 1998 with a term of one
year, all of which he exercised on June 1, 1998.
STOCK OPTION EXERCISES
The following table sets forth certain information with respect to
exercises by the Company's Named Executive Officers of stock options during
fiscal year 1998 and the value of all unexercised employee stock options as of
December 31, 1998 held by such officers.
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS(1) IN-THE-MONEY OPTIONS(2)
ACQUIRED --------------------------- ---------------------------
NAME ON EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C>
Douglas J. Cahill................. 200,000 -- 300,000 $ -- $2,100,000
Thomas R. Heidenthal.............. -- 31,000 169,000 294,500 1,605,500
Richard D. Wohlschlaeger.......... -- 11,972 64,028 113,734 513,266
Richard A. Hannasch............... -- 13,720 58,280 119,490 494,510
David L. Horton................... -- 0 60,000 -- 420,000
Bob L. Robinson(3)................ 298,000 0 0 -- --
</TABLE>
- ---------------
(1) Reflects status of unexercised options as of December 31, 1997. A
determination of options that became exercisable as of December 31, 1998
cannot be made until the Company's audited financial statements as of and
for December 31, 1998 have been finalized. However, such numbers do reflect
Mr. Cahill's exercise of options for 100,000 shares in 1998 and Mr.
Robinson's exercise of options for 298,000 shares in 1998, as well as the
termination of his remaining options for 202,000 shares. In addition, Mr.
Cahill received options for 100,000 additional shares during 1998 and
exercised all 100,000 of such options during 1998.
(2) The value of unexercised in-the-money options is based upon the difference
between the exercise price and an assumed initial public offering price of
$12.00 per share.
(3) Effective as of Mr. Robinson's retirement on June 30, 1998, options for
72,000 shares of Common Stock issued under the terms of two stock option
agreements dated November 1, 1996 became fully vested and his remaining
unexercised options for 202,000 shares were terminated.
57
<PAGE> 59
OTHER COMPENSATORY ARRANGEMENTS
Employee Retirement Plan. On May 31, 1998, the Company terminated its
Employee Retirement Plan (the "Retirement Plan"). The Retirement Plan was a
non-contributory, tax qualified plan that provided retirement benefits based on
the employee's tenure with the Company and average monthly compensation. The
Company is currently structuring a plan for liquidating the Retirement Plan and
anticipates providing a lump sum payment that former plan participants may elect
to contribute to the newly established Doane Products Company Savings and
Investment Plan (see "-- 401(k) Plans") or to use to purchase annuities.
401(k) Plans. As of June 1, 1998 the Company adopted the Doane Products
Company Savings and Investment Plan for eligible employees not covered by
collective bargaining arrangements and the Doane Products Company Savings and
Investment Plan -- Union Plan for eligible union employees at the Joplin,
Missouri plant. The plans are intended to be qualified retirement plans under
the Internal Revenue Code. Both plans permit employee contributions between 1%
and 15% of pre-tax earnings subject to annual dollar limits set by the IRS, an
annual employer profit sharing contribution of $400 for each eligible
participant and a variety of investment options. The Doane Products Company
Savings and Investment Plan also includes an employer matching contribution in
an amount equal to 50% of participant contribution, up to 6% of compensation.
Vesting for the employer match is 25% per year for each full year of service.
Windy Hill adopted the Windy Hill Pet Food Company, Inc. Profit Sharing and
Savings Plan on March 1, 1995, as amended. The plan is intended to be a
qualified plan under the Internal Revenue Code. It permits employee
contributions from 1% to 15% of pre-tax earnings subject to annual dollar limits
set by the IRS. Of this amount, the Company will match 50% of the first 6% of
the employee contribution. In addition, the plan provides for contribution to
participant accounts of amounts equal to 2 1/2% of the employee's compensation.
Non-Qualified Salary Continuation Agreements. The Company has entered into
agreements with all Named Executive Officers to provide benefits to such
employees or their beneficiaries in the event of the death of the employee or
retirement by the employee at age 65 or on or after age 55 with 20 years of
service with the Company. If the employee remains employed until age 65, the
employee (or the employee's beneficiary) will receive an annual retirement
benefit payable for 10 years in accordance with a specified formula. If the
employee terminates employment before age 65 but after age 55 and with 10 years
of service with the Company, the employee's retirement benefit will be reduced
in accordance with percentages specified in the agreement, depending upon the
employee's age at retirement ranging from 100% at age 65 to 55.8% at age 55.
58
<PAGE> 60
CERTAIN TRANSACTIONS
INVESTORS' AGREEMENT
In connection with the Windy Hill Acquisition, the Company, Doane, Summit,
SCI, CMIHI and an affiliate thereof, DLJMB and certain of its affiliates, all of
the stockholders of Windy Hill and certain other shareholders of the Company
(collectively, the "Stockholders") entered into the Investors' Agreement. The
Investors' Agreement contains provisions concerning the governance of the
Company and Doane, restrictions on the transferability of the securities of the
Company and Doane acquired by the Stockholders and registration rights for such
securities. The governance provisions of the Investors' Agreement provide that
the Board of Directors of the Company will consist of eight members, of whom one
will be designated by DLJMB (the "DLJMB Designee"), two will be designated by
SCI on behalf of the Summit-Investors (as defined in the Investors' Agreement)
(each such designee, a "Summit-Investor Designee"), one will be designated by
CMIHI (the "Chase Designee"), one will be designated by Windy Hill Pet Food
Company L.L.C. on behalf of the Windy Hill Investors (as defined in the
Investors' Agreement), one will be designated by BRS on behalf of the Windy Hill
Investors (each of the two foregoing designees, a "Windy Hill Designee"), one
will be the Chief Executive Officer of the Company and one will be designated by
the mutual agreement of the DLJMB Designee (so long as a DLJMB Designee then
serves on the Board) and George B. Kelly (so long as Mr. Kelly is one of the two
Summit-Investor Designees) or, if Mr. Kelly is not then one of the two Summit-
Investor Designees, by any of the Summit-Investor Designees. At any time the
number of shares of Common Stock owned of record by the Summit-Investors is less
than 50% of the number of shares of Common Stock owned as of August 3, 1998 (in
each case, disregarding stock splits, recapitalizations and similar adjustments
in number of shares and stock dividends), the Summit-Investors will only have
the right to designate one individual. At any time the number of shares of
Common Stock owned of record by the Windy Hill Investors is less than 50% of the
number of shares of Common Stock owned as of August 3, 1998 (in each case,
disregarding stock splits, recapitalizations and similar adjustments in number
of shares and stock dividends), the Windy Hill Investors will only have the
right to designate one individual. Notwithstanding the foregoing, at any time
any of DLJMB's, CMIHI's, the Summit-Investors' or the Windy Hill Investors'
respective Percentage Ownership (as defined in the Investors' Agreement) is less
than 5%, such person or group shall not have the further right to designate any
individual to the Board pursuant to the Investors' Agreement. In addition, until
the earlier of one year after the date of the Investors' Agreement and the date
the Windy Hill Investors no longer have the right to designate any individual to
the Board, Windy Hill Pet Food Company L.L.C. will have the right to designate
one Board observer. The Investors' Agreement also provides that the board of
directors of Doane will be comprised of the individuals who are serving as
directors on the Company's Board.
The Investor's Agreement also provides for certain registration rights for
the benefit of the Stockholders. The Company shall not be obligated to effect
more than three demand registrations for the Summit-Investors, collectively,
three demand registrations for the DLJ Entities (as defined in the Investors'
Agreement), collectively, three demand registrations for the Windy Hill
Investors, collectively, and three demand registrations for CMIHI. Following the
date the Company is eligible to use Form S-2 or S-3 for registration of its
securities, demand registrations on Form S-2 or S-3 for the DLJ Entities, CMIHI,
the Summit-Investors and the Windy Hill Investors will be unlimited. The
Stockholders also have piggy-back registration rights if the Company proposes to
register any of its Common Stock or warrants, or if Doane proposes to register
any of its preferred stock under the Securities Act.
TRANSACTIONS WITH DLJMB AND ITS AFFILIATES
In 1995, DLJSC entered into a financial advisory agreement with the Company
and Doane. The financial advisory agreement provides for an annual retainer fee
of $100,000 plus reimbursable expenses; such agreement will terminate upon
consummation of the Offering.
In connection with the 1995 Acquisition, DLJMB purchased 1,000,000 shares
of preferred stock and warrants to purchase 4,514,928 shares of Common Stock for
an aggregate purchase price of $25 million. In December 1997, DLJMB and certain
of its affiliates sold their shares of preferred stock to DLJSC, who
59
<PAGE> 61
thereupon sold such shares to qualified institutional buyers (as defined in Rule
144A under the Securities Act). DLJMB will receive proceeds from the Offering of
$19.4 million as a Selling Stockholder in the Offering (assuming an initial
public offering price of $12.00 per share). DLJMB is also a party to the
Investors' Agreement. See "-- Investors' Agreement." Pursuant to the Investors'
Agreement, DLJMB has designated Mr. Grauer to the Boards of Directors of the
Company and Doane.
DLJMB is an affiliate of DLJSC and DLJ Capital Funding, Inc. ("DLJ
Capital"). DLJSC and DLJ Capital and their affiliates perform various investment
banking and commercial banking services from time to time for the Company. DLJ
Capital serves as an agent bank and a lender to the Company under the New Credit
Facility. DLJSC will serve as lead manager in connection with this Offering and
served as financial advisor to the Company in connection with the Windy Hill
Acquisition. DLJSC also served as dealer manager in connection with the tender
offer for the Senior Notes and for the Exchange Offer. DLJ Bridge Finance, Inc.,
an affiliate of DLJSC, also provided, together with an affiliate of CMIHI, a
bridge loan to the Company in connection with the Refinancing Transactions.
DLJSC received $1.0 million in connection with the Windy Hill Acquisition, and
DLJSC and DLJ Capital received approximately $3.8 million in connection with the
Refinancing Transactions. DLJSC, DLJ Capital and their affiliates have received,
and will receive, customary compensation for acting in the foregoing capacities.
TRANSACTIONS WITH SCI
SCI is the general partner of Summit, which is the owner of 2,880,000
shares of Common Stock of the Company. In addition to certain payments of fees
and reimbursements for out-of-pocket expenses in connection with the 1995
Acquisition, SCI has entered into a management advisory agreement with Doane for
a term of five years or until such time as the Company consummates an initial
public offering of its Common Stock resulting in the receipt by the Company of
at least $35 million in gross proceeds, whichever is shorter, and pursuant to
which Doane will pay SCI an annual fee of $200,000 plus reimbursable expenses;
such agreement will terminate upon consummation of the Offering.
SCI received fees of $2.0 million in connection with the Windy Hill
Acquisition. SCI and Summit are also parties to the Investors' Agreement.
Pursuant to the Investors' Agreement, SCI has designated Messrs. Kelly and
Mansur to the Boards of Directors of the Company and Doane. See "-- Investors'
Agreement."
TRANSACTIONS WITH CMIHI AND AFFILIATES
CMIHI is an affiliate of Chase Securities Inc. ("CSI") and The Chase
Manhattan Bank ("Chase"). CMIHI and an affiliate of CMIHI own (i) 200,000 shares
of preferred stock that will be repurchased by the Company in connection with
the Offering, (ii) 428,000 shares of Class A Common Stock and 2,332,000 shares
of Class B (non-voting) Common Stock and (iii) warrants to purchase 902,984
shares of Common Stock. CMIHI and CSI received fees of $1,000,000 and $500,000,
respectively, in connection with the Windy Hill Acquisition. CMIHI will receive
proceeds from the Offering through the repurchase of the preferred stock
(approximately $8.5 million (based upon the liquidation value of such preferred
stock as of September 30, 1998)). In addition, CMIHI is a party to the
Investors' Agreement. Pursuant to the Investors' Agreement, CMIHI has designated
Jeffrey C. Walker, the Managing General Partner of Chase Capital Partners, which
is an affiliate of CMIHI, to the Boards of Directors of the Company and Doane.
See "-- Investors' Agreement."
CSI, Chase and their affiliates perform various investment banking and
commercial banking services from time to time for the Company and its
affiliates. Chase serves as an agent bank and a lender to the Company under the
New Credit Facility. Chase also acted as agent bank and a lender under Windy
Hill's prior credit facility, which was repaid in connection with the
Refinancing Transactions. CSI acted as an initial purchaser of the May 1997
offering of the Windy Hill Notes and is an Underwriter of this Offering. CSI
acted as financial advisor to Windy Hill in connection with the Windy Hill
Acquisition. CSI also acted as dealer manager in connection with the Exchange
Offer. An affiliate of CMIHI also provided, together with an affiliate of DLJSC,
a bridge loan to the Company in connection with the Refinancing Transactions.
CSI,
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<PAGE> 62
Chase and their affiliates received approximately $3.9 million in connection
with the Refinancing Transactions. CSI, Chase and their affiliates have
received, and will receive, customary compensation for acting in the foregoing
capacities.
TRANSACTIONS WITH M. WALID MANSUR
M. Walid Mansur, a director of the Company and Doane, was paid $500,000 for
services rendered in connection with the 1995 Acquisition and related
financings. Mr. Mansur owns 1,400,000 shares of Common Stock, Mr. Mansur's
spouse, Laura Hawkins Mansur, owns 1,612,000 shares of the Common Stock and
300,000 shares of Common Stock are held in trust for their children.
OTHER TRANSACTIONS
In addition to the fees paid to CMIHI, DLJSC and SCI in connection with the
Windy Hill Acquisition, Dartford received a fee of $3.0 million and BRS received
a fee of $1.0 million. BRS also was paid $500,000 at the closing of the Windy
Hill Acquisition, representing a deferred transaction fee earned by BRS in
connection with Windy Hill's acquisition of certain assets from Heinz Inc. in
April 1996.
WARRANT EXERCISES
At or prior to the closing of the Offering, certain Selling Stockholders
will sell warrants to purchase 1,616,999 shares of Common Stock to the
Underwriters. The warrants purchased by the Underwriters from such Selling
Stockholders will be exercised for a number of shares of Common Stock equal to
the number of shares underlying the warrants reduced by the product of the
number of shares underlying such warrants and a fraction, the numerator of which
is $0.0025 per share and the denominator of which is the initial public offering
price (or 1,616,668 shares assuming an initial public offering price of $12.00
per share). All such shares of Common Stock obtained by the Underwriters as a
result of the exercise of the warrants will be offered by the Underwriters in
the Offering. Unless the context otherwise requires, shares of Common Stock sold
in the Offering by the Underwriters as a result of the exercise of warrants
purchased from the Selling Stockholders are treated as if the corresponding
number of shares of Common Stock were sold by the Selling Stockholders.
The Company believes that the terms of the transactions described above
were no less favorable to the Company than could have been obtained from
unaffiliated parties.
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<PAGE> 63
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 31, 1999, and as adjusted
to reflect the sale of the Common Stock offered hereby, by (i) each director,
(ii) each Named Executive Officer, (iii) each person who is known by the Company
to own beneficially 5% or more of the Common Stock, (iv) all parties to the
Investors' Agreement as a group, (v) each Selling Stockholder and (vi) all
directors and executive officers as a group. Unless otherwise indicated, each
person has sole voting and dispositive power over the shares indicated as owned
by such person. Certain of the Company's principal stockholders are parties to
the Investors' Agreement. See "Certain Transactions -- the Investors'
Agreement."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES TO BE SOLD OWNED AFTER THE
OFFERING IN THE OFFERING OFFERING
-------------------- ----------------- --------------------
NAME(1) NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Summit(2)............................... 2,880,000 15.6% -- 2,880,000 8.9%
DLJMB(3)................................ 4,514,928 19.7 1,616,668 2,897,929 8.2
CMIHI(4)................................ 3,662,984 19.0 -- 3,662,984 11.0
BRS(7) ................................. 2,885,372 15.7 1,200,000 1,685,372 5.2
Dartford(5)............................. 2,348,690 12.8 550,000 1,798,690 5.5
Laura Hawkins Mansur(6)................. 3,312,000 18.0 650,000 2,662,000 8.2
Peter T. Grauer(3)...................... 4,514,928 19.7 1,616,668 2,897,929 8.2
George B. Kelly(2)...................... 2,880,000 15.6 -- 2,880,000 8.9
Jeffrey C. Walker(4).................... 3,662,984 19.0 -- 3,662,984 11.0
Ray Chung(5)............................ 2,348,690 12.8 550,000 1,798,690 5.5
Stephen C. Sherrill(7).................. 2,885,372 15.7 1,200,000 1,685,372 5.2
M. Walid Mansur(6)...................... 3,312,000 18.0 650,000 2,662,000 8.2
Bob L. Robinson......................... 1,098,000 6.0 150,000 948,000 2.9
Douglas J. Cahill....................... 200,000 1.1 -- 200,000 *
Thomas R. Heidenthal(8)................. 231,000 1.3 -- 231,000 *
Richard D. Wohlschlaeger(8)............. 72,972 * -- 72,972 *
Richard A. Hannasch(8).................. 74,720 * -- 74,720 *
David L. Horton......................... 15,000 * -- 15,000 *
All parties to the Investors' Agreement
as a group............................ 23,175,040 96.8 4,166,668 19,008,041 52.2
All executive officers and directors as
a group (15 persons).................. 21,666,617 90.6 4,166,668 17,499,618 48.0
</TABLE>
- ------------------------------
* Represents less than one percent.
(1) The address of Summit/DPC Partners, L.P. and Mr. Kelly is 8 Greenway Plaza,
Suite 714, Houston, Texas 77046. The address of DLJMB and Mr. Grauer is 277
Park Avenue, New York, New York 10172. The address of CMIHI and Mr. Walker
is 380 Madison Avenue, 12th floor, New York, New York 10017. The address of
BRS and Mr. Sherrill is 126 East 56th Street, New York, New York 10022. The
address of Dartford and Mr. Chung is 456 Montgomery, Suite 2200, San
Francisco, California 94109. The address of Mr. Robinson, Mr. Cahill, Mr.
Heidenthal, Mr. Wohlschlaeger, Mr. Hannasch, Mr. Horton, Laura Hawkins
Mansur and Mr. Mansur is 103 Powell Court, Suite 200, Brentwood, Tennessee
37027.
(2) Summit is a limited partnership of which SCI serves as the general partner.
Mr. Kelly, a director of the Company, is Chairman of the Board and a
stockholder of SCI. Mr. Kelly may be deemed to beneficially own the shares
indicated because of Mr. Kelly's affiliation with Summit. Mr. Kelly
disclaims beneficial ownership of such shares within the meaning of Rule
13d-3 of the Exchange Act.
(3) All of the shares indicated as owned by DLJMB are shares that may be
acquired by DLJMB within 60 days pursuant to the exercise of warrants. Of
the shares indicated, warrants to purchase 2,126,748,
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950,960, 55,136, 857,640 and 524,444 shares are held by DLJ Merchant Banking
Partners, L.P., DLJ International Partners, C.V., DLJ Offshore Partners,
C.V., DLJ Merchant Banking Funding, Inc. and DLJ First ESC L.L.C.,
respectively. DLJMB is a limited partnership, the general partner of which
is DLJ Merchant Banking, Inc., an affiliate of DLJSC. Mr. Grauer is a
director of the Company and serves as a Managing Director of DLJ Merchant
Banking, Inc. and, as such, may be deemed to beneficially own such shares.
Mr. Grauer disclaims beneficial ownership of such shares within the meaning
of Rule 13d-3 of the Exchange Act. The shares to be sold in the Offering
include 1,616,668 shares of Common Stock to be issued by the Company upon
the exercise by the Underwriters of warrants to purchase 1,616,999 shares of
Common Stock previously held by DLJMB. See "Certain Transactions."
(4) Represents shares held by CMIHI and related parties. Of the 3,662,984 shares
indicated as owned by CMIHI, (i) 428,000 represent shares of Class A Common
Stock, (ii) 2,332,000 represent shares of Class B Common Stock and (iii)
902,984 are shares issuable within 60 days upon exercise of warrants. CMIHI
is an affiliate of The Chase Manhattan Corporation. Mr. Walker, a director
of the Company, is Managing General Partner of Chase Capital Partners, an
affiliate of The Chase Manhattan Corporation, and may be deemed to
beneficially own the shares indicated as owned by CMIHI. Mr. Walker
disclaims beneficial ownership of 2,208,000 shares of Common Stock and
warrants to purchase 722,388 shares of Common Stock within the meaning of
Rule 13d-3 of the Exchange Act.
(5) Of the shares indicated as owned by Dartford, 494,532 are held in the name
of Dartford and 1,854,158 are held in the name of Windy Hill Pet Food
Company, L.L.C., an entity controlled by Dartford. Mr. Chung, a director of
the Company, is a partner in Dartford and a managing member of Windy Hill
Pet Food Company, L.L.C. and may be deemed to beneficially own the shares
indicated as owned by Dartford. Mr. Chung disclaims beneficial ownership of
such shares within the meaning of Rule 13d-3 of the Exchange Act.
(6) Of the shares indicated as owned by Mr. and Mrs. Mansur, 1,400,000 are held
in Mr. Mansur's name, 1,612,000 are owned by Mrs. Mansur and 300,000 are
held in trust for their children. The shares held by Mrs. Mansur and the
Mansurs' children may be deemed to be beneficially owned by Mr. Mansur; Mr.
Mansur disclaims beneficial ownership of such shares within the meaning of
Rule 13d-3 of the Exchange Act. The shares held by Mr. Mansur and the
Mansurs' children may be deemed to be beneficially owned by Mrs. Mansur;
Mrs. Mansur disclaims beneficial ownership of such shares within the meaning
of Rule 13d-3 of the Exchange Act.
(7) Includes shares held by BRS and certain other entities and individuals
affiliated with BRS. Mr. Sherrill, a director of the Company, is a principal
of BRS and may be deemed to beneficially own the shares indicated as owned
by BRS. Mr. Sherrill disclaims beneficial ownership of such shares within
the meaning of Rule 13d-3 of the Exchange Act.
(8) Amounts include 31,000 options granted to Thomas R. Heidenthal, 11,972
options granted to Richard D. Wohlschlaeger and 13,720 options granted to
Richard A. Hannasch, all of which are exercisable within 60 days.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 70,000,000 shares
of Common Stock, par value $0.0001 per share, and 10,000,000 shares of preferred
stock, par value $0.01 per share ("Preferred Stock"). As of January 31, 1999,
18,409,840 shares of Common Stock were outstanding, and no shares of Preferred
Stock were outstanding. Prior to the Offering, there has been no public market
for the Common Stock. Although the Company intends to apply to list the Common
Stock on the NYSE, there can be no assurance that a market for the Common Stock
will develop or, if developed, will be sustained. See "Risk Factors -- Absence
of Public Market" and "Dilution."
The following descriptions of certain provisions of the Restated
Certificate of Incorporation of the Company, as amended and restated (the
"Charter"), and the Bylaws, are intended only as a summary and do not purport to
be complete and are qualified in their entirety by reference to such documents,
which are included as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The Company's Common Stock consists of two classes, Class A and Class B.
The Class A and Class B Common Stock are identical in all respects except that
the Class B Common Stock has no voting rights. The Class B Common Stock is
convertible into shares of Class A Common Stock at any time at the option of the
holder thereof. References to Common Stock in this Prospectus are references to
Class A and Class B Common Stock on a combined basis. Each holder of Class A
Common Stock is entitled to one vote for each share of Class A Common Stock held
of record on all matters submitted to a vote of stockholders. The holders of
Class A Common Stock do not have cumulative voting rights in the election of
directors. Subject to any preferences accorded to the holders of the Preferred
Stock, if and when issued pursuant to authorization of the Board of Directors,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors of the Company out of legally
available funds. The Company has never paid cash dividends on its Common Stock
and does not intend to pay dividends for the foreseeable future. In addition,
the New Credit Facility and the Note Indenture contain provisions that restrict
the Company from paying dividends on the Common Stock. See "Description of New
Credit Facility" and "Description of Senior Subordinated Notes." Upon
liquidation, dissolution or winding up of the Company, after payments of debts,
expenses and the liquidation preference plus any accrued dividends on any
outstanding shares of Preferred Stock, the holders of Common Stock will be
entitled to share ratably in all remaining assets of the Company. The holders of
Common Stock have no preemptive, subscription, redemptive or conversion rights.
The outstanding shares of Common Stock are, and the shares of Common Stock being
sold in the Offering will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Charter authorizes the Board of Directors, without stockholder
approval, to issue shares of Preferred Stock, from time to time, in one or more
series and to fix the number of shares and rights, preferences and limitations
thereof of each such series. Among the specific matters that may be determined
by the Board of Directors are the designations, preferences, dividend rights,
conversion rights, voting powers, redemption rights and liquidation preferences
of each such series. It is not possible to state the actual effect of the
authorization of the Preferred Stock upon the rights of holders of the Common
Stock until the Board of Directors determines the respective rights of the
holders of one or more series of the Preferred Stock. Such effects, however,
might include: (i) restrictions on dividends on Common Stock if dividends on the
Preferred Stock are in arrears; (ii) dilution of the voting power of the Common
Stock to the extent that a series of the Preferred Stock would have voting
rights; (iii) the holders of Common Stock not being entitled to share in the
Company's assets upon dissolution until satisfaction of any liquidation
preference guaranteed to the Preferred Stock; and (iv) potential dilution of the
equity of holders of Common Stock to the extent that a series of the Preferred
Stock might be convertible into Common Stock. The Company has no present plans
to issue any Preferred Stock.
