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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 1999
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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DOANE PET CARE COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 2047 43-1350515
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
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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)
Copy to:
ALAN P. BADEN
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER
1001 FANNIN
HOUSTON, TEXAS 77002
(713) 758-2222
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
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9 3/4% Senior Subordinated Notes due 2007.......... $150,000,000 $41,700
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(1) Estimated solely for the purpose of calculating registration fee.
(2) Calculated in accordance with Rule 457(f)(2).
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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PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 19, 1999
DOANE PET CARE COMPANY
$150,000,000
OFFER TO EXCHANGE 9 3/4% SENIOR SUBORDINATED NOTES DUE 2007
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ALL OUTSTANDING 9 3/4% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE NOTES
- - The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the old notes, except that we have registered the
exchange notes with the Securities and Exchange Commission. In addition, the
exchange notes will not be subject to certain transfer restrictions and are
not entitled to registration rights.
- - Interest on the exchange notes will accrue from November 12, 1998 at the rate
of 9 3/4% per annum, payable semi-annually in arrears on each November 15 and
May 15, beginning May 15, 1999.
- - The exchange notes will be unsecured and will rank equally with the old notes
and all of our other unsecured senior subordinated indebtedness.
THE EXCHANGE OFFER
- - Subject to certain customary conditions, which we may waive, the exchange
offer is not conditioned upon a minimum aggregate principal amount of old
notes being tendered.
- - We will issue an exchange note in a principal amount equal to the principal
amount of each old note that you tender to us before the expiration of the
exchange offer.
- - You may tender your old notes for exchange at any time before 5:00 p.m., New
York City time, on , 1999. We may extend the expiration date.
- - You may withdraw your tenders of old notes at any time prior to the expiration
of the exchange offer, unless we have already accepted your old notes for
exchange.
- - The exchange of old notes for exchange notes in the exchange offer will not be
a taxable event for U.S. federal income tax purposes.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 7 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE EXCHANGE NOTES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1999.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT WE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. YOU SHOULD RELY ONLY ON THE INFORMATION
PROVIDED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANY PERSON TO PROVIDE
INFORMATION OTHER THAN INFORMATION PROVIDED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING
AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
WE INCLUDE CROSS-REFERENCES IN THIS PROSPECTUS TO CAPTIONS IN THESE
MATERIALS WHERE YOU CAN FIND FURTHER RELATED DISCUSSIONS. THE FOLLOWING TABLE OF
CONTENTS TELLS YOU WHERE TO FIND THESE CAPTIONS.
TABLE OF CONTENTS
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PAGE
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Forward-Looking Statements.................................. i
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
The Company................................................. 13
Capitalization.............................................. 14
Unaudited Pro Forma Financial Statements.................... 15
Selected Consolidated Financial Data........................ 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Business.................................................... 38
Management.................................................. 47
Certain Transactions........................................ 53
Description of New Credit Facility.......................... 55
The Exchange Offer.......................................... 56
The Exchange Notes.......................................... 64
Old Notes Registration Rights............................... 91
Certain United States Federal Income Tax Considerations..... 92
Transfer Restrictions on Old Notes.......................... 93
Plan of Distribution........................................ 95
Legal Matters............................................... 96
Experts..................................................... 96
Where You Can Find More Information......................... 97
Index to Financial Statements............................... F-1
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FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus under the captions
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements:
- address activities, events or developments that we expect, believe,
anticipate or estimate will or may occur in the future;
- are based on certain assumptions and analyses that we have made and that
we believe are reasonable;
- are based on various risks and uncertainties, general economic and
business conditions, the business opportunities that may be presented to
and pursued by us from time to time, changes in laws or regulations and
other factors, many of which are beyond our control.
Any one of these factors, or a combination of these factors, could
materially affect our future results of operations and whether the
forward-looking statements ultimately prove to be accurate. These
forward-looking statements are not guarantees of our future performance, and our
actual results and future developments may differ materially from those
projected in the forward-looking statements. See "Risk Factors."
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PROSPECTUS SUMMARY
This summary highlights information from this prospectus. We encourage you
to read the entire prospectus which describes the exchange offer and contains
detailed information about our business and financial data. You should also
carefully read the risk factors beginning on page 7.
References in this prospectus to "we," "us" or "Doane" refer to Doane Pet
Care Company and its subsidiaries. References in this prospectus to the "notes"
refer to both the old notes and the exchange notes.
THE EXCHANGE OFFER
In this exchange offer, we are offering to exchange up to $150,000,000
principal amount of exchange notes for a like amount of old notes that you now
hold. We will issue an exchange note in a principal amount equal to the
principal amount of each old note that you tender to us before the expiration of
the exchange offer. The exchange notes are substantially identical to the old
notes, except that we have registered the exchange notes with the Securities and
Exchange Commission. Because we have registered the exchange notes, the exchange
notes will not be subject to certain transfer restrictions and will not be
entitled to registration rights.
Terms of the Exchange Notes.
The exchange notes are described in detail under the heading "The Exchange
Notes" beginning on page 64. Some of the key terms of the exchange notes are as
follows:
(1) Maturity Date. The maturity date of the exchange notes is May 15,
2007.
(2) Interest. Interest payment dates are May 15 and November 15 of
each year, beginning on May 15, 1999.
(3) Optional Redemption. We may not redeem the exchange notes prior to
May 15, 2002. After that date, we will have the option to redeem the
exchange notes at redemption prices described in this prospectus. Also,
prior to May 15, 2000, we will have the right to use the cash proceeds of
certain equity offerings to redeem up to 35% of the original principal
amount of the exchange notes at a redemption price of 109.75%. At least 65%
of the original principal amount of the exchange notes must remain
outstanding after such a redemption.
(4) Ranking. The exchange notes are unsecured senior subordinated
obligations of our company and will rank subordinate in right of payment to
all existing and future senior indebtedness of our company.
(5) Change of Control. Upon the occurrence of a change of control of
our company as described in "The Exchange Notes" beginning on page 64, we
will be required to offer to repurchase all or a portion of each holder's
exchange notes at a price in cash equal to 101% of the aggregate principal
amount of such exchange notes, plus accrued and unpaid interest.
(6) Certain Covenants. The old notes have been, and the exchange notes
will be, issued under an indenture containing certain covenants for your
benefit. These covenants limit our ability to:
- incur certain additional indebtedness,
- pay certain dividends,
- make certain distributions,
- make investments and certain other restricted payments,
- enter into certain transactions with affiliates,
- dispose of certain assets and
- engage in certain mergers and consolidations.
Resale.
We believe that you will be able to freely transfer the exchange notes
without registration or any prospectus delivery requirement; however, certain
broker-dealers and certain of our affiliates may be required to deliver copies
of this prospectus if they resell any exchange notes.
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Expiration Date; Withdrawal of Tender.
You can exchange your old notes any time before 5:00 p.m., New York City
time, on , 1999, or such later date and time to which we extend the
exchange offer. You may withdraw your tender of old notes at any time prior to
the expiration date of the exchange offer, unless we have already accepted your
old notes for exchange. We will return to you, without charge, promptly after
the expiration or termination of the exchange offer any old notes that you
tendered but that were not accepted for exchange.
Procedures for Tendering Old Notes.
If you want to exchange your old notes in the exchange offer, you must
complete, sign and date the letter of transmittal or comply with the procedures
for book-entry transfer. Please read this prospectus and the instructions in the
accompanying letter of transmittal before completing your letter of transmittal.
Unless you tender through book-entry transfer, you must deliver your old notes
and your letter of transmittal to our exchange agent.
Special Procedures for Beneficial Holders.
If your old notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you wish to tender in the
exchange offer, you should contact the registered holder promptly and instruct
such holder to tender the old notes on your behalf. If you want to tender your
old notes directly, before delivering your old notes to us, you must either
arrange to register those old notes in your name or obtain a stock power from
the registered holder. You should note that the transfer of record ownership may
take considerable time.
Guaranteed Delivery Procedures.
If you want to tender your old notes but:
(1) you cannot deliver the old notes and a properly completed letter
of transmittal;
(2) your old notes are not immediately available; or
(3) you cannot complete book-entry transfer in a timely manner,
then you may use the guaranteed delivery procedures set forth in this prospectus
under "The Exchange Offer" beginning on page 64.
Termination of Exchange Offer.
We may terminate the exchange offer if we determine it violates any law or
interpretation of the staff of the SEC. If we do not consummate this exchange
offer, you will still be entitled to the benefits of the existing registration
rights agreement.
Acceptance of Old Notes and Delivery of Exchange Notes.
Subject to certain conditions described under "The Exchange Offer"
beginning on page 64, we will accept for exchange any old notes properly
tendered to the exchange agent prior to 5:00 p.m., New York City time, on the
expiration date. We will issue and deliver the exchange notes to you promptly
after the expiration date.
Exchange Agent.
Our exchange agent for this exchange offer is Wilmington Trust Company. The
mailing address of the exchange agent is: Rodney Square North, 1100 North Market
Street, Wilmington, Delaware 19890, Attention: Corporate Trust Operations. If
you would like information about the exchange offer, you should call the
exchange agent at (302) 651-1562. The facsimile number for the exchange agent is
(302) 651-1079.
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THE COMPANY
We are the largest manufacturer of dry pet food in the United States, by
volume. We manufacture a full range of pet food products for both dogs and cats,
including dry, canned, semi-moist, soft dry, soft treats and dog biscuits. We
provide products that meet customer specifications, from super premium to value
products. We manufacture 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. We also manufacture,
package and ship dry pet food and treats for four of the six largest national
branded pet food companies under co-manufacturing agreements.
We have the most extensive manufacturing and distribution network in the
pet food industry, which gives us certain operational and cost advantages over
our competitors. We manufacture and distribute products in the United States
using 32 combination manufacturing and distribution facilities and nine
additional distribution centers. Our extensive network reduces our distribution
expenses and also enables certain of our customers to bypass their distribution
centers and deliver directly to their stores.
We have achieved strong internal growth by increasing sales volumes from
1992 to 1997 at a compound annual growth rate of 10.3%, exclusive of
acquisitions. We believe our growth is primarily due to increased consumer
acceptance of store brands and an increase in volumes co-manufactured for
national pet food companies. In addition, we have been the primary supplier of
store brand pet food to WalMart Stores Inc. ("Wal*Mart") since 1970. We
manufacture and distribute, under a direct store delivery program, a variety of
products for Wal*Mart including its store brand, Ol' Roy. Ol' Roy 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.
RECENT DEVELOPMENTS
Refinancing Transactions.
In November 1998, we refinanced our capital structure through the following
series of transactions:
(1) Windy Hill Pet Food Company, Inc. ("Windy Hill") was merged into
Doane.
(2) Doane completed a cash tender offer for approximately $97 million
principal amount of its 10 5/8% Senior Notes due 2006;
(3) Windy Hill completed a cash tender offer for $46 million principal
amount of its 9 3/4% Senior Subordinated Notes due 2007, which tender offer
was required by a change of control provision in the indenture governing
such notes;
(4) Doane completed an exchange offer of $150 million principal amount
of its 9 3/4% Senior Subordinated Notes due 2007 for the remaining
approximately $63 million principal amount of its 10 5/8% Senior Notes due
2006 and all of the remaining approximately $74 million principal amount of
Windy Hill's 9 3/4% Senior Subordinated Notes due 2007; and
(5) Doane entered into a new senior 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 Windy Hill's 9 3/4% Senior Subordinated Notes due
2007.
Windy Hill Acquisition.
In August 1998, Doane Pet Care Enterprises, Inc., our parent corporation,
acquired Windy Hill for approximately 1.6 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
3
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and dog biscuits. With Windy Hill, we became the
largest manufacturer of dog biscuits in the United States. In 1997, Windy Hill
had pro forma net sales of $304.0 million, EBITDA of $26.7 million and a net
loss before extraordinary item of $1.6 million.
Our acquisition of Windy Hill strengthens our presence in the dry pet food
and dog biscuit market segments, provides revenue synergies and enhances our
position as a low-cost manufacturer and distributor of pet food products. We
also believe the acquisition of Windy Hill provides the opportunity for revenue
growth by: (1) enabling us to offer regional brands, semi-moist, soft dry and
canned pet food products to our traditional customer base and (2) enabling us 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, we
believe we can achieve cost savings by:
- optimizing production schedules;
- lowering distribution costs;
- obtaining purchasing synergies; and
- eliminating redundant overhead functions.
IPES Acquisition.
In April 1998, we acquired IPES IBERICA, S.A. 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 of $21.1 million, EBITDA of $3.8
million and net income of $1.0 million. We believe that our acquisition of IPES,
together with our investment in the Italian pet food manufacturer, Effeffe,
S.p.a., provides us with a platform for growth in Europe.
RISK FACTORS
Please read "Risk Factors" beginning on page 7 for a discussion of certain
factors that you should consider in connection with your investment in the
exchange notes.
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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 Doane 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 Doane
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 acquisition of Windy Hill, including the pro forma effects of each of the
transactions included in the pro forma financial statements of Windy Hill, the
acquisition of IPES and the refinancing transactions 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 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 Doane'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 Doane, the 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.
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PREDECESSOR(1) DOANE
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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
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(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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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 28,861 33,297
Interest expense,
net................. 3,611 5,806 22,471 22,463 42,808 16,973 19,444 32,106
Non-recurring finance
charge(4)........... -- -- 4,815 -- 4,486 -- -- --
Income (loss) before
extraordinary
items(5)............ $ 16,746 $ 1,024 $ (1,518) $ 6,234 $ 1,054 $ 3,381 $ 6,420 $ (567)
OTHER DATA:
EBITDA(6)............. $ 24,364 $ 10,063 $ 35,264 $ 43,216 $ 68,958 $ 30,290 $ 40,444 $ 51,886
Adjusted EBITDA(6).... $ 33,804 $ 10,063 $ 40,079 $ 43,216 $ 75,015 $ 30,290 $ 44,755 $ 64,653
Ratio of adjusted
EBITDA to interest
expense............. 9.4x 1.7x 1.8x 1.9x 1.8x 1.8x 2.3x 2.0x
Ratio of earnings to
fixed charges(7).... 5.6x 1.3x 0.9x 1.3x 1.0x 1.5x 1.5x 1.0x
Depreciation and
amortization
expense............. 3,694 2,359 15,972 12,141 23,221 8,880 12,392 17,746
Capital
expenditures(8)..... 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
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(footnotes on next page)
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SEPTEMBER 30, 1998
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HISTORICAL PRO FORMA
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,833 $ 3,833
Working capital........................................... 50,656 59,665
Total assets.............................................. 664,852 671,154
Total debt................................................ 410,371 467,632
Stockholders' equity...................................... 80,651 36,113
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(1) Doane Pet Care Enterprises, Inc., our parent corporation, was formed by a
group of investors in 1995 to acquire Doane. For financial statement
purposes, the acquisition of Doane was accounted for as a purchase
acquisition effective October 1, 1995. The effects of the acquisition of
Doane have been reflected in Doane's consolidated assets and liabilities at
that date. As a result, Doane'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 Doane.
(2) Represents non-recurring bonus payments to senior management in connection
with the acquisition of Doane.
(3) Represents certain non-recurring transition expenses in connection with the
acquisition of Windy Hill.
(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 Doane's predecessor does not include
any provision for federal income taxes. Prior to the acquisition of Doane,
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 non-recurring finance charge and
transition costs and unusual items. 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 we believe that certain investors may
find it useful. See "Unaudited Condensed Pro Forma Financial Statements" and
Doane's Consolidated Financial Statements and the notes thereto included
elsewhere in this prospectus.
(7) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes plus
fixed charges less capitalized interest) by fixed charges (interest expense
plus capitalized interest).
(8) Capital expenditures excludes payments for acquisitions.
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RISK FACTORS
LEVERAGE; RESTRICTIVE COVENANTS
We are a highly leveraged company. At September 30, 1998, on a pro forma
basis, we would have had approximately $467.6 million in aggregate principal
amount of outstanding indebtedness (excluding trade payables and other accrued
liabilities). Subject to the restrictions in our new credit facility and the
indenture governing the notes, we may incur additional indebtedness from time to
time to finance working capital, capital expenditures, acquisitions or for other
purposes.
Our new credit facility and the indenture governing the notes limit, among
other things, our 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 our assets.
The new credit facility also requires us to maintain specified financial
ratios and satisfy certain financial condition tests. Our ability to meet such
financial ratios and tests can be affected by events beyond our control, and we
cannot assure you that we will meet such tests. In connection with the new
credit facility, we pledged substantially all of our assets as collateral to
secure our indebtedness. Upon the occurrence of an event of default under the
new credit facility, our lenders could declare all amounts outstanding under the
new credit facility to be immediately due and payable. If we were unable to
repay those amounts, the lenders have the right to foreclose upon the collateral
securing the new credit facility. If the lenders take such action, we cannot
assure you that our assets would be sufficient to repay such debt in full. These
restrictions could limit our ability to obtain future financings or restrict
other corporate activities.
We may need to increase our leverage significantly for future acquisition
or development activities. Our ability to meet our debt service obligations and
to reduce our total indebtedness will be dependent upon our future performance,
which will be subject to general economic conditions and to financial, business
and other factors affecting our operations. Many of these factors are beyond our
control. If we are unable to generate sufficient cash flow from operations in
the future to service our indebtedness and to meet our other commitments, we
will be required to adopt one or more alternatives, such as refinancing or
restructuring our indebtedness, selling material assets or operations or seeking
to raise additional debt or equity capital. We cannot assure you that we would
be able to take any of these actions on a timely basis or on satisfactory terms
or that these actions would enable us to continue to satisfy our capital
requirements. The terms of our indebtedness, including the new credit facility
and the Indenture governing the notes, also may prohibit us from taking such
actions.
SUBORDINATION
The notes are general unsecured obligations of Doane and subordinated in
right of payment to all of our existing and future senior indebtedness,
including all indebtedness under the new credit facility. As of September 30,
1998, on a pro forma basis, we would have had approximately $320.7 million of
senior indebtedness outstanding. As a result of such subordination, the holders
of any senior indebtedness must be paid in full before the holders of the notes
in the event of the insolvency, liquidation, reorganization, dissolution or
other winding-up of Doane or upon a default in payment with respect to, or the
acceleration of, any senior indebtedness. If we incur any additional debt that
is on an equal basis with the notes, the holders of such debt would be entitled
to share on an equal basis with the holders of the notes in any proceeds
distributed in connection with any insolvency, liquidation, reorganization,
dissolution or other winding-up of Doane. This may have the effect of reducing
the amount of proceeds paid to holders of the notes. In addition, we cannot
7
<PAGE> 11
make cash payments with respect to the notes during a payment default with
respect to senior indebtedness and, under certain circumstances, no payments may
be made with respect to the principal of (and premium, if any) on the notes for
a period of up to 179 days if a non-payment default exists with respect to
senior indebtedness.
POSSIBLE INABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL
If a change of control of Doane occurs (as described in the indenture
governing the notes), we are required to offer to purchase all outstanding notes
at 101% of the principal amount plus accrued and unpaid interest, if any, to the
date of purchase. We will use our available cash or cash generated from
operations or other sources to fund any such purchases of notes. However, we
cannot assure you that sufficient funds will be available at the time of any
change of control to make any required repurchases of the notes.
In addition, the new credit facility will prohibit us from purchasing the
notes (except in certain limited amounts) and will also provide that certain
change of control events will constitute a default under the new credit
facility. Any future credit agreements or other agreements relating to senior
indebtedness which we enter into may contain similar restrictions and
provisions. In the event a change of control occurs at a time when we are
prohibited from purchasing the notes, we could seek the consent of our lenders
to the purchase of the notes or attempt to refinance the borrowings that contain
such prohibition. If we do not obtain such consent or repay such borrowings, we
will remain prohibited from purchasing the notes by the relevant senior
indebtedness. In such case, our failure to purchase the tendered notes would
constitute an event of default under the indenture governing the notes, which
would, in turn, constitute a default under the new credit facility and could
constitute a default under other senior indebtedness. In such circumstances, the
subordination provisions in the indenture governing the notes would likely
restrict payments by us to the holders of the notes. Furthermore, we cannot
assure you that we will have sufficient resources to satisfy our repurchase
obligation with respect to the exchange notes following a change of control.
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 our 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 our net sales. A portion (3.8%) of our 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 us for
national pet food companies. We do 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 our results of
operations, financial condition and cash flows. In addition, our 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.
RAW MATERIALS AND PACKAGING COSTS
Our financial results depend to a large extent on the cost of raw materials
and packaging and our ability to pass along increases in these costs to our
customers. 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. If there are any
increases in raw materials costs, we would be required to increase sales prices
for our products in order to avoid margin deterioration. We cannot assure you as
to the timing or extent of our ability to implement future price adjustments in
the event of increased raw material costs or as to whether any price increases
implemented by us may affect the volumes of future shipments. Although we manage
the price risk created by market fluctuations by hedging portions of our primary
commodity product purchases, we cannot assure you that our results of operations
will not be exposed to volatility in the commodity markets.
8
<PAGE> 12
HEDGING
We manage price risk created by market fluctuations by hedging portions of
our 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 through exchange for the
physical commodity in which case we deliver the contract against the acquisition
of the physical commodity.
Our hedging 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. We cannot assure you that our results of operations will not be
exposed to volatility in the commodity markets.
ACQUISITION STRATEGY
Our acquisition strategy is based on identifying and acquiring businesses
engaged in manufacturing and distributing pet food products in markets where we
currently do not operate or businesses with products that would complement our
product mix. We will evaluate specific acquisition opportunities based on
prevailing market and economic conditions. Our lack of experience in new markets
we may enter through future acquisitions could have an adverse effect on our
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 that we make could have an adverse
effect on our results of operations. We may encounter increased competition for
acquisitions in the future, which could result in acquisition prices we do not
consider acceptable. We cannot assure you that we will find suitable acquisition
candidates at acceptable prices or succeed in integrating any acquired business
into our existing business or in retaining key customers of acquired businesses.
We cannot assure you that we will have sufficient available capital resources to
execute our acquisition strategy.
INTEGRATION OF RECENT ACQUISITIONS
We cannot assure you that we will succeed in integrating Windy Hill into
our existing business. In addition, we may experience a loss of certain
customers as a result of the acquisition of Windy Hill. Our operating results
and financial condition could be materially and adversely affected: if the
expected operating efficiencies from the acquisition of Windy Hill do not
materialize; if we fail to integrate the acquisition of Windy Hill into our
existing operations; if the costs of such integration exceed expectations; or if
we experience unexpected costs or liabilities at Windy Hill. We cannot assure
you that we will succeed in integrating other recent acquisitions, including
acquisitions made by Windy Hill, into our existing operations.
GOODWILL FROM ACQUISITIONS
We have an aggregate $200 million of goodwill on our 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. We cannot assure you that the amount of such
goodwill will be realized in the future. Goodwill represented 30% of our total
assets as of September 30, 1998. We are amortizing the goodwill over a 40-year
life. We cannot assure you that this amortization rate approximates the time
period over which these businesses will be valuable to us. Our 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 us and possess significantly
greater financial and marketing resources than we do. The store brand pet food
products sold by
9
<PAGE> 13
our 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. We experience price competition from national branded manufacturers. Our
operating results and cash flow could be adversely affected 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. We also compete with regional branded manufacturers and other store
brand manufacturers.
INTERNATIONAL OPERATIONS
We operate a portion of our business and market products internationally,
and we plan to increase our international marketing and business activities. We
are, 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 our operations in such countries.
Interruption of our international operations could have a material adverse
effect on our financial condition and results of operations.
We may, from time to time, conduct a portion of our business in currencies
other than the United States dollar, thus subjecting our results to fluctuations
in foreign currency exchange rates. We cannot assure you that we will be able to
protect ourself against such fluctuations in the future.
CONTROL OF THE BOARD OF DIRECTORS OF DOANE PET CARE ENTERPRISES, INC.
Doane Pet Care Enterprises, Inc., the parent of Doane, is a holding company
with no operations. Doane is its sole operating subsidiary. In connection with
the acquisition of Windy Hill, 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 Doane Pet Care Enterprises, Inc. entered into an
investors' agreement. The investors' agreement provides that the board of
directors of Doane Pet Care Enterprises, Inc. and Doane will consist of eight
members, one being the Chief Executive Officer of Doane Pet Care Enterprises,
Inc. Other than the Chief Executive Officer, each of the remaining seven
directors will be designated by one or a combination of the parties listed
above, subject to certain percentage ownership requirements. Through their
control of the board of directors of Doane Pet Care Enterprises, Inc. and Doane,
the parties listed above will be in a position to control the policies,
management and affairs of Doane and to effectively prevent or cause a change in
control of Doane. None of the parties listed above will have the right to
designate individuals to the board of directors of Doane Pet Care Enterprises,
Inc. if its percentage ownership of common stock of Doane Pet Care Enterprises,
Inc. is reduced below 5%.