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<PAGE> 66
Holders of Common Stock have no preemptive rights to purchase or otherwise
acquire any Preferred Stock that may be issued in the future. Each series of
Preferred Stock, could, as determined by the Board of Directors at the time of
issuance, rank, with respect to dividends, redemption and liquidation rights,
senior to the Common Stock.
One of the effects of the existence of authorized but unissued Common Stock
and undesignated Preferred Stock may be to enable the Board of Directors to make
more difficult or to discourage an attempt to obtain control of the Company by
means of a merger, tender offer, proxy contest or otherwise, and thereby to
protect the continuity of the Company's management. If, in the exercise of its
fiduciary obligations, the Board of Directors were to determine that a takeover
proposal was not in the Company's best interest, such shares could be issued
pursuant to authorization by the Board of Directors without stockholder approval
in one or more transactions that might prevent or make more difficult or costly
the completion of the takeover transaction by diluting the voting or other
rights of the proposed acquiror or insurgent stockholder group, by creating a
substantial voting block in institutional or other hands that might undertake to
support the position of the incumbent Board of Directors, by effecting an
acquisition that might complicate or preclude the takeover or otherwise. In this
regard, the Charter grants the Board of Directors broad power to establish the
rights and preferences of the authorized and unissued Preferred Stock, one or
more series of which could be issued entitling holders (i) to vote separately as
a class on any proposed merger or consolidation, (ii) to cast a proportionately
larger vote together with the Common Stock on any such transaction or for all
purposes, (iii) to elect directors having terms of office or voting rights
greater than those of other directors, (iv) to convert Preferred Stock into a
greater number of shares of Common Stock or other securities, (v) to demand
redemption at a specified price under prescribed circumstances related to a
change of control for the Company or (vi) to exercise other rights designed to
impede a takeover. See " -- Antitakeover Provisions." The issuance of shares of
Preferred Stock pursuant to the authority of the Board of Directors described
above may adversely affect the rights of holders of Common Stock.
ANTITAKEOVER PROVISIONS
The Charter and Bylaws of the Company contain provisions that could have an
antitakeover effect. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors of the
Company and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. The provisions are designed to
reduce the vulnerability of the Company to an unsolicited proposal for a
takeover of the Company that does not contemplate the acquisition of all of its
outstanding shares or an unsolicited proposal for the restructuring or sale of
all or part of the Company. The provisions are also intended to discourage
certain tactics that may be used in proxy fights. The provisions may deprive the
stockholders of opportunities to sell shares of Common Stock at prices higher
than the prevailing market prices; however, the Board of Directors believes
that, as a general rule, such takeover proposals would not be in the best
interest of the Company and its stockholders. Set forth below is a description
of such provisions in the Charter and Bylaws.
Classified Board of Directors. The classification of directors will have
the effect of making it more difficult for stockholders to change the
composition of the Board of Directors. At least two annual meetings of
stockholders generally will be required to effect a change in a majority of the
Board of Directors. Such a delay may help ensure that the Company's directors,
if confronted by a stockholder attempting to force a proxy contest, a tender or
exchange offer or an extraordinary corporate transaction, would have sufficient
time to review the proposal as well as any available alternatives to the
proposal and to act in what they believe to be the best interests of the
stockholders. The classification provisions will apply to every election of
directors, however, regardless of whether a change in the composition of the
Board of Directors would be beneficial to the Company and its stockholders and
whether a majority of the Company's stockholders believes that such a change
would be desirable. Pursuant to the Charter, the provisions relating to the
classification of directors may only be amended by the affirmative vote of
eighty percent of the voting power of the then outstanding shares of capital
stock entitled to vote thereon ("Voting Stock").
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<PAGE> 67
Removal of Directors Only for Cause. Pursuant to the Charter, directors can
be removed from office only for cause and only by the affirmative vote of eighty
percent of the Voting Stock other than at the expiration of their term of
office. Vacancies on the Board of Directors may be filled only by a majority
vote of the remaining directors and not by the stockholders.
Number of Directors. The Charter provides that the entire Board of
Directors will consist of not less than eight members, the exact number to be
set from time to time by resolution of the Board of Directors. Accordingly, the
Board of Directors, and not the stockholders, has the authority to determine the
number of directors and could delay any stockholder from obtaining majority
representation on the Board of Directors by enlarging the Board of Directors and
filling the new vacancies with its own nominees until the next stockholder
election.
No Written Consent of Stockholders. The Charter also provides that, subject
to the terms of any Preferred Stock, any action required or permitted to be
taken by the stockholders of the Company must be taken at a duly called annual
or special meeting of stockholders and may not be taken by written consent. In
addition, special meetings may only be called by (i) the Chairman of the Board,
(ii) the President, (iii) the Board of Directors pursuant to a resolution
adopted by a majority of the then-authorized number of directors or (iv) the
holders of at least 50% of the outstanding Voting Stock.
Amendment of the Bylaws. The Charter provides that the Board of Directors
may adopt, alter, amend or repeal provisions of the Bylaws.
Preferred Stock. As described above under "-- Preferred Stock," the Board
of Directors may designate and issue shares of Preferred Stock without
stockholder approval under certain circumstances. As a result, the Preferred
Stock could be issued quickly with terms designed to make more difficult a
proposed takeover of the Company or the removal of its management. The Board of
Directors will make any determination to issue such shares based on its judgment
as to the best interests of the Company and its stockholders.
Advance Notice of Director Nominations and Stockholder Proposals. The
Charter provides that the only business (including election of directors) that
may be considered at an annual meeting of holders of Common Stock, in addition
to business proposed (or persons nominated to be directors) by the directors of
the Company, is business proposed (or persons nominated to be directors) by
holders of Common Stock who comply with the notice and disclosure requirements
set forth in the Charter. In general, the Charter requires that a stockholder
give the Company notice of proposed business or nominations no later than 90
days prior to the anniversary date of the immediately preceding annual meeting
of stockholders. In general, the notice must also contain information about the
stockholder proposing the business or nomination, the stockholder's interest in
the business and (with respect to nominations for director) information about
the nominee of the nature ordinarily required to be disclosed in public proxy
statements. The stockholder also must submit a letter from each of the
stockholder's nominees stating the nominee's acceptance of the nomination and
indicating the nominee's intention to serve as director if elected.
Section 203 of the Delaware General Corporation Law. The Company is subject
to Section 203 of the Delaware General Corporation Law, which prohibits Delaware
corporations from engaging in a wide range of specified transactions with any
interested stockholder. The latter term is defined to include any person, other
than such corporation and any of its majority-owned subsidiaries, who owns 15%
or more of any class or series of stock entitled to vote generally in the
election of directors, unless, among other exceptions, the transaction is
approved by (i) the Board of Directors prior to the date the interested
stockholder obtained such status or (ii) the holders of two-thirds of the
outstanding shares of each class or series of stock entitled to vote generally
in the election of directors, not including those shares owned by the interested
stockholder.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 30,909,840 shares of
Common Stock outstanding (33,409,840 shares if the Underwriters' over-allotment
option is exercised in full). Of these outstanding shares of Common Stock,
16,666,668 shares to be sold in this Offering will be freely tradeable without
restriction or further registration under the Securities Act, unless purchased
by "affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Rule 144") described below. The remaining 14,243,172 shares of
Common Stock outstanding after the Offering will be "restricted securities"
within the meaning of Rule 144 under the Securities Act and may not be sold in a
public distribution except in compliance with the registration requirements of
the Securities Act or an applicable exemption under the Securities Act,
including an exemption pursuant to Rule 144 thereunder. Restricted securities
are eligible for sale in the public market pursuant to Rule 144 no sooner than
one year from the date of acquisition. In general, under Rule 144, a person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least one year (including the holding period of any prior owner except an
affiliate) is entitled to sell in "broker's transactions" or to market makers,
within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of: (i) one
percent of the number of shares of Common Stock outstanding (approximately
310,000 shares immediately after the Offering); or (ii) generally, the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are also subject to certain "manner of sale" provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
The Company has granted certain stockholders registration rights. See
"Certain Transactions -- Investors' Agreement."
As of January 31, 1999, there were 1,610,548 options to purchase shares of
Common Stock issued and outstanding of which 280,008 are currently exercisable.
In addition, the Company plans to adopt the 1998 Stock Option Plan in connection
with the Offering. See "Management -- Executive Compensation -- Stock Option and
Stock Purchase Plans, "-- Stock Option Grants" and "-- Stock Option Exercises."
DESCRIPTION OF NEW CREDIT FACILITY
As part of the Refinancing Transactions, the Company entered into the New
Credit Facility with a syndicate of banks and other institutional investors, as
lenders, and Chase, as administrative agent, DLJ Capital, as syndication agent,
and Mercantile Bank National Association, as documentation agent. DLJ Capital
and CSI served as the co-arrangers of the New Credit Facility. Each of Chase and
DLJ Capital is an affiliate of one of the Underwriters. The New Credit Facility
consists of a $245.0 million term loan facility (the "Term Loan Facility") and a
$100.0 million revolving credit/swingline facility (the "Revolving Credit
Facility"). The Revolving Credit Facility will enable the Company to obtain
revolving credit loans and issue letters of credit for the account of the
Company from time to time for working capital, permitted acquisitions and
general corporate purposes. As of January 31, 1999 the Company had borrowed
$245.0 million under the Term Loan Facility, $28.0 million under the Revolving
Credit Facility and $6.7 million under the swingline facility. In addition, at
such date the Company had $2.4 million of letters of credit outstanding under
the Revolving Credit Facility. Loans under the New Credit Facility will bear
interest at: (i) the prime rate of the administrative agent (or, if higher, the
secondary market rate for certificates of deposit plus 1% or the federal funds
rate plus 0.5%) plus a specified margin based on the type of loan and the then
current ratio of senior debt to EBITDA (the "Applicable Margin") or (ii) the
Eurodollar rate plus the Applicable Margin. The Company will also pay certain
fees with respect to the New Credit Facility. The Term Loan Facility consists of
three tranches with terms between six and one-half years and eight years, unless
terminated sooner upon an event of default (as defined in the New Credit
Facility). The Term Loan Facility must be repaid in quarterly
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installments commencing on March 31, 1999. The principal amounts under the Term
Loan Facility shall be repaid, as follows: (i) approximately $11.7 million in
each of the calendar years 1999 and 2000, (ii) approximately $14.2 million in
each of the calendar years 2001, 2002, 2003 and 2004, (iii) $85.8 million in the
calendar year 2005 and (iv) $79.0 million in 2006. The Revolving Credit Facility
has a term of six and one-half years, unless terminated sooner upon an event of
default, and outstanding revolving credit loans will be payable on such date or
such earlier date as may be accelerated following the occurrence of any event of
default.
The New Credit Facility contains various covenants that will restrict the
Company from taking various actions and that will require the Company to achieve
and meet certain financial tests, including meeting a consolidated leverage
ratio, a consolidated senior debt ratio, a consolidated interest coverage ratio
and a consolidated fixed charge coverage ratio. The New Credit Facility includes
covenants relating to balance sheet, fixed charge coverage, interest coverage
and leverage ratios and limitations on, among other things, capital and other
permitted expenditures, liens, indebtedness, guarantees, mergers, acquisitions,
disposition of assets, dividends, changes in business activities and certain
corporate activities.
The New Credit Facility also contains events of default, including
nonpayment of principal, interest or fees, violation of covenants, inaccuracy of
representations or warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, ERISA, material
judgments and certain changes in control of the Company.
The Company and certain restricted subsidiaries are required to guarantee
amounts outstanding under the New Credit Facility. The indebtedness incurred
pursuant to the New Credit Facility is secured by a first priority lien on
substantially all of the material assets of the Company and its restricted
domestic subsidiaries.
DESCRIPTION OF SENIOR SUBORDINATED NOTES
On November 12, 1998, Doane issued $150 million in aggregate principal
amount of its 9 3/4% Senior Subordinated Notes under the Note Indenture, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summary of certain provisions of the
Note Indenture and the Senior Subordinated Notes does not purport to be
complete, is subject to, and is qualified in its entirety by reference to, the
provisions of the Note Indenture and the Senior Subordinated Notes.
The Senior Subordinated Notes are general unsecured obligations and are
subordinated in right of payment to all senior indebtedness and senior in right
of payment to any current or future indebtedness of Doane that, by its terms, is
subordinated to the Senior Subordinated Notes. The payment of obligations of
each subsidiary guarantor are subordinated to the payment of senior indebtedness
of such subsidiary guarantor. The Senior Subordinated Notes are limited to $150
million aggregate principal amount and mature on May 15, 2007. The Senior
Subordinated Notes accrue interest at the rate of 9 3/4% payable semiannually on
May 15 and November 15 of each year.
Doane may redeem the Senior Subordinated Notes at any time on or after May
15, 2002, in whole or in part, at the option of Doane, at the redemption prices
set forth below, plus accrued and unpaid interest, if any, to the redemption
date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2002...................................................... 104.875%
2003...................................................... 103.250%
2004...................................................... 101.625%
2005 and thereafter....................................... 100.000%
</TABLE>
In addition, prior to May 15, 2000 Doane may redeem up to 35% of the
aggregate principal amount of the Senior Subordinated Notes with the proceeds of
one or more Equity Offerings (as defined in the Note Indenture), at a redemption
price equal to 109.75% of the principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the redemption date; provided, however, that at
least 65% in aggregate principal amount of the Senior Subordinated Notes remain
outstanding immediately after each such redemption. At
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any time prior to May 15, 2002, the Senior Subordinated Notes may also be
redeemed in whole, but not in part, at the option of Doane upon the occurrence
of a Change in Control (as defined herein) at a redemption price equal to 100%
of the principal amount thereof plus the Applicable Premium (as defined in the
Note Indenture) and the unpaid accrued interest, if any, to the date of
redemption.
Upon the occurrence of any of the following events (each, a "Change of
Control"), each holder of the Senior Subordinated Notes will have the right to
require the Company to repurchase all or any part of such holder's Senior
Subordinated Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
purchase: (i) prior to the first public offering of Voting Stock (as defined in
the Note Indenture) of the Company, the Permitted Holders (as defined in the
Note Indenture) cease to be the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), directly or indirectly, of majority voting power of the Voting Stock of
the Company, whether as a result of issuance of securities of the Company, any
merger, consolidation, liquidation or dissolution of the Company, any direct or
indirect transfer of securities by any Permitted Holder or otherwise; (ii)
following the first public offering of Voting Stock of the Company, any "person"
(as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other
than one or more Permitted Holders, is or becomes the beneficial owner, directly
or indirectly, of more than 35% of the total voting power of the Voting Stock of
the Company; provided that the Permitted Holders beneficially own, directly or
indirectly, in the aggregate a lesser percentage of the total voting power of
the Voting Stock of the Company than such other person and do not have the right
or ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of the Company; or (iii) during
any period of two consecutive years, individuals who at the beginning of such
period constituted the Board of Directors (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
shareholders of the Company was approved by a vote of a majority of the
directors of the Company then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors then in office.
The Note Indenture contains restrictive covenants that, among things,
impose limitations (subject to certain exceptions) on Doane with respect to (i)
limitations on incurrence of indebtedness, (ii) limitations on restricted
payments, (iii) restrictions on distributions from subsidiaries, (iv) sales of
assets and subsidiary capital stock, (v) affiliate transactions and (vi) lines
of business.
Events of Default (as defined in the Note Indenture) include: (i) a default
for 30 days in the payment of interest on the Senior Subordinated Notes when the
same becomes due and payable; (ii) a default in payment of principal on the
Senior Subordinated Notes when the same becomes due and payable at maturity,
upon optional redemption pursuant to the Note Indenture, upon declaration or
otherwise; (iii) failure by Doane to comply with other agreements in the Note
Indenture or the Senior Subordinated Notes, in certain cases subject to notice
and lapse of time; (iv) certain accelerations of other indebtedness of Doane or
its subsidiaries if the amount accelerated (or so unpaid) exceeds $5 million and
such acceleration or failure to pay is not rescinded or cured within a 10-day
period; (v) certain events of bankruptcy or insolvency with respect to Doane or
any significant subsidiary; (vi) certain final, non-appealable judgments or
decrees for the payment of money in excess of $5 million; and (vii) the failure
of any subsidiary guarantee to be in full force and effect or the denial or
disaffirmation by any subsidiary guarantor of its obligations under the Note
Indenture or the Senior Subordinated Notes in certain cases. If an Event of
Default occurs and is continuing, the trustee or the holders of at least 25% in
principal amount of the Senior Subordinated Notes may declare all the Senior
Subordinated Notes to be due and payable immediately. Certain events of
bankruptcy or insolvency are Events of Default that will result in the Senior
Subordinated Notes being due and payable immediately upon the occurrence of such
Events of Default.
69
<PAGE> 71
UNDERWRITING
Subject to the terms and subject to the conditions of an Underwriting
Agreement, dated , 1999 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), who are represented by DLJSC,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Schroder &
Co. Inc. and CSI (the "Representatives"), have severally agreed to purchase from
the Company and the Selling Stockholders the respective number of shares of
Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Schroder & Co. Inc..........................................
Chase Securities Inc........................................
----------
Total............................................. 16,666,668
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below) if any
are purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow to certain other
dealers, a concession not in excess of $ per share. After the initial
offering of the Common Stock, the public offering price and other selling terms
may be changed by the Representatives at any time without notice. The
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable within 30 days after the date of this
Prospectus, to purchase, from time to time, in whole or in part, up to 2,500,000
additional shares of Common Stock at the initial public offering price less
underwriting discounts and commissions. The Underwriters may exercise such
option solely to cover over-allotments, if any, made in connection with the
Offering. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
its pro rata share of such additional shares based on such Underwriter's
percentage underwriting commitment in the Offering as indicated in the preceding
table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company (including the Selling Stockholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, such other securities, in cash
or otherwise) for a period of 180 days after the date of this Prospectus without
the prior written consent of DLJSC. In addition, during such period, the Company
has also agreed not to file any registration statement with respect to, and each
of its executive officers, directors and certain stockholders of the Company
(including the Selling Stockholders) has agreed not to make any demand for, or
exercise any right with
70
<PAGE> 72
respect to, the registration of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock without DLJSC's
prior written consent.
Of the Common Stock offered hereby, up to 5% of the shares will be directed
to, and may be purchased by, employees of the Company and others, subject to
certain restrictions of the NASD.
Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiations among the Company,
representatives of the Selling Stockholders and the Representatives. The factors
to be considered in determining the initial public offering price include the
history of and the prospects for the industry in which the Company competes, the
past and present operations of the Company, the historical results of operations
of the Company, the prospects for future earnings of the Company, the recent
market prices of securities of generally comparable companies and the general
condition of the securities markets at the time of the Offering.
Application will be made to list the Common Stock on the NYSE. In order to
meet the requirements for listing the Common Stock on the NYSE, the Underwriters
have undertaken to sell lots of 100 or more shares to a minimum of 2,000
beneficial owners.
Other than in the United States, no action has been taken by the Company,
the Selling Stockholders or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction where action
for that purpose is required. The shares of Common Stock offered hereby may not
be offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
laws, rules and regulations of such jurisdiction. Persons into whose possession
this Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the Offering and the distribution of this Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of Common Stock offered hereby in any jurisdiction in
which such offer or solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members, if the
syndicate repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilizing transactions or otherwise or if DLJSC receives a
report that indicates that the clients of such syndicate members have "flipped"
the Common Stock. These activities may stabilize or maintain the market price of
the Common Stock above independent market levels. The Underwriters are not
required to engage in these activities and may end any of these activities at
any time.
Each of DLJSC and CSI and their affiliates have performed financial
advisory, investment banking and commercial banking services for the Company in
the past and received compensation in connection therewith. Affiliates of CSI
and DLJSC will receive proceeds from this Offering in connection with the
repayment of the New Credit Facility. In addition, DLJMB, an affiliate of DLJSC,
is a Selling Stockholder in the Offering and an affiliate of CSI will receive
proceeds of the Offering as consideration for redemption of its shares of
preferred stock. Peter Grauer, a Managing Director at DLJMB, and Jeffrey Walker,
Managing General Partner of Chase Capital Partners are members of the Company's
Board of Directors. For a more complete description of these relationships and
services, see "Risk Factors -- Interest of Underwriters," "Certain Transactions"
and "Principal and Selling Stockholders."
Under Rule 2720 of the Conduct Rules ("Rule 2720") of the NASD, each of
DLJSC and CSI may be deemed to be an "affiliate" of the Company and to have a
"conflict of interest" with the Company by virtue of the fact that affiliates of
DLJSC and CSI may be deemed to beneficially own greater than 10% of the voting
stock of the Company. Under Rule 2720, when a member of the NASD, such as DLJSC
and CSI, proposes to underwrite or otherwise assist in the distribution of an
affiliate's securities in a public offering, the price to
71
<PAGE> 73
public at which such securities are to be distributed to the public must not be
lower than that recommended by a "qualified independent underwriter," who must
participate in the preparation of the registration statement and the prospectus
and who must exercise the usual standards of due diligence with respect thereto.
In accordance with such requirements, Merrill Lynch (the "QIU") has agreed to
act as the qualified independent underwriter in connection with the Offering,
has participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part and has exercised the usual
standards of due diligence with respect thereto. The price to public of the
Common Stock when sold will be no lower than that recommended by the QIU. In
addition, the Company has agreed to indemnify the QIU against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments which the QIU may be required to make in respect thereof.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Vinson & Elkins L.L.P., Houston, Texas.
Certain legal matters in connection with the sale of the Common Stock offered
hereby will be passed upon for the Underwriters by Andrews & Kurth L.L.P.,
Houston, Texas.
EXPERTS
The consolidated financial statements of Doane Pet Care Enterprises, Inc.
- -- Successor as of December 31, 1997 and 1996 and for each of the years ended
December 31, 1997 and 1996 and for the three-month period ended December 31,
1995 and the consolidated financial statements of Doane Pet Care Enterprises,
Inc. -- Predecessor for the nine-month period ended September 30, 1995 have been
included herein and in the Registration Statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Windy Hill Pet Food Holdings, Inc.
as of December 27, 1997 and December 28, 1996 and for the period from inception
(March 1, 1995) through December 30, 1995 and for the years ended December 28,
1996 and December 27, 1997 have been included herein and in the Registration
Statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Pet Food Division (a division of Hubbard
Milling Company) as of April 30, 1997 and 1996 and for each of the years in the
three-year period ended April 30, 1997, have been included herein and in the
Registration Statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
72
<PAGE> 74
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Exchange Act. However, the Company's operating subsidiary, Doane, is
subject to the reporting requirements of the Exchange Act. The Company has filed
with the Commission a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the offer and sale of
Common Stock pursuant to this Prospectus. This Prospectus, filed as a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement or the exhibits and schedules thereto in accordance
with the rules and regulations of the Commission and reference is hereby made to
such omitted information. Statements made in this Prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to the
Registration Statement are summaries of the terms of such contracts, agreements
or documents and are not necessarily complete. Reference is made to each such
exhibit for a more complete description of the matters involved and such
statements shall be deemed qualified in their entirety by such reference. The
Registration Statement and the exhibits and schedules thereto filed with the
Commission may be inspected, without charge, and copies may be obtained at
prescribed rates, at the public reference facility maintained by the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60621-2511. Such materials also may be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov. For further information pertaining to the Common Stock
offered by this Prospectus and the Company, reference is made to the
Registration Statement.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
73
<PAGE> 75
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DOANE PET CARE ENTERPRISES, INC.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997 and September 30, 1998 (unaudited)................ F-3
Consolidated Statements of Income for the nine-month
period ending September 30, 1995, for the three-month
period ending December 31, 1995, for the years ending
December 31, 1996 and 1997 and for the nine-month
periods ending September 30, 1997 and 1998
(unaudited)............................................ F-4
Consolidated Statements of Cash Flows for the nine-month
period ending September 30, 1995, for the three-month
period ending December 31, 1995, for the years ending
December 31, 1996 and 1997 and for the nine-month
periods ending September 30, 1997 and 1998
(unaudited)............................................ F-5
Consolidated Statements of Stockholders' Equity for the
nine-month period ended September 30, 1995, for the
three-month period ended December 31, 1995, for the
years ended December 31, 1996 and 1997 and for the
nine-month periods ended September 30, 1997 and
September 30, 1998 (unaudited)......................... F-6
Notes to Consolidated Financial Statements................ F-7
WINDY HILL PET FOOD HOLDINGS, INC.
Independent Auditors' Report.............................. F-24
Consolidated Balance Sheets as of December 28, 1996,
December 27, 1997 and June 27, 1998 (unaudited)........ F-25
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 six months
ended June 28, 1997 and June 27, 1998 (unaudited)...... F-26
Consolidated Statements of Changes in Stockholders' Equity
for the ten months ended December 30, 1995, for the
years ended December 28, 1996 and December 27, 1997,
and for the six months ended June 28, 1997 and June 27,
1998 (unaudited)....................................... F-27
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 six months
ended June 28, 1997 and June 27, 1998 (unaudited)...... F-28
Notes to Consolidated Financial Statements................ F-29
HUBBARD MILLING COMPANY
Independent Auditors' Report.............................. F-46
Balance Sheets as of April 30, 1995, 1996 and 1997........ F-47
Statements of Earnings for the years ended April 30, 1995,
1996 and 1997.......................................... F-48
Statements of Cash Flows for the years ended April 30,
1995, 1996 and 1997.................................... F-49
Notes to Financial Statements............................. F-50
</TABLE>
F-1
<PAGE> 76
When the transaction referred to in Note 2 of the Notes to Consolidated
Financial Statements has been consummated, we will be in a position to render
the following report.
/s/ KPMG LLP
INDEPENDENT AUDITORS' REPORT
Board of Directors
Doane Pet Care Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Doane Pet
Care Enterprises, Inc. -- Successor as of December 31, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity and cash flows
of Doane Pet Care Enterprises, Inc. -- Successor for the years ended December
31, 1997 and 1996 and for the three month period ended December 31, 1995, and
the consolidated statements of income, stockholders' equity and cash flows of
Doane Pet Care Enterprises, Inc. -- Predecessor for the nine months ended
September 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Doane Pet Care Enterprises,
Inc. -- Successor at December 31, 1997 and 1996, and the results of operations
and cash flows of Doane Pet Care Enterprises, Inc. -- Successor for the years
ended December 31, 1997 and 1996 and for the three month period ended December
31, 1995 and of Doane Pet Care Enterprises, Inc. -- Predecessor for the nine
month period ended September 30, 1995 in conformity with generally accepted
accounting principles.
Houston, Texas
February 13, 1998, except as to
Note 2, which is as of .
F-2
<PAGE> 77
DOANE PET CARE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ -- $ -- $ 3,833
Trade accounts receivable, net of allowances............. 68,279 66,369 86,759
Inventories.............................................. 30,737 32,426 52,901
Deferred income tax benefits............................. 881 1,252 6,562
Prepaid expenses and other assets........................ 6,487 2,298 16,333
-------- -------- --------
Total Current Assets............................. 106,384 102,345 166,388
Property, plant, and equipment, net........................ 93,083 99,994 201,665
Goodwill and other intangible assets, net.................. 126,068 122,882 263,368
Other assets, net.......................................... 12,758 12,963 33,351
-------- -------- --------
Total Assets..................................... $338,293 $338,184 $664,772
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt................... $ 10,417 $ 11,667 $ 8,859
Accounts payable......................................... 51,303 42,422 64,782
Accrued liabilities...................................... 18,541 22,611 42,091
-------- -------- --------
Total current liabilities........................ 80,261 76,700 115,732
Long-term debt, excluding current installments............. 196,186 188,743 414,807
Post-retirement benefit liability.......................... 4,030 4,081 6,562
Deferred income tax liability.............................. 409 4,169 22,744
Other long-term liabilities................................ 1,753
-------- -------- --------
Total liabilities................................ 280,886 273,693 561,598
Senior preferred stock, 3,000 shares authorized, 1,200
shares issued............................................ 24,160 30,545 35,898
Stockholders' equity:
Common stock, par value $.0001, 70,000 shares authorized,
11,200, 11,500 and 18,410 shares issued and
outstanding, respectively............................. 1 1 2
Additional paid-in capital............................... 40,824 41,674 73,544
Accumulated other comprehensive income................... -- -- 472
Accumulated deficit...................................... (7,578) (7,729) (6,742)
-------- -------- --------
Total stockholders' equity....................... 33,247 33,946 67,276
-------- -------- --------
Total liabilities and stockholders' equity....... $338,293 $338,184 $664,772
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 78
DOANE PET CARE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE NINE-MONTH PERIOD ENDING SEPTEMBER 30, 1995, FOR THE THREE-MONTH PERIOD
ENDING DECEMBER 31, 1995, FOR THE YEARS ENDING DECEMBER 31, 1996 AND 1997, AND
FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- ----------------------------------------------------------------
NINE MONTH
NINE MONTH THREE MONTH PERIOD ENDED
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------
1995 1995 1996 1997 1997 1998
------------- ------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $303,633 $114,958 $513,217 $564,741 $411,399 $462,991
Cost of goods sold................. 247,394 97,184 446,776 482,896 352,877 378,583
-------- -------- -------- -------- -------- --------
Gross profit....................... 56,239 17,774 66,441 81,845 58,522 84,408
Operating expenses:
Promotion and distribution....... 17,675 6,484 26,480 31,876 23,798 30,381
Selling, general and
administrative................. 8,558 3,677 15,050 17,985 12,505 20,935
Non-recurring transition costs... 9,440 -- -- -- -- 4,311
-------- -------- -------- -------- -------- --------
Income from operations..... 20,566 7,613 24,911 31,984 22,219 28,781
Interest expense, net.............. 3,611 5,806 22,471 22,463 16,973 19,444
Non-recurring finance charge....... -- -- 4,815 -- -- --
Equity in earnings of joint
venture.......................... -- -- -- (186) (117) (111)
Other (income) expense, net........ (8) 29 (2) 84 65 (118)
-------- -------- -------- -------- -------- --------
Income (loss) before
taxes.................... 16,963 1,778 (2,373) 9,623 5,298 9,566
Income tax expense (benefit)....... 217 754 (855) 3,389 1,917 3,226
-------- -------- -------- -------- -------- --------
Net income (loss).......... $ 16,746 $ 1,024 $ (1,518) $ 6,234 $ 3,381 $ 6,340
======== ======== ======== ======== ======== ========
Net income (loss) applicable to
common stock..................... -- $ (314) $ (7,264) $ (151) $ (1,323) $ 989
Basic net income (loss) per common
share............................ -- $ (0.03) $ (0.66) $ (0.01) $ (0.12) $ 0.08
Diluted net income (loss) per
common share..................... -- $ (0.02) $ (0.44) $ (0.01) $ 0.07 $ 0.05
Pro forma earnings data
(unaudited)......................
Net income as reported............. $ 16,746
Pro forma adjustment for federal
and state income tax expense..... 5,861
--------
Pro forma net income............... $ 10,885
========
Pro forma basic net income per
common share..................... $ 189
======== ======== ======== ======== ======== ========
Basic weighted average number of
shares outstanding............... 57,500 11,000 11,006 11,350 11,301 13,088
======== ======== ======== ======== ======== ========
Diluted weighted average number of
shares outstanding............... -- 16,417 16,620 18,085 17,958 19,860
======== ======== ======== ======== ======== ========
</TABLE>
F-4
<PAGE> 79
DOANE PET CARE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE NINE-MONTH PERIOD ENDING SEPTEMBER 30, 1995, FOR THE THREE-MONTH PERIOD
ENDING DECEMBER 31 1995, FOR THE YEARS ENDING DECEMBER 31, 1996 AND 1997
AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- ---------------------------------------------------------------
NINE MONTH
NINE MONTH THREE MONTH PERIOD ENDED
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------
1995 1995 1996 1997 1997 1998
------------- ------------ ------------ ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 16,746 $ 1,024 $ (1,518) $ 6,234 $ 3,381 $ 6,340
Items not requiring (providing) cash:
Depreciation and amortization............. 3,694 2,359 15,972 12,141 8,880 12,392
Stock compensation expense................ -- -- -- -- -- 250
Loss on sale of property and equipment.... 10 -- 26 115 85 --
Deferred income tax expense (benefit)..... -- 1,102 (855) 3,389 1,937 2,871
Equity in foreign joint venture........... -- -- -- (186) (117) (111)
Other..................................... (93) 23 282 51 (127) (304)
Changes in:
Accounts receivable..................... 1,800 (7,620) (21,176) 1,910 11,012 5,401
Inventories............................. (2,424) (2,954) (3,141) (1,689) (394) (138)
Prepaid expenses and other.............. (498) (571) (5,479) 3,818 4,232 (6,409)
Accounts payable........................ (11,526) 4,084 32,155 (8,881) (15,568) (3,777)
Accrued expenses........................ 5,245 7,034 2,317 4,070 (3,718) (498)
Other................................... -- (1,770) -- -- -- --
-------- --------- --------- -------- -------- -------
Net cash provided by operating
activities......................... 12,954 2,711 18,583 20,972 9,603 16,017
-------- --------- --------- -------- -------- -------
Cash flows from investing activities:
Proceeds from sale of property and
equipment................................. 571 -- 26 39 25 72
Capital expenditures, including interest
capitalized............................... (4,224) (1,297) (7,901) (14,437) (12,933) (14,132)
Acquisition related payments................ -- (207,961) (1,087) -- -- --
Investment in foreign joint venture......... -- -- (1,979) -- -- (26,190)
Purchase of Industrial Development Bonds.... -- -- -- -- -- (9,000)
Other....................................... (24) (88) (548) (763) (284) (2,723)
-------- --------- --------- -------- -------- -------
Net cash used in investing
activities......................... (3,677) (209,346) (11,489) (15,161) (13,192) (51,973)
-------- --------- --------- -------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.... (7,225) 204,348 163,136 5,698 4,919 34,121
Increase in debt issuance costs............. -- -- (5,909) (468) (468) --
Retirement of prior indebtedness............ -- (46,013) -- -- -- --
Net borrowings under short-term credit
agreements................................ 595 (6,800) -- -- -- --
Net borrowings (repayments) under revolving
credit agreement.......................... -- -- 1,475 (1,475) 6,100 9,710
Principal payments on long-term debt........ (786) (4,400) (167,746) (10,416) (7,812) (5,614)
Dividends paid.............................. (13,152) -- -- --
Proceeds from issuance of preferred stock... -- 17,075 -- --
Proceeds from issuance of Common Stock...... -- 40,425 400 850 850 1,347
-------- --------- --------- -------- -------- -------
Net cash provided by (used in)
financing activities............... (20,568) 204,635 (8,644) (5,811) 3,589 39,564
-------- --------- --------- -------- -------- -------
Effect of exchange rates on cash..... -- -- -- -- -- 225
-------- --------- --------- -------- -------- -------
Increase (decrease) in cash and cash
equivalents........................ (11,291) (2,000) (1,550) -- -- 3,833
Cash and cash equivalents, beginning of
period...................................... 14,841 3,550 1,550 -- -- --
-------- --------- --------- -------- -------- -------
Cash and cash equivalents, end of period...... $ 3,550 $ 1,550 $ -- $ -- $ -- $ 3,833
======== ========= ========= ======== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 80
DOANE PET CARE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995, FOR THE THREE-MONTH PERIOD
ENDED DECEMBER 31 1995, FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK TREASURY STOCK OTHER
--------------- PAID-IN ------------------ COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT INCOME EARNINGS TOTAL
------ ------ ------- ------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994... 100 $50 $ -- (42,500) $(34,000) $ $ 65,709 $ 31,759
Net income.................. -- -- -- -- -- 16,746 16,746
Dividends declared.......... -- -- -- -- -- (13,152) (13,152)
------ --- ------- ------- -------- ---- -------- --------
Balances, September 30,
1995........................ 100 $50 $ -- (42,500) $(34,000) $ $ 69,303 $ 35,353
====== === ======= ======= ======== ==== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balances, October
1, 1995.................... -- $-- $ -- -- $ -- $ $ -- $ --
Issuance of common stock... 11,000 1 40,424 -- -- -- 40,425
Net income................. -- -- -- -- -- 1,024 1,024
Preferred stock
dividends............... -- -- -- -- -- (1,069) (1,069)
Accretion of preferred
stock................... -- -- -- -- -- (269) (269)
------ --- ------- ------- -------- ---- -------- --------
Balances, December 31,
1995....................... 11,000 1 40,424 -- -- (314) 40,111
Stock rights exercised..... 200 -- 400 -- -- -- 400
Net loss................... -- -- -- -- -- (1,518) (1,518)
Preferred stock
dividends............... -- -- -- -- -- (4,670) (4,670)
Accretion of preferred
stock................... -- -- -- -- -- (1,076) (1,076)
------ --- ------- ------- -------- ---- -------- --------
Balances, December 31,
1996....................... 11,200 1 40,824 -- -- (7,578) 33,247
Stock rights exercised..... 300 -- 850 -- -- -- 850
Net income................. -- -- -- -- -- 6,234 6,234
Preferred stock
dividends............... -- -- -- -- -- (5,308) (5,308)
Accretion of preferred
stock................... -- -- -- -- -- (1,077) (1,077)
------ --- ------- ------- -------- ---- -------- --------
Balances, December 31,
1997....................... 11,500 1 41,674 -- -- (7,729) 33,946
Stock compensation
expense................. -- -- 250 -- -- -- -- 250
Stock options exercised.... 544 -- 1,347 -- -- -- 1,347
Issuance of common stock
in connection with the
acquisition of Windy
Hill.................... 6,366 1 30,273 -- -- -- -- 30,274
Net income (unaudited)..... -- -- -- -- -- 6,340 6,340
Other comprehensive
income.................. -- -- -- -- -- 472 472
Preferred stock
dividends............... -- -- -- -- -- (4,546) (4,546)
Accretion of preferred
stock................... -- -- -- -- -- (807) (807)
------ --- ------- ------- -------- ---- -------- --------
Balances, September 30,
1998....................... 18,410 $ 2 $73,544 -- $ -- $472 $ (6,742) $ 67,276
====== === ======= ======= ======== ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 81
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, 1998 (UNAUDITED) DECEMBER 31, 1997, 1996 AND 1995
(ALL INFORMATION RELATED TO THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND
1998 IS UNAUDITED.)
(1) ACQUISITIONS
On October 5, 1995, Doane Pet Care Enterprises, Inc. a newly organized
Delaware corporation acquired Doane Pet Care Company (formerly Doane Products
Company). The purchase price was $249.1 million, including existing
indebtedness. The acquisition was financed with a senior credit facility which
provides term loan borrowings of $90 million and revolving loan borrowings of up
to $25 million, $120 million of senior subordinated increasing rate notes, and
$30 million of 14.25% Senior Preferred Stock. The cost of the acquisition has
been allocated on the basis of the estimated fair value of the assets acquired
and liabilities assumed. The allocation resulted in goodwill of approximately
$129 million. The goodwill is being amortized over 40 years on a straight-line
basis.
For financial statement purposes, the Acquisition was accounted for as a
purchase acquisition effective October 1, 1995. The effects of the acquisition
have been reflected in the Company's assets and liabilities at that date. As a
result, the Company's financial statements for the periods subsequent to
September 30, 1995 are presented on the Successor's new basis of accounting,
while financial statements for September 30, 1995 and prior periods are
presented on the Predecessor's historical cost basis of accounting.
In connection with the Acquisition, the Company recorded certain merger
related expenses of $9,440 consisting primarily of bonus payments to certain
members of management, which have been charged to operations as of September 30,
1995.
(2) STOCK DIVIDEND
The Company will effect a 4 for 1 stock dividend immediately prior to the
initial public offering. The consolidated financial statements, including all
references to the number of shares of common stock and all per share
information, have been adjusted to reflect the common stock dividend.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company manufactures dry pet foods and operates a machine shop and a
structural steel fabrication plant. The Company extends unsecured credit in the
form of current accounts receivable, principally to large distributors and
retailers throughout the United States, with credit extended to one customer
approximating 70%, 65% and 46% of accounts receivable at December 31, 1996 and
1997, and September 30, 1998 (unaudited), respectively.
Principles of Consolidation
In November 1996, the Company formed a UK holding company, DPC
International, Ltd., a wholly-owned subsidiary of Doane Products Company, to
account for its 50% investment in a foreign joint venture. The Company is
accounting for its investment under the equity method of accounting. The
accompanying consolidated financial statements for December 31, 1996 and 1997,
and September 30, 1998 (unaudited), include the accounts of Doane and its
wholly-owned subsidiary. All inter-company transactions and balances have been
eliminated.
Basis of Presentation
Certain reclassifications have been made to the fiscal 1995 and 1996
consolidated financial statements to conform with the fiscal 1997 presentation.
F-7
<PAGE> 82
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements as of September 30,
1998 and for the nine months ended September 30, 1997 and 1998 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in conformity
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The operating results for interim
periods are not necessarily indicative of results to be expected for an entire
year.
Cash and Cash Equivalents
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents consist primarily
of repurchase agreements and certificates of deposit.
Inventories
All inventories are valued at the lower of cost or market. Cost is
determined using the FIFO method.
Property and Equipment
Property and equipment are depreciated over the estimated useful life of
each asset ranging from three to forty years. Annual depreciation is computed
using the straight-line method.
In fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-lived Assets and for Long Lived Assets to be Disposed Of (SFAS 121).
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. When such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. The adoption of SFAS 121 did not have a material impact on the Company's
consolidated financial statements.
Income Taxes
Effective October 1, 1995, concurrent with the Acquisition and the
Company's change from an S Corporation for federal income tax purposes to a C
Corporation, the Successor Company began applying the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," (FAS
109). Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities. These deferred taxes are measured by applying current tax laws.
The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired in the Acquisition and is being amortized by the
straight-line method over 40 years. The Company's policy is to periodically
evaluate such cost to determine whether there has been any impairment in value.
Accumulated amortization was $4,046, $7,300 and $9,740 at December 31, 1996 and
1997, and September 30, 1998 (unaudited), respectively.
Recognition of Revenue
Revenue is recognized at the time the product is shipped.
F-8
<PAGE> 83
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commodity Hedges
The Company manages price risk created by market fluctuations by hedging
portions of its primary commodity products purchases, principally through
exchange traded futures and options contracts which are designated as hedges.
The terms of such contracts are generally less than one year. Settlement of
positions are either through financial settlement with the exchanges or via
exchange for the physical commodity in which case the Company delivers the
contract against the acquisition of the physical commodity.
The Company's policy does not permit speculative commodity trading. Futures
and options contracts are accounted for as hedges, and gains and losses are
recognized in the period realized as part of the cost of products sold and in
the cash flows. The deferred net futures and options position is reported on the
balance sheet as a current asset for net loss positions and as a deferred credit
for net gain positions. In addition to futures and options, the Company also
contracts for future physical procurement, in which case unrealized gains and
losses are deferred to the applicable accounting period. Typically, maturities
vary and do not exceed twelve months.
Deferred losses on these outstanding contracts were $5,398, $917 and $2,605
at December 31, 1996 and 1997, and September 30, 1998 (unaudited), respectively.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Pro Forma Financial Data
Pro forma net income per common share and pro forma income taxes are set
forth herein because the Predecessor Company previously operated as a subchapter
S Corporation.
Pro forma net income per share of common stock is calculated based on net
income reduced by pro forma income taxes, divided by the weighted average number
of shares of common stock outstanding.
Pro forma income taxes reflect federal income taxes that would have been
incurred had the Predecessor Company been subject to such taxes. Such amounts
have been deducted from net income in the accompanying statements of income,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Financial Instruments
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. The Company believes that the carrying amounts of its
current assets, current liabilities and long-term debt approximate the fair
value of such items.
Net Income (Loss) Per Common Share
In fiscal 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). In
accordance with SFAS 128, basic net income (loss) per common share is computed
based upon the weighted average number of common shares outstanding during each
period. Diluted net income (loss) per common share is determined on the
assumption that outstanding dilutive stock options and warrants have been
exercised and the aggregate proceeds as defined were used to reacquire Company
common stock. Net income (loss) is decreased (increased) by unpaid cumulative
preferred stock dividends and the accretion of the preferred stock in
calculating net income (loss) attributable to the common shareholder. The
following table summarizes the calculation of net income (loss), basic
F-9
<PAGE> 84
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
weighted average number of shares outstanding and diluted weighted average
number of shares outstanding for purposes of computing net income (loss) per
common share:
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
THREE-MONTH DECEMBER 31, SEPTEMBER 30,
PERIOD ENDED ----------------- ------------------
DECEMBER 31, 1995 1996 1997 1997 1998
----------------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)......................... $ 1,024 $(1,518) $ 6,234 $ 3,381 $ 6,340
Less: Preferred stock dividends and
accretion of preferred stock........ (1,338) (5,746) (6,385) (4,704) (5,351)
------- ------- ------- ------- -------
Net income loss applicable to common
stock................................... $ (314) $(7,264) $ (151) $(1,323) $ 989
======= ======= ======= ======= =======
Denominator:
Basic weighted average number of shares
outstanding............................. 11,000 11,006 11,350 11,301 13,088
Effect of dilutive securities:
Warrants................................ 5,417 5,417 5,417 5,417 5,417
Stock options........................... -- 197 1,318 1,240 1,355
------- ------- ------- ------- -------
Diluted weighted average number of shares
outstanding............................. 16,417 16,620 18,085 17,958 19,860
======= ======= ======= ======= =======
Basic net income (loss) per common
share................................... $ (0.03) $ (0.66) $ (0.01) $ (0.12) $ 0.08
======= ======= ======= ======= =======
Diluted net income (loss) per common
share................................... $ (0.02) $ (0.44) $ (0.01) $ (0.07) $ 0.05
======= ======= ======= ======= =======
</TABLE>
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components.
The components of comprehensive income refer to revenues, expenses, gains and
losses that are excluded from net income under current accounting standards,
including foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS 130 requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with other financial
statements; the total or other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130 is
effective for both interim and annual periods beginning after December 15, 1997.
The Company adopted SFAS 130 in the fiscal year ending December 31, 1998. The
Company's total comprehensive earnings, which consist of foreign currency
translation adjustments, are as follows for the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net income (loss) applicable to common stock................ $ 989 $(1,323)
Other comprehensive income.................................. 472 --
------ -------
Total comprehensive income (loss)........................... $1,461 $(1,323)
====== =======
</TABLE>
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in
F-10
<PAGE> 85
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the statement of financial position at fair value. The accounting for changes in
the fair value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, if so, on the reason for holding it. If certain conditions are met,
entities may elect to designate a derivative instrument as a hedge of exposures
to changes in fair values, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative instrument
is recognized in earnings in the period of change together with the offsetting
loss or gain on the hedged item attributable to the risk being hedged. If the
hedged exposure is a cash flow exposure, the effective portion of the gain or
loss on the derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness, as well as the ineffective portion
of the gain or loss, is reported in earnings immediately. Accounting for foreign
currency hedges is similar to the accounting for fair value an cash flow hedges.
If the derivative instrument is not designated as a hedge, the gain or loss is
recognized in earnings in the period of change.
The Company will adopt SFAS 133 beginning in fiscal 2000. The Company has
not determined the impact that SFAS 133 will have on its financial statements
and believes that such determination will not be meaningful until closer to the
date of initial adoption.
(4) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................................... $ 7,268 $ 8,449 $11,466
Packaging materials................................. 10,609 10,735 24,007
Finished goods...................................... 12,860 13,242 17,428
------- ------- -------
$30,737 $32,426 $52,901
======= ======= =======
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Land................................................ $ 3,987 $ 4,037 $ 7,639
Buildings and improvements.......................... 25,395 29,439 54,569
Machinery and equipment............................. 65,377 76,442 149,399
Furniture and fixtures.............................. 1,932 2,536 6,094
Automotive equipment................................ 1,000 1,016 1,462
Construction in progress............................ 3,504 1,972 16,735
------- ------- --------
101,195 115,442 235,898
Less accumulated depreciation....................... 8,112 15,448 34,233
------- ------- --------
$93,083 $99,994 $201,665
======= ======= ========
</TABLE>
F-11
<PAGE> 86
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Salaries and commissions............................. $ 3,223 $ 4,714 $ 8,844
Accrued interest..................................... 6,379 6,223 6,922
Rebates and other promotions......................... 7,510 9,064 12,828
Other................................................ 1,429 2,610 13,497
------- ------- -------
$18,541 $22,611 $42,091
======= ======= =======
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Senior Credit Facility........................... $ 46,603 $ 34,712 $ 42,600
Senior Notes..................................... 160,000 160,000 160,000
Windy Hill Credit Facility....................... -- -- 53,957
Windy Hill Subordinated Notes.................... -- -- 120,000
Promissory Note.................................. -- -- 13,295
Industrial Development Revenue Bonds (net of
reserve funds)................................. -- 5,698 8,496
Debt -- Foreign Subsidiaries..................... -- -- 25,318
-------- -------- --------
206,603 200,410 423,666
Less current maturities.......................... 10,417 11,667 8,859
-------- -------- --------
$196,186 $188,743 $414,807
======== ======== ========
</TABLE>
Senior Credit Facility
In connection with the Acquisition, the Company entered into a senior
credit facility effective October 5, 1995 (the Senior Credit Facility) with
several lending institutions. The Senior Credit Facility, as amended, provides
for an aggregate principal amount of loans of up to $85,000 consisting of
$60,000 in aggregate principal amount of term loans (the Term Loan Facility) and
a $25,000 revolving credit facility (the Revolving Credit Facility).
The Term Loan Facility matures on September 30, 2000 and is due in
quarterly installments in increasing amounts, ranging from $2,100 to $3,700,
commencing September 30, 1996. The Senior Credit Facility provides for mandatory
prepayments of the Term Loan Facility based on certain performance targets as
well as proceeds of asset sales which are subject to certain permitted
exceptions. The Revolving Credit Facility matures on September 30, 2000. Prior
to the amendment of the Senior Credit Facility as discussed below, the Company
was required to reduce borrowings under the Revolving Credit to $10,000 or less
for 30 consecutive days during the fiscal years ended September 30, 1996 and
1997, and to $7,500 or less for 30 consecutive days during each fiscal year
ended September 30 thereafter.
Indebtedness under the Senior Credit Facility bears interest at a rate
based, at the Company's option, upon (i) the Base Rate plus 1.50% with respect
to Base Rate Loans and (ii) the LIBOR Rate for one, two, three or six months
plus 2.75% with respect to LIBOR Rate Loans; provided, however, the interest
rates are subject to reductions in the event the Company meets certain
performance targets. The Revolving Credit Facility bore interest at 9.5% and
9.3% for the years ended December 31, 1996 and 1997, respectively. The Term Loan
Facility bore interest at a weighted average rate of 8.47% for the period from
October 5, 1995 to December 31, 1995, and 7.95% and 8.44% for the years ended
December 31, 1996 and 1997, respectively.