DEPENDENCE ON KEY PERSONNEL
Our success depends in part upon the continued services of our highly
skilled personnel involved in management, production and distribution, and, in
particular, upon the efforts and abilities of our executive management group. If
we lose the service of any of the members of our executive management group,
such loss could have a material adverse effect on our business, financial
condition and results of operations. We have entered into employment agreements
with members of our executive management group. We do not have key-person life
insurance covering any of our employees. Our success also depends upon our
ability to attract and retain additional highly qualified employees.
ENVIRONMENTAL, REGULATORY AND SAFETY MATTERS; PRODUCT RECALL
We are 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
10
<PAGE> 14
remediation of contamination associated with releases of hazardous substances.
We are also subject to regulation by the Occupational Safety and Health
Administration, the Food and Drug Administration and the United States
Department of Agriculture and by various state and local authorities. Violations
of these regulatory requirements can result in administrative, civil or criminal
penalties being levied against us or in a cease and desist order against
operations that are not in compliance.
On October 30, 1998, we initiated a product recall for certain dry dog food
manufactured at our Temple, Texas plant. The recall covers dry dog food
manufactured at our Temple plant between July 1 and August 31, 1998 and does not
apply to dry dog food manufactured at other plants or our 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. We have an extensive corn
testing program for the detection of aflatoxins and that program has been
intensified since the problems were reported. We maintain insurance against
losses from illness or death of animals; however, the cost of the product recall
is not covered by our insurance. We estimate the cost of the product recall to
be $3.0 million, net of insurance recoveries, and have recorded a charge to
non-recurring costs in the fourth quarter of fiscal 1998.
We believe that our operations are in material compliance with
environmental, safety and other regulatory requirements; however, we cannot
assure you that such requirements will not change in the future or that we will
not incur significant costs in the future to comply with such requirements, to
effect future recalls or in connection with the effect on our business of such
matters.
FRAUDULENT CONVEYANCE
The incurrence of indebtedness (such as the exchange notes) is subject to
review under relevant federal and state fraudulent conveyance statutes in a
bankruptcy or reorganization case or lawsuit by or on behalf of our other
creditors. If a court were to find that the exchange notes were issued with the
intent to hinder, delay or defraud any present or future creditor or that we
contemplated insolvency with a design to favor one or more of our creditors to
the exclusion in whole or in part of others or we did not receive fair
consideration or reasonably equivalent value for issuing the exchange notes and,
at the time thereof, we:
- were insolvent or rendered insolvent by reason of the issuance of the
exchange notes,
- were engaged or about to engage in a business or transaction for which
our remaining assets constituted unreasonably small capital or
- intended to incur, or believed that we would incur, debts beyond our
ability to pay such debts as they matured,
a court could avoid or subordinate the exchange notes in favor of our other
creditors.
On the basis of historical financial information, recent operating history
and other information currently available to us, we believe that the exchange
notes are being issued for proper purposes and in good faith and that, after
giving effect to indebtedness incurred in connection with the issuance of the
exchange notes, we are solvent, will have sufficient capital for carrying on our
business and will be able to pay our debts as such debts become absolute and
mature. We cannot assure you, however, that a court passing on such questions
would reach the same conclusions and, if not, a court could, among other things,
void all or a portion of our obligations to holders of exchange notes and/or
subordinate our obligations under the exchange notes to a greater extent than
would otherwise be the case.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESTRICTIONS ON RESALE OF OLD NOTES
The old notes that are not exchanged for exchange notes in the exchange
offer have not been registered with the SEC or in any state. Unless the exchange
notes are so registered, they may not be offered or sold except pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933 and applicable state securities laws.
We anticipate that the liquidity of the market for
11
<PAGE> 15
any old notes remaining after the consummation of the exchange offer may be
substantially limited. Additionally, holders (other than certain holders who
cannot take advantage of the exchange offer) of any old notes not tendered in
the exchange offer prior to the expiration of the exchange offer will not be
entitled to any registration rights, including the ability to require us to file
a shelf registration statement.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The exchange notes will be new securities for which currently there is no
trading market. We do not intend to apply for listing of the exchange notes on
any securities exchange or stock market. The liquidity of any market for the
exchange notes will depend upon the number of holders of the exchange notes, the
interest of securities dealers in making a market in the exchange notes and
other factors. We cannot make any assurances as to the development or liquidity
of any market for the exchange notes. Even if a market does develop, we cannot
make assurances as to the price at which the holders of exchange notes will be
able to sell such exchange notes or that the exchange notes could trade at a
price above or below either their purchase price or face value.
YEAR 2000
We have conducted a comprehensive review of our 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 our 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.
We have made an assessment of year 2000 compliance and reviewed our
business application software which resulted in plans to either replace or
upgrade all essential business software at an estimated cost of $3.5 million. We
are currently reviewing our administrative hardware and software (networks,
communications and security systems) and the software related to manufacturing
equipment. We have implemented a program to confirm year 2000 compliance with
all third parties with which we have material relationships.
As of September 30, 1998, we had incurred costs of approximately $2.4
million in connection with year 2000 compliance. We intend to test and verify
our year 2000 compliance by July 1999, including third party compliance.
Management believes that a failure to complete our year 2000 compliance, or a
failure by parties with whom we have material relationships to complete year
2000 compliance by such date could have a material adverse effect on our
financial condition and results of operations. We believe that we can provide
the resources necessary to ensure year 2000 compliance prior to the year 2000.
However, should we be delayed in our compliance with year 2000, we may
experience a decrease in efficiency that could have a material adverse effect on
results of operations. We also believe that a sufficient number of suppliers
exist if our current suppliers are delayed in their efforts to achieve year 2000
compliance, thereby minimizing risk to our Company. We have developed
contingency plans that include moving production within our plant network,
securing additional ingredient storage facilities and transferring procurement
to year 2000 compliant suppliers.
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<PAGE> 16
THE COMPANY
Doane Pet Care Enterprises, Inc. was formed in 1995 by a group of investors
led by Summit Capital Inc. 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 Doane Pet Care Enterprises, Inc.
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 our company. Doane had been a
manufacturer of dry pet food for 37 years prior to the acquisition in 1995. See
"Risk Factors -- Control of the Board of Directors of Doane Pet Care
Enterprises, Inc."
In April 1998, we 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, Doane Pet Care Enterprises, Inc. acquired Windy Hill for approximately 1.6
million shares of its 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
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 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. for a purchase price of approximately $3.1
million. In June 1998, Windy Hill acquired Deep Run Packing Company, Inc. for a
net purchase price of approximately $16.4 million.
Doane is incorporated under the laws of the State of Delaware. Our
principal executive offices are located at 103 Powell Court, Suite 200,
Brentwood, Tennessee 37027, and our telephone number at such offices is (615)
373-7774.
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<PAGE> 17
CAPITALIZATION
The following table sets forth, as of September 30, 1998, (i) our
historical capitalization and (ii) our pro forma capitalization after giving
effect to our recent refinancing transactions. 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 Doane and Windy Hill and the related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
--------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Total debt(2):
Existing credit facilities............................. $ 96,557 $ --
New credit facility.................................... 286,867
IPES debt.............................................. 25,318 25,318
Industrial revenue bonds............................... 8,496 8,496
Senior notes........................................... 160,000 --
Exchange notes(3)...................................... 146,951
Windy Hill notes....................................... 120,000 --
-------- --------
Total debt(2)..................................... 410,371 467,632
Senior exchangeable preferred stock, 10,000,000 shares
authorized; 1,200,000 shares issued and outstanding; no
shares issued and outstanding, pro forma as adjusted(4)... 35,898 35,898
Stockholders' equity:
Common stock, par value $0.01 per share, 1,000 shares
authorized; 1,000 shares issued and outstanding....... -- --
Additional paid-in capital............................. 86,841 86,841
Accumulated other comprehensive income................. 472 472
Accumulated deficit.................................... (6,662) (51,200)
-------- --------
Total stockholders' equity........................ 80,651 36,113
-------- --------
Total capitalization............................ $526,920 $539,643
======== ========
</TABLE>
- ------------------------------
(1) To give effect to the refinancing transactions and the application of the
proceeds therefrom.
(2) Total debt includes current portion of long-term debt.
(3) The exchange 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.
(4) 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 Doane Pet
Care Enterprises, Inc. 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.
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<PAGE> 18
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 Doane and Windy Hill for the fiscal year ended December 31,
1997 and for the nine months ended September 30, 1998 and related notes, (ii)
Doane's unaudited pro forma condensed consolidated balance sheet as of September
30, 1998 and related notes, (iii) Doane's unaudited pro forma condensed
consolidated statements of operations 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. Doane's unaudited pro forma financial statements give
effect to the acquisition of IPES 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 Doane
and Windy Hill for the entire periods indicated as if the refinancing
transactions had occurred on January 1, 1997. The combined unaudited pro forma
balance sheet gives effect to the refinancing transactions, and the use of
proceeds therefrom, in each case as if such transactions had occurred on
September 30, 1998.
The historical data for the fiscal year ended December 31, 1997 have been
derived from our audited consolidated financial statements, and the historical
data for the nine months ended September 30, 1998 have been derived from our
unaudited interim financial statements. The historical data of Windy Hill have
been derived from its audited 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 interim unaudited 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 Doane,
Windy Hill and Hubbard and the notes thereto included elsewhere in this
prospectus.
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<PAGE> 19
CONDENSED COMBINED DOANE PET CARE COMPANY
AND WINDY HILL PET FOOD HOLDINGS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA COMBINED
DOANE WINDY FOR COMBINED ADJUSTMENTS DOANE
(SEE HILL (SEE WINDY HILL DOANE FOR REFINANCING PRO FORMA
TABLE 1-A) TABLE 2-A) ACQUISITION PRO FORMA TRANSACTIONS 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 (832)(c) 42,808
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 (3,654) 2,929
Income tax expense (benefit)..... 3,242 18 -- 3,260 (1,385) (d) 1,875
-------- -------- ------- -------- ------- --------
Income (loss) before
extraordinary items........ $ 5,461 $ (1,642) $ (496) $ 3,323 $(2,269) $ 1,054
======== ======== ======= ======== ======= ========
Basic and diluted earnings per
share.......................... $ 1,054
Basic and diluted weighted
average number of shares
outstanding.................... 1,000
EBITDA(f)........................ $ 68,958
========
Adjusted EBITDA(f)............... $ 75,015
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
16
<PAGE> 20
CONDENSED COMBINED DOANE PET CARE COMPANY
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
PRO FORMA PRO FORMA ADJUSTMENTS ADJUSTMENTS COMBINED
DOANE WINDY HILL FOR COMBINED FOR DOANE
(SEE (SEE WINDY HILL DOANE REFINANCING PRO FORMA
TABLE 1-B) TABLE 2-B) ACQUISITION PRO FORMA TRANSACTIONS 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......... 21,150 12,014 372(b) 33,536 33,536
Non-recurring transition
costs....................... 4,311 8,456 12,767 -- 12,767
-------- -------- ------- -------- ------- --------
Income from operations... 29,697 3,972 (372) 33,297 33,297
Interest expense, net......... 19,920 11,194 31,114 992(c) 32,106
Equity in earnings of joint
ventures.................... (111) (463) (574) (574)
Other income, net............. (182) (87) (269) (269)
-------- -------- ------- -------- ------- --------
Income before taxes...... 10,070 (6,672) (372) 3,026 (992) 2,034
Income tax expense
(benefit)................... 3,397 (420) -- 2,977 (376)(d) 2,601
-------- -------- ------- -------- ------- --------
Income before
extraordinary items.... $ 6,673 $ (6,252) $ (372) $ 49 $ (616) $ (567)
======== ======== ======= ======== ======= ========
Basic and diluted earnings per
share....................... $ (567)
Basic and diluted weighted
average number of shares
outstanding................. 1,000
EBITDA(f)..................... $ 51,886
========
Adjusted EBITDA(f)............ $ 64,653
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
17
<PAGE> 21
CONDENSED COMBINED DOANE PET CARE COMPANY
AND WINDY HILL PET FOOD HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(a) Adjustment to reclassify $4,197 for the year ended December 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 Doane.
(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, Doane 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 we believe 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 us in our 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 application of the net proceeds to us 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 ($286.9 million estimated at
8.40%)............................................... $ 24,105 $18,079
Exchange 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 ($11.1
million amortized over seven to ten years)........... 1,471 1,103
-------- -------
$ 42,808 $32,106
Less historical interest expense...................... 43,640 31,114
-------- -------
Adjustment............................................ $ (832) $ 992
======== =======
</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 $717 for the year ended
December 31, 1997 and $538 for the nine months ended September 30, 1998.
(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 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 we believe that certain
investors may find it useful.
18
<PAGE> 22
(g) The acquisition of Windy Hill provides us 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;
(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.
19
<PAGE> 23
DOANE PET CARE COMPANY
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR
DOANE REFINANCING DOANE
HISTORICAL TRANSACTIONS PRO FORMA
---------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 3,833 $ -- $ 3,833
Trade and other accounts receivable, net................ 86,759 -- 86,759
Inventories............................................. 52,901 -- 52,901
Deferred income tax benefits............................ 6,562 7,470(a) 16,964
2,932(b)
Prepaid expenses and other assets....................... 16,333 -- 16,333
-------- -------- --------
Total current assets................................ 166,388 10,402 176,790
Property, plant and equipment, net.......................... 201,665 -- 201,665
Goodwill and other intangible assets, net................... 263,368 -- 263,368
Other assets................................................ 33,431 11,126(a) 29,331
(15,226)(b)
-------- -------- --------
Total assets........................................ $664,852 $ 6,302 $671,154
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................. $ 8,859 $ 1,393(a) $ 10,252
Accounts payable........................................ 64,782 -- 64,782
Accrued liabilities..................................... 42,091 -- 42,091
-------- -------- --------
Total current liabilities........................... 115,732 1,393 117,125
Long-term debt, excluding current installments.............. 401,512 55,868(a) 457,380
Post-retirement benefit liability........................... 6,562 -- 6,562
Other long term liabilities................................. 1,753 -- 1,753
Deferred income tax liability............................... 22,744 (4,024)(a) 16,323
(2,397)(b)
-------- -------- --------
Total liabilities................................... 548,303 50,840 599,143
Preferred stock............................................. 35,898 -- 35,898
Stockholders' equity
Common stock............................................ -- -- --
Additional paid-in capital.............................. 86,841 86,841
Accumulated other comprehensive income...................... 472 -- 472
Accumulated deficit..................................... (6,662) (21,346)(a) (51,200)
(13,295)(a)
(9,897)(b)
-------- -------- --------
Total stockholders' equity.......................... 80,651 (44,538) 36,113
-------- -------- --------
Total liabilities and stockholders' equity.......... $664,852 $ 6,302 $671,154
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
20
<PAGE> 24
DOANE PET CARE COMPANY
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
(a) Reflects the proceeds to us from the refinancing transactions and the
application of proceeds therefrom:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Sources:
New credit facility.................................. $286,867
Exchange 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
Distribution to parent............................... 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.
21
<PAGE> 25
TABLE 1-A
DOANE PET CARE COMPANY
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DOANE IPES ADJUSTMENTS FOR PRO FORMA
HISTORICAL(A) HISTORICAL(B) IPES ACQUISITION DOANE
------------- ------------- ---------------- ---------
(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).............................. $ 47,010
========
Adjusted EBITDA(g)..................... $ 47,010
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
22
<PAGE> 26
TABLE 1-B
DOANE PET CARE COMPANY
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
DOANE IPES ADJUSTMENTS FOR PRO FORMA
HISTORICAL(A) HISTORICAL(B) IPES ACQUISITION DOANE
------------- ------------- ---------------- ---------
(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..... 20,855 184 111(d) 21,150
Non-recurring transition costs.......... 4,311 -- -- 4,311
-------- ------ ----- --------
Income from operations.................. 28,861 1,015 (179) 29,697
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.................. 9,646 1,051 (627) 10,070
Income tax expense........................ 3,226 367 (196)(f) 3,397
-------- ------ ----- --------
Income before extraordinary items.... $ 6,420 $ 684 $(431) $ 6,673
======== ====== ===== ========
EBITDA(g)................................. $ 41,690
========
Adjusted EBITDA(g)........................ $ 46,001
========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
23
<PAGE> 27
DOANE PET CARE COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS)
(a) Doane'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 acquisition of IPES.
(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 acquisition of IPES.
(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 acquisition of IPES ($25.3 million at a blended rate
of 6.5%).................................................. $1,803 $430
Additional amortization of deferred financing cost resulting
from the acquisition of IPES.............................. 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 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 we believe that certain investors
may find it useful.
24
<PAGE> 28
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.
25
<PAGE> 29
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 WHPF
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.
26
<PAGE> 30
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.
(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 Hubbard,
AGP, Deep Run, NuPet, Cartersville and Maumee 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 Hubbard, AGP, Deep Run, NuPet,
Cartersville and Maumee 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 the
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 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 we believe that certain investors may find it
useful.
27
<PAGE> 31
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 Doane's audited consolidated financial
statements 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 Doane's consolidated financial
statements 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 Doane's unaudited financial statements 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 Doane 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," Doane's consolidated financial statements and notes thereto, the
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) DOANE
----------------------------------- ---------------------------------------------------------
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 20,855
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 28,861
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 9,646
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 $ 6,420
======== ======== ======== ========= ======== ======== ======== ========
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
EBITDA(6).................. 35,103 38,613 24,364 10,063 35,264 43,216 30,290 40,444
Adjusted EBITDA(6)......... 35,103 38,613 33,804 10,063 40,079 43,216 30,290 44,755
Ratio of Adjusted EBITDA to
interest expense......... 20.6x 15.5x 9.4x 1.7x 1.8x 1.9x 1.8x 2.3x
Ratio of earnings to fixed
charges.................. 17.2x 13.1x 5.6x 1.3x 0.9x 1.3x 1.5x 1.5x
</TABLE>
28
<PAGE> 32
<TABLE>
<CAPTION>
PREDECESSOR(1) DOANE
----------------------------------- ---------------------------------------------------------
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>
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................................ 117,962 142,710 309,584 338,293 338,184 664,852
Total debt.................................. 32,776 68,436 209,738 206,603 200,410 410,371
Preferred stock............................. -- -- 18,414 24,160 30,545 35,898
Stockholders' equity........................ 50,148 31,759 40,111 33,247 33,946 80,651
</TABLE>
- ---------------
(1) Doane Pet Care Enterprises, Inc., our parent corporation, was formed by a
group of investors in 1995 to acquire Doane. For financial statement
purposes, the acquisition of Doane was accounted for as a purchase
acquisition effective October 1, 1995. The effects of the acquisition of
Doane have been reflected in Doane's consolidated assets and liabilities at
that date. As a result, Doane'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 Doane's Consolidated Financial Statements.
(2) Represents non-recurring bonus payments to senior management in connection
with the acquisition of Doane.
(3) Represents certain non-recurring transition expenses in connection with the
acquisition of Windy Hill.
(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 Doane's predecessor does not include
any provision for federal income taxes. Prior to the acquisition of Doane,
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, 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 we believe that certain investors may
find it useful. See "Unaudited Condensed Pro Forma Financial Statements" and
our Consolidated Financial Statements and the notes thereto included
elsewhere in this prospectus.
(7) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes plus
fixed charges less capitalized interest) by fixed charges (interest expense
plus capitalized interest and the portion of operating lease rental expense
that represents the interest factor).
(8) Capital expenditures exclude payments for acquisitions.
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<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HISTORY OF DOANE
Doane Pet Care Enterprises, Inc., our parent corporation, 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. Our parent corporation's sole asset
and activities are its ownership of Doane common stock. Our parent corporation
has no other operations.
In April 1998, we 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, Doane Pet Care Enterprises, Inc. acquired Windy Hill for approximately 1.6
million shares of its common stock and the assumption of $183.5 million of
indebtedness. Windy Hill was merged into Doane in November 1998. Windy Hill was
a manufacturer of pet food products based in Tennessee.
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, we refinanced our 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 its notes, which tender offer was required by a change of control
provision in the indenture governing such notes;
- Doane completed an exchange offer of $150 million principal amount of its
old notes for the remaining approximately $63 million principal amount of
its senior notes and all of 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 our previous credit facilities, repay other debt and repay bridge
financing incurred in connection with the tender offer for the Windy Hill
notes.
OVERVIEW
We are the largest manufacturer of dry pet food in the United States by
volume, producing approximately 26% of the total volumes sold in 1997 on a pro
forma basis. We manufacture products for store brands owned by retail customers,
also known as private labels, contract manufacture products for national branded
pet food companies and produce and sell under regional brands owned by us.
We manufacture for our 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. We provide products that meet customer
30
<PAGE> 34
specifications across all retail channels and price points, from super premium
to value products. Accordingly, we manufacture 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. We also manufacture dry pet food and treats for four of the six
largest national branded pet food companies through co-manufacturing agreements
pursuant to which we produce, package and ship a portion of such companies'
products. Our engineering services group designs and builds extruders,
conveyors, dryers and other parts and equipment, including replacement parts,
for pet food manufacturing facilities of our company and third parties.
We derive substantially all of our 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.
We manage the price risk created by market fluctuations by hedging portions
of our primary commodity products purchases on an on-going and continuous basis,
principally through exchange traded futures and options contracts. We
implemented a hedging policy in 1996 that does not permit trading in commodities
not utilized by us. All futures and options activity is based on the projected
requirements of our 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 we
deliver the contract against the acquisition of the physical commodity.
We account for our futures and options contracts as hedges, and gains and
losses are recognized in the period realized as part of the cost of products
sold. Our 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, we also contract 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. We have hedged over half of our corn and soybean meal
requirements through June 30, 1999. Corn and soybean meal are the two principal
commodities used by us 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 our subsidiaries are denominated in
foreign currencies. We may encounter exchange rate risk to the extent that the
values of such currencies fluctuate. We do not currently hedge, and do 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. Our 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.
Our sales are somewhat seasonal. We typically experience 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.
RESULTS OF OPERATIONS
The following discussion is based on Doane's historical financial
statements 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 acquisition of Doane in 1995, 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
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<PAGE> 35
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, we recorded expenses for depreciation and
amortization significantly in excess of historical levels recorded by the
predecessor. In addition, our results of operations have been significantly
affected by the impact of the financing of the acquisition of Doane, including
interest expense on the indebtedness incurred in connection with a credit
facility and the senior notes. Our net income prior to the acquisition of Doane
does not include any provision for federal income taxes. Prior to the
acquisition of Doane, 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.
Doane's historical combined results of operations 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 acquisition of Doane.
<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 20,855 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 28,861 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 9,646 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 $ 6,420 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
acquisition of Windy Hill and the acquisition of IPES. Excluding the
acquisitions of Windy Hill and IPES, 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 of
Windy Hill and IPES) 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 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 of Windy
Hill and IPES) 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.
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<PAGE> 36
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 67.2% (30.2% of which was attributable to the
acquisitions of Windy Hill and IPES) 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 our 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 Doane. 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 of Windy Hill and IPES) 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 of Windy Hill and IPES.
Net income. Net income for the nine-month period ended September 30, 1998
increased to $6.4 million from $3.4 million in the same period in 1997. The
acquisitions of Windy Hill and IPES 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 our
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 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.
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<PAGE> 37
Interest expense. Net interest expense remained unchanged at $22.5 million
for 1997 and 1996. Interest expense reductions resulting from payments on the
term loan facility were largely offset by additional interest expense on
proceeds from the industrial development bonds that were used to finance the
construction of the new Miami, Oklahoma facility. Interest expense as a
percentage of net sales decreased to 4.0% 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 acquisition of Doane in 1995. 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 acquisition of Doane in 1995.
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 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 acquisition of Doane.
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.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and
working capital requirements from cash flow from operations, bank borrowings and
bonds. The acquisitions of IPES and Windy Hill were funded through bank
borrowings and the issuance of common stock of our parent corporation,
respectively. We 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
34
<PAGE> 38
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, we 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, we spent $14.1
million on capital expenditures, of which $12.4 million was used for expansion.