F-12
<PAGE> 87
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is required to pay a commitment fee based on the committed
undrawn amount of the Revolving Credit Facility during the preceding quarter
equal to .375% per annum, payable in arrears on a quarterly basis during 1996
and equal to .5% per annum, payable in arrears on a quarterly basis, thereafter;
provided, such fee may be reduced after 1996 to as low as .25% based on certain
performance targets.
The Senior Credit Facility is secured by substantially all of the assets of
the Company and a pledge of all of the Company's common stock held by DPCAC.
The Senior Credit Facility requires the Company to meet certain financial
tests, including minimum cash flow, minimum cash flow coverage ratio and maximum
leverage ratios. The Senior Credit Facility also contains covenants which, among
other things, will limit the incurrence of additional indebtedness, the nature
of the business of the Company and its subsidiaries, investments, leases of
assets, ownership of subsidiaries, dividends, transaction with affiliates, asset
sales, acquisitions, mergers and consolidations, liens and encumbrances and
other matters customarily restricted in such agreements.
The Company had approximately $24,225 available under the revolving credit
agreement at December 31, 1997 which expires in 1999.
Effective April 13, 1998, the Company amended its senior credit facility
pursuant to the Second Amended and Restated Revolving Credit and Term Loan
Agreement (the "Amended Senior Credit Facility"). Under the Amended Senior
Credit Facility funding was increased under the "Term Loan Facility" from the
outstanding balance of $31,795 to $41,794 and a new $7,000 purchase money
facility was created, which may be drawn upon at a later time. The "Revolving
Credit Facility" remains at $25,000. The term of the Amended Senior Credit
Facility has been extended from September 30, 2000 to September 30, 2001.
Concurrent with the extension of the term of the facility, the amortization of
the Term Loan Facility has been extended and quarterly principal payments
reduced, initially from $2,917 to $2,500.
The Company has the option to draw funds at either a Base Rate of LIBOR
Rate plus an Applicable Margin, which margin is determined from a pricing grid
predicated upon the ratio of Consolidated Total Debt to Consolidated EBITDA. In
general the LIBOR margins have decreased by .375% and the Base Rate margins have
decreased by .5%.
The predecessor agreement required the Company to cause the aggregate
principal amount of all Revolving Credit and Swing Loans to be less than $7,500
for a minimum period of 30 consecutive days each fiscal year, which provision,
together with the Excess Cash Flow Recapture provision, has been eliminated.
Additionally, certain financial covenants have been amended consistent with the
extended term of the facility.
Bridge Notes
The bridge notes (the Bridge Notes) matured on October 5, 1996 and bore
interest at a floating rate equal to the sum of (i) the prime rate, (ii) 5.00%,
and (iii) an additional percentage amount, equal to 1.00% effective from March
30, 1996 and increasing by .50% effective from and including each quarterly
anniversary of such date until the Bridge Notes are paid in full; provided that
the interest rate shall not exceed 20% per annum. On March 4, 1996, the Bridge
Notes were repaid with the proceeds from the issuance of the Senior Notes. The
Bridge Notes bore interest at a rate of 13.50% per annum at December 31, 1995
and for the period January 1, 1996 to March 4, 1996. In connection with this
debt refinancing, the Company incurred a $4,815 non-recurring finance charge to
write-off debt issuance costs associated with the Bridge Notes.
Senior Notes
The Senior Notes (the Senior Notes) bear interest at the rate of 10.625%
per annum, payable semiannually on March 1 and September 1 of each year,
commencing on September 1, 1996. The Senior Notes are redeemable, at the
Company's option, in whole or in part, from time to time, on or after March 1,
2001, initially at 105.313% of their principal amount and thereafter at prices
declining to 100% at March 1, 2004 until maturity, in each case together with
accrued and unpaid interest to the redemption date. In addition, at any time on
or prior to March 1, 1999, the Company may redeem up to 35% of the aggregate
F-13
<PAGE> 88
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal amount of the Notes originally issued with the net cash proceeds of
one or more public equity offerings, at 109.625% of their principal amount,
together with accrued and unpaid interest, if any, to the redemption date;
provided that at least $104,000 in principal amount of the Senior Notes remain
outstanding immediately after any such redemption.
The Senior Notes are general senior unsecured obligations of the Company,
ranking senior to all subordinated indebtedness of the Company and ranking pari
passu in right of payment to all other senior indebtedness of the Company.
Lenders under the Senior Credit Facility have claims with respect to the assets
constituting collateral for such indebtedness that are effectively senior and
right of payment to the claims of holders of the Senior Notes. The Senior Notes
were issued pursuant to the Note Indenture which contains covenants restricting
or limiting the ability of the Company and its subsidiaries to pay dividends or
make other restricted payments, incur additional indebtedness and issue
preferred stock, create liens, incur dividends and other payment restrictions
affecting subsidiaries, enter into mergers or consolidations, make asset sales,
enter into transactions with affiliates, and engage in other lines of business.
Under certain circumstances, the Company is required to offer to purchase all
outstanding Senior Notes at a purchase price in cash equal to 100% of their
principal amount, plus accrued and unpaid interest to the date of repurchase,
with the proceeds of certain asset sales. Upon a Change of Control (as defined
in the Note Indenture) each holder of Senior Notes will have the right to
require the Company to repurchase all or any part of such holder's Senior Notes
at a purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase.
Industrial Revenue Bonds
On March 12, 1997 the Company issued $6,000 of industrial development
revenue bonds (the "Bonds") through the Ottawa County Finance Authority in
Miami, Oklahoma. The Bonds bear interest at the rate of 7.25% payable on each
December 1 and June 1, commencing December 1, 1997. The Bonds are subject to
mandatory redemption prior to maturity, in part, at a redemption price of 100%
of the principal amount thereof, plus accrued interest to the redemption date,
in varying principal amounts on June 1 of each year from 2007 through 2017. The
Bonds are general secured obligations of the Company, ranking senior to all
subordinated indebtedness of the Company and on a parity in right of payment
with all other senior indebtedness of the Company. The Bonds are additionally
secured by a Mortgage and Security Agreement.
On July 24, 1998, the $9,000 Oklahoma Development Finance Authority,
Industrial Development Revenue Bonds, Series 1998 (Doane Products Company
Clinton, Oklahoma Project) (the "Bonds") were issued by the Oklahoma Development
Finance Authority. The net proceeds of the issuances were loaned to the Company
to finance the Company's acquisition and construction of a new dry pet food
manufacturing facility in Clinton, Oklahoma. At September 30, 1998 $2,798 had
been drawn down by the Company. The Bonds bear interest at the rate of 6.25%
payable on each of January 15 and July 15, commencing January 15, 1999. The
Bonds are subject to mandatory redemption prior to maturity, in part, at a
redemption price of 100% of the principal amount thereof, plus accrued interest
to the redemption date, in varying principal amounts on July 15 of each year
from 2018 through 2023. The Bonds are general obligations of the Company and
rank on parity in right of payment with all other senior indebtedness of the
Company. The Bonds, which approximate fair value, are secured by the Clinton,
Oklahoma manufacturing facility and certain related equipment. The
above-referenced Bonds were purchased by the Company's wholly owned subsidiary,
DPC Funding Corp., which has changed its name to Doane/Windy Hill Joint Venture
Corp. It is anticipated that such entity will attempt to sell the Bonds. See
Subsequent Events in Note 19 below.
*****
F-14
<PAGE> 89
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate annual maturities of long-term debt at December 31, 1997 were:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
1998........................................................ $11,667
1999........................................................ 11,667
2000........................................................ 11,378
Thereafter.................................................. 165,698
</TABLE>
On November 12, 1998, the Company refinanced the Senior Credit Facility,
the Windy Hill Credit Facility, a Windy Hill bridge loan facility, the Windy
Hill Subordinated Notes and its Senior Notes. See discussion of subsequent
events at Note 19 below.
(8) SENIOR PREFERRED STOCK
The Company has authorized 3,000 shares of Senior Preferred Stock of which
the Company issued 1,200 shares in connection with the financing of the
Acquisition.
The Senior Preferred Stock has an initial liquidation preference of $25.00
per share (aggregate initial liquidation preference is $30,000). The Senior
Preferred Stock was recorded at the net proceeds of $17,075 after deducting
$12,925 paid to DPCAC for warrants of DPCAC which were issued in conjunction
with the Senior Preferred Stock. The excess of the liquidation preference over
the carrying value is being accreted quarterly over a twelve year period ended
September 30, 2007 by a direct reduction to retained earnings.
Dividends on the Senior Preferred Stock are payable quarterly at the rate
of 14.25% per annum per share. Dividends on the Senior Preferred Stock accrete
to the liquidation value of the Senior Preferred Stock and, at the option of the
holders of a majority of the shares of Senior Preferred Stock, may be paid
through the issuance of additional shares of Senior Preferred Stock on each
dividend payment date through September 30, 2000. The Company does not expect to
pay dividends on the Senior Preferred Stock in cash for any period prior to
September 30, 2000. Cumulative dividends on Senior Preferred Stock that have not
been paid at December 31, 1996 and 1997, and September 30, 1998 (unaudited), are
$5,739, $11,047 and $12,510, respectively and are included in the carrying
amount of the Senior Preferred Stock. As of December 31, 1997, and September 30,
1998 (unaudited), the cumulative accretion to redemption value and cumulative
dividends on the Senior Preferred Stock are $2,422 and $3,229, respectively and
$11,047 and $15,591, respectively.
Prior to September 30, 1998, the Company may, at its option, redeem up to
one-third of the then outstanding Senior Preferred Stock with the net proceeds
of an initial public offering of its common stock at a redemption price of 114%
of the then liquidation value of the Senior Preferred Stock, plus accrued and
unpaid dividends. On and after September 30, 1998, and prior to September 30,
2000, the Company is not precluded from purchasing in whole or in part the
Senior Preferred Stock on the open market at prevailing market prices. On and
after September 30, 2000, the Company may, at its option, redeem the Senior
Preferred Stock in whole or in part at redemption prices per share set forth
below, together with accrued and unpaid dividends:
<TABLE>
<CAPTION>
YEAR PERCENT OF
BEGINNING LIQUIDATION
SEPTEMBER 30, VALUE
- ------------- -----------
<S> <C> <C>
2000............................................................... 107.125%
2001............................................................... 105.700
2002............................................................... 104.275
2003............................................................... 102.850
2004............................................................... 101.425
2005............................................................... 100.000
2006............................................................... 100.000
</TABLE>
F-15
<PAGE> 90
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company will be required to redeem all outstanding shares of Senior
Preferred Stock on September 30, 2007 at 100% of the then liquidation value,
together with accrued and unpaid dividends.
In the event of a change of control, as defined, the holders of Senior
Preferred Stock have the right to require the Company to redeem such Senior
Preferred Stock, in whole or in part, at a price equal to 101% of the then
liquidation value together with any unpaid dividends.
The terms of the Senior Preferred Stock prohibit (i) the payment of
dividends on securities ranking on a parity with or junior to the Senior
Preferred Stock and (ii) redemption, repurchase or acquisition of any Junior
Securities with certain exceptions, in each case, unless full cumulative
dividends have been paid on the Senior Preferred Stock.
Holders of the Senior Preferred Stock have limited voting rights customary
for preferred stock, and the right to elect two additional directors upon
certain events such as the Company failing to declare and pay dividends on any
six consecutive dividend payment dates.
(9) STOCK OPTION AND STOCK PURCHASE PLANS
Effective as of November 1, 1996, the Company adopted the 1996 Management
Stock Option Plan, as amended (the "1996 Stock Option Plan"). The maximum number
of options that may be granted under the 1996 Stock Option Plan is 3,000,000.
The options vest based on the attainment of performance levels as defined by the
plan. Set forth below is certain information regarding such issuances, exercises
and cancellations of options in each of the indicated fiscal years.
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE EXERCISE PRICE
--------- ----------------------
<S> <C> <C>
Balance at December 31, 1994................................ -- $ --
Fiscal 1995:
Granted................................................... -- --
Exercised................................................. -- --
Cancelled................................................. -- --
---------
Balance at December 31, 1995................................ -- --
Fiscal 1996:
Granted................................................... 1,499,000 2.55
Exercised................................................. -- --
Cancelled................................................. -- --
---------
Balance at December 31, 1996................................ 1,499,000 2.55
Fiscal 1997:
Granted................................................... 704,000 3.71
Exercised................................................. -- --
Cancelled................................................. (129,000) 2.50
--------- -----
Balance at December 31, 1997................................ 2,074,000 $2.94
========= =====
</TABLE>
The 2,074,000 options outstanding as of December 31, 1997 had exercise
prices ranging between $2.50 and $5.00, a weighted average exercise price of
$2.94, and a weighted average remaining contract life of 8.99 years. At December
31, 1997, options to purchase 662,140 shares were exercisable with exercise
prices ranging between $2.50 and $5.00, and a weighted average exercise price of
$2.93.
F-16
<PAGE> 91
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has elected to continue to follow APB Opinion No. 25; however,
if the Company adopted SFAS 123, the Company's net income and earnings per share
for the years ended December 31, 1996, and December 31, 1997 would have been
reduced as follows:
<TABLE>
<CAPTION>
1996 1997
----------------------- -----------------------
AS REPORTED PROFORMA AS REPORTED PROFORMA
----------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income.............................. $(7,264) $(7,359) $ (151) $ (481)
Basic earnings per share................ (0.66) (0.67) (0.01) 0.04
Diluted earnings per share.............. (0.44) (0.44) (0.01) 0.03
</TABLE>
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the minimum value method of SFAS 123 under the assumptions of a risk free rate
of 5.75% and an expected life of options of 6 years. The Company has no present
plans to pay dividends on its Common Stock. The effects of applying SFAS 123 as
calculated above may not be representative of the effects on reported net income
for future years.
For the nine months ended September 30, 1998, the Company recorded
compensation expense of $250 as an addition to additional paid-in-capital in
connection with stock option grants under the 1996 Stock Option Plan.
Effective November 1, 1996, the Company adopted the 1996 Management Stock
Purchase Plan (the "1996 Plan"). The 1996 Plan provides that officers and other
key employees may be granted an aggregate of 200,000 rights to purchase one
share of the Company's common stock at $2.50 per share. Effective June 19, 1997,
the Company adopted the 1997 Management Stock Purchase Plan (the "1997 Plan")
which authorized the Company to grant an additional 300,000 rights to officers
and key employees to purchase one share of the Company's common stock at $2.50
per share. In fiscal 1996 and 1997, 200,000 and 300,000 shares were purchased
under the plans.
(10) MAJOR CUSTOMER
For the nine months ended September 30, 1995, one customer accounted for
approximately 65% of the Predecessor Company's total revenue. For the three
months ended December 31, 1995, the years ended December 31, 1996 and 1997, and
the unaudited nine months ended September 30, 1998, the same customer accounted
for approximately 65%, 63%, 61% and 57%, respectively, of the Successor
Company's total revenue. The Company does not have a long-term contract with
this customer.
(11) INCOME TAXES
The Predecessor had elected under both Federal and certain state income tax
laws to be taxed as an S Corporation. Under this election, the Company's taxable
income was taxed to the stockholders on their individual income tax returns. The
provision for income taxes reflects the accrual of corporation income taxes due
in states which do not recognize the S Corporation status.
Effective October 1, 1995, concurrent with the Acquisition, the Company
changed from an S Corporation for Federal income tax purposes to a C Corporation
and began applying the provisions of SFAS 109.
The Company elected to step up the tax basis in the assets acquired.
Goodwill recorded in the acquisition is deductible for tax purposes over 15
years.
F-17
<PAGE> 92
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of income tax expense (benefit) are:
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal....................................... $ (318) $ -- $ --
State......................................... (30) -- --
Deferred:
Federal....................................... 1,102 (855) 3,084
State......................................... -- -- 305
------ ----- ------
Total income tax expense (benefit).... $ 754 $(855) $3,389
====== ===== ======
</TABLE>
The difference between the statutory rate and the effective tax rate is a
result of nondeductible meals and entertainment expenses and other miscellaneous
expenses.
The tax effects of temporary differences that give rise to the significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1997 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- --------
<S> <C> <C>
CURRENT DEFERRED
Deferred tax assets:
Accounts receivable....................................... $ 19 $ 40
Inventory................................................. 286 291
Accruals and provisions................................... 576 921
------- --------
Current deferred tax asset........................ $ 881 $ 1,252
======= ========
NONCURRENT DEFERRED
Deferred tax assets -- net operating loss carryforwards..... 8,656 10,093
------- --------
8,656 10,093
Deferred tax liabilities:
Tax over book amortization.................................. (4,088) (5,751)
Difference between book and tax basis of property and
equipment................................................. (4,977) (8,511)
------- --------
(9,065) (14,262)
Net noncurrent deferred tax liability....................... (409) (4,169)
------- --------
Total net deferred tax asset (liability).......... $ 472 $ (2,917)
======= ========
</TABLE>
There is no valuation allowance as of fiscal year ended December 31, 1997.
It is the opinion of management that future operations will more likely than not
generate taxable income to realize deferred tax assets.
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $27,000 which are available to
offset future taxable income, if any, through 2011.
(12) EMPLOYEE BENEFIT PLANS
The Company has a defined benefit, noncontributory pension plan (terminated
on May 31, 1998) covering substantially all non-bargaining employees. Benefits
under the plan are based on the employee's compensation during the five most
highly compensated consecutive years during the ten years preceding normal
retirement date. The Company's funding policy for the plan is to make the
minimum annual contribution required by applicable regulations.
F-18
<PAGE> 93
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension cost for the Company's defined benefit pension plans
consisted of the following components for the years ended:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- ------------------------------------------
NINE MONTH THREE MONTH
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost (benefits) earned..... $ 714 $ 237 $1,059 $ 1,276
Interest cost on projected benefit
obligation....................... 515 197 781 903
Actual return on plan assets....... (1,509) (377) (906) (1,914)
Net amortization and deferral...... 997 180 71 983
------- ----- ------ -------
Net periodic pension cost.......... $ 717 $ 237 $1,005 $ 1,248
======= ===== ====== =======
</TABLE>
Assumptions used by the Company in the determination of pension plan
information consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 7.0% 7.0% 7.0%
Rate of increase in compensation levels..................... 5.5% 5.5% 5.5%
Expected long-term rate of return on plan assets............ 7.5% 7.5% 7.5%
</TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the accompanying balance sheets as of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits........................................... $ (7,940) $ (8,936)
======== ========
Accumulated benefits...................................... $ (8,172) $ (9,192)
======== ========
Projected benefits........................................ $(13,060) $(14,818)
Plan assets at fair value................................. 12,428 14,557
-------- --------
Projected benefit obligation in excess of plan
assets.......................................... (632) (261)
Items not yet recognized in earnings:
Unrecognized net loss (gain).............................. (45) (1,144)
Unrecognized net asset at December 31, 1986, being
recognized over 14.49 to 17.95 years................... 333 313
-------- --------
Pension liability recognized in the balance
sheet........................................... $ (344) $ (1,092)
======== ========
</TABLE>
F-19
<PAGE> 94
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company sponsors a defined contribution postretirement plan which
provides medical coverage for eligible retirees and their dependents (as defined
in the plan). On October 1, 1995, the Company adopted SFAS 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. The following sets
forth the plans' funded status reconciled with the amount shown in the Company's
consolidated balance sheets and consolidated statements of income on an accrual
basis rather than a pay-as-you-go (cash) basis as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents..................................... $ 825 $ 824
Fully eligible active plan participants..................... 356 382
Other active plan participants.............................. 316 363
------ ------
Accrued postretirement benefit cost......................... $1,497 $1,569
====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net periodic postretirement benefit cost
included the following components:
Service cost -- benefits attributed to service
during the period.......................... $ 17 $ 17 $ 18
Interest cost on accumulated postretirement
benefit obligation......................... 100 104 102
---- ---- ----
Net periodic postretirement benefit
cost................................ $117 $121 $120
==== ==== ====
</TABLE>
For measurement purposes, per capita claims costs for participants over age
65 were assumed to increase at a 7.07% and 6.50% annual rate for 1996 and 1997,
respectively; the rate was assumed to decrease gradually to 4.0% for 2001 and
remain at that level thereafter. The medical cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing the
assumed medical cost trend rates by 1 percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1997 by $214 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year ended 1997 by $18.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% for December 31, 1996 and 1997.
As of June 1, 1998 the Company adopted the Doane Products Company Savings
and Investment Plan for eligible employees not covered by collective bargaining
arrangements and the Doane Products Company Savings and Investment Plan -- Union
Plan for eligible union employees at the Joplin, Missouri plant. The plans are
intended to be qualified retirement plans under the Internal Revenue Code. Both
plans permit employee contributions between 1% and 15% of pre-tax earnings
subject to annual dollar limits set by the IRS, an annual employer profit
sharing contribution of $400 for each eligible participant and a variety of
investment options. The Doane Products Company Savings and Investment Plan also
includes an employer matching contribution in an amount equal to 50% of
participant contribution, up to 6% of compensation. Vesting for the employer
match is 25% per year for each full year of service.
Windy Hill adopted the Windy Hill Pet Food Company, Inc. Profit Sharing and
Savings Plan on March 1, 1995, as amended. The plan is intended to be a
qualified plan under the Internal Revenue Code. It permits employee
contributions from 1% to 15% of pre-tax earnings subject to annual dollar limits
set by the IRS. Of this amount, the Company will match 50% of the first 6% of
the employee contribution. In addition,
F-20
<PAGE> 95
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the plan provides for contribution to participant accounts of amounts equal to
2 1/2% of the employee's compensation.
(13) DEFERRED COMPENSATION AGREEMENTS AND SALARY CONTINUATION PLAN
The Company has deferred compensation agreements with two individuals which
provide, upon retirement, annual payments to be paid over ten consecutive years.
The liability is approximately $1,190, $1,150, and $1,117 at December 31, 1996
and 1997 and September 30, 1998 (unaudited), respectively.
The Company also has a salary continuation plan in which there were
twenty-three and twenty-two participants at December 31, 1996 and 1997,
respectively. Participants in the plan, who reach age fifty-five and have ten
years of service with the Company, become vested as to benefits which are
payable in ten equal annual installments after retirement. The Company has
recorded an expected future liability equal to the present value of future
payments under this plan. The liability is approximately $1,343, $1,362, and
$1,347 at December 31, 1996 and 1997 and September 30, 1998 (unaudited),
respectively.
(14) ADDITIONAL CASH FLOW INFORMATION
The following is additional cash flow information for the nine month period
ended September 30, 1995, for the three month period ended December 31, 1995,
and for the years ended December 31, 1996 and 1997 and for the nine months ended
September 30, 1997 and 1998 (unaudited).
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- --------------------------------------------------------------
NINE MONTH
NINE MONTH THREE MONTH PERIOD ENDED
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, -----------------
1995 1995 1996 1997 1997 1998
------------- ------------ ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Additional cash payment
information:
Interest paid (net of amounts
capitalized)................ $5,114 $192 $21,028 $21,924 $20,879 $20,565
Income taxes paid
(refunded).................. 302 (51) 351 -- -- --
Common stock issued in
connection with the
acquisition of Windy Hill... -- -- -- -- -- 30,273
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
The Company is party, in the ordinary course of business, to certain claims
and litigation. In management's opinion, the resolution of such matters is not
expected to have a material impact on the financial condition or results of
operations of the Company.
On October 30, 1998 the Company initiated a product recall for certain dry
dog food manufactured at its Temple, Texas plant. The recall covers dry dog food
manufactured at its Temple plant between July 1 and August 31, 1998 and does not
apply to dry dog food manufactured at other plants or the Company's dry cat
food, biscuits, treats or canned products. The recall resulted from reported
sickness and death of dogs in the State of Texas. These conditions were
attributed to elevated aflatoxins in corn which, is an ingredient in dry dog
food. Aflatoxins are compounds produced from certain kinds of crop molds that
can be caused by extreme weather conditions such as drought and heat. The
Company has an extensive corn testing program for the detection of aflatoxins
and that program has been intensified since the problems were reported. The
Company maintains insurance against losses from illness or death of animals;
however, the cost of the product recall is not covered by insurance. The Company
estimates the cost of the product recall to be $3.0 million, net of insurance
recoveries, and has recorded a charge to non-recurring costs in the fourth
quarter of fiscal 1998.
F-21
<PAGE> 96
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.......................................... $141,741 $137,215 $132,445 $153,340
Gross margins...................................... 19,016 18,885 20,623 23,321
Net income......................................... 995 481 1,905 2,853
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.......................................... $122,000 $116,132 $127,256 $147,829
Gross margins...................................... 18,247 15,416 14,508 18,270
Net income (loss).................................. (1,650) (236) (609) 977
</TABLE>
(17) NON-RECURRING TRANSITION EXPENSES
Non-recurring transition expenses for the nine months ended September 30,
1998 (unaudited) represent the non-recurring costs incurred in connection with
the acquisition and integration of Windy Hill with the Company as follows:
<TABLE>
<S> <C>
Relocation expense.......................................... 1,674
Merger bonuses.............................................. 1,477
Severance (former CEO of Doane)............................. 629
Miscellaneous............................................... 531
-----
4,311
</TABLE>
The relocation expense represents liability incurred to relocate personnel
from the former Doane corporate office to merged corporate headquarters. Merger
bonuses are being paid to Doane personnel in connection with the acquisition. As
of September 30, 1998, $3.5 million of these expenses were accrued and expected
to be paid in the next six months.
(18) BUSINESS ACQUISITIONS (UNAUDITED)
Ipes Iberica, S.A. Acquisition
On April 17, 1998 the Company purchased 100% of the outstanding stock of
Ipes Iberica, S.A. ("Ipes") for $28.3 million. Ipes is a private label pet food
manufacturer located in Spain with 1997 net sales of $21.1 million. The
transaction was financed through a $20.9 million non recourse facility provided
by the HSBC Investment Bank, Plc. in Spain, and $7.4 million from the Company's
Senior Credit Facility.
Windy Hill Acquisition
On August 3, 1998, the Company acquired Windy Hill for 6,366,000 shares of
Common Stock and the assumption of $183.5 million of indebtedness. Windy Hill is
a leading manufacturer of pet food products. Windy Hill manufactures products
for both dogs and cats, including dry, canned, semi-moist, soft dry and soft
treats and dog biscuits. With Windy Hill, the Company is the largest
manufacturer of dog biscuits in the United States. This acquisition has been
accounted for as a purchase with the purchase price and direct acquisition costs
allocated based on fair value of assets acquired and liabilities assumed.
Goodwill of approximately $19,000 was recorded in connection with this
transaction. The goodwill is being amortized over 40 years on a straight-line
basis.
F-22
<PAGE> 97
DOANE PET CARE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma information below has been prepared assuming Windy
Hill and Ipes were acquired January 1, 1997:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Net Sales................................................... $885,681 $641,674
Income before taxes
and extraordinary item.................................... 8,771 4,661
Net income (loss)........................................... $ 2,386 $ 1,032
======== ========
</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 acquisition occurred on the date indicated. The pro forma
results reflect certain adjustments for amortization, interest expense, fixed
overhead, and general and administrative expenses.
(19) SUBSEQUENT EVENTS (UNAUDITED)
On November 12, 1998, the Company refinanced the Senior Credit Facility,
the Windy Hill Credit Facility, a Windy Hill bridge loan facility, the Windy
Hill Subordinated Notes and its Senior Notes (the "Refinancing Transactions").
The pro forma effects of the Refinancing Transactions have been reflected in the
pro forma consolidated balance sheet as of September 30, 1998.
F-23
<PAGE> 98
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 LLP
San Francisco, California
March 13, 1998
F-24
<PAGE> 99
WINDY HILL PET FOOD HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JUNE 27,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 570 $ 731 $ 1,063
Accounts receivable (net of $48, $372 and $386 allowance,
respectively).......................................... 8,224 19,252 21,894
Accounts receivable -- other.............................. 19 1,694 1,716
Inventories (Note 4)...................................... 5,141 13,312 17,181
Prepaid expenses.......................................... 811 990 1,356
Current deferred tax asset (Note 11)...................... 30 2,335 2,394
------- -------- --------
Total current assets.............................. 14,795 38,314 45,604
Property, plant and equipment, net (Note 5)................. 22,484 60,774 79,277
Investments in joint ventures (Note 6)...................... -- 3,527 1,975
Goodwill and other intangible assets, net (Note 7).......... 51,515 98,465 108,570
Other assets, net (Note 8).................................. 3,431 13,612 15,617
------- -------- --------
Total assets...................................... $92,225 $214,692 $251,043
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 9)................ $ 5,800 $ 1,312 $ 1,937
Senior secured revolving debt facility (Note 9)........... 2,000 2,000 --
Accounts payable.......................................... 9,816 20,178 21,140
Accrued liabilities....................................... 2,699 8,154 10,750
------- -------- --------
Total current liabilities......................... 20,315 31,644 33,827
Accrued interest -- non-current (Note 9).................... 962 2,595 3,458
Deferred tax liability (Note 11)............................ 1,867 12,390 13,004
Senior secured term debt (Note 9)........................... 35,750 13,688 44,223
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 4,788
------- -------- --------
Total liabilities................................. 81,020 198,241 233,967
------- -------- --------
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) (3,715)
------- -------- --------
Total stockholders' equity........................ 11,205 16,451 17,076
------- -------- --------
Commitments and contingent liabilities (Notes 9, 12 and 17)
Total liabilities and stockholders' equity........ $92,225 $214,692 $251,043
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 100
WINDY HILL PET FOOD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
TEN MONTH YEARS ENDED ENDED
PERIOD ENDED --------------------------- -------------------
DECEMBER 30 DECEMBER 28, DECEMBER 27, JUNE 28, JUNE 27,
1995 1996 1997 1997 1998
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ $34,481 $82,993 $164,288 $60,323 $127,791
Cost of good sold 22,107 54,379 113,288 39,330 92,580
------- ------- -------- ------- --------
Gross profit................... 12,374 28,614 51,000 20,993 35,211
------- ------- -------- ------- --------
Operating expenses:
Promotion and distribution.......... 8,483 17,165 28,980 13,581 16,217
Selling, general and
administrative.................... 1,978 4,934 10,886 4,171 8,943
Non-recurring transition costs (Note
10)............................... -- -- 1,571 107 513
------- ------- -------- ------- --------
Total operating expenses....... 10,461 22,099 41,437 17,859 25,673
------- ------- -------- ------- --------
Operating income............... 1,913 6,515 9,563 3,134 9,538
Interest expense, net.................... 1,192 4,981 12,241 4,424 8,561
Equity in earnings of joint ventures..... -- -- (377) (29) (485)
Other expenses, net...................... -- 40 93 31 58
------- ------- -------- ------- --------
Income (loss) before income
taxes and extraordinary
item......................... 721 1,494 (2,394) (1,292) 1,404
Income tax expense (benefit)............. -- 824 (574) (514) 779
------- ------- -------- ------- --------
Income (loss) before
extraordinary item........... 721 670 (1,820) (778) 625
Extraordinary loss on early
extinguishment of debt, net of tax of
$0 in 1996 and $1,529 in 1997 (Note
9)..................................... -- 604 2,294 2,294 --
------- ------- -------- ------- --------
Net income (loss).............. $ 721 $ 66 $ (4,114) $(3,072) $ 625
======= ======= ======== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 101
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).......... -- -- -- -- -- -- -- -- 625 625
------ ----- ----- --- ----- ----- ------ ------- ------- -------
Balance at June 27, 1998
(unaudited)................. $ -- 2,540 $ -- 569 $ -- 4,167 $4,167 $16,624 $(3,715) $17,076
====== ===== ===== === ===== ===== ====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 102
WINDY HILL PET FOOD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTH
TEN MONTH YEARS ENDED PERIODS ENDED
PERIOD ENDED --------------------------- --------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27, JUNE 28, JUNE 27,
1995 1996 1997 1997 1998
------------ ------------ ------------ --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 721 $ 66 $ (4,114) $ (3,072) $ 625
Adjustments to reconcile net income
(loss) to cash provided by
operating activities:
Depreciation and amortization..... 787 2,719 6,882 2,543 4,470
Interest expense -- non-current... -- 962 1,633 1,077 1,365
Deferred income taxes............. -- 824 2,582 5,809 923
Early extinguishment of debt, net
of tax.......................... -- 604 2,294 2,294 --
Gain on sale of fixed assets...... -- -- 4 -- --
Equity in earnings of joint
ventures........................ -- -- (377) (29) (485)
Operating advances from joint
ventures........................ -- -- 1,015 84 1,063
Change in assets and liabilities,
net of effects of businesses
acquired:
(Increase) decrease in accounts
receivable................... (960) (3,941) (4,650) 1,348 540
(Increase) decrease in
inventories.................. 352 (454) (1,726) (243) 2,123
Increase in prepaid expenses.... (34) (412) (50) 66 (960)
Increase (decrease) in accounts
payable...................... 847 6,250 313 (3,121) (1,390)
Increase (decrease) in accrued
liabilities.................. -- 1,063 4,436 17,150 2,262
-------- -------- --------- --------- --------
Net cash provided by
operating activities....... 1,713 7,681 8,242 23,906 10,537
-------- -------- --------- --------- --------
Cash flows from investing activities:
Additions to property, plant and
equipment......................... (1,120) (1,091) (4,175) (944) (3,700)
Change to other non-current assets
and liabilities................... (321) (357) (1,087) (2,534) (678)
Proceeds from sale of assets......... -- -- 51,704 49,889 --
Payment for acquisition of
businesses, net of cash
acquired.......................... (22,165) (56,768) (135,350) (138,528) (34,523)
-------- -------- --------- --------- --------
Net cash used in investing
activities................. (23,606) (58,216) (88,908) (92,117) (38,901)
-------- -------- --------- --------- --------
Cash flows from financing activities:
Proceeds from senior secured term and
revolving debt.................... 17,000 48,000 71,500 189,917 34,000
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) (109,952) (5,263)
Capital contributions................ 6,000 4,750 10,000 9,583
Debt issuance and syndication
costs............................. (780) (3,272) (10,721) (10,565) (41)
-------- -------- --------- --------- --------
Net cash provided by (used
in) financing activities... 22,220 50,778 80,827 78,983 28,696
-------- -------- --------- --------- --------
Increase (decrease) in cash and cash
equivalents.......................... 327 243 161 10,772 332
Cash and cash equivalents, beginning of
period............................... -- 327 570 570 731
-------- -------- --------- --------- --------
Cash and cash equivalents, end of
period............................... $ 327 $ 570 $ 731 $ 11,342 $ 1,063
======== ======== ========= ========= ========
Supplemental cash flow disclosure:
Cash paid for interest............... $ 1,179 $ 3,759 $ 6,660 $ 3,391 $ 3,757
Income taxes paid.................... $ -- $ -- $ 8,806 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 103
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All information related to the six-month periods ended June 28, 1997 and
June 27, 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.
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.
F-29
<PAGE> 104
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 six-month periods ended June 28, 1997 and June 27, 1998 was
$0.3 million, $1.1 million, $2.9 million, $0.8 million and $1.8 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 six-month periods ended June 28, 1997
and June 27, 1998 was $67,000, $259,000, $715,000, $154,000, and $486,000,
respectively. Amortization of packaging design costs charged against income was
$158,000, $205,000, $283,000, $120,000 and $230,000, for the same periods
respectively.
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 June 27, 1998 (unaudited) based on terms currently
available to the Company in financial markets for similar instruments.
F-30
<PAGE> 105
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 June 27, 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 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
F-31
<PAGE> 106
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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.
F-32
<PAGE> 107
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- INVENTORIES
Inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JUNE 27,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................ $ 1,253 $ 3,004 $ 3,787
Packaging supplies....................... 2,339 5,536 8,230
Finished goods........................... 1,549 4,772 4,597
------- ------- -------
$ 5,141 $13,312 $16,614
======= ======= =======
</TABLE>
At December 27, 1997, the Company had commitments to purchase raw materials
aggregating approximately $13.2 million.
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JUNE 27,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Land.......................................... $ 203 $ 2,663 $ 2,968
Machinery and equipment....................... 17,043 42,882 56,393
Buildings and improvements.................... 6,266 16,328 19,781
Furniture and fixtures........................ 238 1,390 1,517
Computer equipment............................ 70 127 155
Construction-in-progress...................... 11 1,626 5,098
------- ------- -------
23,831 65,016 85,912
Less accumulated depreciation............... 1,347 4,242 (6,636)
------- ------- -------
$22,484 $60,774 $79,276
======= ======= =======
</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.
F-33
<PAGE> 108
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, JUNE 27,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill...................................... $ 7,588 $ 35,122 $ 46,948
Trademarks.................................... 45,000 66,807 66,807
Other intangibles............................. 332 852 852
------- -------- --------
52,920 102,781 114,607
Less accumulated amortization............... 1,405 4,316 6,037
------- -------- --------
$51,515 $ 98,465 $108,570
======= ======== ========
</TABLE>
NOTE 8 -- OTHER ASSETS
Other assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JUNE 27,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Debt issuance costs........................... $2,978 $10,464 $10,464
Defined benefit pension plan asset............ -- 2,474 2,923
Packaging, plate cost and other costs......... 1,059 1,899 4,171
------ ------- -------
4,037 14,837 17,558
Less accumulated amortization............... 606 1,225 1,941
------ ------- -------
$3,431 $13,612 $15,617
====== ======= =======
</TABLE>
F-34
<PAGE> 109
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- LONG TERM DEBT
Long term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JUNE 27,
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 46,160
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
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
</TABLE>
F-35
<PAGE> 110
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JUNE 27,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
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
------- -------- --------
65,351 151,667 180,827
Less: current portion of senior secured debt.......... 5,800 1,312 1,937
current portion of senior secured revolving debt
facility........................................ 2,000 2,000 --
------- -------- --------
Long term debt........................................ $57,551 $148,355 $178,890
======= ======== ========
</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 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.
F-36
<PAGE> 111
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-37
<PAGE> 112
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-38
<PAGE> 113
WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-39
<PAGE> 114
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.
F-40
<PAGE> 115
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 six-month periods ended June 28,
1997 and June 27, 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 six-month periods
ended June 28, 1997 and June 27, 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>
F-41
<PAGE> 116
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.
F-42
<PAGE> 117
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.
F-43
<PAGE> 118
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
F-44
<PAGE> 119
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.
F-45
<PAGE> 120
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hubbard Milling Company:
We have audited the accompanying balance sheets of Pet Food Division (a
division of Hubbard Milling Company) as of April 30, 1995, 1996 and 1997, and
the related statements of earnings and cash flows for each of the years in the
three-year period ended April 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pet Food Division (a
division of Hubbard Milling Company) at April 30, 1995, 1996 and 1997, and the
results of its operations and its cash flows for each of the years in the
three-year period ended April 30, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
June 6, 1997
Minneapolis, Minnesota
F-46
<PAGE> 121
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and short-term investments, at cost which
approximates market........................... $ 11,882,585 $ 13,846,705 $ 15,006,116
Trade receivables, less allowance for doubtful
accounts of $274,000, $258,500 and $224,221,
respectively.................................. 4,999,458 5,773,101 5,356,769
Inventories...................................... 6,194,481 5,762,544 5,372,905
Prepaid expenses................................. 177,467 102,155 59,764
------------ ------------ ------------
Total current assets..................... 23,253,991 25,484,505 25,795,554
Property, plant and equipment, at cost:
Land............................................. 1,345,190 1,340,063 1,348,540
Buildings........................................ 11,641,431 12,085,731 12,904,693
Equipment........................................ 32,395,959 34,658,895 35,986,524
------------ ------------ ------------
45,382,580 48,084,689 50,239,757
Less accumulated depreciation...................... (18,902,486) (21,575,369) (25,164,947)
------------ ------------ ------------
26,480,094 26,509,320 25,074,810
Construction in progress........................... 1,422,542 117,342 174,959
------------ ------------ ------------
Net property, plant and equipment................ 27,902,636 26,626,662 25,249,769
Investments in and advances to joint ventures and
partnerships..................................... 2,342,012 4,756,956 4,190,414
Other assets....................................... 4,366,328 5,227,497 4,082,569
------------ ------------ ------------
$ 57,864,967 $ 62,095,620 $ 59,318,306
============ ============ ============
LIABILITIES AND INVESTMENT AND ADVANCES BY PARENT
Current liabilities:
Accounts payable and accrued expenses............ $ 7,274,333 $ 8,686,131 $ 7,341,254
Associates' profit sharing trust, bonus and
savings plan.................................. 1,614,852 1,944,507 226,909
Income tax payable............................... 25,862 223,144 262,430
------------ ------------ ------------
Total current liabilities................ 8,915,047 10,853,782 7,830,593
Deferred credits................................... 2,864,497 1,565,007 2,393,560
Accrued postretirement and pension expense......... 1,085,814 1,423,852 1,610,471
------------ ------------ ------------
Total liabilities........................ 12,865,358 13,842,641 11,834,624
Investment and advances by Parent.................. 44,999,609 48,252,979 47,483,682
------------ ------------ ------------
Contingencies...................................... $ 57,864,967 $ 62,095,620 $ 59,318,306
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 122
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Net sales........................................... $87,736,386 $102,268,658 $108,523,031
Cost of sales....................................... 67,052,037 80,658,065 87,767,776
----------- ------------ ------------
Gross profit.............................. 20,684,349 21,610,593 20,755,255
Operating expenses:
Warehouse and delivery............................ 245,690 200,119 188,327
Selling and advertising........................... 6,468,689 7,035,518 6,924,434
General and administrative........................ 5,743,380 5,917,179 6,098,926
----------- ------------ ------------
Total operating expenses.................. 12,457,759 13,152,816 13,211,687
Operating income.................................. 8,226,590 8,457,777 7,543,568
Other income:
Interest.......................................... 789,672 774,582 867,180
Equity in earnings of joint ventures.............. 1,355,832 980,576 976,179
Other............................................. 46,207 36,910 80,865
----------- ------------ ------------
Total other income........................ 2,191,711 1,792,068 1,924,224
Income before other expenses and income taxes..... 10,418,301 10,249,845 9,467,792
Other expenses...................................... 41,124 26,456 10,778
Earnings before income taxes...................... 10,377,177 10,223,389 9,457,014
Income tax expense.................................. 4,133,387 3,935,682 3,683,678
----------- ------------ ------------
Net earnings...................................... $ 6,243,790 $ 6,287,707 $ 5,773,336
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 123
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------------------
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 6,243,790 $ 6,287,707 $ 5,773,336
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation.................................... 3,060,395 3,490,004 3,755,973
Amortization of goodwill and other intangible
assets........................................ 31,797 265,668 269,623
Deferred income taxes........................... 503,931 (1,916,094) 1,112,636
Deferred compensation........................... 724,434 152,519 180,147
(Gain) loss on disposal of property, plant and
equipment..................................... 22,036 22,418 (1,017)
Change in assets and liabilities excluding effects
of acquisitions:
(Increase) decrease in trade receivables........ (925,844) (773,643) 416,332
Decrease in inventories......................... 662,535 431,937 389,639
Decrease in prepaid expenses.................... 351,511 75,312 42,391
(Increase) decrease in other assets............. (226,584) (662,752) 411,220
Increase (decrease) in accounts payable and
accrued expenses.............................. 1,490,813 1,749,836 (1,158,260)
Increase (decrease) in income taxes payable..... (286,302) 197,282 39,286
Increase (decrease) in other current
liabilities................................... 423,347 329,655 (1,717,598)
------------ ----------- -----------
Total adjustments.......................... 5,832,069 3,362,142 3,740,372
------------ ----------- -----------
Net cash provided by operating
activities............................... 12,075,859 9,649,849 9,513,708
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from disposal of property, plant and
equipment....................................... 167,663 946 27,599
Additions to property, plant and equipment......... (2,607,308) (3,839,178) (2,405,805)
Payments and advances for acquisitions, joint
ventures and partnerships....................... (10,597,258) (813,160) 566,542
------------ ----------- -----------
Net cash used in investing activities...... (13,036,903) (4,651,392) (1,811,664)
------------ ----------- -----------
Cash flows from financing activities:
Increase (decrease) in intercompany account........ 4,890,319 (3,034,337) (6,542,633)
------------ ----------- -----------
Net cash provided by (used by) financing
activities............................... 4,890,319 (3,034,337) (6,542,633)
------------ ----------- -----------
Net increase in cash and cash
equivalents.............................. 3,929,275 1,964,120 1,159,411
------------ ----------- -----------
Cash and cash equivalents at beginning of period..... 7,953,310 11,882,585 13,846,705
============ =========== ===========
Cash and cash equivalents at end of period........... $ 11,882,585 $13,846,705 $15,006,116
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 124
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information and Basis of Statement Presentation
Pet Food Division ("Pet Food" or the "Company") is a division of Hubbard
Milling Company ("Hubbard"). Pet Food is a North American manufacturer and
marketer of private label dog and cat food.
The accompanying financial statements do not necessarily reflect the
financial position and results of operations of Pet Food in the future, or what
the financial position and results of operations would have been had it been an
independent entity during the periods presented.
Receivables
The Company provides an allowance for estimated collection losses. The
estimated losses are based on a review of the current status of existing
receivables in conjunction with historical collection experience.
Inventories
Inventories are valued substantially at the lower of cost (first in, first
out) or market.
Property, Depreciation and Amortization
The cost of buildings and equipment is capitalized and charged to earnings
utilizing the straight-line method of depreciation over the estimated useful
lives of the related assets. The cost of significant improvements to properties
is similarly depreciated, while the cost of repairs and routine maintenance is
charged to earnings as incurred. Goodwill is generally amortized over a period
of 15 years. Other intangible assets are amortized over the life of the related
assets.
Pension Plans
The Company has defined benefit plans covering substantially all of its
associates. The benefits are based on years of service and associate
compensation. The Company's funding policy is to contribute annually the amount
recommended by its actuaries. Contributions are intended to provide not only for
benefits attributed to service to-date but also for those expected to be earned
in the future.
Other Postretirement Benefits
The Company has adopted Statement of Financial Accounting Standards (SFAS)
106 "Employers' Accounting for Postretirement Benefits Other Than Pensions."
SFAS 106 requires the accrual of postretirement benefits over the years the
associates provide service to the date of their first eligibility for such
benefits. The Company is fully reserved to cover anticipated costs.
Income Taxes
The Company follows the practice of recognizing the income tax effects of
transactions in the year in which they enter into the determination of
accounting income, regardless of when they are recognized for income tax
purposes. Accordingly, income tax expense includes charges and credits for
deferred income taxes and the accumulated deferred income taxes are recorded in
the accompanying balance sheets.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
109 "Accounting for Income Taxes." SFAS 109 requires that deferred tax
liabilities and assets be established based on the difference between the
financial and income tax carrying values of assets and liabilities using
existing tax rates.
F-50
<PAGE> 125
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Statements of Cash Flows
Investments are valued at cost which approximates market. Short-term
investments with maturities of 60 days or less and investments which can be
redeemed immediately are considered cash equivalents.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for income taxes....................... $4,777,076 $7,933,594 $2,747,334
</TABLE>
The noncash investment activity during the fiscal year ended April 30, 1996
of $1,601,784 was for a transfer of property, plant & equipment to a joint
venture.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(2) SUPPLEMENTAL ASSET AND LIABILITY INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Inventories:
Raw materials.................................. $1,090,260 $ 980,509 $1,015,665
Finished and in-process goods.................. 2,070,094 2,205,168 2,005,206
Packaging and supplies......................... 3,034,127 2,576,867 2,352,034
---------- ---------- ----------
Total inventories...................... $6,194,481 $5,762,544 $5,372,905
========== ========== ==========
Other assets:
Goodwill....................................... $3,871,113 $3,615,663 $3,357,027
Other intangible assets........................ 123,696 114,574 104,158
Deferred taxes................................. -- 464,085 --
Restricted insurance deposits.................. -- 229,971 288,886
Other.......................................... 371,519 803,204 332,498
---------- ---------- ----------
Total other assets..................... $4,366,328 $5,227,497 $4,082,569
========== ========== ==========
Accounts payable and accrued expenses:
Accounts payable............................... $4,912,216 $5,496,369 $4,368,548
Accrued insurance.............................. 841,987 1,631,510 1,246,563
Accrued vacation............................... 612,890 852,068 889,363
Other.......................................... 907,240 706,184 836,780
---------- ---------- ----------
Total accounts payable and accrued
expenses............................. $7,274,333 $8,686,131 $7,341,254
========== ========== ==========
Deferred credits:
Deferred taxes................................. $1,452,009 $ -- $ 648,551
Deferred compensation.......................... 1,412,488 1,565,007 1,745,009
---------- ---------- ----------
Total deferred credits................. $2,864,497 $1,565,007 $2,393,560
========== ========== ==========
</TABLE>
F-51
<PAGE> 126
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENT AND ADVANCES BY PARENT
Investment and advances by parent represents Hubbard's ownership interest
in the recorded net assets of Pet Food. All cash transactions and intercompany
transactions flow through this account. A summary of the activity is as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period................ $33,865,500 $44,999,609 $48,252,979
Net earnings.................................. 6,243,790 6,287,707 5,773,336
Net intercompany activity..................... 4,890,319 (3,034,337) (6,542,633)
----------- ----------- -----------
Balance at end of period...................... $44,999,609 $48,252,979 $47,483,682
</TABLE>
(4) RELATED PARTY TRANSACTIONS
Transactions with Hubbard include certain disbursements by Hubbard on
behalf of Pet Food and charges for certain operating expenses including
insurance, bonus, profit sharing, corporate aircraft, corporate accounting,
information services and office services.
Expenses are charged based upon the specific identification of applicable
costs, and in certain instances, a proportional cost allocation based on
proportional headcount. Management believes that the basis of all such charges
is reasonable. The amount of general and administrative expenses charged by
Hubbard to Pet Food is as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
- ------------------------------------
1995 1996 1997
- ---------- ---------- ----------
<S> <C> <C>
$2,358,819 $2,201,489 $2,872,473
</TABLE>
Sales to and purchases from the Hubbard Animal Feed Division amounted to
the following:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Sales............................................ $3,161,613 $3,631,688 $3,492,207
Purchases........................................ $ 407,835 $ 601,549 $ 909,291
</TABLE>
(5) ACQUISITIONS
On April 3, 1995, the Company acquired substantially all the manufacturing
assets of Triumph Pet Industries, Inc. for cash. The facility manufactures and
markets pet biscuit products. The acquisition has been accounted for as a
purchase and included in the accompanying financial statements from the date of
purchase.