We expect that existing manufacturing facilities will not be sufficient to
meet our anticipated volume growth. We have continued to examine alternatives
for expanding our business either through construction of additional
manufacturing capacity or acquisition of manufacturing assets. Such potential
acquisitions could include acquisitions of operating companies. We intend to
finance such expansions or acquisitions with borrowings under existing or
expanded credit facilities.
On April 17, 1998, we acquired IPES for $26.2 million, net of cash
purchased of $1.9 million, and the assumption of indebtedness of $1.9 million.
We financed the acquisition of IPES 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, Doane Pet Care Enterprises, Inc. acquired Windy Hill for
approximately 1.6 million shares of its common stock and the assumption of
$183.5 million of indebtedness.
On November 12, 1998, Doane Pet Care Enterprises, Inc. merged Windy Hill
into Doane and we completed the refinancing transactions. As part of the
refinancing transactions, we entered into a new credit facility, which provides
for total commitments of $345.0 million. As of December 31, 1998, we had
outstanding borrowings of $245.0 million under the term loan facility, $31.0
million under the revolving credit facility and $1.0 million under the swingline
facility. In addition, at such date we had $2.4 million of outstanding letters
of credit under the new credit facility.
Our 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. Our ability to borrow is limited
by the new credit facility and the limitations on the incurrence of indebtedness
in the indenture governing the notes. We anticipate that our operating cash
flow, together with amounts available to us under the new credit facility and
new 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 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.
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We will adopt SFAS 133 beginning in fiscal 1999. We have not determined the
impact that SFAS 133 will have on our financial statements and believe that such
determination will not be meaningful until closer to the date of initial
adoption.
YEAR 2000
We have conducted a comprehensive review of our 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 our 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.
We have made an assessment of year 2000 compliance and reviewed our
business application software which resulted in plans to either replace or
upgrade all essential business software at an estimated cost of $3.5 million. We
are currently reviewing our administrative hardware and software (networks,
communications and security systems) and the software related to manufacturing
equipment. We have implemented a program to confirm year 2000 compliance with
all third parties with which we have material relationships.
As of September 30, 1998, we had incurred costs of approximately $2.4
million in connection with year 2000 compliance. We intend to test and verify
our year 2000 compliance projects by July 1999, including third party
compliance. We believe that a failure to complete our year 2000 compliance, or a
failure by parties with whom we have material relationships to complete year
2000 compliance by such date, could have a material adverse effect on our
financial condition and results of operations. We believe that we can provide
the resources necessary to ensure year 2000 compliance prior to the year 2000.
However, if we are delayed in our compliance with year 2000, we may experience a
decrease in efficiency that could have a material adverse effect on results of
operations. We also believe that a sufficient number of suppliers exist if our
current suppliers are delayed in their efforts to achieve year 2000 compliance
thereby minimizing risk to us. We have developed contingency plans that include
moving production within our plant network, securing additional ingredient
storage facilities and transferring procurement to year 2000 compliant
suppliers.
COMMITMENTS AND CONTINGENCIES
On October 30, 1998 we initiated a product recall for certain dry dog food
manufactured at our Temple, Texas plant between July 1 and August 31, 1998. The
recall covers dry dog food manufactured at our Temple plant and does not apply
to dry dog food manufactured at other plants or to our 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. We have an extensive corn
testing program for the detection of aflatoxins and that program has been
intensified since the problems were reported. We maintain insurance against
losses from illness or death of animals; however, the cost of the product recall
is not covered by insurance. We estimate the cost of the product recall to be
$3.0 million, net of insurance recoveries, and have recorded a charge to
non-recurring costs in the fourth quarter of fiscal 1998. See "Risk
Factors -- Environmental, Regulatory and Safety Matters; Product Recall."
We believe that our 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 we
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. We are currently considering
options to ensure that our European subsidiaries can operate effectively in the
Euro. Our subsidiaries in Italy and Spain may incur significant costs in
conversion of their systems to the Euro. We are unable to predict whether such
costs can be passed on to customers. The customers of these subsidiaries may
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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 our markets. We do not believe that the implementation of the
Euro will have a material effect on our operations or financial condition taken
as a whole.
INFLATION AND CHANGES IN PRICES
Our financial results depend to a large extent on the cost of raw materials
and packaging and our ability to pass along to our 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, we may be required to increase sales prices
for our products in order to avoid margin deterioration. There can be no
assurance as to the timing or extent of our ability to implement future price
adjustments in the event of increased raw material costs or as to whether any
price increases implemented by us may affect the volumes of future shipments.
We manage the price risk created by market fluctuations by hedging portions
of our 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 we deliver the contract against the acquisition of the
physical commodity. Our policy does not permit speculative commodity trading.
Although we manage the price risk of market fluctuations by hedging portions of
our primary commodity product purchases, there can by no assurance that our
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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BUSINESS
OVERVIEW
We are the largest manufacturer of dry pet food in the United States by
volume, producing approximately 26% of the total volumes sold in 1997 on a pro
forma basis. We manufacture products for store brands owned by retail customers,
also known as private labels, contract manufacture products for national branded
pet food companies and produce and sell under regional brands owned by us.
We manufacture for our 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. We provide products that meet customer specifications across all
retail channels and price points, from super premium to value products.
Accordingly, we manufacture 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. We also manufacture
dry pet food and treats for four of the six largest national branded pet food
companies through co-manufacturing agreements pursuant to which we produce,
package and ship a portion of such companies' products.
We have the most extensive manufacturing and distribution network in the
industry, providing us with certain operational, cost and competitive
advantages. We manufacture and distribute our products in the United States
through 32 combination manufacturing and distribution facilities and nine
additional distribution centers. The number and strategic location of our
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. Our extensive network can further reduce expenses by enabling
certain of our customers to bypass their distribution centers and deliver
directly to their stores. Direct store delivery service currently accounts for
approximately 45% of our sales by volume.
We have achieved strong internal growth. From 1992 to 1997, we increased
sales volumes at a compound annual growth rate of 10.3%, exclusive of
acquisitions. We believe our 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, we have been the primary supplier of
store brand pet food to Wal*Mart since 1970. We manufacture and distribute,
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 our 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% of total sales volume of biscuits and treats, 29% of total
sales volume of dry dog food, 23% of total sales volume of dry cat food, 18% of
total sales volume of canned dog food and 17% of total sales volume of canned
cat food. Store brand volume share of canned dog food increased from 10% to 18%
from 1992 to 1997. Store brand volume of canned cat food increased from 9% to
17% from 1992 to 1997.
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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, we refinanced our 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 its notes, which tender offer was required by a change of
control provision in the indenture governing such notes;
-- Doane completed an exchange offer of $150 million principal amount of
its old notes for the remaining approximately $63 million principal
amount of its senior notes and all of 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 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, Doane Pet Care Enterprises, Inc.
acquired Windy Hill for approximately 1.6 million shares of its 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, we are the
largest manufacturer of dog biscuits in the United States. In 1997, Windy Hill
generated pro forma net sales of $304.0 million, EBITDA of $26.7 million and a
net loss before extraordinary item of $1.6 million.
The acquisition of Windy Hill strengthens our presence in the dry pet food
and dog biscuit market segments, provides revenue synergies and enhances our
position as a low-cost manufacturer and distributer of pet food products. We
believe the acquisition of Windy Hill provides the opportunity for revenue
growth by (i) enabling us to offer regional brands, semi-moist, soft dry and
canned pet food products to our traditional customer base and (ii) enabling us
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, we
believe cost savings can be achieved through optimizing production schedules and
lowering distribution costs by reducing the distance products are shipped. The
acquisition of Windy Hill also provides us with the opportunity to achieve cost
savings by obtaining purchasing synergies and eliminating redundant overhead
functions.
IPES Acquisition. In April 1998, we 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 of $21.1 million, EBITDA of $3.8
million and net income of $1.0 million. We believe that the acquisition of IPES,
together with our investment in the Italian manufacturer, Effeffe, S.p.a.,
provides us with a platform for growth in Europe.
STRATEGY
Our business objective is to increase revenues and earnings and to enhance
our leadership position within the pet food industry. The key elements of the
strategy to achieve our business objective are as follows:
Continue to be the Low Cost Quality Provider in the Pet Food Industry. We
believe we are the low cost provider of quality dry pet food. We believe our
position as the largest manufacturer of dry pet food provides us with certain
economies of scale, including production efficiencies and packaging purchasing
leverage. In addition, the number and strategic location of our facilities
enhances our position as the low cost provider by
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reducing transportation costs for raw materials and finished goods. We also
maintain in-house engineering, machining and fabrication capabilities that
enable us to design, construct and maintain facilities on a cost-effective
basis.
Leverage Distribution System. Our manufacturing and distribution network
enables us to service customers on a national basis and facilitates our direct
store delivery program, the scope of which we believe is unique in the industry.
In addition, we have developed capabilities that allow us to provide vendor
managed inventory to certain key customers. Vendor managed inventory allows us
to communicate on-line with our customers, evaluate their inventory status and
place orders on their behalf. We intend to leverage our manufacturing and
distribution network by expanding sales of our full range of pet food products
to our existing customers. For example, we recently completed the construction
of a soft treat manufacturing facility, which will enable us to offer soft
treats to our traditional customer base, and we intend to expand sales of
certain products acquired in the acquisition of Windy Hill, including
semi-moist, soft dry, canned and regional brands to our existing customers.
Provide a Full Range of Pet Food Products. We offer 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, we can be a significant source for our 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. We believe 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.
We believe this growth will continue due to:
- an increased awareness of retailers concerning the advantages of store
brands, including enhanced margins and customer loyalty,
- improved quality, innovation and variety of store brand products and
- increasingly informed and value-conscious consumers.
We believe co-manufactured national brands offer growth opportunities as
national branded pet food companies increasingly take advantage of our low-cost
status, quality products, extensive plant network and logistics capabilities. We
believe that the regional brands acquired with the acquisition of Windy Hill
complement our existing product lines, and we intend to capitalize on demand for
such brands within our existing customer base.
Acquire Additional Pet Food Companies. To supplement our internal growth,
we have acquired eight pet food companies over the last three years. We believe
that substantial opportunities exist in the United States and abroad to acquire
additional pet food companies. We will continue to seek accretive acquisitions
that offer complementary product lines, geographic scope, additional
distribution channels and cost saving opportunities.
Expand International Presence. We believe substantial opportunities exist
to increase sales in international markets. We believe 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. We are currently expanding our manufacturing and distribution
capabilities in Spain and Italy and intend to pursue acquisitions of additional
pet food companies and expand our product offerings. In addition, we believe
that an opportunity exists to expand export sales to the Pacific Rim and South
America.
PRODUCTS AND SERVICES
We provide our 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,
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- packaging design services and
- assistance in formulating pricing and marketing strategies in connection
with their store brand programs.
We sell our products as store brands owned by customers (also known as
private labels) and regional brands owned by us, and we also contract
manufacture products for national pet food companies. Our 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, we
manufacture 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, we are able to provide customers with a single source for store
brands, certain co-manufactured national brands and regional brands. We are 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.
We manufacture 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. We also co-manufacture branded pet food products for
national pet food companies in accordance with such companies' specifications
and standards. Our regional brands include Kozy Kitten(R), G. Whiskers(R), Trail
Blazer(R), and Tuffy's(R), which are sold to allow our customers to broaden
their product offerings and to provide them with a single source for their pet
food requirements.
In addition to our pet food products, we sell products manufactured by
third parties and maintain an engineering group. A description of each of our
product lines is set forth below:
Dry Pet Food Products (82.0% of 1997 Pro Forma Net Sales)
We are the largest manufacturer of dry pet food products in the United
States. We produce, market and distribute 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 our
dry pet food shipments over the past three years, with such products
representing approximately 84.1% of our dry pet food shipments (tonnage) in 1997
on a pro forma basis. Our cat food lines accounted for approximately 15.9% of
our dry pet food shipments (tonnage) in 1997 on a pro forma basis.
Biscuits and Treats (9.6% of 1997 Pro Forma Net Sales)
We are the largest manufacturer of dog biscuits in the United States, and
we are 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 acquisition of Windy Hill, we have expanded our
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. We receive these items at our
manufacturing facilities and warehouses and aggregate them with our products
into truckload quantities for combined shipment to certain customers. We provide
this service as a part of our direct shipment program and receive a handling fee
for this service.
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Engineering Services Group
Our engineering services group designs and builds extruders, conveyors,
dryers and other parts and equipment, including replacement parts, for our pet
food manufacturing facilities and for third parties. The engineering services
group also includes a repair staff that is available to service and repair
machinery and equipment at our production facilities, giving us the ability to
make timely repairs, thereby minimizing downtime. Our in-house engineers
generally design and supervise plant construction, thereby reducing plant
construction costs and ensuring consistent manufacturing processes and quality
control. We believe that our engineering services group provides us services at
a lower cost and more efficiently than could be obtained from third parties.
SALES AND DISTRIBUTION
Our direct sales force seeks new accounts and works directly with mass
merchandisers, membership clubs, feed stores and specialty pet stores. We also
use independent food brokers. We generate new business through the expansion of
our product line and the development of new marketing programs to existing
customers.
Most of our products are distributed utilizing our customers'
transportation networks. Several of our largest customers utilize us as a
"just-in-time" supplier and maintain trailers at our 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 our 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. Our ability to ship directly to certain of our
customers is a key consideration in locating our manufacturing facilities and is
a significant competitive advantage.
Our customers not utilizing their own fleet either arrange their own
transportation or have us arrange transportation on a contract basis through
common carriers. We do not own or operate any transportation equipment.
We have developed capabilities that allow us to provide vendor managed
inventory service to certain key customers. Vendor managed inventory allows us
to communicate on-line with our customers, evaluate their inventory status then
place the order for the customer. We utilize vendor managed inventory for both
direct store and warehouse deliveries. Vendor managed inventory benefits include
shorter lead-time, higher inventory turns and reduced out-of-stock positions.
CUSTOMERS
We manufacture 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, we manufacture 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 our net sales. A
portion (3.8%) of our 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 us for national pet food companies. We
have been the primary supplier of private label dry pet food products to
Wal*Mart since 1970 and to Sam's Club since 1990. We utilize 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 our
facilities. The direct ship program, which reduces customer inventory, handling
and warehouse expenses, is enhanced by the number and strategic locations of our
facilities. We also offer direct shipment programs and electronic data
interchange systems to our other larger customers.
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The loss of any significant customer, or customers that in the aggregate
represent a significant portion of our sales, would have an adverse impact on
our 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 us and possess significantly
greater financial and marketing resources than us. The store brand pet food
products sold by our 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.
We 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, our operating results and cash flow could be adversely
affected. We also compete with regional branded manufacturers and other store
brand manufacturers.
We believe that we differentiate our company 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. We
believe that we differentiate our company 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 our manufacturing operations are
bulk commodity grains and foodstocks, including corn, soybean meal, wheat
middlings, meat and bone meal, and corn gluten meal. We generally purchase raw
materials one to three months in advance. We purchase the raw material
requirements of each of our 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. We do not
maintain long-term contracts with any of our suppliers; however, we believe that
alternative sources of supply are readily available.
We manage the price risk created by market fluctuations by hedging portions
of our 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 we deliver the contract against the acquisition of the
physical commodity. Our 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 our raw material costs. We have five
main suppliers of packaging and believe that additional suppliers of packaging
are available. A majority of our requirements are not covered by long term
contracts with any of our packaging suppliers.
We generally price our pet food products based on the cost of raw
materials, packaging and certain other costs plus a conversion charge (which
includes a profit factor). We periodically adjust 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."
RESEARCH AND DEVELOPMENT
Our 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 our production facilities used for quality control. We
are continually developing new products. The research and development department
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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 our research and development. We
maintain a program of testing raw materials to ensure nutritional adequacy and
to test for the presence of bacteria and other harmful substances. We
continuously test pet food production at each of our 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
Our corporate headquarters are located in Brentwood, Tennessee. We own
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. We also have a 50% joint interest in facilities located in Butler,
Missouri; Caldwell, Idaho; Hereford, Texas; and Italy. We are in the process of
building a state of the art facility in Clinton, Oklahoma. We also own a
facility in Spain. In addition, we own or lease nine warehouses.
Our manufacturing facilities are generally located in rural areas in
proximity to customers, raw materials and transportation networks, including
rail transportation. We believe the number and strategic locations of our
manufacturing facilities enhance our 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. We believe we are able to construct new manufacturing facilities at a
lower cost than competitors due to our engineering services group that designs
and constructs most of the necessary production equipment.
ENVIRONMENTAL, REGULATORY AND SAFETY MATTERS; PRODUCT RECALL
We are 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. We have not been
subject to any material environmental liabilities and compliance of our business
and operations with environmental laws and regulations has not had a material
adverse effect on our capital expenditures, earnings, or competitive position.
Environmental laws and regulations have changed substantially in recent years
and we believe that the trend of more expansive and more strict environmental
legislation and regulations will continue. While we believe we are 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.
Our business involves the use of aboveground and underground storage tanks.
Under applicable laws and regulations, we are responsible for the proper use,
maintenance and abandonment of regulated storage tanks that we own or operate,
and for remediation of subsurface soils and groundwater impacted by releases
from such existing or abandoned aboveground or underground storage tanks. We are
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 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
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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 our past operations in connection with any
CERCLA site, we have not received, nor do we expect to receive, any notice that
we are or will be designated a potentially responsible party to any CERCLA site.
We currently own or lease, and in connection with our 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
we have 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 us 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 our 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, we 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 our 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 our properties. We have not been advised, nor do we
expect to be advised, by any environmental agency that we are considered a
potentially responsible party for the neighboring environmental conditions, and
we have no reason to believe that such conditions would have a material adverse
effect on our company.
The manufacturing and marketing of our 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 our 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. We procure and maintain the necessary permits and
licenses in order to operate our facilities and consider our company to be in
material compliance with applicable OSHA, DOA, and FDA requirements.
On October 30, 1998 we initiated a product recall for certain dry dog food
manufactured at our Temple, Texas plant. The recall covers dry dog food
manufactured at our Temple plant between July 1 and August 31, 1998 and does not
apply to dry dog food manufactured at other plants or to our 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. We have an extensive corn
testing program for the detection of aflatoxins and that program has been
intensified since the problems were reported. We maintain insurance against
losses from illness or death of animals; however, the cost of the product recall
is not covered by insurance. We estimate the cost of the product recall to be
$3.0 million, net of insurance recoveries, and have recorded a charge to
non-recurring costs in the fourth quarter of fiscal 1998.
We believe that our 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 we
will not incur significant costs in the future (1) to comply with such
requirements, (2) to effect future recalls or (3) in connection with the effect
on our business of such matters.
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<PAGE> 49
TRADEMARKS
Certain of our brands are protected by trademark registrations in the
United States and in certain foreign markets. We believe that our registered
trademarks are adequate to protect such brand names.
EMPLOYEES
As of December 31, 1998, we had approximately 2,493 employees, of which
approximately 276 were management and administrative personnel and approximately
2,217 were manufacturing personnel. Of this number, 400 employees in five of our
plants are represented by labor unions. The collective bargaining agreement with
respect to the Birmingham, Alabama plant covers 94 employees and expires on
January 20, 2001. The collective bargaining agreement with the Joplin, Missouri
plant covers 191 employees and expires on January 31, 1999. The collective
bargaining agreement with the Muscatine, Iowa plant covers 45 employees and
expires in December 1999. The collective bargaining agreement with respect to
the NuPet plant in Ripon, California covers 26 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
44 employees and expires in July 1999. We consider our relations with our
employees to be satisfactory.
LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings, other than
ordinary routine litigation incidental to our business that we believe would not
have a material adverse effect on our financial condition or results of
operations.
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<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and titles of the current
executive officers and directors of Doane and Doane Pet Care Enterprises, Inc.,
our parent corporation. Each of the members of the board of directors of Doane
Pet Care Enterprises, Inc. named below also serves on the board of directors of
Doane. The board of directors of Doane Pet Care Enterprises, Inc. is currently
composed of eight members. Certain of the directors of Doane Pet Care
Enterprises, Inc. and Doane 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 Doane Pet Care Enterprises, Inc. and
Doane, see "-- Employment and Termination Agreements."
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
George B. Kelly............. 49 Chairman of the Board and Director
Douglas J. Cahill........... 38 Chief Executive Officer, President and Director
Thomas R. Heidenthal........ 47 Senior Vice President and Chief Financial Officer
F. Donald Cowan, Jr......... 52 Senior Vice President, Business Development and
Quality of Doane
Richard A. Hannasch......... 45 Vice President, Fulfillment of Doane
Richard D. Wohlschlaeger.... 45 Vice President, Sales and Marketing of Doane
David L. Horton............. 37 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............. 52 Director
M. Walid Mansur............. 39 Director
Bob L. Robinson............. 61 Director
Jeffrey C. Walker........... 43 Director
Ray Chung................... 50 Director
Stephen C. Sherrill......... 45 Director
</TABLE>
Set forth below is a brief description of the business experience of the
directors and executive officers of Doane Pet Care Enterprises, Inc. and Doane.
George B. Kelly has been Chairman of the Board of Doane since October 1995
and Chairman of the Board of Doane Pet Care Enterprises, Inc. 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 Doane and Doane Pet
Care Enterprises, Inc. in September 1997, began serving as President of Doane
and Doane Pet Care Enterprises, Inc. in January 1998 and began serving as Chief
Executive Officer of Doane and Doane Pet Care Enterprises, Inc. in July 1998. He
has been a director of Doane and Doane Pet Care Enterprises, Inc. since
September 1998. Prior to joining us, Mr. Cahill served as President of Olin
Corporation's Winchester Division, Corporate Vice President of Olin 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 Doane and Doane Pet Care Enterprises, Inc. in March 1997. Prior to
joining us, 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 Doane in August
1998 as Senior Vice President, Operations, he served
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<PAGE> 51
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 Doane in October 1996, has served as Vice
President, Fulfillment since January 1999 and served as Vice President,
Strategic Planning from June 1998 to January 1999 and Vice President of
Marketing from November 1997 to January 1999. Prior to joining us, 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 Doane in April 1993, has served as Vice
President, Sales and Marketing since January 1999 and served as Vice President,
Customer Development from November 1997 to January 1999. Prior to joining us,
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 Doane in November 1997, has served as Vice
President, Manufacturing and Engineering since January 1999 and served as Vice
President, Fulfillment from November 1997 to January 1999. Prior to joining us,
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 Doane's Vice President, Co-Manufacturing
(Sales) since November 1997. Mr. Bechtel joined us in June 1973 and served as
Vice President, Administration from March 1990 until October 1997, and as Vice
President, Sales from September 1976 through February 1990.
Charles W. Dunleavy served as Vice President of Finance for Windy Hill
before joining Doane in August 1998 as Vice President, Finance. 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 Doane and Doane Pet Care
Enterprises, Inc. 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 Doane and Doane Pet Care
Enterprises, Inc. 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 Doane in August 1960 and served as President and
Chief Executive Officer until his resignation effective June 30, 1998. Mr.
Robinson became a director of Doane 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 Doane and Doane Pet Care
Enterprises, Inc. 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 Doane and Doane Pet Care Enterprises, Inc.
in August 1998. He is a partner in Dartford Partnership, L.L.C. 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,
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<PAGE> 52
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 Doane and Doane Pet Care
Enterprises, Inc. in August 1998. He has been a Principal of Bruckmann, Rosser
and Sherrill Co. ("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 Doane 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
------------
ANNUAL SECURITIES
COMPENSATION(1) UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL ------------------- OPTIONS/SARS ALL OTHER
AT DOANE YEAR SALARY BONUS (#) COMPENSATION
<S> <C> <C> <C> <C> <C>
Douglas J. Cahill(2)............. 1998 $327,082 (3) 25,000 $1,278,538(4)(5)(7)(11)
President and Chief Executive 1997 91,667 $100,000 100,000 305,717(6)(7)
Officer
Thomas R. Heidenthal............. 1998 199,583 (3) -- 303,198(4)(5)
Senior Vice President and Chief 1997 145,833 93,000 50,000 47,023(6)
Financial Officer
Bob L. Robinson(8)............... 1998 183,000 (3) -- 299,300(9)(10)
1997 366,000 569,294 -- 38,712(10)
1996 366,000 420,289 125,000 37,052(10)
Rick Wohlschlaeger............... 1998 152,361 (3) 9,500 161,282(4)(5)
Vice President, Sales 1997 116,616 40,000 -- 794
and Marketing 1996 109,853 22,380 9,500 --
Rick Hannasch.................... 1998 147,917 (3) -- 186,327(4)(5)
Vice President, Fulfillment 1997 108,627 40,000 -- 794
1996 22,222 -- 18,000 30,000(7)
David L. Horton.................. 1998 154,583 (3) 15,000 154,711(4)(5)
Vice President, Manufacturing 1997 14,071 -- -- 80,794(7)
and Engineering
</TABLE>
- ---------------
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported for each executive officer.