The components of cash used for the acquisition, as reflected in the
statement of cash flows, were as follows:
<TABLE>
<S> <C>
Fixed assets................................................ $ 6,147,745
Inventory................................................... 1,314,038
Prepaid expenses............................................ 127,231
Goodwill.................................................... 3,680,000
Noncompete agreements....................................... 100,000
-----------
$11,369,014
===========
</TABLE>
F-52
<PAGE> 127
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Assuming the acquisition had been made on May 1, 1994, pro forma net sales
in fiscal year 1995 and earnings of the Company would have been $98,549,343 and
$6,772,418, respectively.
(6) INCOME TAXES
The Company is part of a consolidated federal income tax return with
Hubbard and is allocated a federal tax provision as if the Company filed a
separate return. The state tax provision is allocated by applying a
weighted-average state tax rate to the Company's federal taxable income.
Income tax expense is comprised of the following components:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Current tax expense:
Federal....................................... $3,435,412 $ 6,294,306 $2,268,403
State......................................... 754,759 1,450,830 472,021
Deferred federal and state...................... (56,784) (3,809,454) 943,254
---------- ----------- ----------
Total income tax expense.............. $4,133,387 $ 3,935,682 $3,683,678
========== =========== ==========
</TABLE>
Income tax expense on earnings before income taxes differs from the amounts
derived by applying the federal statutory rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1995
----------------------
PERCENT
OF PRETAX
AMOUNT EARNINGS
---------- ---------
<S> <C> <C>
Computed "expected" federal tax expense..................... $3,632,012 35.0%
State income tax, net of federal income tax benefit......... 487,727 4.7%
Other, net.................................................. 13,648 0.1%
---------- ----
Total income tax expense.......................... $4,133,387 39.8%
========== ====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------------------------
1996 1997
---------------------- ----------------------
PERCENT PERCENT
OF PRETAX OF PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Computed "expected" federal tax expense... $3,475,952 34.0% $3,309,955 35.0%
State income tax, net of federal income
tax benefit............................. 480,499 4.7% 406,652 4.3%
Other, net................................ (20,769) (0.2%) (32,929) (0.3%)
---------- ---- ---------- ----
Total income tax expense........ $3,935,682 38.5% $3,683,678 39.0%
========== ==== ========== ====
</TABLE>
F-53
<PAGE> 128
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities result from temporary
differences in the carrying values of assets and liabilities for financial
statement and income tax purposes. The deferred tax assets and liabilities
relate to the following asset and liability accounts:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets related to:
Associate and retiree benefit accruals...... $ 1,183,228 $ 1,289,462 $ 1,696,798
Inventory................................... 727,405 616,518 538,599
Other accrued expenses...................... 175,892 494,844 360,773
Allowance for doubtful accounts............. 89,688 103,400 109,600
Other, net.................................. 97,096 598,132 67,688
----------- ----------- -----------
Total deferred tax assets........... $ 2,273,309 $ 3,102,356 $ 2,773,458
=========== =========== ===========
Deferred tax liabilities related to:
Property, plant and equipment............... (2,822,069) (2,509,652) (2,340,332)
Other, net.................................. (903,249) (128,619) (1,081,677)
----------- ----------- -----------
Total deferred tax liabilities...... (3,725,318) (2,638,271) (3,422,009)
Net deferred tax assets
(liabilities)..................... $(1,452,009) $ 464,085 $ (648,551)
=========== =========== ===========
</TABLE>
SFAS 109 also requires consideration of a valuation allowance if it is
"more likely than not" that benefits of deferred tax assets will not be
realized. Management has determined, based on prior earnings history and
anticipated earnings, that no valuation allowance is necessary at April 30,
1995, 1996, or 1997.
F-54
<PAGE> 129
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) ASSOCIATE BENEFIT PLANS
The Company has two noncontributory, defined benefit pension plans covering
hourly and salaried associates. Total pension expense for the plans for the
years ended April 30, 1997, 1996 and 1995 was $159,290, $211,914 and $193,546,
respectively.
The following tables set forth the funded status of the pension plans and
the amount recognized in the Company's balance sheets:
<TABLE>
<CAPTION>
APRIL 30, 1995
------------------------------------
HOURLY SALARIED
PLAN PLAN TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested............................................. $3,073,766 $2,020,267 $5,094,033
Nonvested.......................................... 191,633 129,893 321,526
Accumulated benefit obligation.................. 3,265,399 2,150,160 5,415,559
Effect of projected future salary increases.......... 27,779 404,386 432,165
Projected benefit obligation....................... 3,293,178 2,554,546 5,847,724
Market value of plan assets.......................... 3,140,553 2,655,823 5,796,376
Plan assets in (deficit) excess of projected
benefit obligation.............................. (152,625) 101,277 (51,348)
Unrecognized net transition asset.................... (280,934) (283,665) (564,599)
Unrecognized prior service cost...................... 127,238 84,928 212,166
Unrecognized net loss (gain)......................... 409,465 (50,292) 359,173
Prepaid pension cost (pension liability)........... $ 103,144 $ (147,752) $ (44,608)
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1996
------------------------------------
HOURLY SALARIED
PLAN PLAN TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested............................................. $3,800,501 $2,693,190 $6,493,691
Nonvested.......................................... 199,035 147,002 $ 346,037
Accumulated benefit obligation.................. 3,999,536 2,840,192 6,839,728
Effect of projected future salary increases.......... 42,593 538,180 580,773
Projected benefit obligation....................... 4,042,129 3,378,372 7,420,501
Market value of plan assets.......................... 3,938,066 3,638,533 7,576,599
Plan assets in (deficit) excess of projected
benefit obligation.............................. (104,063) 260,161 156,098
Unrecognized net transition asset.................... (260,765) (281,621) (542,386)
Unrecognized prior service cost...................... 171,088 85,210 256,298
Unrecognized net loss (gain)......................... 349,934 (192,126) 157,808
Prepaid pension cost (pension liability)........... $ 156,194 $ (128,376) $ 27,818
</TABLE>
F-55
<PAGE> 130
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
APRIL 30, 1997
------------------------------------
HOURLY SALARIED
PLAN PLAN TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested............................................. $4,312,313 $3,502,569 $7,814,882
Nonvested.......................................... 243,606 200,333 443,939
Accumulated benefit obligation.................. 4,555,919 3,702,902 8,258,821
Effect of projected future salary increases.......... 24,928 656,313 681,241
Projected benefit obligation....................... 4,580,847 4,359,215 8,940,062
Market value of plan assets.......................... 4,327,689 4,848,895 9,176,584
Plan assets in (deficit) excess of projected
benefit obligation.............................. (253,158) 489,680 236,522
Unrecognized net transition asset.................... (229,225) (295,599) (524,824)
Unrecognized prior service cost...................... 168,572 90,740 259,312
Unrecognized net loss (gain)......................... 499,731 (421,792) 77,939
Prepaid pension cost (pension liability)........... $ 185,920 $ (136,971) $ 48,949
</TABLE>
The net periodic pension cost components were as follows:
<TABLE>
<CAPTION>
HOURLY SALARIED
PLAN PLAN TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Service cost benefits earned during the year......... $ 81,541 $ 97,412 $ 178,953
Interest cost on projected benefit obligation........ 252,525 191,678 444,203
Loss on plan assets.................................. 211,690 94,462 306,152
Net amortization and other components................ (456,371) (318,175) (774,546)
---------- ---------- ----------
Total pension expense for the year ended
April 30, 1995........................... $ 89,385 $ 65,377 $ 154,762
========== ========== ==========
Service cost benefits earned during the year......... $ 103,112 $ 131,845 $ 234,957
Interest cost on projected benefit obligation........ 290,642 237,334 527,976
Gain on plan assets.................................. (368,043) (534,211) (902,254)
Net amortization and other components................ 70,016 239,891 309,907
---------- ---------- ----------
Total pension expense for the year ended
April 30, 1996........................... $ 95,727 $ 74,859 $ 170,586
========== ========== ==========
Service cost benefits earned during the year......... $ 108,381 $ 156,150 $ 264,531
Interest cost on projected benefit obligation........ 330,229 307,990 638,219
Gain on plan assets.................................. 91,312 (175,232) (83,920)
Net amortization and other components................ (449,558) (209,982) (659,540)
---------- ---------- ----------
Total pension expense for the year ended
April 30, 1997........................... $ 80,364 $ 78,926 $ 159,290
========== ========== ==========
</TABLE>
F-56
<PAGE> 131
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The principal actuarial assumptions used were:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------
1995 1996
----------------- -----------------
HOURLY SALARIED HOURLY SALARIED
PLAN PLAN PLAN PLAN
------ -------- ------ --------
<S> <C> <C> <C> <C>
Discount rate at period end......................... 8.0% 8.0% 7.5% 7.5%
Long-term rate of compensation increase............. -- 5.0% 5.0% 5.0%
Long-term rate of return on plan assets............. 8.0% 8.0% 8.0% 8.0%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1997
-------------------
HOURLY SALARIED
PLAN PLAN
-------- --------
<S> <C> <C>
Discount rate at period end................................. 7.5% 7.5%
Long-term rate of compensation increase..................... 5.0% 5.0%
Long-term rate of return on plan assets..................... 8.0% 8.0%
</TABLE>
The Company sponsors a profit sharing plan covering all salaried associates
and office clerical associates, with the exception of commissioned associates.
Contributions and costs are determined by Hubbard's Board of Directors and are
allocated to each participating associate in the proportion of the individual
associate's salary to the aggregate salaries of all participating associates.
Contribution expense for the years ended April 30, 1995, 1996 and 1997 was
$286,980, $0 and $198,500, respectively. In addition, the Company sponsors a
non-contributory 401(k) plan for its associates.
(8) OTHER POSTRETIREMENT BENEFITS
The Company provides health care benefits for eligible retired associates
and their covered dependents and spouses. Associates must be 55 years old 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 in effect is not
funded.
Under SFAS 106, postretirement benefit expense included the following
components:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current service cost................................. $ 38,400 $ 21,947 $ 26,510
Interest on accumulated benefit obligation........... 84,371 99,946 104,661
Amortization of unrecognized net gain................ -- (33,269) (70,092)
-------- -------- --------
Total postretirement benefits expense...... $122,771 $ 88,624 $ 61,079
======== ======== ========
</TABLE>
The accumulated postretirement obligation included the following
components:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Eligible active plan participants................ $ 964,542 $ 968,118 $1,215,459
Retirees......................................... 53,450 46,491 79,569
Other active plan participants................... 108,490 130,450 161,007
---------- ---------- ----------
Accumulated postretirement benefit
obligation........................... $1,126,482 $1,145,059 $1,456,035
========== ========== ==========
</TABLE>
F-57
<PAGE> 132
PET FOOD DIVISION
(A DIVISION OF HUBBARD MILLING COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The discount rate used to determine the accumulated postretirement benefit
obligation was 8%. The assumed health care cost trend rate used to measure the
obligation was 8% for 1997, and 8% thereafter. A one-percentage point increase
in the assumed health care cost trend rate would have increased the expense for
the year ended April 30, 1997 by $20,413 and the accumulated postretirement
obligation by $207,732.
(9) CONTINGENCIES
The Company is a party to several lawsuits and claims arising out of the
conduct of its business. While the ultimate results of lawsuits or other
proceedings against the Company cannot be predicted with certainty, management
does not expect that these matters will have a material adverse effect on the
financial position or results of operations of the Company.
F-58
<PAGE> 133
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Forward-looking Statements............ 9
Risk Factors.......................... 9
The Company........................... 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Dilution.............................. 18
Capitalization........................ 19
Unaudited Pro Forma Financial
Statements.......................... 20
Selected Consolidated Financial
Data................................ 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 35
Business.............................. 43
Management............................ 52
Certain Transactions.................. 59
Principal and Selling Stockholders.... 62
Description of Capital Stock.......... 64
Shares Eligible for Future Sale....... 67
Description of New Credit Facility.... 67
Description of Senior Subordinated
Notes............................... 68
Underwriting.......................... 70
Legal Matters......................... 72
Experts............................... 72
Available Information................. 73
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
16,666,668 SHARES
[LOGO]
DOANE PET CARE
ENTERPRISES, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
SCHRODER & CO. INC.
CHASE SECURITIES INC.
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 134
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of the Offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 67,850
NASD filing fee............................................. 23,500
NYSE listing fee............................................ 125,000
Legal fees and expenses..................................... 700,000
Accounting fees and expenses................................ 225,000
Printing expenses........................................... 300,000
Transfer Agent fees......................................... 10,000
Miscellaneous............................................... 148,650
----------
TOTAL............................................. $1,600,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, a Delaware
corporation has the power, under specified circumstances, to indemnify its
directors, officers, employees and agents in connection with threatened, pending
or completed actions, suits or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in right of the
corporation), brought against them by reason of the fact that they were or are
such directors, officers, employees or agents, against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in any
such action, suit or proceeding. Article Ten of the Amended and Restated
Certificate of Incorporation of the Registrant provides that the Registrant may
indemnify any director, officer, employee or agent of the Registrant to the
fullest extent permitted by the Delaware General Corporation Law as the same
exists or may be hereafter amended. Article VI of the Registrant's Amended and
Restated Bylaws provides that the Registrant shall indemnify each person who is
or was made a party to any actual or threatened civil, criminal, administrative
or investigative action, suit or proceeding because such person is or was an
officer or director of the Registrant or is a person who is or was serving at
the request of the Registrant as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service relating to employee benefit plans, to the fullest
extent permitted by the Delaware General Corporation Law as it existed at the
time the indemnification provisions of the Registrant's Amended and Restated
Bylaws were adopted or as may be thereafter amended.
Article VI of the Registrant's Amended and Restated Bylaws also provide
that the Registrant may maintain insurance, at its own expense, to protect
itself and any director, officer, employee or agent of the Registrant or of
another entity against any expense, liability, or loss, regardless of whether
the Registrant would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law provides that a
certificate of incorporation may contain a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law (relating to liability for unauthorized
acquisitions or redemptions of, or dividends on, capital stock) or (iv) for any
transaction from which the director derived an improper personal benefit.
Article Eight of the Registrant's Amended and Restated Certificate of
Incorporation contains such a provision.
II-1
<PAGE> 135
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the 1996 Management Stock Purchase Plan and the 1997 Management
Stock Purchase Plan, 500,000 shares of Common Stock of the Company were sold for
$2.50 per share to certain key employees. The sales of such Common Stock were
deemed to be exempt from registration under Rule 701 of Regulation F under the
Securities Act. See "Management -- Stock Option and Stock Purchase Plans."
Pursuant to the 1996 Stock Option Plan, 543,672 shares of Common Stock have
been sold to certain employees as a result of the exercise of options, all at an
exercise price of $2.50 per share, including 298,000 shares purchased by Bob L.
Robinson and 200,000 shares purchased by Douglas J. Cahill. The sales of such
shares of Common Stock were deemed to be exempt from registration under the
Securities Act in reliance on Rule 701 of Regulation F thereof. See
"Management -- Stock Option Grants" and "-- Stock Option Exercises."
On August 3, 1998, the Company issued 6,366,168 shares of Common Stock to
certain stockholders of Windy Hill in connection with the Windy Hill
Acquisition. The issuances of such securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) thereof as
transactions by an issuer not involving any public offering. In addition, the
recipients of the securities in such transactions represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions. To the Company's
knowledge, all recipients had adequate access, through their relationships with
the Company, to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1.1 -- Form of Underwriting Agreement
**3.1 -- Form of Amended and Restated Certificate of Incorporation
of Doane Pet Care Enterprises, Inc.
**3.2 -- Form of Amended and Restated Bylaws of Doane Pet Care
Enterprises, Inc.
*4.1 -- Specimen Common Stock certificate
**5.1 -- Opinion of Vinson & Elkins L.L.P.
***9.1 -- Amended and Restated Investors' Agreement dated as of
August 3, 1998 among Doane Pet Care Enterprises, Inc.,
Doane, 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., Bruckmann, Rosser,
Sherrill & Co., L.P., PNC Capital Corp, Windy Hill Pet
Food Company, L.L.C. and certain other persons named
therein
9.2 -- First Amendment to First Amended and Restated Investors'
Agreement dated as of October 14, 1998 among Doane Pet
Care Company, Doane Pet Care Enterprises, Inc., 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., Bruckmann, 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 9.2 of Doane's
Registration Statement on Form S-4, Reg. No 333-70757
(the "Doane Form S-4")
</TABLE>
II-2
<PAGE> 136
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
***10.1 -- Early Retirement Agreement and Release effective as of
June 30, 1998 between Doane and Bob L. Robinson
10.2 -- Employment Agreement dated January 1, 1998, between Doane
and Douglas J. Cahill (incorporated by reference to
Exhibit 10.3 to the Annual Report of Doane on Form 10-K
for the year ended December 31, 1997 (the "Doane 1997
Form 10-K"))
10.3 -- Employment Agreement dated January 1, 1998, between Doane
and Thomas R. Heidenthal (incorporated by reference to
Exhibit 10.4 to the Doane 1997 Form 10-K)
10.4 -- Employment Agreement dated January 1, 1998, between Doane
and Richard D. Wohlschlaeger (incorporated by reference
to Exhibit 10.4 to the Doane Form S-4)
10.5 -- Employment Agreement dated January 1, 1998, between Doane
and Richard A. Hannasch (incorporated by reference to
Exhibit 10.5 to the Doane Form S-4)
10.6 -- Employment Agreement dated January 1, 1998, between Doane
and David L. Horton (incorporated by reference to Exhibit
10.6 to the Doane Form S-4)
10.7 -- Doane Pet Care Enterprises, Inc.'s 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to the Annual
Report on Form 10-K for the year ended December 31, 1996)
10.8 -- First Amendment to Doane Pet Care Enterprises, Inc.'s
1996 Stock Option Plan (incorporated by reference to
Exhibit 10.8 to the Doane 1997 Form 10-K)
10.9 -- Second Amendment to Doane Pet Care Enterprises, Inc.'s
1996 Stock Option Plan (incorporated by reference to
Exhibit 10.9 to the Doane 1997 Form 10-K)
*10.10 -- Doane Pet Care Enterprises, Inc.'s 1999 Stock Option Plan
10.11 -- Termination and Dissolution Agreement, dated March 25,
1998, between Flint River Mills, Inc. and Windy Hill Pet
Food Company, Inc. (incorporated by reference to the
Quarterly Report of Windy Hill Pet Food Company, Inc. on
Form 10-Q filed on May 12, 1998)
***10.12 -- Indenture, dated November 12, 1998 between Doane and
Wilmington Trust Company
***10.13 -- Revolving Credit and Term Loan Agreement dated as of
November 12, 1998 among Doane Pet Care Enterprises, Inc.,
Doane, DLJ Capital Funding, Inc., as syndication agent,
Mercantile Bank National Association, as documentation
agent, and The Chase Manhattan Bank, as administrative
agent, and the banks named therein
**21.1 -- List of subsidiaries of Doane Pet Care Enterprises, Inc.
**23.1 -- Consent of KPMG LLP
**23.2 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto)
</TABLE>
II-3
<PAGE> 137
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
***24.1 -- Powers of Attorney
***27.1 -- Financial Data Schedule
</TABLE>
- ------------------------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
(b) Consolidated Financial Statement Schedules, Years ended December 31,
1995, 1996 and 1997.
All schedules are omitted because the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
related notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 138
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on the 8th day of February, 1999.
DOANE PET CARE ENTERPRISES, INC.
By /s/ THOMAS R. HEIDENTHAL
-----------------------------------
Thomas R. Heidenthal
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
* Chairman of the Board and Director February 8, 1999
- -----------------------------------------------------
George B. Kelly
* Chief Executive Officer, President February 8, 1999
- ----------------------------------------------------- and Director (Principal
Douglas J. Cahill Executive Officer)
/s/ THOMAS R. HEIDENTHAL Senior Vice President and Chief February 8, 1999
- ----------------------------------------------------- Financial Officer (Principal
Thomas R. Heidenthal Financial Officer and Principal
Accounting Officer)
* Director February 8, 1999
- -----------------------------------------------------
Peter T. Grauer
* Director February 8, 1999
- -----------------------------------------------------
M. Walid Mansur
Director February 8, 1999
- -----------------------------------------------------
Bob L. Robinson
* Director February 8, 1999
- -----------------------------------------------------
Jeffrey C. Walker
* Director February 8, 1999
- -----------------------------------------------------
Ray Chung
* Director February 8, 1999
- -----------------------------------------------------
Stephen C. Sherrill
*By: /s/ THOMAS R. HEIDENTHAL
------------------------------------------------
Thomas R. Heidenthal,
as attorney-in fact
Dated: February 8, 1999
</TABLE>
II-5
<PAGE> 139
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1.1 -- Form of Underwriting Agreement
**3.1 -- Form of Amended and Restated Certificate of Incorporation
of Doane Pet Care Enterprises, Inc.
**3.2 -- Form of Amended and Restated Bylaws of Doane Pet Care
Enterprises, Inc.
*4.1 -- Specimen Common Stock certificate
**5.1 -- Opinion of Vinson & Elkins L.L.P.
***9.1 -- Amended and Restated Investors' Agreement dated as of
August 3, 1998 among Doane Pet Care Enterprises, Inc.,
Doane, 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., Bruckmann, Rosser,
Sherrill & Co., L.P., PNC Capital Corp, Windy Hill Pet
Food Company, L.L.C. and certain other persons named
therein
9.2 -- First Amendment to First Amended and Restated Investors'
Agreement dated as of October 14, 1998 among Doane Pet
Care Company, Doane Pet Care Enterprises, Inc., 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., Bruckmann, 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 9.2 of Doane's
Registration Statement on Form S-4, Reg. No 333-70757
(the "Doane Form S-4")
***10.1 -- Early Retirement Agreement and Release effective as of
June 30, 1998 between Doane and Bob L. Robinson
10.2 -- Employment Agreement dated January 1, 1998, between Doane
and Douglas J. Cahill (incorporated by reference to
Exhibit 10.3 to the Annual Report of Doane on Form 10-K
for the year ended December 31, 1997 (the "Doane 1997
Form 10-K"))
10.3 -- Employment Agreement dated January 1, 1998, between Doane
and Thomas R. Heidenthal (incorporated by reference to
Exhibit 10.4 to the Doane 1997 Form 10-K)
10.4 -- Employment Agreement dated January 1, 1998, between Doane
and Richard D. Wohlschlaeger (incorporated by reference
to Exhibit 10.4 to the Doane Form S-4)
10.5 -- Employment Agreement dated January 1, 1998, between Doane
and Richard A. Hannasch (incorporated by reference to
Exhibit 10.5 to the Doane Form S-4)
</TABLE>
<PAGE> 140
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.6 -- Employment Agreement dated January 1, 1998, between Doane
and David L. Horton (incorporated by reference to Exhibit
10.6 to the Doane Form S-4)
10.7 -- Doane Pet Care Enterprises, Inc.'s 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to the Annual
Report on Form 10-K for the year ended December 31, 1996)
10.8 -- First Amendment to Doane Pet Care Enterprises, Inc.'s
1996 Stock Option Plan (incorporated by reference to
Exhibit 10.8 to the Doane 1997 Form 10-K)
10.9 -- Second Amendment to Doane Pet Care Enterprises, Inc.'s
1996 Stock Option Plan (incorporated by reference to
Exhibit 10.9 to the Doane 1997 Form 10-K)
*10.10 -- Doane Pet Care Enterprises, Inc.'s 1999 Stock Option Plan
10.11 -- Termination and Dissolution Agreement, dated March 25,
1998, between Flint River Mills, Inc. and Windy Hill Pet
Food Company, Inc. (incorporated by reference to the
Quarterly Report of Windy Hill Pet Food Company, Inc. on
Form 10-Q filed on May 12, 1998)
***10.12 -- Indenture, dated November 12, 1998 between Doane and
Wilmington Trust Company
***10.13 -- Revolving Credit and Term Loan Agreement dated as of
November 12, 1998 among Doane Pet Care Enterprises, Inc.,
Doane, DLJ Capital Funding, Inc., as syndication agent,
Mercantile Bank National Association, as documentation
agent, and The Chase Manhattan Bank, as administrative
agent, and the banks named therein
**21.1 -- List of subsidiaries of Doane Pet Care Enterprises, Inc.
**23.1 -- Consent of KPMG LLP
**23.2 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto)
***24.1 -- Powers of Attorney
***27.1 -- Financial Data Schedule
</TABLE>
- ------------------------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
<PAGE> 1
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DOANE PET CARE ENTERPRISES, INC.
FIRST: The name of the Corporation is Doane Pet Care Enterprises, Inc. (the
"Corporation").
SECOND: The address of its registered office in the State of Delaware is
The Corporation Trust Company, 1209 Orange Street, City of Wilmington, County of
New Castle, Delaware 19801. The name of its registered agent at such address is
The Corporation Trust Company.
THIRD: The nature of the business, or purpose to be conducted or promoted,
is to engage in any lawful act or activity for which corporations may be
organized under the Delaware General Corporation Law.
FOURTH: The total number of shares of capital stock which the Corporation
shall have authority to issue is eighty million (80,000,000) shares, of which
sixty-five million (65,000,000) shares shall be designated Class A Common Stock,
par value $.0001 per share (the "Class A Common Stock"); of which five million
(5,000,000) shares shall be designated Class B Common Stock, par value $.0001
per share (the "Class B Common Stock" and, together with the Class A Common
Stock, the "Common Stock") and of which ten million (10,000,000) shares shall be
designated Preferred Stock, par value $.01 per share (the "Preferred Stock").
Except as otherwise provided in this Article Fourth or as otherwise
required by Applicable Law (as defined below), all shares of Class A Common
Stock and Class B Common Stock shall be identical in all respects and shall
entitle the holders thereof to identical rights, preferences, privileges and
immunities.
The Preferred Stock may be divided into and issued from time to time in one
or more series as may be fixed and determined by the Board of Directors. The
relative rights and preferences of the Preferred Stock of each series shall be
such as shall be stated in any resolution or resolutions adopted by the Board of
Directors setting forth the designation of the series and fixing and determining
the relative rights and preferences thereof, any such resolution or resolutions
being herein called a "Directors' Resolution." The Board of Directors is hereby
authorized to fix and determine such variations in the designations,
preferences, and relative, participating, optional or other special rights
(including, without limitation, special voting rights, preferential rights to
receive dividends or assets upon liquidation, rights of conversion into Common
Stock or other securities, redemption provisions or sinking fund provisions) as
between series and as between the Preferred Stock or any series thereof and the
Common Stock, and the qualifications, limitations or restrictions of such
rights, all as shall be stated in a Directors' Resolution, and the shares of
Preferred Stock or any series thereof may have full or limited voting powers, or
be without voting powers, all as shall be stated in a Directors' Resolution.
<PAGE> 2
A. Voting Rights.
1. Class A Common Stock. Except as otherwise required by Applicable Law,
each outstanding share of Class A Common Stock shall be entitled to vote on each
matter on which the stockholders of the Corporation shall be entitled to vote,
and each holder of Class A Common Stock shall be entitled to one vote for each
share of such stock held by such holder. Except as otherwise provided by law,
the Class A Common Stock shall possess full and complete voting power for the
election of directors.
2. Class B Common Stock. Except as set forth herein or as otherwise
required by Applicable Law, each outstanding share of Class B Common Stock shall
not be entitled to vote on any matter on which the stockholders of the
Corporation shall be entitled to vote, and shares of Class B Common Stock shall
not be included in determining the number of shares voting or entitled to vote
on any such matters; provided that the holders of Class B Common Stock shall
have the right to vote as a separate class on any merger or consolidation of the
Corporation with or into another entity or entities (other than a merger that
does not result in any reclassification, conversion, exchange or cancellation of
the Common Stock) and any recapitalization or reorganization, in which merger,
consolidation, recapitalization or reorganization shares of Class B Common Stock
would receive or be exchanged for consideration different on a per share basis
from consideration received with respect to or in exchange for the shares of
Class A Common Stock or would otherwise be treated differently from shares of
Class A Common Stock in connection with such transaction, except that shares of
Class B Common Stock may, without being entitled to such a separate class vote,
receive or be exchanged in any such transaction for non-voting securities which
are otherwise identical on a per share basis in amount and form to the voting
securities received with respect to or exchanged for the Class A Common Stock so
long as (a) such non-voting securities are convertible into such voting
securities on the same terms as the Class B Common Stock is convertible into
Class A Common Stock and (b) all other consideration is equal on a per share
basis.
If the Class B Common Stock shall be entitled to vote as a class with
respect to any matter under the provisions of the laws of the State of Delaware,
the vote or concurrence of the holders of a majority of the outstanding shares
of Class B Common Stock shall be required for approval of such matter, unless
otherwise expressly required by law (and then only to the extent so required).
If the Class A Common Stock and the Class B Common Stock shall be entitled to
vote together as a single class with respect to any action under the provisions
of the law of the State of Delaware, the vote or concurrence of the holders of a
majority of the aggregate outstanding shares of Class A Common Stock and Class B
Common Stock, voting together as a single class, shall be required for approval
of such action, unless otherwise expressly required by Delaware law (and then
only to the extent so required).
B. Dividends. Any dividend or distribution on the Common Stock shall be
payable on shares of Class A Common Stock and Class B Common Stock, share and
share alike; provided, that, in the case of dividends payable in shares of
Common Stock of the Corporation, the shares so payable shall
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be payable in shares of Common Stock of the same class upon which the dividend
or distribution is being paid.
C. Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, after payment or provision for
payment of the debts and other liabilities of the Corporation, and after payment
of any amounts due under the terms of any class or series of stock senior to the
Class A Common Stock or Class B Common Stock as to dividends or upon
liquidation, the holders of shares of Class A Common Stock and Class B Common
Stock shall be entitled to share ratably, share and share alike, in the
remaining net assets of the Corporation.
D. Conversion.
1. Conversion of Class A Common Stock. Subject to and upon compliance with
the provisions of this Section D, each record holder of Class A Common Stock
shall be entitled to convert, at any time and from time to time, any or all of
the shares of Class A Common Stock held by such stockholder into the same number
of shares of Class B Common Stock, but only to the extent necessary to enable
compliance by a Person, or its Bank Holding Company Affiliates (as defined
below), with the requirements of Regulation Y or other bank regulatory statute,
rule or regulation.
2. Conversion of Class B Common Stock. Subject to and upon compliance with
the provisions of this Section D, each record holder of Class B Common Stock
shall be entitled at any time and from time to time, to convert any or all of
the shares of Class B Common Stock held by such stockholder into the same number
of shares of Class A Common Stock.
3. Conversion Procedure. Each conversion of shares of Common Stock of the
Corporation into shares of another class of Common Stock of the Corporation
shall be effected by the surrender of the certificate or certificates
representing the shares to be converted (the "Converting Shares") at the
principal office of the Corporation (or such other office or agency of the
Corporation as the Corporation may designate by written notice to the holders of
Common Stock) at any time during its usual business hours, together with written
notice by the holder of such Converting Shares, stating that such holder desires
to convert the Converting Shares, or a stated number of the shares represented
by such certificate or certificates, into an equal number of shares of the class
into which such shares may be converted (the "Converted Shares"). Such notice
shall also state the name or names with addresses and denomination in which the
certificate or certificates for Converted Shares are to be issued and shall
include instructions for the delivery thereof. Promptly after such surrender and
the receipt of such written notice, the Corporation will issue and deliver in
accordance with the surrendering holder's instructions the certificate or
certificates evidencing the Converted Shares issuable upon such conversion and
the Corporation will deliver to the converting holder a certificate (which shall
contain such legends as were set forth on the surrendered certificate or
certificates) representing any shares which were represented by the certificate
or certificates that were delivered to the Corporation in connection with such
conversion, but which were not converted. Such conversion, to the extent
permitted by law, shall be deemed to have been effected as of the close of
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business on the date on which such certificate or certificates shall have been
surrendered and such notice shall have been received by the Corporation, and at
such time the rights of the holder of the Converting Shares as such holder shall
cease and the person or persons in whose name or names the certificate or
certificates for the Converted Shares are to be issued upon such conversion
shall be deemed to have become the holder or holders of record of the Converted
Shares. Upon issuance of shares in accordance with this Section D, such
Converted Shares shall be deemed to be duly authorized, validly issued, fully
paid and non-assessable. The Corporation shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any Applicable Law or governmental regulation or any
requirements of any domestic securities upon which shares of Common Stock may be
listed (except for official notice of issuance which will be immediately
transmitted by the Corporation upon issuance).
4. Certain Legal Requirements. No Person subject to the provisions of
Regulation Y (as defined below) shall, and no such Person shall permit any of
its Affiliates to, convert any shares of Class B Common Stock held by it into
shares of Class A Common Stock if, after giving effect to such conversion, (a)
such Person and its Affiliates would own more than 5% of the total issued and
outstanding shares of Class A Common Stock, or (b) such Person would be deemed
under Regulation Y to control the Corporation.
5. Stock Splits; Adjustments. If the Corporation shall in any manner
subdivide (by stock split, stock dividend or otherwise) or combine (by reverse
stock split or otherwise) the outstanding shares of the Class A Common Stock or
the Class B Common Stock, then the outstanding shares of each other class of
Common Stock shall be subdivided or combined, as the case may be, to the same
extent, share and share alike, and effective provision shall be made for the
protection of the conversion rights hereunder.
In case of any reorganization, reclassification or change of shares of the
Class A Common Stock or Class B Common Stock (other than a change in par value
or from par to no par value or as a result of subdivision or combination), or in
case of any consolidation of the Corporation with one or more corporations or a
merger of the Corporation with another corporation (other than a consolidation
or merger in which the Corporation is the resulting or surviving corporation and
which does not result in any reclassification or change of outstanding shares of
Class A Common Stock or Class B Common Stock), each holder of a share of Class A
Common Stock or Class B Common Stock shall have the right at any time
thereafter, so long as the conversion right hereunder with respect to such share
would exist had such event not occurred, to convert such share into the kind and
amount of shares of stock and other securities and properties (including cash)
receivable upon such reorganization, reclassification, change, consolidation or
merger by a holder of the number of shares of Class A Common Stock or Class B
Common Stock into which such shares of Class A Common Stock or Class B Common
Stock, as the case may be, might have been converted immediately prior to such
reorganization, reclassification, change, consolidation or merger. In the event
of such reorganization, reclassification, change, consolidation or merger,
effective provision shall be made in the certificate of incorporation of the
resulting or surviving corporation or otherwise for the protection of the
conversion rights of the shares of Class A Common Stock and Class B
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Common Stock that shall be applicable, as nearly as reasonably may be, to any
such other shares of stock and other securities and property deliverable upon
conversion of such shares of Class A Common Stock or Class B Common Stock into
which such Class A Common Stock or Class B Common Stock might have been
converted immediately prior to such event.
E. Definitions. As used herein, the following terms shall have the meanings
below:
1. "Affiliate" shall mean, with respect to any Person, any other Person
directly or indirectly controlling, controlled by or under common control with
such Person.
2. "Applicable Law" shall mean all provisions of laws, statutes,
ordinances, rules, regulations, permits, certificates, writs, decrees or orders
of any governmental authority applicable to the Person in question or any of its
asset or property.
3. "Bank Holding Company Affiliate" shall mean, with respect to any
stockholder of the Corporation subject to the provisions of Regulation Y, (i) if
such stockholder is a bank holding company, any company controlled by such bank
holding company, and (ii) otherwise, the bank holding company that controls such
stockholder and any Person (other than such stockholder) controlled by such bank
holding company.
4. "Person" or "person" shall be construed broadly and shall include an
individual, a partnership, a limited liability company, a corporation, a trust,
a joint venture, an unincorporated organization or a government or any
department or agency thereof.
5. "Regulation Y" shall mean Regulation Y promulgated by the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 225 (or any successor to
such regulation).
FIFTH: The Board of Directors shall have the power to adopt, amend or
repeal by bylaws of the Corporation.
SIXTH: The number of directors which shall constitute the whole board shall
be such as from time to time shall be fixed in the manner provided in the bylaws
of the Corporation or, in the absence of any such provision, by resolution of
the Board of Directors, but in no case shall the number be less than eight.
The right to cumulate votes in the election of directors is expressly
prohibited.
The directors shall be classified with respect to the time for which they
shall severally hold office by dividing them into three classes, which classes
shall consist of an equal, or as near to equal as possible, number of directors.
At the first election of directors following the effective time of the
certificate of amendment to the certificate of incorporation of the Corporation
reflecting this Article, the director or directors of the first class shall be
elected for a term expiring at the next succeeding annual meeting of
stockholders to be held in 2000; the director or directors of the second class
for
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a term expiring at the annual meeting to be held in 2001; and the director or
directors of the third class for a term expiring at the annual meeting to be
held in 2002. At each annual meeting, commencing with the annual meeting in
2000, the successor or successors to the class of directors whose term shall
expire in that year shall be elected to hold office for the term of three years,
so that the term of office for one class of directors shall expire in each year.
Any increase or decrease in the number of directors constituting the Board shall
be apportioned among the classes so as to maintain the number of directors in
each class as near as possible to one-third of the whole number of directors as
so adjusted. Any director elected or appointed to fill a vacancy shall hold
office for the remaining term of the class to which such directorship is
assigned. No decrease in the number of directors constituting the Corporation's
Board of Directors shall shorten the term of any incumbent director. Any vacancy
in the Board of Directors, whether arising through death, resignation or removal
of a director, or through an increase in the number of directors of any class,
shall be filled by the majority vote of the remaining directors, although less
than a quorum, or by a sole remaining director. The bylaws may contain any
provision regarding classification of the Corporation's directors not
inconsistent with the terms hereof.
A director may be removed by the stockholders of the Corporation only with
cause, upon the affirmative vote of the holders of not less than eighty percent
(80%) of the outstanding shares of the Corporation then entitled to vote in an
election of directors, voting together as a single class.
Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or any provision of law that might otherwise permit
a lesser or no vote, but in addition to any affirmative vote of the holders of
any particular class or series of the capital stock of the Corporation required
by law or by this Amended and Restated Certificate of Incorporation, the
affirmative vote of the holders of not less than eighty percent (80%) of the
outstanding shares of the Corporation then entitled to vote in an election of
directors, voting together as a single class, shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article Sixth.
SEVENTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction with the State of Delaware may, on the application in a summary way
of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the applicable
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangements, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be
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binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
EIGHTH: To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or may hereafter be amended, a director of this
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
NINTH: All actions which are required to be or may be taken by the
stockholders of the Corporation shall be taken at a meeting of the stockholders,
duly held and upon proper notice, may not be taken by written consent without a
meeting, and the power of stockholders to consent in writing to the taking of
any action is specifically denied.
TENTH: The Corporation may indemnify any director, officer, employee or
agent of the Corporation to the fullest extent permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended.
ELEVENTH: The Corporation, by action of the Board of Directors, shall have
the right, subject to any express provisions or restrictions contained in the
Certificate of Incorporation or bylaws of the Corporation, from time to time, to
amend the certificate of incorporation or any provision thereof in any manner
now or hereafter provided by law, and all rights and powers of any kind
conferred upon a director or stockholder of the Corporation by the certificate
of incorporation or any amendment thereof are subject to such right of the
Corporation.
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FORM
OF
AMENDED AND RESTATED
BYLAWS
OF
DOANE PET CARE ENTERPRISES, INC.
A Delaware Corporation
Date of Adoption:
<PAGE> 2
BYLAWS
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
Article I
Offices
Section 1. Registered Office............................................................................5
Section 2. Other Offices................................................................................5
Article II
Stockholders
Section 1. Place of Meetings............................................................................5
Section 2. Quorum; Adjournment of Meetings..............................................................5
Section 3. Annual Meetings..............................................................................6
Section 4. Special Meetings.............................................................................6
Section 5. Record Date..................................................................................7
Section 6. Notice of Meetings...........................................................................7
Section 7. Stock List...................................................................................7
Section 8. Proxies......................................................................................8
Section 9. Voting; Elections; Inspectors................................................................8
Section 10. Conduct of Meetings..........................................................................9
Section 11. Treasury Stock...............................................................................9
Section 12. Action Without Meeting.......................................................................9
Section 13. Nominations for Election as a Director.......................................................9
Article III
Board of Directors
Section 1. Power; Number; Term of Office...............................................................10
Section 2. Quorum......................................................................................11
Section 3. Place of Meetings; Order of Business........................................................11
Section 4. First Meeting...............................................................................11
</TABLE>
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<TABLE>
<S> <C> <C>
Section 5. Regular Meetings............................................................................11
Section 6. Special Meetings............................................................................12
Section 7. Removal.....................................................................................12
Section 8. Vacancies; Increases in the Number of Directors.............................................12
Section 9. Compensation................................................................................12
Section 10. Action Without a Meeting; Telephone Conference Meeting......................................12
Section 11. Approval or Ratification of Acts or Contracts by Stockholders...............................13
Article IV
Committees
Section 1. Designation; Powers.........................................................................13
Section 2. Procedure; Meetings; Quorum.................................................................13
Section 3. Substitution of Members.....................................................................14
Article V
Officers
Section 1. Number, Titles and Term of Office...........................................................14
Section 2. Salaries....................................................................................14
Section 3. Removal.....................................................................................14
Section 4. Vacancies...................................................................................14
Section 5. Powers and Duties of the Chief Executive Officer............................................14
Section 6. Powers and Duties of the Chairman of the Board..............................................15
Section 7. Powers and Duties of the President..........................................................15
Section 8. Vice Presidents.............................................................................15
Section 9. Treasurer...................................................................................15
Section 10. Assistant Treasurers........................................................................15
Section 11. Secretary...................................................................................15
Section 12. Assistant Secretaries.......................................................................16
Section 13. Action with Respect to Securities of Other Corporations.....................................16
Article VI
Indemnification of Directors,
Officers, Employees and Agents
Section 1. Right to Indemnification....................................................................16
Section 2. Indemnification of Employees and Agents.....................................................17
Section 3. Right of Claimant to Bring Suit.............................................................17
Section 4. Nonexclusivity of Rights....................................................................17
Section 5. Insurance...................................................................................17
Section 6. Savings Clause..............................................................................18
</TABLE>
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<TABLE>
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Section 7. Definitions.................................................................................18
Article VII
Capital Stock
Section 1. Certificates of Stock.......................................................................18
Section 2. Transfer of Shares..........................................................................18
Section 3. Ownership of Shares.........................................................................19
Section 4. Regulations Regarding Certificates..........................................................19
Section 5. Lost or Destroyed Certificates..............................................................19
Article VIII
Miscellaneous Provisions
Section 1. Fiscal Year.................................................................................19
Section 2. Corporate Seal..............................................................................19
Section 3. Notice and Waiver of Notice.................................................................19
Section 4. Resignations................................................................................20
Section 5. Facsimile Signatures........................................................................20
Section 6. Reliance upon Books, Reports and Records....................................................20
Article IX
Amendments
</TABLE>
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DELAWARE BYLAWS
OF
DOANE PET CARE ENTERPRISES, INC.
Article I
Offices
Section 1. Registered Office. The registered office of Doane Pet Care
Enterprises, Inc. (the "Corporation") required by the General Corporation Law of
the State of Delaware to be maintained in the State of Delaware, shall be the
registered office named in the original Certificate of Incorporation of the
Corporation, or such other office as may be designated from time to time by the
Board of Directors in the manner provided by law. Should the Corporation
maintain a principal office within the State of Delaware such registered office
need not be identical to such principal office of the Corporation.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
Article II
Stockholders
Section 1. Place of Meetings. All meetings of the stockholders shall be
held at the principal office of the Corporation, or at such other place within
or without the State of Delaware as shall be specified or fixed in the notices
or waivers of notice thereof.
Section 2. Quorum; Adjournment of Meetings. Unless otherwise required
by law or provided in the Certificate of Incorporation or these bylaws, the
holders of a majority of the stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum at
any meeting of stockholders for the transaction of business and the act of a
majority of such stock so represented at any meeting of stockholders at which a
quorum is present shall constitute the act of the meeting of stockholders. The
stockholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
Notwithstanding the other provisions of the Certificate of
Incorporation or these bylaws, the chairman of the meeting or the holders of a
majority of the issued and outstanding stock, present in person or represented
by proxy, at any meeting of stockholders, whether or not a quorum is present,
shall have the power to adjourn such meeting from time to time, without any
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notice other than announcement at the meeting of the time and place of the
holding of the adjourned meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at such meeting. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally called.
Section 3. Annual Meetings. An annual meeting of stockholders, for the
election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held on such date, and at such time as the Board of Directors shall fix
and set forth in the notice of the meeting, which date shall be within thirteen
(13) months subsequent to the last annual meeting of stockholders. At the annual
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the annual meeting. To be properly brought before
the annual meeting of stockholders, business must be (a) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors or (c) otherwise properly brought before the
meeting by a stockholder of the Corporation who is a stockholder of record at
the time of giving of notice provided for in this Section 3, who shall be
entitled to vote at such meeting and who complies with the notice procedures set
forth below in this Section 3. For business to be properly brought before an
annual meeting by a stockholder, the stockholder, in addition to any other
applicable requirements, must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than ninety (90) days prior tot he anniversary date of the
immediately preceding annual meeting of stockholders of the Corporation. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of voting stock of the
Corporation which are beneficially owned by the stockholder, (iv) a
representation that the stockholder intends to appear in person or by proxy at
the meeting to bring the proposed business before the annual meeting, and (v) a
description of any material interest of the stockholder in such business.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Section 3. The presiding officer of an annual meeting shall, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 3, and if he should so determine, he shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted.
Notwithstanding the foregoing provisions of this Section 3, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Section 3.
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Section 4. Special Meetings. Unless otherwise provided in the
Certificate of Incorporation, special meetings of the stockholders for any
purpose or purposes may be called at any time by the Chairman of the Board (if
any), by the President or by a majority of the Board of Directors, or by a
majority of the executive committee (if any), and shall be called by the
Chairman of the Board (if any), by the President or the Secretary upon the
written request there for, stating the purpose or purposes of the meeting,
delivered to such officer, signed by the holder(s) of at least fifty percent
(50%) of the issued and outstanding stock entitled to vote at such meeting.
Section 5. Record Date. For the purpose of determining stockholders
entitled to notice of or to vote at any meeting of stockholders, or any
adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a date as the record date for any such determination of stockholders, which date
shall not be more than sixty (60) days nor less than ten (l0) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not fix a record date for any meeting of
the stockholders, the record date for determining stockholders entitled to
notice of or to vote at such meeting shall be at the close of business on the
day next preceding the day on which notice is given, or, if in accordance with
Article VIII, Section 3 of these bylaws notice is waived, at the close of
business on the day next preceding the day on which the meeting is held. If, in
accordance with Section 12 of this Article II, corporate action without a
meeting of stockholders is to be taken, the record date for determining
stockholders entitled to express consent to such corporate action in writing,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is expressed. The record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 6. Notice of Meetings. Written notice of the place, date and
hour of all meetings, and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be given by or at the direction of the
Chairman of the Board (if any) or the President, the Secretary or the other
person(s) calling the meeting to each stockholder entitled to vote at such
meeting not less than ten (10) nor more than sixty (60) days before the date of
the meeting. Such notice may be delivered either personally or by mail. If
mailed, notice is given when deposited in the United States mail, postage
prepaid, directed to the stockholder at his address as it appears on the records
of the Corporation.
Section 7. Stock List. A complete list of stockholders entitled to vote
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of
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each such stockholder and the number of shares registered in the name of such
stockholder, shall be open to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours, for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held. The stock list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 8. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to a corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy. Proxies for use at any meeting of stockholders shall be filed with the
Secretary, or such other officer as the Board of Directors may from time to time
determine by resolution, before or at the time of the meeting. All proxies shall
be received and taken charge of and all ballots shall be received and canvassed
by the secretary of the meeting who shall decide all questions touching upon the
qualification of voters, the validity of the proxies, and the acceptance or
rejection of votes, unless an inspector or inspectors shall have been appointed
by the chairman of the meeting, in which event such inspector or inspectors
shall decide all such questions.
No proxy shall be valid after three (3) years from its date, unless the
proxy provides for a longer period. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power.
Should a proxy designate two or more persons to act as proxies, unless
such instrument shall provide the contrary, a majority of such persons present
at any meeting at which their powers thereunder are to be exercised shall have
and may exercise all the powers of voting or giving consents thereby conferred,
or if only one be present, then such powers may be exercised by that one; or, if
an even number attend and a majority do not agree on any particular issue, each
proxy so attending shall be entitled to exercise such powers in respect of the
same portion of the shares as he or she is of the proxies representing such
shares.
Section 9. Voting; Elections; Inspectors. Unless otherwise required by
law or provided in the Certificate of Incorporation, each stockholder shall have
one vote for each share of stock entitled to vote which is registered in his
name on the record date for the meeting. Shares registered in the name of
another corporation, domestic or foreign, may be voted by such officer, agent or
proxy as the bylaw (or comparable instrument) of such corporation may prescribe,
or in the absence of such provision, as the Board of Directors (or comparable
body) of such corporation may determine. Shares registered in the name of a
deceased person may be voted by his executor or administrator, either in person
or by proxy.
All voting, except as required by the Certificate of Incorporation or
where otherwise required by law, may be by a voice vote; provided, however, that
upon demand therefor by stockholders holding a majority of the issued and
outstanding stock present in person or by proxy at any meeting a stock vote
shall be taken. Every stock vote shall be taken by written ballots, each of
which shall state the name of the stockholder or proxy voting and such other
information as may
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be required under the procedure established for the meeting. All elections of
directors shall be by ballot, unless otherwise provided in the Certificate of
Incorporation.
At any meeting at which a vote is taken by ballots, the chairman of the
meeting may appoint one or more inspectors, each of whom shall subscribe an oath
or affirmation to execute faithfully the duties of inspector at such meeting
with strict impartiality and according to the best of his ability. Such
inspector shall receive the ballots, count the votes and make and sign a
certificate of the result thereof. The chairman of the meeting may appoint any
person to serve as inspector, except no candidate for the office of director
shall be appointed as an inspector.
Unless otherwise provided in the Certificate of Incorporation,
cumulative voting for the election of directors shall be prohibited.
Section 10. Conduct of Meetings. The meetings of the stockholders shall
be presided over by the Chairman of the Board (if any), or if he is not present,
by the President, or if neither the Chairman of the Board (if any), nor
President is present, by a chairman elected at the meeting. The Secretary of the
Corporation, if present, shall act as secretary of such meetings, or if he is
not present, an Assistant Secretary shall so act; if neither the Secretary nor
an Assistant Secretary is present, then a secretary shall be appointed by the
chairman of the meeting. The chairman of any meeting of stockholders shall
determine the order of business and the procedure at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seem to him
in order. Unless the chairman of the meeting of stockholders shall otherwise
determine, the order of business shall be as follows:
(a) Calling of meeting to order.
(b) Election of a chairman and the appointment of a secretary
if necessary.