(2) Mr. Cahill served as Doane's Chief Operating Officer from September 1997 to
January 1998, became Doane's President in January 1998 and became Doane'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 Doane.
(3) A determination of the amount of bonus earned for 1998 cannot be made until
Doane's audited financial statements as of and for December 31, 1998 have
been finalized. However, pursuant to Mr. Robinson's retirement agreement, we
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.
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<PAGE> 53
(4) Includes bonuses received in connection with the acquisition of Windy Hill
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 Doane's Chief Executive Officer until his
resignation effective June 30, 1998. Upon his resignation, options for
50,500 shares of common stock of Doane Pet Care Enterprises, Inc. 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 Doane's deferred
compensation plan set forth in footnote 10 below.
(10) Includes the following amounts vested under Doane'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 25,000 shares of common
stock of Doane Pet Care Enterprises, Inc. that Mr. Cahill received in
fiscal 1998.
EMPLOYMENT AND RETIREMENT AGREEMENTS
Doane 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 our board of directors under our
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
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, 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.
Doane entered into a retirement agreement with Mr. Robinson effective June
30, 1998 pursuant to which Mr. Robinson resigned from employment with Doane and
Doane Pet Care Enterprises, Inc. Pursuant to his retirement agreement, we paid
Mr. Robinson his base salary, at the rate in effect on the retirement date (June
30, 1998), through December 31, 1998. We 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 us effective as of September 1, 1994. Effective as of
his retirement date, options for 18,000 shares of the common stock of Doane Pet
Care Enterprises, Inc. issued under the terms of two stock option agreements
dated November 1, 1996 became fully vested.
COMPENSATION OF DIRECTORS
No compensation is paid by us to our directors.
Certain directors of Doane are partners or directors of entities that
received fees in connection with the acquisition of Windy Hill, the exchange
offer for Doane's senior notes and Windy Hill's notes, the tender offer
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<PAGE> 54
for Doane's senior notes and the repayment of bridge financing incurred in
connection with the tender offer for the Windy Hill notes. See "Certain
Transactions."
STOCK OPTION AND STOCK PURCHASE PLANS
Effective as of November 1, 1996, our parent corporation adopted its 1996
Management Stock Purchase Plan and its 1996 Stock Option Plan, as amended. The
stock option plans are intended to encourage certain of our employees to develop
a sense of proprietorship and personal involvement in the development and
financial success of our company.
Effective as of June 19, 1997, our parent corporation adopted its 1997
Management Stock Purchase Plan. Pursuant to the 1996 Management Stock Purchase
Plan and the 1997 Management Stock Purchase Plan, 125,000 shares of common stock
of Doane Pet Care Enterprises, Inc. were sold for $10.00 per share to certain
key employees, including sales of 50,000 shares to Mr. Heidenthal, 11,500 shares
to Mr. Wohlschlaeger and 11,500 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. As of December 31, 1998, options for 124,500
shares of stock had been exercised by the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------
NUMBER OF % OF TOTAL EXERCISE
SECURITIES OPTIONS PRICE
UNDERLYING OPTIONS GRANTED TO PER EXPIRATION
NAME GRANTED(#) EMPLOYEES SHARE DATE
---- ------------------ ---------- -------- ----------
<S> <C> <C> <C> <C>
Douglas J. Cahill....................... 25,000 27.3% $10.00 2008
Richard D. Wohlschlaeger................ 9,500 10.4 20.00 2008
David L. Horton......................... 15,000 16.4 20.00 2008
</TABLE>
STOCK OPTION EXERCISES
The following table sets forth certain information with respect to
exercises by the Named Executive Officers of stock options during fiscal year
1998 and the number of shares underlying unexercised stock options held by such
officers as of December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST YEAR
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING
SHARES UNEXERCISED OPTIONS(1)
ACQUIRED ----------------------------
NAME ON EXERCISE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C>
Douglas J. Cahill..................................... 50,000 -- 75,000
Thomas R. Heidenthal.................................. -- 7,750 42,250
Richard D. Wohlschlaeger.............................. -- 2,993 19,000
Richard A. Hannasch................................... -- 3,430 18,000
David L. Horton....................................... -- 0 15,000
Bob L. Robinson(2).................................... 74,500 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 Doane'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 25,000 shares in 1998 and Mr.
Robinson's exercise of options for 74,500 shares in 1998, as well as the
termination of his remaining options for 50,500 shares. In addition, Mr.
Cahill received options for 25,000 additional shares during 1998 and
exercised all 25,000 of such options during 1998.
(2) Effective as of Mr. Robinson's retirement on June 30, 1998, options for
18,000 shares of common stock of Doane Pet Care Enterprises, Inc. issued
under the terms of two stock option agreements dated November 1, 1996
became fully vested and his remaining unexercised options for 50,500
shares were terminated.
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<PAGE> 55
OTHER COMPENSATORY ARRANGEMENTS
Employee Retirement Plan. On May 31, 1998, we terminated our employee
retirement plan. The retirement plan was a non-contributory, tax qualified plan
that provided retirement benefits based on the employee's tenure with Doane and
average monthly compensation. We are currently structuring a plan for
liquidating the retirement plan and anticipate providing a lump sum payment
which 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 Doane 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, we 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. Doane has entered into
agreements with all of the 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 Doane. 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 Doane, 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.
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<PAGE> 56
CERTAIN TRANSACTIONS
INVESTORS' AGREEMENT
In connection with the Windy Hill acquisition, Doane Pet Care Enterprises,
Inc, 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 Doane (collectively, the "Stockholders") entered into an
investors' agreement. The investors' agreement contains provisions concerning
the governance of Doane Pet Care Enterprises, Inc. and Doane, restrictions on
the transferability of the securities of Doane Pet Care Enterprises, Inc. 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 Doane Pet Care Enterprises, Inc. 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 (each, a
Summit investors 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 (a Windy Hill designee),
- one will be designated by BRS on behalf of the Windy Hill investors (also
a "Windy Hill designee"),
- one will be the Chief Executive Officer of Doane and
- one will be designated by the mutual agreement of the following (or such
subset of the following that is then entitled to be designated to the
board of directors in accordance with the investors' agreement):
(1) the DLJMB designee and
(2) George B. Kelly so long as Mr. Kelly is one of the two
Summit-Investors designees or, if Mr. Kelly is not then one of the two
Summit-Investor designees, by any of the Summit-Investor designees.
If at any time the number of shares of common stock of Doane Pet Care
Enterprises, Inc. owned of record by the Summit investors is less than 50% of
the number of shares of common stock of Doane Pet Care Enterprises, Inc. 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. If any time the
number of shares of common stock of Doane Pet Care Enterprises, Inc. owned of
record by the Windy Hill investors is less than 50% of the number of shares of
common stock of Doane Pet Care Enterprises, Inc. owned as of August 3, 1998 (in
each case, disregarding stock splits, recapitalization 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 is less than 5%, such person or group
shall not have the further right to designate any individual to the board of
directors of Doane 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 of directors of Doane Pet Care Enterprises, Inc., Windy Hill 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 board of directors of Doane Pet Care
Enterprises, Inc.
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The investors' agreement also provides for certain registration rights for
the benefit of the Stockholders. Doane Pet Care Enterprises, Inc. will not be
obligated to effect more than three demand registrations for the Summit
investors, collectively, three demand registrations for the DLJ entities,
collectively, three demand registrations for the Windy Hill investors,
collectively, and three demand registrations for CMIHI. Following the date Doane
Pet Care Enterprises, Inc. 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 shall be unlimited. The
Stockholders also have piggy-back registration rights if Doane Pet Care
Enterprises, Inc. proposes to register any of its common stock or warrants, or
if Doane proposes to register any of the Doane preferred stock under the
Securities Act.
TRANSACTIONS WITH DLJMB AND ITS AFFILIATES
In 1995, DLJSC entered into a financial advisory agreement with Doane Pet
Care Enterprises, Inc. and Doane that will terminate upon consummation of an
initial public offering by Doane Pet Care Enterprises, Inc. The financial
advisory agreement provides for an annual retainer fee of $100,000 plus
reimbursable expenses.
In connection with the acquisition of Doane, DLJMB purchased 1,000,000
shares of the Doane preferred stock and warrants to purchase 1,128,732 shares of
common stock of Doane Pet Care Enterprises, Inc. for an aggregate purchase price
of $25 million. In December 1997, DLJMB and certain of its affiliates sold their
shares of Doane preferred stock to DLJSC, who thereupon sold such shares to
qualified institutional buyers (as defined in Rule 144A under the Securities
Act). DLJMB is also a party to the investors' agreement described above.
Pursuant to the investors' agreement, DLJMB has designated Mr. Grauer to the
boards of directors of Doane and Doane Pet Care Enterprises, Inc.
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 us and for Doane
Pet Care Enterprises, Inc. DLJ Capital serves as an agent bank and a lender to
us under our new credit facility. DLJSC served as financial advisor to us in
connection with the Windy Hill acquisition and received fees of $1.0 million.
DLJSC also served as dealer manager in connection with the tender offer for our
senior notes and for the exchange offer for our senior notes and Windy Hill's
notes. DLJ Bridge Finance, Inc., an affiliate of DLJSC, also provided, together
with an affiliate of CMIHI, a bridge loan to us in connection with our
refinancing transactions. DLJSC and DLJ Capital received approximately $3.8
million in connection with our 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 720,000 shares
of common stock of Doane Pet Care Enterprises, Inc. In addition to certain
payments of fees and reimbursements for out-of-pocket expenses in connection
with the acquisition of Doane in 1995, SCI has entered into a management
advisory agreement with Doane for a term of five years or until such time as
Doane Pet Care Enterprises, Inc. consummates an initial public offering of its
common stock resulting in the receipt by Doane Pet Care Enterprises, Inc. 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.
SCI received fees of $2.0 million in connection with the acquisition of
Windy Hill. 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 Doane and Doane Pet Care Enterprises, Inc.
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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:
- 200,000 shares of the Doane preferred stock that will be repurchased by
Doane in connection with Doane Pet Care Enterprises, Inc.'s initial
public offering of common stock,
- 107,000 shares of Class A common stock of Doane Pet Care Enterprises,
Inc. and 583,000 shares of Class B (non-voting) common stock of Doane Pet
Care Enterprises, Inc. and
- warrants to purchase 225,746 shares of common stock of Doane Pet Care
Enterprises, Inc.
CMIHI and CSI received fees of $1,000,000 and $500,000, respectively, in
connection with the acquisition of Windy Hill. Jeffrey C. Walker, a director of
Doane and Doane Pet Care Enterprises, Inc., is the Managing General Partner of
Chase Capital Partners, which is an affiliate of CMIHI. In addition, CMIHI is a
party to the investor's agreement as described above.
CSI, Chase and their affiliates perform various investment banking and
commercial banking services from time to time for Doane and its affiliates.
Chase serves as an agent bank and a lender to the Doane 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 our refinancing
transactions. CSI acted as an initial purchaser of the May 1997 offering of the
Windy Hill notes. CSI acted as financial advisor to Windy Hill in connection
with the acquisition of Windy Hill. CSI also acted as dealer manager in
connection with Doane's exchange offer for its senior notes and Windy Hill's
notes. An affiliate of CMIHI also provided, together with an affiliate of DLJSC,
a bridge loan to Doane in connection with our refinancing transactions. CSI,
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 Doane Pet Care Enterprises, Inc. and Doane,
was paid $500,000 for services rendered in connection with the acquisition of
Doane in 1995 and related financings. Mr. Mansur owns 375,000 shares of common
stock of Doane Pet Care Enterprises, Inc., Mr. Mansur's spouse, Laura Hawkins
Mansur, owns 403,000 shares of common stock of Doane Pet Care Enterprises, Inc.
and 75,000 shares of common stock of Doane Pet Care Enterprises, Inc. are held
in trust for their children.
OTHER TRANSACTIONS
In addition to the fees paid to CMIHI, DLJSC and SCI in connection with the
acquisition of Windy Hill, Dartford Partners 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 acquisition of Windy Hill, representing a deferred transaction fee earned by
BRS in connection with Windy Hill's acquisition of certain assets from Heinz in
April 1996.
DESCRIPTION OF NEW CREDIT FACILITY
As part of the refinancing transactions, Doane 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 Chase served as the co-arrangers of the new credit facility. The new credit
facility consists of a $245.0 million term loan facility and a $100.0 million
revolving credit/swingline facility. The revolving credit facility will enable
us to obtain revolving credit loans and issue letters of credit for our account
from time to time for working capital, permitted acquisitions and general
corporate purposes. As of December 31, 1998 we had borrowed $245.0 million under
the term loan facility, $31.0 million under the revolving credit facility and
$1.0
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million under the swingline facility. In addition, at such date we had $2.4
million of letters of credit outstanding under the revolving credit facility.
Loans under the new credit facility will bear interest at:
- 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
- the Eurodollar rate plus the Applicable Margin. We 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. The term
loan facility must be repaid in quarterly installments commencing on
March 31, 1999. The principal amounts under the term loan facility shall
be repaid, as follows:
- approximately $11.7 million in each of the calendar years 1999 and 2000,
- approximately $14.2 million in each of the calendar years 2001, 2002,
2003 and 2004,
- $85.8 million in the calendar year 2005 and
- $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 us
from taking various actions and that will require us 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 Doane.
Doane 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 Doane and its restricted domestic subsidiaries.
THE EXCHANGE OFFER
EXCHANGE TERMS
$150 million principal amount of old notes are currently issued and
outstanding. The maximum principal amount of exchange notes that will be issued
in exchange for old notes is $150 million.
The exchange notes will bear interest at a rate of 9 3/4% per year, payable
semiannually on May 15 and November 15 of each year, beginning on May 15, 1999.
Holders of exchange notes will receive interest on May 15, 1999 from the date of
the original issuance of the old notes. Holders of exchange notes will not
receive any interest on old notes.
In order to exchange your old notes for transferable exchange notes in the
exchange offer, you will be required to make the following representations:
- any exchange notes will be acquired in the ordinary course of your
business;
- you have no arrangement with any person to participate in the
distribution of the exchange notes; and
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- you are not our "affiliate," as defined in Rule 405 of the Securities
Act, or if you are our affiliate, that you will comply with the
applicable registration and prospectus delivery requirements of the
Securities Act.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered in the exchange offer, and the exchange agent will deliver the
exchange notes promptly after the expiration date of the exchange offer. We
expressly reserve the right to delay acceptance of any of the tendered old notes
or terminate the exchange offer and not accept for exchange any tendered old
notes not already accepted if any conditions set forth under "-- Conditions of
the Exchange Offer" shall not have been satisfied or waived by us or do not
comply, in whole or in part, with any applicable law.
If you tender your old notes, you will not be required to pay brokerage
commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of the old notes. We
will pay all charges, expenses and transfer taxes in connection with the
exchange offer, other than certain taxes described below under "-- Transfer
Taxes."
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
, 1999, unless extended by us. We expressly reserve the right to
extend the exchange offer on a daily basis or for such period or periods as we
may determine in our sole discretion from time to time by giving oral (confirmed
in writing) or written notice to the exchange agent and by making a public
announcement by press release to the Dow Jones News Service prior to 9:00 a.m.,
New York City time, on the first business day following the previously scheduled
expiration date. During any extension of the exchange offer, all old notes
previously tendered, not validly withdrawn and not accepted for purchase will
remain subject to the exchange offer and may be accepted for purchase by us.
To the extent we are legally permitted to do so, we expressly reserve the
absolute right, in our sole discretion, to:
- waive any condition to the exchange offer and
- amend any of the terms of the exchange offer.
Any waiver or amendment to the exchange offer will apply to all old notes
tendered, regardless of when or in what order such old notes were tendered. If
we make a material change in the terms of the exchange offer or if we waive a
material condition of the exchange offer, we will disseminate additional
exchange offer materials, and we will extend the exchange offer to the extent
required by law.
We expressly reserve the right, in our sole discretion, to terminate the
exchange offer if any of the conditions set forth under "-- Conditions of the
Exchange Offer" exist. Any such termination will be followed promptly by a
public announcement. In the event we terminate the exchange offer, we will give
immediate notice to the exchange agent, and all old notes previously tendered
and not accepted for payment will be returned promptly to the tendering holders.
In the event that the exchange offer is withdrawn or otherwise not completed,
the exchange notes will not be given to holders of old notes who have validly
tendered their old notes.
RESALE OF EXCHANGE NOTES
Based on interpretations of the SEC staff set forth in no action letters
issued to third parties, we believe that exchange notes issued under the
exchange offer in exchange for old notes may be offered for resale, resold and
otherwise transferred by you without compliance with the registration and
prospectus delivery provisions of the Securities Act, if:
- you are not an "affiliate" of our company within the meaning of Rule 405
under the Securities Act;
- such exchange notes are acquired in the ordinary course of your business;
and
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- you do not intend to participate in the distribution of such exchange
notes.
If you tender old notes in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
- you cannot rely on such interpretations by the SEC staff, and
- you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute exchange notes should be covered by an effective
registration statement under the Securities Act containing the selling
securityholder's information required by Item 507 of Regulation S-K under the
Securities Act. This prospectus may be used for an offer to resell, resale or
other retransfer of exchange notes only as specifically set forth in this
prospectus. Only broker-dealers that acquired the old notes as a result of
market-making activities or other trading activities may participate in the
exchange offer. Each broker-dealer that receives exchange notes for its own
account in exchange for old notes, where such old notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. Please read the section captioned "Plan
of Distribution" for more details regarding the transfer of exchange notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE
We will accept for exchange old notes validly tendered pursuant to the
exchange offer (or defectively tendered, if such defect has been waived by us)
after the later of: (1) the expiration date of the exchange offer and (2) the
satisfaction or waiver of the conditions specified below under "-- Conditions of
the Exchange Offer." We will not accept old notes for exchange prior to the
expiration date of the exchange offer. Tenders of old notes will be accepted
only in principal amounts equal to $1,000 or integral multiples of $1,000.
We expressly reserve the right, in our sole discretion, to:
- delay acceptance for exchange of old notes tendered under the exchange
offer (subject to Rule 14e-1 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), which requires that an offeror pay the
consideration offered or return the securities deposited by or on behalf
of the holders promptly after the termination or withdrawal of a tender
offer), or
- terminate the exchange offer and not accept for exchange any old notes
not theretofore accepted for exchange, if any of the conditions set forth
below under "-- Conditions of the Exchange Offer" have not been satisfied
or waived by us or in order to comply in whole or in part with any
applicable law. In all cases, exchange notes will be issued only after
timely receipt by the exchange agent of certificates representing old
notes (or confirmation of book-entry transfer), a properly completed and
duly executed letter of transmittal (or a manually signed facsimile
thereof) and any other required documents.
For purposes of the exchange offer, we will be deemed to have accepted for
exchange validly tendered old notes (or defectively tendered old notes with
respect to which we have waived such defect) if, as and when we give oral
(confirmed in writing) or written notice to the exchange agent. Promptly after
the expiration date, we will deposit the exchange notes with the exchange agent,
who will act as agent for the tendering holders for the purpose of receiving the
exchange notes and transmitting them to such holders. The exchange agent will
deliver the exchange notes to holders of old notes accepted for exchange after
the exchange agent receives such exchange notes.
If, for any reason, we delay acceptance for exchange of validly tendered
old notes or we are unable to accept for exchange validly tendered old notes,
then the exchange agent may, nevertheless, on our behalf, retain tendered old
notes, without prejudice to our rights described under "-- Expiration Date;
Extensions; Termination; Amendments," "-- Conditions of the Exchange Offer" and
"Withdrawal of Tenders" (subject
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to Rule 14e-1 under the Exchange Act, which requires that an offeror pay the
consideration offered or return the securities deposited by or on behalf of the
holders thereof promptly after the termination or withdrawal of a tender offer).
If any tendered old notes are not accepted for exchange for any reason, or
if certificates are submitted evidencing more old notes than those that are
tendered, certificates evidencing old notes that are not exchanged will be
returned, without expense, to the tendering holder (or, in the case of old notes
tendered by book-entry transfer into the exchange agent's account at a
book-entry transfer facility under the procedure set forth under "-- Procedures
for Tendering Old Notes -- Book-Entry Transfer," such old notes will be credited
to the account maintained at such book-entry transfer facility from which such
old notes were delivered), unless otherwise requested by such holder under
"Special Delivery Instructions" in the letter of transmittal, promptly following
the exchange date or the termination of the exchange offer.
Tendering holders of old notes exchanged in the exchange offer will not be
obligated to pay brokerage commissions or transfer taxes with respect to the
exchange of their old notes other than as described in "-- Transfer Taxes" or in
Instruction 7 to the letter of transmittal. We will pay all other charges and
expenses in connection with the exchange offer.
PROCEDURES FOR TENDERING OLD NOTES
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee or held through
a book-entry transfer facility and who wishes to tender old notes should contact
such registered holder promptly and instruct such registered holder to tender
old notes on such beneficial owner's behalf.
Tender of Old Notes Held Through DTC. The exchange agent and DTC have
confirmed that the exchange offer is eligible for the DTC automated tender offer
program. Accordingly, DTC participants may electronically transmit their
acceptance of the exchange offer by causing DTC to transfer old notes to the
exchange agent in accordance with DTC's automated tender offer program
procedures for transfer. DTC will then send an Agent's Message to the exchange
agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, which states
that DTC has received an express acknowledgment from the participant in DTC
tendering old notes that are the subject of such book-entry confirmation that
such participant has received and agrees to be bound by the terms of the letter
of transmittal, and that we may enforce such agreement against such participant.
In the case of an Agent's Message relating to guaranteed delivery, the term
means a message transmitted by DTC and received by the exchange agent, which
states that DTC has received an express acknowledgment from the participant in
DTC tendering old notes that such participant has received and agrees to be
bound by the notice of guaranteed delivery.
Tender of Old Notes Held in Physical Form. For a holder to validly tender
old notes held in physical form:
- the exchange agent must receive at its address set forth in this
prospectus a properly completed and validly executed letter of
transmittal (or a manually signed facsimile thereof), together with any
signature guarantees and any other documents required by the instructions
to the letter of transmittal, and
- the exchange agent must receive certificates for tendered old notes at
such address, or such old notes must be transferred pursuant to the
procedures for book-entry transfer described above. A confirmation of
such book-entry transfer must be received by the exchange agent prior to
the expiration date of the exchange offer. A holder who desires to tender
old notes and who cannot comply with the procedures set forth herein for
tender on a timely basis or whose old notes are not immediately available
must comply with the procedures for guaranteed delivery set forth below.
LETTERS OF TRANSMITTAL AND OLD NOTES SHOULD BE SENT ONLY TO THE EXCHANGE
AGENT, AND NOT TO DOANE OR TO ANY BOOK-ENTRY TRANSFER FACILITY.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER TENDERING OLD NOTES. DELIVERY OF SUCH DOCUMENTS WILL
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BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH
DELIVERY IS BY MAIL, WE SUGGEST THAT THE HOLDER USE PROPERLY INSURED, REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN
ADVANCE OF THE EXPIRATION DATE OF THE EXCHANGE OFFER TO PERMIT DELIVERY TO THE
EXCHANGE AGENT PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT
TENDERS OF OLD NOTES WILL BE ACCEPTED.
Signature Guarantees. Signatures on the letter of transmittal must be
guaranteed by an eligible institution unless:
- the letter of transmittal is signed by the registered holder of the old
notes tendered therewith (or by a participant in one of the book-entry
transfer facilities whose name appears on a security position listing it
as the owner of such old notes) or if any old notes for principal amounts
not tendered are to be issued directly to such holder (or, if tendered by
a participant in one of the book-entry transfer facilities, any old notes
for principal amounts not tendered or not accepted for exchange are to be
credited to such participant's account at such book-entry transfer
facility) and the "Special Issuance Instructions" and the "Special
Delivery Instructions" boxes on the letter of transmittal have not been
completed, or
- such old notes are tendered for the account of an eligible institution.
An eligible institution is a firm that is a participant in the Security
Transfer Agents Medallion Program or the Stock Exchange Medallion Program
(generally a member of a registered national securities exchange, a
member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office in the United States).
Book-Entry Transfer. The exchange agent will seek to establish a new
account or utilize an existing account with respect to the old notes at DTC (DTC
being a book-entry transfer facility) promptly after the date of this
prospectus. Any financial institution that is a participant in the book-entry
transfer facility system and whose name appears on a security position listing
as the owner of the old notes may make book-entry delivery of old notes by
causing the book-entry transfer facility to transfer such old notes into the
exchange agent's account. HOWEVER, ALTHOUGH DELIVERY OF OLD NOTES MAY BE
EFFECTED THROUGH BOOK-ENTRY TRANSFER INTO THE EXCHANGE AGENT'S ACCOUNT AT A
BOOK-ENTRY TRANSFER FACILITY, A PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER
OF TRANSMITTAL (OR A MANUALLY SIGNED FACSIMILE THEREOF) MUST BE RECEIVED BY THE
EXCHANGE AGENT AT ONE OF ITS ADDRESSES SET FORTH IN THIS PROSPECTUS ON OR PRIOR
TO THE EXPIRATION DATE OF THE EXCHANGE OFFER, OR ELSE THE GUARANTEED DELIVERY
PROCEDURES DESCRIBED BELOW MUST BE COMPLIED WITH. The confirmation of a
book-entry transfer of old notes into the exchange agent's account at a
book-entry transfer facility is referred to in this prospectus as a "book-entry
confirmation." Delivery of documents to the book-entry transfer facility in
accordance with such book-entry transfer facility's procedures does not
constitute delivery to the exchange agent.
Guaranteed Delivery. If a holder desires to tender old notes and:
(1) certificates representing such old notes are not lost but are not
immediately available,
(2) time will not permit such holder's letter of transmittal, certificates
representing such old notes and all other required documents to reach
the exchange agent on or prior to the expiration date of the exchange
offer, or
(3) the procedures for book-entry transfer cannot be completed on or prior
to the expiration date of the exchange offer,
a tender may be effected if all the following are complied with:
- such tender is made by or through an eligible institution;
- on or prior to the expiration date of the exchange offer, the exchange
agent has received from such eligible institution a properly completed
and validly executed notice of guaranteed delivery (by manually signed
facsimile transmission, mail or hand delivery) in substantially the
form provided with this prospectus. The notice of guaranteed delivery
must: (a) set forth the name(s) and address(es) of the registered
holder(s) and the principal amount of old notes being tendered, (b)
state that the tender is being made thereby and (c) guarantee that,
within three New York Stock Exchange ("NYSE") trading days after the
date of the notice of guaranteed delivery, the letter of transmittal
properly completed and validly executed (or a manually signed
facsimile thereof), together with certificates representing the old
notes (or confirmation of book-entry transfer of such old notes into
the exchange agent's account with a book-entry transfer facility),
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and any other documents required by the letter of transmittal and the
instructions thereto, will be deposited by such eligible institution
with the exchange agent; and
- such letter of transmittal (or a manually signed facsimile thereof)
properly completed and validly executed with any required signature
guarantees, together with certificates for all old notes in proper
form for transfer (or confirmation of book-entry transfer of such old
notes into the exchange agent's account with a book-entry transfer
facility) and any other required documents, are received by the
exchange agent within three NYSE trading days after the date of such
notice of guaranteed delivery.
Other Matters. Exchange notes will be issued in exchange for old notes
accepted for exchange only after timely receipt by the exchange agent of:
- certificates for (or a timely book-entry confirmation with respect to)
such old notes,
- a letter of transmittal (or a manually signed facsimile thereof),
properly completed and duly executed, with any required signature
guarantees, or, in the case of a book-entry transfer, an Agent's Message,
and
- any other documents required by the letter of transmittal.
All questions as to the form of all documents and the validity (including
time of receipt) and acceptance of all tenders of old notes will be determined
by us, in our sole discretion, the determination of which shall be final and
binding. ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD NOTES WILL NOT BE
CONSIDERED VALID. We reserve the absolute right to reject any or all tenders of
old notes that are not in proper form or the acceptance of which, in our
opinion, would be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes.
Our interpretation of the terms and conditions of the exchange offer
(including the instructions in the letter of transmittal) will be final and
binding.
Any defect or irregularity in connection with tenders of old notes must be
cured within such time as we determine, unless waived by us. Tenders of old
notes shall not be deemed to have been made until all defects and irregularities
have been waived by us or cured. Neither our company, the exchange agent, or any
other person will be under any duty to give notice of any defects or
irregularities in tenders of old notes, or will incur any liability to holders
for failure to give any such notice.
By signing or agreeing to be bound by the letter of transmittal, you will
represent to us that, among other things:
- any exchange notes that you receive will be acquired in the ordinary
course of your business;
- you have no arrangement or understanding with any person or entity to
participate in the distribution of the exchange notes;
- if you are not a broker-dealer, that you are not engaged in and do not
intend to engage in the distribution of the exchange notes;
- if you are a broker-dealer that will receive exchange notes for your own
account in exchange for old notes that were acquired as a result of
market-making activities, that you will deliver a prospectus, as required
by law, in connection with any resale of such exchange notes; and
- you are not an "affiliate," as defined in Rule 405 of the Securities Act,
of our company or, if you are an affiliate, you will comply with any
applicable registration and prospectus delivery requirements of the
Securities Act.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw your
tender of old notes at any time prior to the expiration date.
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For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at one of
the addresses set forth below under "-- Exchange Agent," or
- you must comply with the appropriate procedures of DTC's automated tender
offer program system.
Any notice of withdrawal must:
- specify the name of the person who tendered the old notes to be withdrawn
and
- identify the old notes to be withdrawn, including the principal amount of
such old notes.
If old notes have been tendered pursuant to the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn old notes and
otherwise comply with the procedures of DTC.
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal, and our determination shall be final
and binding on all parties. We will deem any old notes so withdrawn not to have
been validly tendered for exchange for purposes of the exchange offer.
Any old notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder or, in the case of old notes tendered by book-entry transfer into the
exchange agent's account at DTC according to the procedures described above,
such old notes will be credited to an account maintained with DTC for the old
notes. This return or crediting will take place as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. You may
retender properly withdrawn old notes by following one of the procedures
described under "-- Procedures for Tendering Old Notes" above at any time on or
prior to the expiration date.
CONDITIONS OF THE EXCHANGE OFFER
We will not be required to accept for exchange, or exchange any exchange
notes for, any old notes tendered, and we may terminate, extend or amend the
exchange offer and may (subject to Rule 14e-1 under the Exchange Act, which
requires that an offeror pay the consideration offered or return the securities
deposited by or on behalf of the holders thereof promptly after the termination
or withdrawal of a tender offer) postpone the acceptance for exchange of old
notes so tendered if, on or prior to the expiration date of the exchange offer,
any of the following shall have occurred:
- any action or proceeding concerning the exchange offer is pending or
threatened before any court, governmental, regulatory or administrative
agency that is, or is reasonably likely to be, in our sole judgment,
materially adverse to us or our affiliates, or would or might, in our
sole judgment, prohibit, prevent, restrict or delay consummation of the
exchange offer;
- any development occurs that would, in our sole judgment, materially
adversely affect our business or the business of our affiliates;
- an order, statute, rule, regulation, executive order, stay, decree,
judgment or injunction arises that, in our sole judgment, would prevent
consummation of the exchange offer or is materially adverse to us or our
affiliates;
- any event affecting the business or financial affairs of our company or
our affiliates occurs, that, in our sole judgment, would or might prevent
consummation of the exchange offer;
- the trustee under the indenture takes any action that could, in our sole
judgment, adversely affect the consummation of the exchange offer or
takes any action that challenges the validity of the procedures used by
us in the exchange offer or the acceptance of, the old notes; or
- any of the following occurs:
(1) any general suspension of, or limitation on prices for, trading in
securities in U.S. or Canadian securities or financial markets,
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(2) any significant change in the price of the old notes or any publicly
traded securities of our company or any of our affiliates that is
adverse to us or any of our affiliates,
(3) a material impairment in the trading market for debt securities,
(4) a declaration of a banking moratorium or any suspension of payments
in respect of banks in the United States or Canada,
(5) any limitation, whether or not mandatory, by any government or
governmental, administrative or regulatory authority or agency,
domestic or foreign, or other event that, in our reasonable
judgment, might affect the extension of credit by banks or other
lending institutions,
(6) a commencement of a war or armed hostilities or other national or
international calamity directly or indirectly involving the United
States or Canada or
(7) in the case of any of the foregoing existing on the date hereof, a
material acceleration or worsening thereof.
The conditions to the exchange offer are for our sole benefit and may be
asserted by us in our sole discretion or may be waived by us, in whole or in
part, in our sole discretion, whether or not any other condition of the exchange
offer also is waived. We have not made a decision as to what circumstances would
lead us to waive any such condition, and any such waiver would depend on
circumstances prevailing at the time of such waiver. Any determination by us
concerning the events described in this section shall be final and binding upon
all persons.
ALTHOUGH WE HAVE NO PRESENT PLANS OR ARRANGEMENTS TO DO SO, WE RESERVE THE
RIGHT TO AMEND, AT ANY TIME, THE TERMS OF THE EXCHANGE OFFER. WE WILL GIVE
HOLDERS NOTICE OF SUCH AMENDMENTS AS MAY BE REQUIRED BY APPLICABLE LAW.
TRANSFER TAXES
We will pay all transfer taxes applicable to the transfer and exchange of
old notes pursuant to the exchange offer. If, however:
- delivery of the exchange notes, and/or certificates for old notes for
principal amounts not exchanged, are to be made to any person other than
the record holder of the old notes tendered;
- tendered certificates for old notes are recorded in the name of any
person other than the person signing any letter of transmittal; or
- a transfer tax is imposed for any other reason other than the transfer
and exchange of old notes to us or our order,
the amount of any such transfer taxes, whether imposed on the recordholder or
any other person, will be payable by the tendering holder prior to the issuance
of the exchange notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange your old notes for exchange notes in the exchange
offer, you will remain subject to the restrictions on transfer of such old
notes:
- as set forth in the legend printed on the notes as a consequence of the
issuance of the old notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
- otherwise set forth in the confidential memorandum distributed in
connection with the private offering of the old notes.
In general, you may not offer or sell the old notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
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Except as required by the registration rights agreement, we do not intend to
register resales of the old notes under the Securities Act. Based on
interpretations of the SEC staff, you may offer for resale, resell or otherwise
transfer exchange notes issued in the exchange offer without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that (1) you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act, (2) you acquired the exchange notes in the ordinary course of
your business and (3) you have no arrangement or understanding with respect to
the distribution of the exchange notes to be acquired in the exchange offer. If
you tender old notes in the exchange offer for the purpose of participating in a
distribution of the exchange notes:
- you cannot rely on the applicable interpretations of the SEC; and
- you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
EXCHANGE AGENT
Wilmington Trust Company has been appointed as exchange agent for the
exchange offer. You should send certificates for old notes, letters of
transmittal and any other required documents to the exchange agent at an address
listed below. You should also direct questions and requests for assistance,
requests for additional copies of this prospectus, the letter of transmittal or
any other documents to the exchange agent addressed as follows:
WILMINGTON TRUST COMPANY
<TABLE>
<CAPTION>
By Registered or Certified Mail
or Overnight Courier: By Hand in New York City: By Hand in Delaware:
<S> <C> <C>
Wilmington Trust Company Wilmington Trust Company Wilmington Trust Company
Rodney Square North c/o Harris Trust Co. of New 1105 North Market Street,
1100 North Market Street York, as Agent 1st Floor
Wilmington, Delaware 19890 88 Pine Street, 19th Floor Wilmington, Delaware 19890
Attn: Corporate Trust Wall Street Plaza Attn: Corporate Trust
Operations New York, New York 10005 Operations
Attn: Corporate Trust
Operations
By Facsimile:
(for Eligible Institutions
only)
(302) 651-1079
Confirm by Telephone:
(302) 651-1562
Kristin Long
</TABLE>
THE EXCHANGE NOTES
GENERAL
We will issue the exchange notes under the indenture dated as of November
12, 1998 that we entered into with Wilmington Trust Company, as trustee, in
connection with the issuance of the old notes. We have summarized certain
provisions of the exchange notes and the indenture below. For a complete
description, you should refer to the indenture, which we have filed with the
SEC. Please read "Where You Can Find More Information" on page 97 of this
prospectus. We have used certain capitalized terms in this summary, which are
defined on page 80 under "-- Certain Definitions." As used in this summary, the
term "Company" refers to Doane Pet Care Company and not to any of its
subsidiaries.
Principal of, premium, if any, and interest on the exchange notes will be
payable, and the exchange notes may be exchanged or transferred, at the office
or agency of the Company in the Borough of Manhattan, The City of New York,
except that, at the option of the Company, payment of interest may be made by
check mailed to the registered addresses of the holders.
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The exchange notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge will be made for any registration of transfer or exchange of
exchange notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.
The old notes and the exchange notes will constitute a single class of debt
securities under the indenture. If the exchange offer is consummated, holders of
old notes who do not exchange their old notes for exchange notes will vote
together with holders of the exchange notes for all relevant purposes under the
indenture. In that regard, the indenture requires that certain actions by
holders, including acceleration following an event of default, must be taken,
and certain rights must be exercised, by specified minimum percentages of the
aggregate principal amount of the outstanding securities issued under the
indenture. In determining whether holders of the requisite percentage in
principal amount have given any notice, consent or waiver or taken any other
action permitted under the indenture, any old notes that remain outstanding
after the exchange offer will be aggregated with the exchange notes, and the
holders of the old notes and the exchange notes will vote together as a single
series for all such purposes. All references in this prospectus to specified
percentages in aggregate principal amount of the old notes means, at any time
after the exchange offer is consummated, the percentages in aggregate principal
amount of the old notes and the exchange notes collectively then outstanding.
TERMS OF NOTES
The exchange notes are unsecured senior subordinated obligations of the
Company, limited to $150.0 million aggregate principal amount, and will mature
on May 15, 2007. Each exchange note will bear interest at the rate of 9 3/4% per
annum from the date of issuance, or from the most recent date to which interest
has been paid or provided for, payable semi-annually on May 15 and November 15
of each year commencing on May 15, 1999 to holders of record at the close of
business on the May 1 or November 1 (whether or not a business day) immediately
preceding the interest payment date.
OPTIONAL REDEMPTION
Except as set forth below, the exchange notes will not be redeemable at the
option of the Company prior to May 15, 2002. On and after such date, the
exchange notes will be redeemable, at the Company's option, in whole or in part,
at any time upon not less than 30 nor more than 60 days prior notice mailed by
first-class mail to the registered address of each holder of exchange notes to
be redeemed, at the following redemption prices (expressed in percentages of
principal amount), plus accrued and unpaid interest to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
If redeemed during the 12-month period commencing on May 15 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2002...................................................... 104.875%
2003...................................................... 103.250%
2004...................................................... 101.625%
2005 and thereafter....................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to May 15, 2000, the
Company may redeem up to 35% of the aggregate principal amount of exchange notes
with the cash proceeds of one or more equity offerings received by, or invested
in, the Company at a redemption price (expressed as a percentage of principal
amount) of 109.750%, plus accrued and unpaid interest, if any, to the redemption
date (subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that at least 65% of the aggregate principal amount of the exchange notes remain
outstanding after each such redemption.
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At any time on or prior to May 15, 2002, the exchange notes may also be
redeemed as a whole at the option of the Company upon the occurrence of a change
of control, upon not less than 30 nor more than 60 days prior notice (but in no
event more than 90 days after the occurrence of such change of control) mailed
by first-class mail to each holder's registered address, at a redemption price
equal to 100% of the principal amount thereof plus the Applicable Premium as of,
and accrued and unpaid interest, if any, to, the date of redemption (subject to
the right of holders of record on the relevant record date to receive interest
due on the relevant interest payment date).
"Applicable Premium" means, with respect to an exchange note at any
redemption date, the greater of 1.0% of the principal amount of such exchange
note and the excess of the present value at such time of the redemption price of
such exchange note at May 15, 2002 (such redemption price being described under
"-- Optional Redemption") plus all required interest payments due on such
exchange note through May 15, 2002, computed using a discount rate equal to the
Treasury Rate plus 50 basis points over the principal amount of such exchange
note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
redemption date (or, if such statistical release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the redemption date to May 15, 2002; provided, however, that if the
period from the redemption date to May 15, 2002 is less than one year, the
weekly average yield on actually traded United States Treasury securities
adjusted to a constant maturity of one year shall be used.
In the case of any partial redemption, selection of the exchange notes for
redemption will be made by the trustee on a pro rata basis, by lot or by such
other method as the trustee in its sole discretion shall deem to be fair and
appropriate, although no exchange note of $1,000 in original principal amount or
less will be redeemed in part. If any exchange note is to be redeemed in part
only, the notice of redemption relating to such exchange note shall state the
portion of the principal amount thereof to be redeemed. A new exchange note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original exchange note.
RANKING
The payment of Indebtedness evidenced by, and all other obligations in
respect of, the exchange notes is subordinated in right of payment, as set forth
in the indenture, to the prior payment in full in cash or Cash Equivalents when
due of all Senior Indebtedness of the Company. However, payment from the money
or the proceeds of U.S. Government Obligations held in any defeasance trust
described under "Defeasance" below is not subordinate to any Senior Indebtedness
or subject to the restrictions described herein. At September 30, 1998 on a pro
forma basis after giving effect to the refinancing transactions, the aggregate
amount of the Company's Senior Indebtedness would have been approximately $320.7
million. Although the indenture contains limitations on the amount of additional
Indebtedness that the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "-- Certain Covenants -- Limitation on
Indebtedness."
"Senior Indebtedness" means the principal of, premium (if any), and
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization of the Company regardless of whether
post-filing interest is allowed in such proceeding) on, and fees and other
amounts owing in respect of, the Bank Indebtedness and all other Indebtedness of
the Company, whether outstanding on the exchange date or thereafter issued,
unless, in the instrument creating or evidencing the same, it is provided that
the obligations in respect of such Indebtedness are not superior in right of
payment to the exchange notes; provided, however, that Senior Indebtedness will
not include:
- any obligation of the Company to any Subsidiary;
- any liability for federal, state, foreign, local or other taxes owed or
owing by the Company;
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- any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities);
- any Indebtedness, Guarantee or obligation of the Company that is
expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of the Company, including any
Senior Subordinated Indebtedness and any Subordinated Obligations; or
- any Capital Stock.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the exchange notes in accordance with the provisions of the indenture.
The exchange notes will in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company. The Company has agreed in the
indenture that it will not incur, directly or indirectly, any Indebtedness that
is subordinate or junior in ranking in any respect to Senior Indebtedness unless
such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured
Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness
merely because it is unsecured.
The Company may not pay principal of, premium (if any), or interest on, or
liquidated damages with respect to, or make any payment on account of any other
obligations with respect to, the exchange notes or make any deposit pursuant to
the provisions described under "Defeasance" below and may not otherwise purchase
or retire any exchange notes (collectively, "pay the exchange notes") if:
(1) any Senior Indebtedness is not paid when due in cash or Cash
Equivalents; or
(2) any other default on Senior Indebtedness occurs and the maturity of
such Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, the default has been cured or waived and any
such acceleration has been rescinded or such Senior Indebtedness has
been paid in full in cash or Cash Equivalents.
However, the Company may pay any such amounts without regard to the
foregoing if the Company and the trustee receive written notice approving such
payment from the Representative of the Designated Senior Indebtedness with
respect to which either of the events set forth in clause (1) or (2) of the
immediately preceding sentence has occurred and is continuing.
During the continuance of any default (other than a default described in
clause (1) or (2) of the second preceding sentence) with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, the Company may not pay any amounts in respect of the exchange notes
for a period (a "Payment Blockage Period") commencing upon the receipt by the
trustee (with a copy to the Company) of written notice (a "Blockage Notice") of
such default from the Representative of the holders of such Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter. Notwithstanding the provisions described in the
immediately preceding sentence, unless the holders of such Designated Senior
Indebtedness or the Representative of such holders have accelerated the maturity
of such Designated Senior Indebtedness, the Company may resume payments on the
exchange notes after the end of such Payment Blockage Period. Not more than one
Blockage Notice may be given in any consecutive 360 day period, irrespective of
the number of defaults with respect to Designated Senior Indebtedness during
such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization or bankruptcy of or
similar proceeding relating to the Company or its property, the holders of
Senior Indebtedness will be entitled to receive payment in full in cash or Cash
Equivalents of the Senior Indebtedness before the holders of the exchange notes
are entitled to receive any payment, and until the Senior Indebtedness is paid
in full in cash or Cash Equivalents, any payment or distribution to which
holders would be entitled but for the subordination provisions of the indenture
will be made to holders of the Senior Indebtedness as their interests may
appear. If a distribution is made to holders of the exchange notes
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<PAGE> 71
that, due to the subordination provisions, should not have been made to them,
such holders are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the exchange notes is accelerated because of an event of
default, the Company or the trustee shall promptly notify the holders of the
Designated Senior Indebtedness or the Representative of such holders of the
acceleration. The Company may not pay the exchange notes until five business
days after such holders or the Representative of the Designated Senior
Indebtedness receive notice of such acceleration and, thereafter, may pay the
exchange notes only if the subordination provisions of the indenture otherwise
permit payment at that time.
By reason of such subordination provisions contained in the indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the holders of exchange notes, and
creditors of the Company who are not holders of Senior Indebtedness or of Senior
Subordinated Indebtedness (including the exchange notes) may recover less,
ratably, than holders of Senior Indebtedness and may recover more, ratably, than
the holders of Senior Subordinated Indebtedness.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each holder of the exchange notes will have the right to require the
Company to repurchase all or any part of such holder's exchange 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 (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date):
(1) prior to the first public offering of Voting Stock of the Company
or Doane Pet Care Enterprises, Inc., as the case may be, the Permitted
Holders 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 or Doane Pet Care Enterprises, Inc., as the case may be, any
merger, consolidation, liquidation or dissolution of the Company or Doane
Pet Care Enterprises, Inc., as the case may be, any direct or indirect
transfer of securities by any Permitted Holder or otherwise (for purposes
of this clause (1) and clause (2) below, the Permitted Holders will be
deemed to beneficially own any Voting Stock of a person (the "specified
corporation") held by any other person (the "parent corporation") so long
as the Permitted Holders beneficially own, directly or indirectly, a
majority of the voting power of the Voting Stock of the parent
corporation);
(2) following the first public offering of Voting Stock of the Company
or Doane Pet Care Enterprises, Inc., as the case may be, 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 (as
defined in clause (1) above, except that a person shall be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 35% of the total
voting power of the Voting Stock of the Company or Doane Pet Care
Enterprises, Inc., as the case may be; provided that the Permitted Holders
beneficially own (as defined in clause (1) above), directly or indirectly,
in the aggregate a lesser percentage of the total voting power of the
Voting Stock of the Company or Doane Pet Care Enterprises, Inc., as the
case may be, 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 Doane Pet Care
Enterprises, Inc., as the case may be (for purposes of this clause (2),
such other person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other person
"beneficially owns" (as defined in this clause (2)), directly or
indirectly, more than 35% of the voting power of the Voting Stock of such
parent corporation and the Permitted Holders "beneficially own" (as defined
in clause (1) above), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation 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 such parent corporation); or
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(3) 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.
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding exchange notes in
connection with such Change of Control, the Company shall mail a notice to each
holder of record of the exchange notes with a copy to the trustee stating:
- that a Change of Control has occurred and that such holder has the right
to require the Company to purchase such holder's exchange 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 (subject to
the right of holders of record on a record date to receive interest on
the relevant interest payment date);
- the circumstances and relevant facts and financial information concerning
such Change of Control;
- the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and
- the procedures determined by the Company, consistent with the indenture,
that a holder must follow in order to have its exchange notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of exchange notes pursuant to this covenant.
To the extent that the provisions of any securities laws or regulations conflict
with provisions of the indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the indenture by virtue thereof.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the new credit facility. Future Senior
Indebtedness of the Company and its Subsidiaries may contain prohibitions of
certain events that would constitute a Change of Control or require such Senior
Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require the Company to repurchase the exchange
notes could cause a default under such Senior Indebtedness, even if the Change
of Control itself does not, due to the financial effect of such repurchase on
the Company. Finally, the Company's ability to pay cash to the holders upon a
repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any required repurchases. Even if sufficient funds were otherwise
available, the terms of the new credit facility generally prohibit the Company's
prepayment of the exchange notes prior to their scheduled maturity.