(c) Presentation of proof of the due calling of the meeting.
(d) Presentation and examination of proxies and determination of
a quorum.
(e) Reading and settlement of the minutes of the previous meeting.
(f) Reports of officers and committees.
(g) The election of directors if an annual meeting, or a meeting
called for that purpose.
(h) Unfinished business.
(i) New business.
(j) Adjournment.
Section 11. Treasury Stock. The Corporation shall not vote, directly or
indirectly, shares of its own stock owned by it and such shares shall not be
counted for quorum purposes.
Section 12. Action Without Meeting. Unless otherwise provided in the
Certificate of Incorporation, any action permitted or required by law, the
Certificate of Incorporation or these bylaws to be taken at a meeting of
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock entitled to vote thereon having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all
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shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than a unanimous
written consent shall be given by the Secretary to those stockholders who have
not consented in writing.
Section 13. Nominations for Election as a Director. Only persons who
are nominated in accordance with the procedures set forth in these bylaws shall
be eligible for election by stockholders to serve as directors. Nominations of
persons for election to the Board of Directors may be made at a meeting of
stockholders (a) by or at the direction of the Board of Directors or (b) by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of notice provided for in this Section 13, who shall be entitled to vote
for the election of directors at the meeting and who complies with the notice
procedures set forth in this Section 13. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation (i) with respect to an election
to be held at the annual meeting of the stockholders of the Corporation, not
less than ninety (90) days prior to the anniversary date of the immediately
preceding annual meeting of stockholders of the Corporation, and (ii) with
respect to an election to be held at a special meeting of stockholders of the
Corporation for the election of directors not later than the close of business
on the tenth (10th) day following the day on which notice of the date of the
special meeting was mailed to stockholders of the Corporation as provided in
these bylaws or public disclosure of the date of the special meeting was made,
whichever first occurs. Such stockholder's notice to the Secretary shall set
forth (x) as to each person whom the stockholder proposes to nominate for
election or re-election as a director, all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including such person's written
consent to being named in the proxy statement as a nominee and to serve as a
director if elected), and (y) as to the stockholder giving the notice (i) the
name and address, as they appear on the Corporation's books, of such stockholder
and (ii) the class and number of shares of voting stock of the Corporation which
are beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. In the event that a person is validly designated as a nominee to
the Board of Directors in accordance with the procedures set forth in this
Section 13 and shall thereafter become unable or unwilling to stand for election
to the Board of Directors, the Board of Directors may designate a substitute
nominee. Other than directors chosen pursuant to the provisions of Article III,
Section 8, no person shall be eligible to serve as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section 13.
The presiding officer of the meeting of stockholders shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these bylaws, and if he or she
should so determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing provisions of
this Section 13, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder with respect to the matters set forth in this Section
13.
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Article III
Board of Directors
Section 1. Power; Number; Term of Office. The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors, and subject to the restrictions imposed by law or the Certificate of
Incorporation, they may exercise all the powers of the Corporation.
The number of directors which shall constitute the whole Board of
Directors shall be such number as determined from time to time by resolution of
the Board of Directors, but in no case shall the number be less than eight (8).
No decrease in the number of directors may be made by the Board of Directors
which would have the effect of shortening the term of an incumbent director. If
the Board of Directors makes no such determination, the number of directors
shall be the number set forth in the Certificate of Incorporation. Each director
shall hold office for the term for which he is elected, and until his successor
shall have been elected and qualified or until his earlier death, incapacity,
resignation or removal.
The Board of Directors shall be divided into three classes: Class I,
Class II and Class III. The number of directors in each class shall be the whole
number contained in the quotient arrived at by dividing the authorized number of
Directors by three and if a fraction is also contained in such quotient and if
such fraction is one-third, the extra Director shall be a member of Class III,
and if the fraction is two-thirds, one extra Director shall be a member of Class
III and the other shall be a member of Class II. Except as otherwise provided in
this Section 1, each Director elected at an annual meeting shall serve for a
term ending on the third annual meeting following the meeting at which such
Director was elected; provided, however, that the Directors first elected to
Class I shall serve for a term ending at the annual meeting in 2000, the
Directors first elected to Class II shall serve for a term ending at the annual
meeting in 2001 and the Directors first elected to Class III shall serve for a
term ending at the annual meeting in 2002. If for any reason the number of
Directors in the various classes shall not conform with the formula set forth in
this Section, the Board of Directors may redesignate any director in a different
class in order that the balance of Directors in such class shall conform
thereto; provided, however, that no such redesignation may have the effect of
reducing the term to which a Director was elected.
Unless otherwise provided in the Certificate of Incorporation,
directors need not be stockholders nor residents of the State of Delaware.
Section 2. Quorum. Unless otherwise provided in the Certificate of
Incorporation, a majority of the total number of directors shall constitute a
quorum for the transaction of business of the Board of Directors and the vote of
a majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
Section 3. Place of Meetings; Order of Business. The directors may hold
their meetings and may have an office and keep the books of the Corporation,
except as otherwise provided by law, in such place or places, within or without
the State of Delaware, as the Board of Directors
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may from time to time determine by resolution. At all meetings of the Board of
Directors business shall be transacted in such order as shall from time to time
be determined by the Chairman of the Board (if any), or in his absence by the
President, or by resolution of the Board of Directors.
Section 4. First Meeting. Each newly elected Board of Directors may
hold its first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as the
annual meeting of the stockholders. Notice of such meeting shall not be
required. At the first meeting of the Board of Directors in each year at which a
quorum shall be present, held next after the annual meeting of stockholders, the
Board of Directors shall proceed to the election of the officers of the
Corporation.
Section 5. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as shall be designated from time to time
by resolution of the Board of Directors. Notice of such regular meetings shall
not be required.
Section 6. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board (if any), the President or, on the
written request of any two directors, by the Secretary, in each case on at least
twenty-four (24) hours personal, written, telecopy, cable or wireless notice to
each director. Such notice, or any waiver thereof pursuant to Article VIII,
Section 3 hereof, need not state the purpose or purposes of such meeting, except
as may otherwise be required by law or provided for in the Certificate of
Incorporation or these bylaws.
Section 7. Removal. Any director or the entire Board of Directors may
be removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at an election of directors; provided that, unless the
Certificate of Incorporation otherwise provides, if the Board of Directors is
classified, then the stockholders may effect such removal only for cause; and
provided further that, if the Certificate of Incorporation expressly grants to
stockholders the right to cumulate votes for the election of directors and if
less than the entire board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him if
then cumulatively voted at an election of the entire Board of Directors, or, if
there be classes of directors, at an election of the class of directors of which
such director is a part.
Section 8. Vacancies; Increases in the Number of Directors. Unless
otherwise provided in the Certificate of Incorporation, vacancies and newly
created directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office, although
less than a quorum, or a sole remaining director; and any director so chosen
shall hold office until the next annual election and until his successor shall
be duly elected and shall qualify, unless sooner displaced.
If the directors of the Corporation are divided into classes, any
directors elected to fill vacancies or newly created directorships shall hold
office until the next election of the class for which such directors shall have
been chosen, and until their successors shall be duly elected and shall qualify.
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Section 9. Compensation. Unless otherwise restricted by the Certificate
of Incorporation, the Board of Directors shall have the authority to fix the
compensation of directors.
Section 10. Action Without a Meeting; Telephone Conference Meeting.
Unless otherwise restricted by the Certificate of Incorporation, any action
required or permitted to be taken at any meeting of the Board of Directors, or
any committee designated by the Board of Directors, may be taken without a
meeting if all members of the Board of Directors or committee, as the case may
be consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee. Such consent
shall have the same force and effect as a unanimous vote at a meeting, and may
be stated as such in any document or instrument filed with the Secretary of
State of Delaware.
Unless otherwise restricted by the Certificate of Incorporation,
subject to the requirement for notice of meetings, members of the Board of
Directors, or members of any committee designated by the Board of Directors, may
participate in a meeting of such Board of Directors or committee, as the case
may be, by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in such a meeting shall constitute presence in person at such
meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
Section 11. Approval or Ratification of Acts or Contracts by
Stockholders. The Board of Directors in its discretion may submit any act or
contract for approval or ratification at any annual meeting of the stockholders,
or at any special meeting of the stockholders called for the purpose of
considering any such act or contract, and any act or contract that shall be
approved or be ratified by the vote of the stockholders holding a majority of
the issued and outstanding shares of stock of the Corporation entitled to vote
and present in person or by proxy at such meeting (pro vided that a quorum is
present), shall be as valid and as binding upon the Corporation and upon all the
stockholders as if it has been approved or ratified by every stockholder of the
Corporation. In addition, any such act or contract may be approved or ratified
by the written consent of stockholders holding a majority of the issued and
outstanding shares of capital stock of the Corporation entitled to vote and such
consent shall be as valid and as binding upon the Corporation and upon all the
stockholders as if it had been approved or ratified by every stockholder of the
Corporation.
Article IV
Committees
Section 1. Designation; Powers. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors, designate one
or more committees, including, if they shall so determine, an executive
committee, each such committee to consist of one or more of the directors of the
Corporation. Any such designated committee shall have and may exercise such of
the powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation as may be provided in such resolution,
except that no such committee
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shall have the power or authority of the Board of Directors in reference to
amending the Certifi cate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution of the Corporation, or amending, altering or repealing the bylaws or
adopting new bylaws for the Corporation and, unless such resolution or the
Certificate of Incorporation expressly so provides, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock. Any such designated committee may authorize the seal of the Corporation
to be affixed to all papers which may require it. In addition to the above such
committee or committees shall have such other powers and limitations of
authority as may be determined from time to time by resolution adopted by the
Board of Directors.
Section 2. Procedure; Meetings; Quorum. Any committee designated
pursuant to Section 1 of this Article shall choose its own chairman, shall keep
regular minutes of its proceedings and report the same to the Board of Directors
when requested, shall fix its own rules or procedures, and shall meet at such
times and at such place or places as may be provided by such rules, or by
resolution of such committee or resolution of the Board of Directors. At every
meet ing of any such committee, the presence of a majority of all the members
thereof shall constitute a quorum and the affirmative vote of a majority of the
members present shall be necessary for the adoption by it of any resolution.
Section 3. Substitution of Members. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of such committee. In
the absence or disqualification of a member of a committee, the member or
members present at any meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of the absent or disqualified
member.
Article V
Officers
Section 1. Number, Titles and Term of Office. The officers of the
Corporation shall be a President, one or more Vice Presidents (any one or more
of whom may be designated Executive Vice President or Senior Vice President), a
Treasurer, a Secretary and, if the Board of Directors so elects, a Chairman of
the Board and such other officers as the Board of Directors may from time to
time elect or appoint. Each officer shall hold office until his successor shall
be duly elected and shall qualify or until his death or until he shall resign or
shall have been removed in the manner hereinafter provided. Any number of
offices may be held by the same person, unless the Certificate of Incorporation
provides otherwise. Except for the Chairman of the Board, if any, no officer
need be a director.
Section 2. Salaries. The salaries or other compensation of the officers
and agents of the Corporation shall be fixed from time to time by the Board of
Directors.
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Section 3. Removal. Any officer or agent elected or appointed by the
Board of Directors may be removed, either with or without cause, by the vote of
a majority of the whole Board of Directors at a special meeting called for the
purpose, or at any regular meeting of the Board of Directors, provided the
notice for such meeting shall specify that the matter of any such proposed
removal will be considered at the meeting but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. In addition,
any officer may be removed, with or without cause, by any ranking officer of
such first officer, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights.
Section 4. Vacancies. Any vacancy occurring in any office of the
Corporation may be filled by the Board of Directors.
Section 5. Powers and Duties of the Chief Executive Officer. The
President shall be the chief executive officer of the Corporation unless the
Board of Directors designates the Chairman of the Board as chief executive
officer. Subject to the control of the Board of Directors and the executive
committee (if any), the chief executive officer shall have general executive
charge, management and control of the properties, business and operations of the
Corporation with all such powers as may be reasonably incident to such
responsibilities; he may agree upon and execute all leases, contracts, evidences
of indebtedness and other obligations in the name of the Corporation and may
sign all certificates for shares of capital stock of the Corporation; and shall
have such other powers and duties as designated in accordance with these bylaws
and as from time to time may be assigned to him by the Board of Directors.
Section 6. Powers and Duties of the Chairman of the Board. If elected,
the Chairman of the Board shall preside at all meetings of the stockholders and
of the Board of Directors; and he shall have such other powers and duties as
designated in these bylaws and as from time to time may be assigned to him by
the Board of Directors.
Section 7. Powers and Duties of the President. Unless the Board of
Directors otherwise determines, the President shall have the authority to agree
upon and execute all leases, contracts, evidences of indebtedness and other
obligations in the name of the Corporation; and, unless the Board of Directors
otherwise determines, he shall, in the absence of the Chairman of the Board or
if there be no Chairman of the Board, preside at all meetings of the
stockholders and (should he be a director) of the Board of Directors; and he
shall have such other powers and duties as designated in accordance with these
bylaws and as from time to time may be assigned to him by the Board of
Directors.
Section 8. Vice Presidents. In the absence of the President, or in the
event of his inability or refusal to act, a Vice President designated by the
Board of Directors shall perform the duties of the President, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. In the absence of a designation by the Board of Directors of a Vice
President to perform the duties of the President, or in the event of his absence
or inability or refusal to act, the Vice President who is present and who is
senior in terms of time as a Vice
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President of the Corporation shall so act. The Vice Presidents shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
Section 9. Treasurer. The Treasurer shall have responsibility for the
custody and control of all the funds and securities of the Corporation, and he
shall have such other powers and duties as designated in these bylaws and as
from time to time may be assigned to him by the Board of Directors. He shall
perform all acts incident to the position of Treasurer, subject to the control
of the chief executive officer and the Board of Directors; and he shall, if
required by the Board of Directors, give such bond for the faithful discharge of
his duties in such form as the Board of Directors may require.
Section 10. Assistant Treasurers. Each Assistant Treasurer shall have
the usual powers and duties pertaining to his office, together with such other
powers and duties as designated in these bylaws and as from time to time may be
assigned to him by the chief executive officer or the Board of Directors. The
Assistant Treasurers shall exercise the powers of the Treasurer during that
officer's absence or inability or refusal to act.
Section 11. Secretary. The Secretary shall keep the minutes of all
meetings of the Board of Directors, committees of directors and the
stockholders, in books provided for that purpose; he shall attend to the giving
and serving of all notices; he may in the name of the Corporation affix the seal
of the Corporation to all contracts of the Corporation and attest the affixation
of the seal of the Corporation thereto; he may sign with the other appointed
officers all certificates for shares of capital stock of the Corporation; he
shall have charge of the certificate books, transfer books and stock ledgers,
and such other books and papers as the Board of Directors may direct, all of
which shall at all reasonable times be open to inspection of any director upon
application at the office of the Corporation during business hours; he shall
have such other powers and duties as designated in these bylaws and as from time
to time may be assigned to him by the Board of Directors; and he shall in
general perform all acts incident to the office of Secretary, subject to the
control of the chief executive officer and the Board of Directors.
Section 12. Assistant Secretaries. Each Assistant Secretary shall have
the usual powers and duties pertaining to his office, together with such other
powers and duties as designated in these bylaws and as from time to time may be
assigned to him by the chief executive officer or the Board of Directors. The
Assistant Secretaries shall exercise the powers of the Secretary during that
officer's absence or inability or refusal to act.
Section 13. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the chief executive officer
shall have power to vote and otherwise act on behalf of the Corporation, in
person or by proxy, at any meeting of security holders of or with respect to any
action of security holders of any other corporation in which this Corporation
may hold securities and otherwise to exercise any and all rights and powers
which this Corporation may possess by reason of its ownership of securities in
such other corporation.
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Article VI
Indemnification of Directors,
Officers, Employees and Agents
Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she or a person
of whom he or she is the legal representative, is or was or has agreed to become
a director or officer of the Corporation or is or was serving or has agreed to
serve at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director or officer or in any other capacity while serving or having agreed to
serve as a director or officer, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended, (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment) against all expense, liability
and loss (including without limitation, attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to serve in the
capacity which initially entitled such person to indemnity hereunder and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors. The right to indemnification conferred in this Article VI
shall be a contract right and shall include the right to be paid from time to
time (and within thirty (30) days after the indemnitee submits sufficient
evidence of the expenses incurred or to be incurred within sixty (60) days after
such request) by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires, the payment of such expenses incurred
by a current, former or proposed director or officer in his or her capacity as a
director or officer or proposed director or officer (and not in any other
capacity in which service was or is or has been agreed to be rendered by such
person while a director or officer, including, without limitation, service to an
employee benefit plan) in advance of the final disposition of a proceeding,
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such indemnified person, to repay all amounts so advanced if it shall
ultimately be determined that such indemnified person is not entitled to be
indemnified under this Section or otherwise.
Section 2. Indemnification of Employees and Agents. The Corporation
may, by action of its Board of Directors, provide indemnification to employees
and agents of the Corporation, individually or as a group, with the same scope
and effect as the indemnification of directors and officers provided for in this
Article.
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Section 3. Right of Claimant to Bring Suit. If a written claim received
by the Corporation from or on behalf of an indemnified party under this Article
VI is not paid in full by the Corporation within ninety days after such receipt,
the claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is required, has
been tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
Section 4. Nonexclusivity of Rights. The right to indemnification and
the advancement and payment of expenses conferred in this Article VI shall not
be exclusive of any other right which any person may have or hereafter acquire
under any law (common or statutory), provision of the Certificate of
Incorporation of the Corporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 5. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any person who is or was serving as a director,
officer, employee or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
Section 6. Savings Clause. If this Article VI or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify and hold harmless each director and
officer of the Corporation, as to costs, charges and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit or proceeding, whether civil, criminal, administrative or
investigative to the full extent permitted by any applicable portion of this
Article VI that shall not have been invalidated and to the fullest extent
permitted by applicable law.
Section 7. Definitions. For purposes of this Article, reference to the
"Corporation" shall include, in addition to the Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger prior to (or, in the case of an entity specifically
designated in a resolution of the Board of Directors, after) the adoption hereof
and which, if its separate existence had continued, would have had the power and
authority to
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indemnify its directors, officers and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another cor poration, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
Article VII
Capital Stock
Section 1. Certificates of Stock. The certificates for shares of the
capital stock of the Corporation shall be in such form or forms, not
inconsistent with that required by law and the Certificate of Incorporation, as
shall be approved by the Board of Directors. The Chairman of the Board (if any),
President or a Vice President shall cause to be issued to each stockholder one
or more certificates, under the seal of the Corporation or a facsimile thereof
if the Board of Directors shall have provided for such seal, and signed by the
Chairman of the Board (if any), President or a Vice President and the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer certifying
the number of shares (and, if the stock of the Corporation shall be divided into
classes or series, the class and series of such shares) owned by such
stockholder in the Corporation; provided, however, that any of or all the
signatures on the certificate may be facsimile. The stock record books and the
blank stock certificate books shall be kept by the Secretary, or at the office
of such transfer agent or transfer agents as the Board of Directors may from
time to time by resolution determine. In case any officer, transfer agent or
registrar who shall have signed or whose facsimile signature or signatures shall
have been placed upon any such certificate or certificates shall have ceased to
be such officer, transfer agent or registrar before such certificate is issued
by the Corporation, such certificate may nevertheless be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent or registrar at the date of issue. The stock certificates shall be
consecutively numbered and shall be entered in the books of the Corporation as
they are issued and shall exhibit the holder's name and number of shares.
Section 2. Transfer of Shares. The shares of stock of the Corporation
shall be transferable only on the books of the Corporation by the holders
thereof in person or by their duly authorized attorneys or legal representatives
upon surrender and cancellation of certificates for a like number of shares.
Upon surrender to the Corporation or a transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
Section 3. Ownership of Shares. The Corporation shall be entitled to
treat the holder of record of any share or shares of capital stock of the
Corporation as the holder in fact thereof and, accordingly, shall not be bound
to recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Delaware.
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Section 4. Regulations Regarding Certificates. The Board of Directors
shall have the power and authority to make all such rules and regulations as
they may deem expedient concerning the issue, transfer and registration or the
replacement of certificates for shares of capital stock of the Corporation.
Section 5. Lost or Destroyed Certificates. The Board of Directors may
determine the conditions upon which a new certificate of stock may be issued in
place of a certificate which is alleged to have been lost, stolen or destroyed;
and may, in their discretion, require the owner of such certificate or his legal
representative to give bond, with sufficient surety, to indemnify the
Corporation and each transfer agent and registrar against any and all losses or
claims which may arise by reason of the issue of a new certificate in the place
of the one so lost, stolen or destroyed.
Article VIII
Miscellaneous Provisions
Section 1. Fiscal Year. The fiscal year of the Corporation shall be
such as established from time to time by the Board of Directors.
Section 2. Corporate Seal. The Board of Directors may provide a
suitable seal, containing the name of the Corporation. The Secretary shall have
charge of the seal (if any). If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by the Assistant Secretary or Assistant Treasurer.
Section 3. Notice and Waiver of Notice. Whenever any notice is required
to be given by law, the Certificate of Incorporation or under the provisions of
these bylaws, said notice shall be deemed to be sufficient if given (i) by
telegraphic, cable or wireless transmission (including telecopy) or (ii) by
deposit of the same in a post office box in a sealed prepaid wrapper addressed
to the person entitled thereto at his post office address, as it appears on the
records of the Corpora tion, and such notice shall be deemed to have been given
on the day of such transmission or mailing, as the case may be.
Whenever notice is required to be given by law, the Certificate of
Incorporation or under any of the provisions of these bylaws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice unless so required by the Certificate of Incorporation
or the bylaws.
Section 4. Resignations. Any director, member of a committee or officer
may resign at any time. Such resignation shall be made in writing and shall take
effect at the time specified therein, or if no time be specified, at the time of
its receipt by the chief executive officer or Secretary.
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The acceptance of a resignation shall not be necessary to make it effective,
unless expressly so provided in the resignation.
Section 5. Facsimile Signatures. In addition to the provisions for the
use of facsimile signatures elsewhere specifically authorized in these bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors. Action taken by the Board
of Directors pursuant to Section 10 of Article II may be taken and evidenced by
facsimile signatures.
Section 6. Reliance upon Books, Reports and Records. Each director and
each member of any committee designated by the Board of Directors shall, in the
performance of his duties, be fully protected in relying in good faith upon the
books of account or reports made to the Corporation by any of its officers, or
by an independent certified public accountant, or by an appraiser selected with
reasonable care by the Board of Directors or by any such committee, or in
relying in good faith upon other records of the Corporation.
Article IX
Amendments
If provided in the Certificate of Incorporation of the Corporation, the
Board of Directors shall have the power to adopt, amend and repeal from time to
time bylaws of the Corporation, subject to the right of the stockholders
entitled to vote with respect thereto to amend or repeal such bylaws as adopted
or amended by the Board of Directors.
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EXHIBIT 5.1
[VINSON & ELKINS L.L.P. LETTERHEAD]
, 1999
Doane Pet Care Enterprises, Inc.
103 Powell Court, Suite 200
Brentwood, Tennessee 37027
Ladies and Gentlemen:
We have acted as counsel to Doane Pet Care Enterprises, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the Company's
Registration Statement on Form S-1 (File No. 333-61027) as filed by the Company
with the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended (the "Registration Statement"), which Registration Statement
relates to the proposed offer and sale by the Company and certain stockholders
of an aggregate of up to 19,166,668 shares of the Company's common stock,
$0.0001 par value (including the underwriters' over-allotment option) (the
"Shares"). In such connection, we are passing on certain legal matters in
connection with the sale of the Shares. At your request, this opinion is being
furnished to you for filing as an exhibit to the Registration Statement.
In connection with rendering this opinion, we have examined such
certificates, instruments and documents and reviewed such questions of law as we
have considered necessary or appropriate for the purposes of this opinion. In
addition, we have relied as to factual matters on certificates of certain public
officials and officers of the Company.
Based upon the foregoing examination and review, we are of the opinion that
(i) with respect to the Shares that are currently issued and outstanding, such
Shares have been validly issued and are fully paid and non-assessable and (ii)
with respect to all other Shares, such Shares have been duly authorized for
issuance and, when the Registration Statement has been declared effective and
the Shares are issued in accordance with the provisions of the Underwriting
Agreement (as defined in the Registration Statement), such Shares will be
validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving this consent, however, we do not hereby admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933 and the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
VINSON & ELKINS L.L.P.
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EXHIBIT 21.1
SUBSIDIARIES OF DOANE PET CARE ENTERPRISES, INC.
Name of Subsidiary Place of Incorporation/Organization
- ------------------ -----------------------------------
Doane Pet Care Company Delaware
DPC International Limited United Kingdom
Effeffe, S.p.a. Italy
Doane Pet Care Spain, S.A. Spain
IPES IBERICA, S.A. Spain
Doane/Windy Hill Joint Venture Corp. Delaware
Doane/Windy Hill Joint Venture, LLC Texas
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Doane Pet Care Enterprises, Inc.
We consent to the use of our reports (dated February 13, 1998 with
respect to Doane Pet Care Enterprises, Inc., dated March 13, 1998 with
respect to Windy Hill Pet Food Holdings, Inc. and dated June 6, 1997 with
respect to the Pet Food Division (a division of Hubbard Milling Company))
included herein and to the reference to our firm under the heading
"Experts" in the registration statement.
/s/ KMPG LLP
KMPG LLP
Houston, Texas
February 8, 1999