Consequently, if the Company is not able to prepay the Bank Indebtedness and any
other Senior Indebtedness containing similar restrictions or obtain requisite
consents or waivers, as described above, the Company will be unable to fulfill
its repurchase obligations if holders of exchange notes exercise their
repurchase rights following a Change of Control, thereby resulting in a default
under the indenture.
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CERTAIN COVENANTS
The indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness.
(1) The Company shall not, and shall not permit any of its Subsidiaries to,
incur any Indebtedness; provided, however, that the Company and any of its
Subsidiaries may incur Indebtedness if on the date thereof the Consolidated
Coverage Ratio would be greater than 2.00:1.00.
(2) Notwithstanding the foregoing paragraph (1), the Company and its
Subsidiaries may incur the following Indebtedness:
- Bank Indebtedness provided that the aggregate principal amount of
Indebtedness incurred pursuant to this clause does not exceed an
amount outstanding at any time equal to $330.0 million less the
aggregate amount of permanent reductions of commitments and repayments
of principal thereof (without duplication of repayments required as a
result of such reductions of commitments);
- Indebtedness of the Company to any Wholly-Owned Subsidiary and of any
Subsidiary to the Company or any Wholly-Owned Subsidiary;
- Indebtedness represented by the exchange notes, any Indebtedness
(other than the Indebtedness described above outstanding on November
12, 1998 and any Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause;
- Indebtedness represented by the Note Guarantees and certain Guarantees
of Indebtedness;
- Indebtedness under Currency Agreements and Interest Rate Agreements
which are entered into for bona fide hedging purposes of the Company
or its Subsidiaries (as determined in good faith by the board of
directors or senior management of the Company) and correspond in terms
of notional amount, duration, currencies and interest rates, as
applicable, to Indebtedness of the Company or its Subsidiaries
incurred without violation of the indenture or to business
transactions of the Company or its Subsidiaries on customary terms
entered into in the ordinary course of business; and
- Indebtedness of the Company or any of its Subsidiaries (which may
comprise Bank Indebtedness) in an aggregate principal amount at any
time outstanding not in excess of $15.0 million.
(3) Notwithstanding any other provision of this covenant, the Company shall
not incur any Indebtedness:
- pursuant to paragraph (2) above if the proceeds thereof are used,
directly or indirectly, to repay, prepay, redeem, defease, retire,
refund or refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the exchange notes to at least
the same extent as such Subordinated Obligations or
- pursuant to paragraph (1) or (2) if such Indebtedness is subordinate
or junior in ranking in any respect to any Senior Indebtedness unless
such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness.
(4) The Company shall not incur any Secured Indebtedness which is not
Senior Indebtedness unless contemporaneously therewith effective provision is
made to secure the exchange notes equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien.
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Limitation on Restricted Payments.
(1) The Company shall not, and shall not permit any Subsidiary, directly or
indirectly, after November 12, 1998 to:
- declare or pay any dividend or make any distribution on or in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving the Company) except dividends or distributions
payable in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable to the Company or another Subsidiary
(and, if such Subsidiary is not a Wholly-Owned Subsidiary, to its other
stockholders on a pro rata basis);
- purchase, redeem, retire or otherwise acquire for value any Capital Stock
of the Company or any Subsidiary held by persons other than the Company
or another Subsidiary;
- purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations
purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year
of the date of acquisition); or
- make any Investment (other than a Permitted Investment) in any person
(any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment being herein
referred to as a "Restricted Payment"), if at the time the Company or
such Subsidiary makes such Restricted Payment: a Default shall have
occurred and be continuing (or would result therefrom); or the Company
could not incur at least an additional $1.00 of Indebtedness pursuant to
paragraph (1) under "Limitation on Indebtedness"; or the aggregate amount
of such Restricted Payment and all other Restricted Payments declared
(the amount so expended, if other than in cash, to be determined in good
faith by the board of directors, whose determination shall be conclusive
and evidenced by a resolution of the board of directors) or made
subsequent to (but not on) November 12, 1998 would exceed the sum of:
(A) 50% of the Consolidated Net Income (disregarding any impact on
Consolidated Net Income caused by the Company's distribution to Doane Pet
Care Enterprises, Inc. on November 12, 1998 of an amount required to
enable Doane Pet Care Enterprises, Inc. to repay in full the convertible
subordinated promissory note issued to Heinz Pet Products Company) accrued
during the period (treated as one accounting period) from November 12,
1998 to the end of the most recent fiscal quarter ending prior to the date
of such Restricted Payment as to which financial results are available
(but in no event more than 135 days prior to the date of such Restricted
Payment) (or, in case such Consolidated Net Income shall be a deficit,
minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from the
issue or sale of its Capital Stock (other than Disqualified Stock) or
other cash contributions to its capital subsequent to November 12, 1998
(other than an issuance or sale to a Subsidiary of the Company or an
employee stock ownership plan or other trust established by the Company or
any of its Subsidiaries);
(C) aggregate Net Cash Proceeds from the issue or sale of its Capital
Stock to an employee stock ownership plan or similar trust, provided,
however, that if such plan or trust incurs any Indebtedness to or
Guaranteed by the Company to finance the acquisition of such Capital
Stock, such aggregate amount shall be limited to any increase in the
Consolidated Net Worth of the Company resulting from principal repayments
made by such plan or trust with respect to Indebtedness incurred by it to
finance the purchase of such Capital Stock; and
(D) the amount by which Indebtedness of the Company or its Subsidiaries
is reduced on the Company's balance sheet upon the conversion or exchange
(other than by a Subsidiary) subsequent to November 12, 1998 of any
Indebtedness of the Company or its Subsidiaries convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the
Company (less the amount of any cash, or other property, distributed by
the Company or any Subsidiary upon such conversion or exchange).
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(2) The provisions of paragraph (1) shall not prohibit:
- any purchase or redemption of Capital Stock or Subordinated
Obligations of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary or an employee stock ownership plan or
other trust established by the Company or any of its Subsidiaries);
provided, however, that such purchase or redemption shall be excluded
in the calculation of the amount of Restricted Payments and the Net
Cash Proceeds from such sale shall be excluded from clause (B) of
paragraph (1);
- any purchase or redemption of Subordinated Obligations of the Company
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of the Company; provided,
however, that such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments;
- any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted under "Limitation on Sales of
Assets and Subsidiary Stock" below; provided, however, that such
purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments;
- dividends paid within 60 days after the date of declaration if at such
date of declaration such dividend would have complied with this
provision; provided, however, that such dividend shall be included in
the calculation of the amount of Restricted Payments;
- payment of dividends or other distributions by the Company for the
purposes set forth in clauses (A) through (C) below; provided,
however, that any such dividend or distribution described in clauses
(A) and (B) will be excluded in the calculation of the amount of
Restricted Payments and any such dividend or distribution described in
clause (C) will be included in the calculation of the amount of
Restricted Payments:
(A) in amounts equal to the amounts required for Doane Pet Care
Enterprises, Inc. to pay franchise taxes and other fees required to
maintain its legal existence and provide for audit, accounting, legal
and other operating costs of up to $500,000 per fiscal year;
(B) in amounts equal to amounts required for Doane Pet Care
Enterprises, Inc. to pay Federal, state and local income taxes to the
extent such income taxes are attributable to the income of the Company
and its Subsidiaries; and
(C) in amounts equal to amounts expended by the Company or Doane Pet
Care Enterprises, Inc. to repurchase Capital Stock of the Company or
Doane Pet Care Enterprises, Inc. owned by employees (including former
employees) of the Company or its Subsidiaries or their assigns, estates
and heirs; provided that the aggregate amount paid, loaned or advanced
pursuant to this clause (C) shall not, in the aggregate, exceed the sum
of $3.0 million plus any amounts contributed by Doane Pet Care
Enterprises, Inc. to the Company as a result of resales of such
repurchased shares of Capital Stock; or
- any repurchase of equity interest deemed to occur upon exercise of
stock options if such equity interests represent a portion of the
exercise price of such options.
Limitation on Restrictions on Distributions From Subsidiaries. Except for
agreements of IPES, Doane Pet Care Spain, S.L. or Effeffe, S.p.a. governing
Indebtedness existing prior to November 12, 1998 or incurred thereafter in
accordance with the "Limitation of Indebtedness" restrictions described above,
the Company shall not, and shall not permit any of its Subsidiaries to:
(1) create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any such Subsidiary to pay
dividends, make any other distributions on its Capital Stock or pay any
Indebtedness or other obligation owed to the Company;
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(2) make any loans or advances to the Company; or
(3) transfer any of its property or assets to the Company except:
- any encumbrance or restriction pursuant to an agreement in effect on
November 12, 1998, including those arising under the Senior Credit
Documents;
- any encumbrance or restriction with respect to a Subsidiary pursuant
to an agreement relating to any Indebtedness incurred by a Subsidiary
prior to the date on which such Subsidiary was acquired by the Company
(other than Indebtedness incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Subsidiary was acquired by the Company);
- any encumbrance or restriction with respect to a Subsidiary pursuant
to an agreement effecting a refinancing of Indebtedness incurred
pursuant to an agreement referred to in this subsection or contained
in any amendment, supplement or modification (including an amendment
and restatement) to an agreement referred to in this subsection;
provided, however, that the encumbrances and restrictions contained in
any such refinancing agreement or amendment taken as a whole are no
less favorable to the holders of the exchange notes in any material
respect than encumbrances and restrictions contained in such
agreements;
- any encumbrance or restriction:
(A) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease,
license, or similar contract,
(B) by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the
Company or any Subsidiary not otherwise prohibited by the
indenture, or
(C) contained in security agreements securing Indebtedness of a
Subsidiary to the extent such encumbrance or restrictions
restrict the transfer of the property subject to such security
agreements;
- any such restriction imposed by applicable law;
- any restriction with respect to a Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Subsidiary
pending the closing of such sale or disposition; and
- purchase obligations for property acquired in the ordinary course of
business that impose certain restrictions on the property so acquired.
Limitation On Sales of Assets.
(1) The Company shall not, and shall not permit any Subsidiary to, make any
Asset Disposition unless:
- the Company or such Subsidiary receives consideration (including by
way of relief from, or by any other person assuming sole
responsibility for, any liabilities, contingent or otherwise) at the
time of such Asset Disposition at least equal to the fair market value
of the shares and assets subject to such Asset Disposition,
- at least 85% of the consideration thereof received by the Company or
such Subsidiary is in the form of cash and
- an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Subsidiary, as the case
may be):
(A) first, to the extent the Company elects (or is required by the
terms of any Senior Indebtedness or Indebtedness (other than
Preferred Stock) of a Wholly-Owned Subsidiary), to prepay, repay
or purchase Senior Indebtedness or such Indebtedness (other than
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Preferred Stock) of a Wholly-Owned Subsidiary (in each case other
than Indebtedness owed to the Company or an Affiliate of the
Company) within one year after the later of the date of such
Asset Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of Net Available Cash after
application in accordance with clause (A), to the extent the
Company or such Subsidiary elects, to reinvest in Additional
Assets (including by means of an Investment in Additional Assets
by a Subsidiary with Net Available Cash received by the Company
or another Subsidiary) within one year after the later of the
date of such Asset Disposition or the receipt of such Net
Available Cash;
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to make
an offer to purchase exchange notes pursuant and subject to the
conditions of the indenture to the holders of exchange notes at a
purchase price of 100% of the principal amount thereof plus
accrued and unpaid interest to the purchase date; and
(D) fourth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B) and (C), to
acquire Additional Assets (other than Indebtedness and Capital
Stock) or to prepay, repay or purchase Indebtedness of the
Company (other than Indebtedness owed to an Affiliate of the
Company and other than Disqualified Stock of the Company) or
Indebtedness of any Subsidiary (other than Indebtedness owed to
the Company or an Affiliate of the Company), in each case
described in this clause (D) within one year from the receipt of
such Net Available Cash or, if the Company has made an offer
pursuant to clause (C), six months from the date such offer is
consummated.
In connection with any prepayment, repayment or purchase of Indebtedness
pursuant to clause (A), (C) or (D) above, the Company or such Subsidiary shall
retire such Indebtedness and shall cause the related loan commitment (if any) to
be permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions, the Company and
its Subsidiaries shall not be required to apply any Net Available Cash in
accordance herewith except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
covenant at any time exceed $1.0 million. The Company shall not be required to
make an offer for exchange notes pursuant to this covenant if the Net Available
Cash available therefor (after application of the proceeds as provided in
clauses (A) and (B)) is less than $10.0 million for any particular Asset
Disposition (which lesser amounts shall be carried forward for purposes of
determining whether an offer is required with respect to the Net Available Cash
from any subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash:
- the assumption of Indebtedness (other than Disqualified Stock) of the
Company or any Subsidiary and the release of the Company or such
Subsidiary from all liability on such Indebtedness in connection with
such Asset Disposition and
- securities received by the Company or any Subsidiary of the Company
from the transferee that are promptly converted by the Company or such
Subsidiary into cash.
(2) In the event of an Asset Disposition that requires the purchase of
exchange notes pursuant to clause (1)(C) above, the Company will be required to
purchase exchange notes tendered pursuant to an offer by the Company for the
exchange notes at a purchase price of 100% of their principal amount plus
accrued interest to the purchase date in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
indenture. If the aggregate purchase price of the exchange notes tendered
pursuant to the offer is less than the Net Available Cash allotted to the
purchase of the exchange notes, the Company will apply the remaining Net
Available Cash in accordance with clause (1)(D) above.
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(3) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of exchange notes pursuant to
the indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the indenture by virtue thereof.
Limitation On Affiliate Transactions. (1) The Company will not, and will
not permit any Subsidiary to, directly or indirectly, enter into or conduct any
transaction (including the purchase, sale, lease or exchange of any property or
the rendering of any service) with any Affiliate of the Company (an "Affiliate
Transaction") unless:
- the terms of such Affiliate Transaction are no less favorable to the
Company or such Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a
person who is not such an Affiliate;
- in the event such Affiliate Transaction involves an aggregate amount in
excess of $1.0 million, the terms of such transaction have been approved
by a majority of the members of the board of directors of the Company and
by a majority of the disinterested members of such board, if any; and
- in the event such Affiliate Transaction involves an aggregate amount in
excess of $5.0 million, the Company has received a written opinion from
an independent investment banking firm of nationally recognized standing
that such Affiliate Transaction is fair to the Company or such
Subsidiary, as the case may be, from a financial point of view.
(2) The provisions of the foregoing paragraph (1) will not prohibit:
- any Restricted Payment permitted to be paid pursuant to the covenant
described under "-- Limitation on Restricted Payments;"
- the performance of the Company's or Subsidiary's obligations under any
employment contract, collective bargaining agreement, employee benefit
plan, related trust agreement or any other similar arrangement heretofore
or hereafter entered into in the ordinary course of business;
- payment of compensation to, and indemnity provided on behalf of,
employees, officers, directors or consultants in the ordinary course of
business;
- maintenance in the ordinary course of business of benefit programs or
arrangements for employees, officers or directors, including vacation
plans, health and life insurance plans, deferred compensation plans, and
retirement or savings plans and similar plans or
- any transaction between the Company and a Wholly-Owned Subsidiary or
between Wholly-Owned Subsidiaries.
Limitation On Sale of Subsidiary Capital Stock. The Company will not, and
will not permit any Subsidiary to, transfer, convey, sell, lease or otherwise
dispose of any Capital Stock of any Subsidiary to any person (other than to the
Company or a Wholly-Owned Subsidiary), and the Company will not permit any
Subsidiary to issue any of its Capital Stock to any person other than to the
Company or a Wholly-Owned Subsidiary; provided, however, that the foregoing
shall not prohibit such conveyance, sale, lease or other disposition of all the
Capital Stock of a Subsidiary if the net cash proceeds from such transfer,
conveyance, sale, lease, other disposition or issuance are applied in accordance
with the covenant described above under "-- Limitation on Sales of Assets."
SEC Reports. Notwithstanding that the Company may not be required to be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the Commission, and within 15 days after such
reports are filed, provide the trustee and the holders (at their addresses as
set forth in the register of exchange notes) with the annual reports and the
information, documents and other reports which are otherwise required pursuant
to Section 13 and 15(d) of the Exchange Act. In addition, following the
registration of the common stock of the Company pursuant to Section 12(b) or
12(g) of the Exchange
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Act, the Company shall furnish to the trustee and the holders, promptly upon
their becoming available, copies of the Company's annual report to stockholders
and any other information provided by the Company to its public stockholders
generally.
Future Note Guarantors. The Company will cause each Subsidiary (other than
Foreign Subsidiaries) which incurs Indebtedness or which is a guarantor of
Indebtedness incurred pursuant to clause (2) of the covenant described under
"-- Limitation on Indebtedness" to execute and deliver to the trustee a Note
Guarantee pursuant to which such Subsidiary (other than Foreign Subsidiaries)
will Guarantee, jointly and severally, to the holders and the trustee, subject
to subordination provisions substantially the same as those described above, the
full and prompt payment of the exchange notes. Each Note Guarantee will be
limited in amount to an amount not to exceed the maximum amount that can be
Guaranteed by that Subsidiary without rendering the Note Guarantee, as it
relates to such Subsidiary, voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally.
Limitation On Lines of Business. The Company will not, and will not permit
any Subsidiary to, engage in any business, other than the pet food business and
such other business activities which are incidental or related thereto.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all its assets
to, any person, unless:
- the resulting, surviving or transferee person (the "Successor Company")
is a corporation organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and the
Successor Company (if not the Company) expressly assumes, by supplemental
indenture, executed and delivered to the trustee, in form satisfactory to
the trustee, all the obligations of the Company under the exchange notes
and the indenture;
- immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as
having been incurred by the Successor Company or such Subsidiary at the
time of such transaction), no Default shall have occurred and be
continuing;
- immediately after giving effect to such transaction, the Successor
Company would be able to incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (1) of "-- Limitation on
Indebtedness;"
- immediately after giving effect to such transaction, the Successor
Company will have Consolidated Net Worth in an amount which is not less
than the Consolidated Net Worth of the Company immediately prior to such
transaction; and
- the Company shall have delivered to the trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger
or transfer and such supplemental indenture (if any) comply with the
indenture.
The Successor Company will succeed to, and be substituted for, and may exercise
every right and power of, the Company under the indenture, but the predecessor,
the Company, in the case of a lease of all or substantially all its assets, will
not be released from the obligation to pay the principal of and interest on the
exchange notes.
Notwithstanding the foregoing clauses, any Subsidiary of the Company may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company or another Wholly-Owned Subsidiary of the Company, and the
Company may merge with an Affiliate incorporated solely for the purpose of
reincorporating the Company in another jurisdiction to realize tax or other
benefits.
EVENTS OF DEFAULT
An Event of Default is defined in the indenture as:
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(1) a default in any payment of interest on any exchange note when due,
continued for 30 days,
(2) a default in the payment of principal of any exchange note when due at
its Stated Maturity, upon optional redemption, upon required
repurchase, upon declaration or otherwise,
(3) the failure by the Company to comply with its obligations under
"-- Merger and Consolidation" above,
(4) the failure by the Company to comply for 30 days after notice with any
of its obligations under the covenants described under "-- Change of
Control" above or under covenants described under "-- Certain
Covenants" above (in each case, other than a failure to purchase
exchange notes which shall constitute an Event of Default), other than
"-- Merger and Consolidation,"
(5) the failure by the Company to comply for 60 days after notice with its
other agreements contained in the indenture,
(6) Indebtedness of the Company or any Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the
holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $5.0 million and such
default shall not have been cured or such acceleration rescinded within
a 10-day period (the "cross acceleration provision"),
(7) certain events of bankruptcy, insolvency or reorganization of the
Company or a Significant Subsidiary (the "Bankruptcy provisions"),
(8) any judgement or decree for the payment of money in excess of $5.0
million (to the extent not covered by insurance) is rendered against
the Company or a Significant Subsidiary and such judgment or decree
shall remain undischarged or unstayed for a period of 60 days after
such judgment becomes final and non-appealable (the "judgment default
provision") or
(9) the failure of any Note Guarantee to be in full force and effect
(except as contemplated by the terms thereof) or the denial or
disaffirmation by any Note Guarantor of its obligations under the
indenture or any Note Guarantee if such default continues for 10 days.
However, a default under clauses (4) and (5) will not constitute an
Event of Default until the trustee or the holders of at least 25% in
principal amount of the outstanding exchange notes notify the Company
of the default and the Company does not cure such default within the
time specified in clauses (4) and (5) hereof after receipt of such
notice.
If an Event of Default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the outstanding exchange notes by notice
to the Company may declare the principal of and accrued and unpaid interest on
all the exchange notes to be due and payable. Upon such a declaration, such
principal and accrued and unpaid interest shall be due and payable immediately.
If an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Company occurs and is continuing, the principal of and
accrued and unpaid interest on all the exchange notes will become and be
immediately due and payable without any declaration or other act on the part of
the trustee or any holders. Under certain circumstances, the holders of a
majority in principal amount of the outstanding exchange notes may rescind any
such acceleration with respect to the exchange notes and its consequences.
Subject to the provisions of the indenture relating to the duties of the
trustee, if an Event of Default occurs and is continuing, the trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the request or direction of any of the holders unless such holders have
offered to the trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the indenture or the exchange notes unless:
- such holder has previously given the trustee notice that an Event of
Default is continuing,
- holders of at least 25% in principal amount of the outstanding exchange
notes have requested the trustee to pursue the remedy,
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- such holders have offered the trustee reasonable security or indemnity
against any loss, liability or expense,
- the trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and
- the holders of a majority in principal amount of the outstanding exchange
notes have not given the trustee a direction that, in the opinion of the
trustee, is inconsistent with such request within such 60 day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding exchange notes are given the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
trustee or of exercising any trust or power conferred on the trustee. The
trustee, however, may refuse to follow any direction that conflicts with law or
the indenture or that the trustee determines is unduly prejudicial to the rights
of any other holder or that would involve the trustee in personal liability.
Prior to taking any action under the indenture, the trustee shall be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The indenture provides that if a Default occurs and is continuing and is
known to the trustee, the trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any exchange note, the trustee
may withhold notice if and so long as a committee of its trust officers in good
faith determines that withholding notice is in the interests of the holders of
exchange notes. In addition, the Company is required to deliver to the trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Company also is required to deliver to the trustee, within 30
days after the occurrence thereof, written notice of any events which would
constitute certain Defaults, their status and what action the Company is taking
or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the indenture may be amended with the
consent of the holders of a majority in principal amount of the exchange notes
then outstanding and any past default or compliance with any provisions may be
waived with the consent of the holders of a majority in principal amount of the
exchange notes then outstanding. However, without the consent of each holder of
an outstanding exchange note affected, no amendment may, among other things:
- reduce the amount of exchange notes whose holders must consent to an
amendment,
- reduce the rate of or extend the time for payment of interest on any
exchange note,
- reduce the principal of or extend the Stated Maturity of any exchange
note,
- reduce the premium payable upon the redemption or repurchase of any
exchange note or change the time at which any exchange note may be
redeemed as described under "Optional Redemption" above,
- make any exchange note payable in money other than that stated in the
exchange note,
- make any change to the subordination provisions of the indenture that
adversely affects the rights of any holder of the exchange notes,
- impair the right of any holder to receive payment of principal of and
interest on such holder's exchange notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or
with respect to such holder's exchange notes or
- make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, the Company and the trustee may amend
the indenture to:
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- cure any ambiguity, omission, defect or inconsistency, to provide for the
assumption by a successor corporation of the obligations of the Company
under the indenture,
- provide for uncertificated exchange notes in addition to or in place of
certificated exchange notes (provided that the uncertificated exchange
notes are issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated exchange notes are
described in Section 163(f) (2) (B) of the Code),
- add Guarantees with respect to the exchange notes,
- secure the exchange notes,
- add to the covenants of the Company for the benefit of the holders of the
exchange notes or
- surrender any right or power conferred upon the Company, to make any
change that does not adversely affect the rights of any holder or to
comply with any requirement of the Commission in connection with the
qualification of the indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
indenture that adversely affects the rights of any holder of Senior Indebtedness
then outstanding unless the holders of such Senior Indebtedness (or any group or
representative thereof authorized to give a consent) consent to such change.
The consent of the holders is not necessary under the indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders, or any defect
therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the
exchange notes and the indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the exchange notes, to replace mutilated,
destroyed, lost or stolen exchange notes and to maintain a registrar and paying
agent in respect of the exchange notes. The Company at any time may terminate
its obligations under covenants described under "-- Certain Covenants" (other
than "-- Merger and Consolidation"), the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Subsidiaries and the
judgment default provision described under "-- Events of Default" above and the
limitations contained under "-- Certain Covenants -- Merger and Consolidation"
above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the exchange notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the exchange notes may not be
accelerated because of an Event of Default specified in clause (4), (6), (7)
(with respect only to Subsidiaries), or (8) or (9) under "-- Events of Default"
above or because of the failure of the Company to comply with certain clauses
under "-- Certain Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the exchange notes to redemption or maturity, as the case may be,
and must comply with certain other conditions, including delivery to the trustee
of an Opinion of Counsel to the effect that holders of the exchange notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such deposit and defeasance and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such Opinion of Counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable federal income tax law).
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CONCERNING THE TRUSTEE
Wilmington Trust Company is the trustee under the indenture.
GOVERNING LAW
The indenture provides that it and the exchange notes will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock) to
be used by the Company or a Subsidiary in a Related Business;
(2) the Capital Stock of a person that becomes a Subsidiary as a result of
the acquisition of such Capital Stock by the Company or another
Subsidiary; or
(3) Capital Stock constituting a minority interest in any person that at
such time is a Subsidiary; provided, however, that, in the case of
clauses (2) and (3), such Subsidiary is primarily engaged in a Related
Business.
"Affiliate" of any specified person means any other person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified person, any person who is a director or officer of
such person or any Subsidiary of such person. For the purposes of this
definition, "control" when used with respect to any person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the covenants described under "Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock", "-- Limitation
on Restricted Payments" and "-- Limitation on Affiliate Transactions" only,
"Affiliate" shall also mean any beneficial owner of shares representing 5% or
more of the total voting power of the Voting Stock (on a fully diluted basis) of
the Company or of rights or warrants to purchase such Voting Stock (whether or
not currently exercisable) and any person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Subsidiary (other than directors' qualifying shares), property or other assets
(each referred to for the purposes of this definition as a "disposition") by the
Company or any of its Subsidiaries (including any disposition by means of a
merger, consolidation or similar transaction) other than:
- a disposition by a Subsidiary to the Company or a Wholly-Owned Subsidiary
or by the Company or a Subsidiary to a Wholly-Owned Subsidiary;
- a disposition of inventory or Temporary Cash Investments in the ordinary
course of business;
- a disposition of obsolete equipment or equipment that is no longer useful
in the conduct of the business of the Company and its Subsidiaries and
that is disposed of in each case in the ordinary course of business;
- the sale of other assets so long as the fair market value of the assets
disposed of pursuant to this clause does not exceed $1.0 million in the
aggregate in any fiscal year and $5.0 million in the aggregate prior to
May 15, 2007;
- for the purposes of the covenant described under "Certain
Covenants -- Limitation on Sales of Assets" only, a disposition subject
to the covenant described under "-- Limitation on Restricted Payments;"
and
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- the disposition of all or substantially all of the assets of the Company
in the manner permitted pursuant to the provisions described under the
caption "-- Merger and Consolidation" or any disposition that constitutes
a Change of Control pursuant to the indenture.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the exchange notes, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing the sum of
the products of the numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to Preferred Stock multiplied by the
amount of such payment by the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the New Credit Documents and any Indebtedness that is incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) Indebtedness under such New Credit Documents including
Indebtedness that refinances such Indebtedness, as amended from time to time,
including principal, premium (if any), interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization relating
to the Company whether or not a claim for postfiling interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees and
all other amounts payable thereunder or in respect thereof (including, without
limitation, cash collateralization of letters of credit).
"Board of directors" means the board of directors of the Company or any
committee thereof duly authorized to act on behalf of such board.
"Business day" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City or Wilmington, Delaware are authorized
or required by law to close.
"Capital Stock" of any person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
"Cash Equivalents" means:
(1) securities issued or directly and fully guaranteed or insured by the
United States Government, or any agency or instrumentality thereof,
having maturities of not more than one year from the date of
acquisition;
(2) marketable general obligations issued by any state of the United States
of America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition thereof, having a
credit rating of "A" or better from either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc.;
(3) certificates of deposit, time deposits, eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of
not more than one year from the date of acquisition thereof issued by
any domestic commercial bank the long-term debt of which is rated at
the time of acquisition thereof at least "A" or the equivalent thereof
by Standard & Poor's Ratings Group, or "A" or the equivalent thereof by
Moody's Investors Service, Inc., and having capital and surplus in
excess of $500.0 million;
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(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1), (2) and
(3) entered into with any bank meeting the qualifications specified in
clause (3) above;
(5) commercial paper rated at the time of acquisition thereof at least
"A-2" or the equivalent thereof by Standard & Poor's Ratings Group or
"P-2" or the equivalent thereof by Moody's Investors Service, Inc., or
carrying an equivalent rating by a nationally recognized rating agency,
if both of the two named rating agencies cease publishing ratings of
investments, and in either case maturing within 270 days after the date
of acquisition thereof; and
(6) interests in any investment company which invests solely in instruments
of the type specified in clauses (1) through (5) above.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus, to the extent deducted in calculating such Consolidated
Net Income:
- income tax expense,
- Consolidated Interest Expense,
- depreciation expense,
- amortization expense, in each case for such period,
- fees and expenses related to the Windy Hill Acquisition and the Windy
Hill Merger and non-recurring fees and expenses related to the
Transactions and
- other non-cash charges, reducing Consolidated Net Income (excluding any
such non-cash charge to the extent that it represents an accrual of or
reserve for cash charges in any future period or amortization of a
prepaid cash expense that was paid in a prior period),
in each case for such period, and minus, to the extent not already deducted in
calculating Consolidated Net Income the aggregate amount of "earnout" payments
paid in cash during such period in connection with acquisitions previously made
by the Company and non-cash items increasing Consolidated Net Income for such
period.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of the aggregate amount of Consolidated Cash Flow for the period of the
most recent four consecutive fiscal quarters ending prior to the date of such
determination to Consolidated Interest Expense for such four fiscal quarters;
provided, however, that:
(1) if the Company or any of its Subsidiaries has incurred any Indebtedness
since the beginning of such period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an incurrence of Indebtedness, or both, Consolidated
Cash Flow and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been incurred on the first day
of such period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of
such period;
(2) if since the beginning of such period the Company or any of its
Subsidiaries shall have made any Asset Disposition, Consolidated Cash
Flow for such period shall be reduced by an amount equal to the
Consolidated Cash Flow (if positive) attributable to the assets which
are the subject of such Asset Disposition for such period or increased
by an amount equal to the Consolidated Cash Flow (if negative)
attributable thereto for such period, and Consolidated Interest Expense
for such period shall be reduced by an amount equal to the Consolidated
Interest Expense attributable to any Indebtedness of the Company or any
of its Subsidiaries repaid, repurchased, defeased or otherwise
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discharged with respect to the Company and its continuing Subsidiaries
in connection with such Asset Disposition for such period (or, if the
Capital Stock of any Subsidiary of the Company is sold, the
Consolidated Interest Expense for such period directly attributable to
the Indebtedness of such Subsidiary to the extent the Company and its
continuing Subsidiaries are no longer liable for such Indebtedness
after such sale);
(3) if since the beginning of such period the Company or any of its
Subsidiaries (by merger or otherwise) shall have made an Investment in
any Subsidiary of the Company (or any person which becomes a Subsidiary
of the Company) or an acquisition of assets, including any Investment
in a Subsidiary of the Company or any acquisition of assets occurring
in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating
unit of a business, Consolidated Cash Flow and Consolidated Interest
Expense for such period shall be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness and
including the pro forma expenses and cost reductions calculated on a
basis consistent with Regulation S-X of the Securities Act) as if such
Investment or acquisition occurred on the first day of such period; and
(4) if since the beginning of such period any person (that subsequently
became a Subsidiary of the Company or was merged with or into the
Company or any Subsidiary of the Company since the beginning of such
period) shall have made any Asset Disposition or any Investment or
acquisition of assets that would have required an adjustment pursuant
to clause (2) or (3) above if made by the Company or a Subsidiary of
the Company during such period, Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro
forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets, the amount of income or earnings relating thereto
and the amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Subsidiaries, plus, to the extent not included in
such interest expense:
- interest expense attributable to Capitalized Lease Obligations and
imputed interest with respect to Attributable Indebtedness;
- amortization of debt discount and debt issuance cost (other than those
debt discounts and debt issuance costs incurred on November 12, 1998);
- capitalized interest;
- non-cash interest expense;
- commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
- interest actually paid by the Company or any such Subsidiary under any
Guarantee of Indebtedness or other obligation of any other person;
- net costs associated with Currency Agreements and Interest Rate
Agreements (including amortization of fees);
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- the product of all Preferred Stock dividends in respect of all Preferred
Stock of Subsidiaries of the Company and Disqualified Stock of the
Company held by persons other than the Company or a Wholly-Owned
Subsidiary multiplied by a fraction, the numerator of which is one and
the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of the Company, expressed as a
decimal, in each case, determined on a consolidated basis in accordance
with GAAP; and
- the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to
pay interest or fees to any person (other than the Company) in connection
with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income:
(1) any net income (loss) of any person if such person is not a Subsidiary,
except that subject to the limitations contained in clause (4) below,
the Company's equity in the net income of any such person for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such person during
such period to the Company or a Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
to a Subsidiary, to the limitations contained in clause (3) below) and
the Company's equity in a net loss of any such person for such period
shall be included in determining such Consolidated Net Income;
(2) any net income (loss) of any person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(3) any net income (loss) of any Subsidiary if such Subsidiary is subject
to restrictions, directly or indirectly, on the payment of dividends or
the making of distributions by such Subsidiary, directly or indirectly,
to the Company, except that subject to the limitations contained in (4)
below, the Company's equity in the net income of any such Subsidiary
for such period shall be included in such Consolidated Net Income up to
the aggregate amount of cash that could have been distributed by such
Subsidiary during such period to the Company or another Subsidiary as a
dividend (subject, in the case of a dividend that could have been made
to another Subsidiary, to the limitation contained in this clause) and
the Company's equity in a net loss of any such Subsidiary for such
period shall be included in determining such Consolidated Net Income;
(4) any gain (but not loss) realized upon the sale or other disposition of
any assets of the Company or its consolidated Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) which are not sold or
otherwise disposed of in the ordinary course of business and any gain
or loss realized upon the sale or other disposition of any Capital
Stock of any person;
(5) any extraordinary gain or loss; and
(6) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending prior to the taking of any action for the
purpose of which the determination is being made as the par or stated value of
all outstanding Capital Stock of the Company plus paid in capital or capital
surplus relating to such Capital Stock plus any retained earnings or earned
surplus less any accumulated deficit and any amounts attributable to
Disqualified Stock.
"Currency Agreement" means in respect of a person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
person is a party or a beneficiary.
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"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means the Bank Indebtedness and any other
Senior Indebtedness which, at the date of determination, has an aggregate
principal amount outstanding of, or under which, at the date of determination,
the holders thereof are committed to lend up to, at least $5.0 million and is
specifically designated by the Company in the instrument evidencing or governing
such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of the
indenture.
"Disqualified Stock" means, with respect to any person, any Capital Stock
of such person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event:
- matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
- is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
- is redeemable at the option of the holder thereof, in whole or in part,
in each case on or prior to 123 days after the Stated Maturity of the
exchange notes.
"Equity Investors" means the equity owners (including those holding
warrants) of Doane Pet Care Enterprises, Inc. on November 12, 1998.
"Equity Offering" means any public or private sales of equity securities
(excluding Disqualified Stock) of the Company or Doane Pet Care Enterprises,
Inc.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on November 12, 1998 including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the indenture shall be
computed in conformity with GAAP.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof or any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Guarantee" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any Indebtedness of any other person and any
obligation, direct or indirect, contingent or otherwise, of such person to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of any other person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or entered into for purposes of assuring in
any other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a person
existing at the time such person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary.
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"Indebtedness" means, with respect to any person on any date of
determination (without duplication):
(1) the principal of and premium (if any) in respect of indebtedness of
such person for borrowed money,
(2) the principal of and premium (if any) in respect of obligations of such
person evidenced by bonds, debentures, notes or other similar
instruments,
(3) all obligations of such person in respect of letters of credit or other
similar instruments (including reimbursement obligations with respect
thereto) (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (1),
(2) and (5)) entered into in the ordinary course of business of such
person to the extent that such letters of credit are not drawn upon or,
if and to the extent drawn upon, such drawing is reimbursed no later
than the third business day following receipt by such person of a
demand for reimbursement following payment on the letter of credit),
(4) all obligations of such person to pay the deferred and unpaid purchase
price of property or services (other than contingent or "earn-out"
payment obligations and Trade Payables and accrued expenses incurred in
the ordinary course of business), which purchase price is due more than
six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services,
(5) all Capitalized Lease Obligations and all Attributable Indebtedness of
such person,
(6) all Indebtedness of other persons secured by a Lien on any asset of
such person, whether or not such Indebtedness is assumed by such
person, provided, however, that the amount of Indebtedness of such
person shall be the lesser of the fair market value of such asset at
such date of determination and the amount of such Indebtedness of such
other persons,
(7) all Indebtedness of other persons to the extent Guaranteed by such
person,
(8) the amount of all obligations of such person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of the Company, any Preferred Stock (but
excluding, in each case, any accrued dividends) and
(9) to the extent not otherwise included in this definition, obligations of
such person under Currency Agreements and Interest Rate Agreements. The
amount of Indebtedness of any person at any date shall be the
outstanding balance at such date of all unconditional obligations as
described above as such amount would be reflected on a balance sheet in
accordance with GAAP and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent
obligations at such date.
"Interest Rate Agreement" means with respect to any person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such person is party or a beneficiary.
"Investment" in any person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such person.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or
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otherwise, but only as and when received, but excluding any other consideration
received in the form of assumption by the acquiring person of Indebtedness or
other obligations relating to the properties or assets that are the subject of
such Asset Disposition or received in any other noncash form) therefrom, in each
case net of:
- all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all federal, state, foreign and local taxes
required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition;
- all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain
a necessary consent to such Asset Disposition, or by applicable law, be
repaid out of the proceeds from such Asset Disposition;
- all distributions and other payments required to be made to any person
owning a beneficial interest in assets subject to sale or minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition;
- the deduction of appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the assets disposed of in such Asset Disposition and retained by the
Company or any Subsidiary of the Company after such Asset Disposition;
and
- any portion of the purchase price from an Asset Disposition placed in
escrow (whether as a reserve for adjustment of the purchase price, for
satisfaction of indemnities in respect of such Asset Disposition or
otherwise in connection with such Asset Disposition) provided, however,
that upon the termination of such escrow, Net Available Cash shall be
increased by any portion of funds therein released to the Company or any
Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock
or Indebtedness, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result of such issuance or sale.
"New Credit Agreement" means the New Credit Facility to be entered into
among the Company and the lenders parties thereto in conjunction with the
issuance of the old notes.
"New Credit Documents" means the collective reference to the New Credit
Agreement, the notes issued pursuant thereto, the Guarantee and the mortgages
and other security agreements, guarantees and other instruments and documents
executed and delivered pursuant to any of the foregoing or the New Credit
Agreement, in each case as amended, modified, renewed, refunded, replaced or
refinanced from time to time, including any agreement extending the maturity of,
refinancing, replacing or otherwise restructuring (including increasing the
amounts of available borrowing thereunder provided that such increase in
borrowing is permitted by the covenant described under the caption
"-- Limitation on Indebtedness" or adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement
whether by the same or any other agent, lender or group of lenders.
"Note Guarantee" means any guarantee which may from time to time be
executed and delivered by a Subsidiary of the Company pursuant to the provisions
of the covenant described under "Certain Covenants -- Future Note Guarantors."
Each such Note Guarantee will have subordination provisions equivalent to those
contained in the indenture.
"Note Guarantor" means any Subsidiary that has issued a Note Guarantee.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two officers.
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"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the trustee. The counsel may be an employee of or counsel to the
Company or the trustee.
"Permitted Holders" means the Equity Investors and their respective
Affiliates.
"Permitted Investment" means:
- any Investment in a Subsidiary of the Company or a Person which will,
upon making such Investment, become a Subsidiary; provided, however, that
the primary business of such Subsidiary is a Related Business;
- any Investment in another person if as a result of such Investment such
other person is merged or consolidated with or into, or transfers or
conveys all or substantially all its assets to, the Company or a
Subsidiary of the Company; provided, however, that such person's primary
business is a Related Business;
- any Investment in Temporary Cash Investments;
- receivables owing to the Company or any of its Subsidiaries, if created
or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms;
- payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business;
- loans or advances to employees made in the ordinary course of business of
the Company or such Subsidiary;
- stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any of its
Subsidiaries or in satisfaction of judgments or claims;
- Investments the payment for which consists exclusively of equity
securities (exclusive of Disqualified Stock) of the Company;
- any Investment existing on November 12, 1998;
- loans or advances to employees and directors to purchase equity
securities of the Company or Doane Pet Care Enterprises, Inc.; provided
that the aggregate amount of such loans and advances shall not exceed
$2.0 million at any time outstanding;
- any Investment in another person to the extent such Investment is
received by the Company or any Subsidiary as consideration for Asset
Disposition effected in compliance with the covenant under "Limitations
on Sales of Assets";
- prepayment and other credits to suppliers made in the ordinary course of
business consistent with the past practices of the Company and its
Subsidiaries;
- Investments in connection with pledges, deposits, payments or performance
bonds made or given in the ordinary course of business in connection with
or to secure statutory, regulatory or similar obligations, including
obligations under health, safety or environmental obligations; and
- any Investment in another person provided that the aggregate Investments
made pursuant to this clause shall not exceed in the aggregate $4.0
million at any one time outstanding (measured as of the date made and
without giving effect to subsequent changes in value) provided further
that such amount shall be increased by an amount equal to any return of
capital received from any Investment.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision hereof or any other entity.
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"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Principal" of an exchange note means the principal of the exchange note
plus the premium, if any, payable on the exchange note which is due or overdue
or is to become due at the relevant time.
"Refinancing Indebtedness" means Indebtedness that is incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances," and "refinanced" shall have
a correlative meaning) any Indebtedness existing on November 12, 1998 or
Incurred in compliance with the indenture (including Indebtedness of the Company
that refinances Indebtedness of any Subsidiary and Indebtedness of any
Subsidiary that refinances Indebtedness of another Subsidiary) including
Indebtedness that refinances Refinancing Indebtedness, provided, however, that:
- the Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being refinanced;
- the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced; and
- such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the sum of the aggregate principal
amount (or if issued with original issue discount, the aggregate accreted
value) then outstanding of the Indebtedness being refinanced (plus the
amount of any premium required to be paid in connection therewith and
plus reasonable fees and expenses in connection therewith);
provided further that Refinancing Indebtedness shall not include Indebtedness of
a Subsidiary which refinances Indebtedness of the Company.
"Related Business" means the pet food business and such other business
activities which are incidental or related thereto.
"Representative" means any trustee, agent or representative (if any) of an
issue of Senior Indebtedness.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Subsidiary transfers such
property to a person and the Company or a Subsidiary leases it from such person.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Subordinated Indebtedness" means the exchange notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the exchange notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
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"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on November 12, 1998 or thereafter incurred) which is subordinate or
junior in right of payment to the exchange notes pursuant to a written
agreement.
"Subsidiary" of any person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such person, such person and one or more
Subsidiaries of such person or one or more Subsidiaries of such person. Unless
otherwise specified herein, each reference to a Subsidiary shall refer to a
Subsidiary of the Company.
"Temporary Cash Investments" means any of the following:
(1) any Investment in direct obligations of the United States of America or
any agency thereof or obligations Guaranteed by the United States of
America or any agency thereof;
(2) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the
laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America having capital,
surplus and undivided profits aggregating in excess of $250.0 million
(or the foreign currency equivalent thereof) and whose long-term debt,
or whose parent holding company's long-term debt, is rated "A" (or such
similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436
under the Securities Act);
(3) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above
entered into with a bank meeting the qualifications described in clause
(2) above; or
(4) Investments in commercial paper, maturing not more than 180 days after
the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of
the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard and
Poor's Ratings Group.
"Trade Payables" means, with respect to any person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a person means all classes of Capital Stock of such
person then outstanding and normally entitled to vote in the election of
directors or managers.
"Wholly-Owned Subsidiary" means a Subsidiary of the Company, all of the
Capital Stock of which (other than directors' qualifying shares) is owned by the
Company or another Wholly-Owned Subsidiary.
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OLD NOTES REGISTRATION RIGHTS
We agreed pursuant to a registration agreement for the benefit of the
holders of the old notes, at our cost, to use our reasonable best efforts to:
- file with the SEC a registration statement within 90 days after the date
of the original issuance of the old notes (November 12, 1998) with
respect to a registered offer to exchange the old notes for the exchange
notes, and
- cause such exchange offer registration statement to be declared effective
under the Securities Act within 150 days after the date of the original
issuance of the old notes.
We are offering the holders of old notes who are not prohibited by any law
or policy of the SEC from participating in this exchange offer the opportunity
to exchange their old notes for exchange notes registered under the Securities
Act that are substantially identical to the old notes, except that the exchange
notes will not contain terms with respect to transfer restrictions, registration
rights and additional interest. We have agreed to use our reasonable best
efforts to keep this exchange offer open for not less than 30 days (or longer if
required by applicable law) after the date notice of this exchange offer is
mailed to the holders of the old notes. For each old note surrendered to us
pursuant to this exchange offer, the holder of such old note will receive a
registered exchange note having a principal amount equal to that of the
surrendered old note. Interest on each exchange note will accrue from the last
interest payment date on which interest was paid on the old note surrendered in
exchange thereof or, if no interest has been paid on such old note, from the
date of its original issue. Under existing SEC interpretations, the exchange
notes will be freely transferable by holders, other than affiliates of our
Company, after this exchange offer without further registration under the
Securities Act if the holder of the old notes represents that it is acquiring
the exchange notes in the ordinary course of its business, that it has no
arrangement or understanding with any person to participate in the distribution
of the exchange notes and that it is not an affiliate of our Company, as such
terms are interpreted by the SEC; provided that broker-dealers receiving
exchange notes in this exchange offer will have a prospectus delivery
requirement with respect to resales of such exchange notes. The SEC has taken
the position that participating broker-dealers may fulfill their prospectus
delivery requirements with respect to exchange notes with the prospectus
contained in the exchange offer registration statement. Under the registration
agreement, we are required to allow participating broker-dealers and other
persons, if any, with similar prospectus delivery requirements to use the
prospectus contained in the exchange offer registration statement in connection
with the resale of such exchange notes.
A holder of old notes (other than certain specified holders) who wishes to
exchange such notes for exchange notes in this exchange offer will be required
to represent that any exchange notes to be received by it will be acquired in
the ordinary course of its business and that at the time of the commencement of
the registered exchange offer it has no arrangement or understanding with any
person to participate in the distribution (within the meaning of the Securities
Act) of the exchange notes and that it is not an "affiliate" of our Company, as
defined in Rule 405 of the Securities Act, or if it is an affiliate, that it
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
If applicable interpretations of the staff of the SEC do not permit us to
effect this exchange offer, for any other reason the exchange offer registration
statement is not declared effective within 150 days after the date of the
original issuance of the old notes or the registered exchange offer is not
consummated within 45 days after the effective date of the exchange offer
registration statement or any holder is not eligible to participate in this
exchange offer or such holder does not receive freely tradeable exchange notes
in the registered exchange offer other than by reason of such holder being an
affiliate of our Company, we will, at our cost, use our reasonable best efforts
to:
- as promptly as practicable, file a shelf registration statement covering
resales of the old notes or the exchange notes, as the case may be;
- cause the shelf registration statement to be declared effective under the
Securities Act; and
- keep the shelf registration statement effective until two years after its
effective date.
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We will, in the event a shelf registration statement is filed, among other
things, provide to each holder for whom such shelf registration statement was
filed copies of the prospectus which is a part of the shelf registration
statement, notify each such holder when the shelf registration statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the old notes or the exchange notes, as the case may be.
A holder selling such old notes or exchange notes pursuant to the shelf
registration statement generally would be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the registration agreement that are applicable to such holder
(including certain indemnification obligations).
If:
- the registered exchange offer has not been consummated on or prior to the
45th day following the effective date of the exchange offer registration
statement;
- a shelf registration statement has not been filed on or prior to 30 days
after the obligation to do so arises; or
- after either the exchange offer registration statement or the shelf
registration statement is declared effective, such registration statement
thereafter ceases to be effective or usable in connection with resales of
old notes or exchange notes in accordance with and during the periods
specified in the registration agreement,
special interest will accrue on the old notes and the exchange notes (in
addition to the stated interest on the old notes and the exchange notes) from
and including the date on which any such registration default occurs to, but
excluding, the date on which all registration defaults have been cured. The
special interest will accrue at a rate of 0.5% per annum during the 90-day
period immediately following the occurrence of any registration default and
shall increase by 0.25% per annum at the end of each subsequent 90-day period,
but in no event shall such rate exceed 1.5% per annum.
All accrued special interest will be paid to holders of the old notes in
the same manner in which payments of other interest are made pursuant to the
indenture governing the old notes.
The summary herein of certain provisions of the registration agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the registration agreement, a copy of
which we filed with the SEC as an exhibit to the registration statement of which
this prospectus is a part.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion generally summarizes the principal U.S. federal
income tax consequences of the exchange of old notes for exchange notes. This
discussion is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated under the Code and
judicial and administrative interpretations thereof, all as in effect and
available as of the date of this prospectus and all of which are subject to
change, possibly retroactively or different interpretation. We cannot assure you
that the Internal Revenue Service will not challenge one or more of the tax
consequences described in this prospectus. We have not obtained, nor do we
intend to obtain, a ruling from the Internal Revenue Service with respect to the
U.S. federal income tax consequences of the exchange offer. This discussion does
not purport to address all aspects of U.S. federal income taxation that may be
relevant to you in light of your specific circumstances or to you if you are
subject to special treatment under the Code. This discussion does not address
the effect of any applicable U.S. federal estate and gift tax laws or state,
local or foreign tax laws.
The exchange of old notes for exchange notes pursuant to the exchange offer
will not be a taxable event for U.S. federal income tax purposes. You will not
recognize gain or loss upon the receipt of exchange notes, and if you are
otherwise subject to U.S. federal income tax you will be subject to such tax on
the same amount and in the same manner and at the same times as you would have
been as a result of holding the old notes. If
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you are a cash-basis exchanging holder, you will not recognize in income any
accrued and unpaid interest on the old notes by reason of the exchange. The
basis and holding period of an exchange note will be the same as the basis and
holding period of the corresponding old note.
THIS DESCRIPTION IS INCLUDED IN THIS PROSPECTUS FOR GENERAL INFORMATION
ONLY. ACCORDINGLY, YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISOR CONCERNING THE
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER WITH RESPECT TO YOUR
PARTICULAR SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS.
TRANSFER RESTRICTIONS ON OLD NOTES
OFFERS AND SALES OF THE OLD NOTES
The old notes were not registered under the Securities Act and may not be
offered or sold, except in accordance with an applicable exemption from the
registration requirements thereof. Accordingly, the old notes were offered and
sold only (i) in the United States to qualified institutional buyers pursuant to
Rule 144A under the Securities Act and (ii) to institutional "accredited
investors," as defined under Rule 501(a)(1), (2), (3) or (7) under the
Securities Act.
INVESTOR REPRESENTATIONS AND RESTRICTIONS ON RESALE
Each purchaser of old notes represented and agreed to each of the
following:
- it acquired the old notes for its own account or for an account with
respect to which it exercises sole investment discretion, and that it or
such account is a qualified institutional buyer or an institutional
accredited investor;
- it acknowledged that the old notes have not been registered under the
Securities Act, and may not be sold, pledged or otherwise transferred
except as permitted below;
- it agreed that such old notes were offered only in a transaction not
involving any public offering within the meaning of the Securities Act;
- it agreed that:
(1) if within two years after the date of original issuance of the old
notes or if within three months after it ceases to be an affiliate
(within the meaning of Rule 144 under the Securities Act) of the
issuer, it decides to resell, pledge or otherwise transfer such old
notes on which the legend set forth below appears, such old notes may
be resold, pledged or transferred only:
(a) to the issuer,
(b) so long as such security is eligible for resale pursuant to Rule
144A, to a person whom the seller reasonably believes is a
qualified institutional buyer that purchases for its own account or
for the account of a qualified institutional buyer to whom notice
is given that the resale, pledge or transfer is being made in
reliance on Rule 144A,
(c) to an institutional accredited investor who has certified to the
issuer and the trustee for the old notes that such transferee is an
institutional accredited investor and is acquiring the old notes
for investment purposes and not for distribution in violation of
the Securities Act or any other applicable securities laws,
(d) pursuant to an exemption from the registration requirements of the
Securities Act provided by Rule 144 (if applicable) under the
Securities Act or
(e) pursuant to an effective registration statement under the
Securities Act, in each case in accordance with any applicable
securities laws of any state of the United States,
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(2) the purchaser will, and each subsequent holder is required to, notify
any purchaser of old notes from it of the resale restrictions referred
to in (1) above, if then applicable, and
(3) with respect to any transfer of old notes by an institutional
accredited investor, such holder will deliver to the issuer and the
trustee such certificates and other information as they may reasonably
require to confirm that the transfer by it complies with the foregoing
restrictions;
- it understands that the notification requirement referred to above will
be satisfied, in the case only of transfer by physical delivery of
certificated old notes other than a global security, by virtue of the
fact that the following legend will be placed on the old notes unless
otherwise agreed by the issuer:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY
PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE ISSUER OF THIS
SECURITY THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE HEREOF
(OR A PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN
AFFILIATE OF THE ISSUER AT ANY TIME DURING THE THREE MONTHS PRECEDING
THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE ISSUER,
(2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE
144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT
OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A
(AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS SECURITY), (3) TO AN INSTITUTION THAT IS
AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7)
UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE
TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS
SECURITY) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT PURPOSES AND
NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR ANY OTHER
APPLICABLE SECURITIES LAWS, AND A CERTIFICATE IN THE FORM ATTACHED TO
THIS SECURITY IS DELIVERED BY THE TRANSFEREE TO THE ISSUER AND THE
TRUSTEE, (4) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES
ACT, OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AN INSTITUTIONAL
ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES IT WILL FURNISH TO THE
ISSUER AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY
MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS
SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE
ISSUER THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING
OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND
THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION;"
- it:
(1) is able to fend for itself in the transactions contemplated by this
prospectus;
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(2) has such knowledge and experience in financial and business matters
as to be capable of evaluating the merits and risks of its
prospective investment in the old notes; and
(3) has the ability to bear the economic risks of its prospective
investment and can afford the complete loss of such investment;
- it received a copy of the confidential memorandum relating to the old
notes and acknowledged that it had access to such financial and other
information, and was afforded the opportunity to ask questions of the
issuer and receive answers thereto, as it deemed necessary in connection
with its decision to purchase the old notes;
- it understood that the issuer and others will rely upon the truth and
accuracy of the foregoing acknowledgments, representations and agreements
and agreed that if any of the acknowledgments, representations and
agreements deemed to have been made by its purchase of the old notes are
no longer accurate, it would promptly notify the issuer; and if it
acquired the old notes as a fiduciary or agent for one or more investor
accounts, it represented that it had sole investment discretion with
respect to each such account and it had full power to make the foregoing
acknowledgments, representations and agreements on behalf of such
account; and
- it did not acquire the old notes with a view to any distribution thereof
in a transaction that would violate the Securities Act or the securities
laws of any state of the United States or any other applicable
jurisdiction; provided that the disposition of its property and the
property of any accounts for which it is acting as fiduciary shall remain
at all times within its control.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC set forth in no action
letters issued to third parties, we believe that you may transfer exchange notes
issued under the exchange offer in exchange for old notes unless you are:
- an "affiliate" of our company within the meaning of Rule 405 under the
Securities Act;
- a broker-dealer that acquired old notes directly from us; or
- a broker-dealer that acquired old notes as a result of market-making or
other trading activities without compliance with the registration and
prospectus delivery provisions of the Securities Act;
provided that you acquire the exchange notes in the ordinary course of your
business and you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such exchange notes. Broker-dealers receiving exchange notes in the exchange
offer will be subject to a prospectus delivery requirement with respect to
resales of the exchange notes.
To date, the staff of the SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as this exchange offer,
other than a resale of an unsold allotment from the original sale of the old
notes, with the prospectus contained in the exchange offer registration
statement. Pursuant to the registration rights agreement, we have agreed to
permit participating broker-dealers to use this prospectus in connection with
the resale of exchange notes. We have agreed that, for a period of up to 180
days after the expiration of the exchange offer, we will make this prospectus,
and any amendment or supplement to this prospectus, available to any
broker-dealer that requests such documents in the letter of transmittal.
If you wish to exchange your old notes for exchange notes in the exchange
offer, you will be required to make certain representations to us as set forth
in "The Exchange Offer -- Exchange Terms" and "-- Procedures for Tendering Old
Notes" of this prospectus and in the letter of transmittal. In addition, if you
are a broker-dealer who receives exchange notes for your own account in exchange
for old notes that were acquired by you as a result of market-making activities
or other trading activities, you will be required to acknowledge that you will
deliver a prospectus in connection with any resale by you of such exchange
notes.
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We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Broker-dealers who receive exchange notes for their own account
pursuant to the exchange offer may sell them from time to time in one or more
transactions in the over-the-counter market:
- in negotiated transactions;
- through the writing of options on the exchange notes or a combination of
such methods of resale;
- at market prices prevailing at the time of resale; or
- at prices related to such prevailing market prices or negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or the purchasers of any exchange notes. Any
broker-dealer that resells exchange notes it received for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act, and any profit on any resale of exchange
notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the old notes, including any broker-dealers, against certain
liabilities, including liabilities under the Securities Act, as set forth in the
registration rights agreement.
LEGAL MATTERS
Certain legal matters in connection with the offering of the exchange notes
will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Doane Pet Care Company as of
December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 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 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.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual reports, quarterly reports, special reports, proxy
statements and other information with the Securities and Exchange Commission.
You can read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
SEC's regional offices located at Seven World Trade Center, New York, New York
10048, and at 500 West Madison Street, Chicago, Illinois 60661. You can obtain
information about the operation of the SEC's Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains a Web site that contains
information we file electronically with the SEC, which you can access over the
Internet at http://www.sec.gov.
97
<PAGE> 101
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DOANE PET CARE COMPANY
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 years ended
December 31, 1995, 1996 and 1997 and for the nine
months ended September 30, 1997 and 1998 (unaudited)... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and for the nine
months ended September 30, 1997 and 1998 (unaudited)... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997 and for
the nine months ended September 30, 1998 (unaudited)... F-6
Notes to Consolidated Financial Statements................ F-7
DOANE PET CARE COMPANY
Supplemental Condensed Combined Balance Sheet as of
September 30, 1998..................................... F-22
Supplemental Condensed Combined Statement of Income for
the nine months ended September 30, 1998............... F-23
Supplemental Condensed Combined Statement of Cash Flows
for the nine months ended September 30, 1998........... F-24
Notes to Supplemental Condensed Combined Financial
Statements............................................. F-25
WINDY HILL PET FOOD HOLDINGS, INC.
Independent Auditors' Report.............................. F-29
Consolidated Balance Sheets as of December 28, 1996,
December 27, 1997 and June 27, 1998 (unaudited)........ F-30
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-31
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-32
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-33
Notes to Consolidated Financial Statements................ F-34
HUBBARD MILLING COMPANY
Independent Auditors' Report.............................. F-51
Balance Sheets as of April 30, 1995, 1996 and 1997........ F-52
Statements of Earnings for the years ended April 30, 1995,
1996 and 1997.......................................... F-53
Statements of Cash Flows for the years ended April 30,
1995, 1996 and 1997.................................... F-54
Notes to Financial Statements............................. F-55
</TABLE>
F-1
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
Board of Directors
Doane Pet Care Company:
We have audited the accompanying consolidated balance sheets of Doane Pet
Care Company -- Successor as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows of Doane
Pet Care Company -- Successor for the years ended December 31, 1997 and 1996 and
for the three month period ended December 31, 1995, and the consolidated
statements of income, stockholders' equity and cash flows of Doane Pet Care
Company -- Predecessor for the nine months ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Doane Pet Care Company --
Successor at December 31, 1997 and 1996, and the results of operations and cash
flows of Doane Pet Care Company -- 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 Company -- Predecessor for the nine month period ended September
30, 1995 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Houston, Texas
February 13, 1998
F-2
<PAGE> 103
DOANE PET CARE COMPANY
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................................ $ -- $ -- $ 3,285
Trade accounts receivable, net of allowances............. 68,279 66,369 65,332
Inventories.............................................. 30,737 32,426 35,148
Deferred income tax benefits............................. 881 1,252 --
Prepaid expenses and other assets........................ 6,487 2,298 19,008
-------- -------- --------
Total Current Assets............................. 106,384 102,345 122,773
Property, plant, and equipment, net........................ 93,083 99,994 121,388
Goodwill and other intangible assets, net.................. 126,068 122,882 135,282
Other assets, net.......................................... 12,758 12,963 13,288
-------- -------- --------
Total Assets..................................... $338,293 $338,184 $392,731
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt................... $ 10,417 $ 11,667 6,977
Accounts payable......................................... 51,303 42,422 44,256
Accrued liabilities...................................... 18,541 22,611 27,448
-------- -------- --------
Total current liabilities........................ 80,261 76,700 78,681
Long-term debt, excluding current installments............. 196,186 188,743 229,437
Post-retirement benefit liability.......................... 4,030 4,081 4,091
Deferred income tax liability.............................. 409 4,169 7,540
-------- -------- --------
Total liabilities................................ 280,886 273,693 319,749
Senior exchangeable preferred stock, 10,000 shares
authorized, 1,200 shares issued.......................... 24,160 30,545 35,898
Stockholders' equity:
Common stock, par value $.01, authorized and issued 1,000
shares................................................ -- -- --
Additional paid-in capital............................... 40,825 41,675 43,272
Accumulated other comprehensive income................... -- -- 472
Accumulated deficit...................................... (7,578) (7,729) (6,660)
-------- -------- --------
Total stockholders' equity....................... 33,247 33,946 37,084
-------- -------- --------
Total liabilities and stockholders' equity....... $338,293 $338,184 $392,731
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 104
DOANE PET CARE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDING DECEMBER 31, 1995, 1996 AND 1997
AND THE NINE MONTH PERIODS 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
------------- ------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $303,633 $114,958 $513,217 $564,741 $411,399 $422,157
Cost of goods sold................. 247,394 97,184 446,776 482,896 352,877 348,086
-------- -------- -------- -------- -------- --------
Gross profit....................... 56,239 17,774 66,441 81,845 58,522 74,071
Operating expenses:
Promotion and distribution....... 17,675 6,484 26,480 31,876 23,798 26,236
Selling, general and
administrative................. 8,558 3,677 15,050 17,985 12,505 17,646
Non-recurring transition costs... 9,440 -- -- -- -- 4,074
-------- -------- -------- -------- -------- --------
Income from operations..... 20,566 7,613 24,911 31,984 22,219 26,115
Interest expense, net.............. 3,611 5,806 22,471 22,463 16,973 16,614
Non-recurring finance charge....... -- -- 4,815 -- -- --
Equity in earnings of joint
venture.......................... -- -- -- (186) (117) (29)
Other (income) expense, net........ (8) 29 (2) 84 65 (118)
-------- -------- -------- -------- -------- --------
Income (loss) before
taxes.................... 16,963 1,778 (2,373) 9,623 5,298 9,648
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 $ 6,422
======== ======== ======== ======== ======== ========
Net income (loss) applicable to
common stock..................... -- $ (314) $ (7,264) $ (151) $ (1,323) $ 1,069
Basic and diluted net income (loss)
per common share................. -- $ (314) $ (7,264) $ (151) $ (1,323) $ 1,069
Pro forma earnings data
(unaudited)......................
Net income as reported............. $ 16,746
Pro forma adjustment for federal
and state income tax expense..... 5,861
--------
Pro forma net income............... $ 10,885
========
Pro forma basic net income per
common share..................... $ 189
======== ======== ======== ======== ======== ========
Weighted average shares
outstanding...................... 57,500 1,000 1,000 1,000 1,000 1,000
======== ======== ======== ======== ======== ========
</TABLE>
F-4
<PAGE> 105
DOANE PET CARE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDING DECEMBER 31, 1995, 1996 AND 1997
AND 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>
Cash flows from operating activities:
Net income (loss)........................... $ 16,746 $ 1,024 $ (1,518) $ 6,234 $ 3,381 $ 6,422
Items not requiring (providing) cash:
Depreciation and amortization............. 3,694 2,359 15,972 12,141 8,880 10,640
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) (29)
Other..................................... (93) 23 282 51 (127) (114)
Changes in:
Accounts receivable..................... 1,800 (7,620) (21,176) 1,910 11,012 5,325
Inventories............................. (2,424) (2,954) (3,141) (1,689) (394) (506)
Prepaid expenses and other.............. (498) (571) (5,479) 3,818 4,232 (5,771)
Accounts payable........................ (11,526) 4,084 32,155 (8,881) (15,568) (3,693)
Accrued expenses........................ 5,245 7,034 2,317 4,070 (3,718) 2,626
Other................................... -- (1,770) -- -- -- --
-------- --------- --------- -------- -------- -------
Net cash provided by operating
activities......................... 12,954 2,711 18,583 20,972 9,603 18,021
-------- --------- --------- -------- -------- -------
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) (12,779)
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) (423)
-------- --------- --------- -------- -------- -------
Net cash used in investing
activities......................... (3,677) (209,346) (11,489) (15,161) (13,192) (48,320)
-------- --------- --------- -------- -------- -------
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 3,310
Principal payments on long-term debt........ (786) (4,400) (167,746) (10,416) (7,812) (5,419)
Dividends paid.............................. (13,152) -- -- --
Proceeds from issuance of preferred stock... -- 17,075 -- --
Capital contribution........................ -- 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 33,359
-------- --------- --------- -------- -------- -------
Effect of exchange rates on cash..... -- -- -- -- -- 225
-------- --------- --------- -------- -------- -------
Increase (decrease) in cash and cash
equivalents........................ (11,291) (2,000) (1,550) -- -- 3,285
Cash and cash equivalents, beginning of
period...................................... 14,841 3,550 1,550 -- -- --
-------- --------- --------- -------- -------- -------
Cash and cash equivalents, end of period...... $ 3,550 $ 1,550 $ -- $ -- $ -- $ 3,285
======== ========= ========= ======== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 106
DOANE PET CARE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDING DECEMBER 31, 1995, 1996 AND 1997
AND NINE MONTHS ENDED SEPTEMBER 30, 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....................... 100,000.. $50 $ -- (42,500) $(34,000) $ $ 65,709 $ 31,759
Net income................. -- -- -- -- -- 16,746 16,746
Dividends declared......... -- -- -- -- -- (13,152) (13,152)
------- --- ------- ------- -------- ---- -------- --------
Balances, September 30,
1995....................... 100,000 $50 $ -- (42,500) $(34,000) $ $ 69,303 $ 35,353
======= === ======= ======= ======== ==== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balances, October
1, 1995.................... -- $-- $ -- -- $ -- $ $ -- $ --
Capital contribution....... 1,000 -- 40,425 -- -- -- 40,425
Net income................. -- -- -- -- -- 1,024 1,024
Preferred stock
dividends............... -- -- -- -- -- (1,069) (1,069)
Accretion of preferred
stock................... -- -- -- -- -- (269) (269)
------ --- ------- ------- -------- ---- -------- --------
Balances, December 31,
1995....................... 1,000 -- 40,425 -- -- (314) 40,111
Capital contribution....... -- -- 400 -- -- -- 400
Net loss................... -- -- -- -- -- (1,518) (1,518)
Preferred stock
dividends............... -- -- -- -- -- (4,670) (4,670)
Accretion of preferred
stock................... -- -- -- -- -- (1,076) (1,076)
------ --- ------- ------- -------- ---- -------- --------
Balances, December 31,
1996....................... 1,000 -- 40,825 -- -- (7,578) 33,247
Capital contribution )..... -- -- 850 -- -- -- 850
Net income................. -- -- -- -- -- 6,234 6,234
Preferred stock
dividends............... -- -- -- -- -- (5,308) (5,308)
Accretion of preferred
stock................... -- -- -- -- -- (1,077) (1,077)
------ --- ------- ------- -------- ---- -------- --------
Balances, December 31,
1997....................... 1,000 -- 41,675 -- -- (7,729) 33,946
Stock compensation expense
(unaudited)................ -- -- 250 -- -- -- -- 250
Capital contribution
(unaudited)............. -- 1,347 -- -- -- 1,347
Net income (unaudited)..... -- -- -- -- -- 6,422 6,422
Other comprehensive income
(unaudited)............. -- -- -- -- -- 472 472
Preferred stock dividends
(unaudited)............. -- -- -- -- -- (4,546) (4,546)
Accretion of preferred
stock (unaudited)....... -- -- -- -- -- (807) (807)
------ --- ------- ------- -------- ---- -------- --------
Balances, September 30, 1998
(unaudited)................ 1,000 $-- $43,272 -- $ -- $472 $ (6,660) $ 37,084
====== === ======= ======= ======== ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 107
DOANE PET CARE COMPANY
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. ("Enterprises"), a
newly organized Delaware corporation acquired Doane Pet Care Company (the
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
Exchangeable Preferred Stock. The cost of the acquisition has been allocated on
the basis of the estimated fair value of the assets acquired and liabilities
assumed. The allocation resulted in goodwill of approximately $129 million. The
goodwill is being amortized over 40 years on a straight-line basis.
For financial statement purposes, the Acquisition 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) 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 66% 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 the 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 the Company 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.
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
F-7
<PAGE> 108
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-8
<PAGE> 109
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1,769
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. 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.
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
F-9
<PAGE> 110
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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................ $1,069 $(1,323)
Other comprehensive income.................................. 472 --
------ -------
Total comprehensive income (loss)........................... $1,541 $(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 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.
(3) 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 $ 7,389
Packaging materials................................. 10,609 10,735 14,469
Finished goods...................................... 12,860 13,242 13,290
------- ------- -------
$30,737 $32,426 $35,148
======= ======= =======
</TABLE>
F-10
<PAGE> 111
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) 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 $ 4,672
Buildings and improvements.......................... 25,395 29,439 34,498
Machinery and equipment............................. 65,377 76,442 90,659
Furniture and fixtures.............................. 1,932 2,536 6,716
Automotive equipment................................ 1,000 1,016 1,302
Construction in progress............................ 3,504 1,972 9,869
------- ------- --------
101,195 115,442 147,716
Less accumulated depreciation....................... 8,112 15,448 26,328
------- ------- --------
$93,083 $99,994 $121,388
======= ======= ========
</TABLE>
(5) 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 $ 7,232
Accrued interest..................................... 6,379 6,223 2,231
Rebates and other promotions......................... 7,510 9,064 11,174
Other................................................ 1,429 2,610 7,061
------- ------- -------
$18,541 $22,611 $27,698
======= ======= =======
</TABLE>
(6) 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
Industrial Development Revenue Bonds (net of
reserve funds)................................. -- 5,698 8,496
Debt -- Foreign Subsidiaries..................... -- -- 25,318
-------- -------- --------
206,603 200,410 236,414
Less current maturities.......................... 10,417 11,667 6,977
-------- -------- --------
$196,186 $188,743 $229,437
======== ======== ========
</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
F-11
<PAGE> 112
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-12
<PAGE> 113
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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 (unaudited),
$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
F-13
<PAGE> 114
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
*****
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,
and its Senior Notes. See discussion of subsequent events at Note 17 below.
(7) SENIOR EXCHANGEABLE PREFERRED STOCK
The Company has authorized 10,000 shares of Senior Exchangeable Preferred
Stock of which the Company issued 1,200 shares in connection with the financing
of the Acquisition.
The Senior Exchangeable Preferred Stock has an initial liquidation
preference of $25.00 per share (aggregate initial liquidation preference is
$30,000). The Senior Exchangeable Preferred Stock was recorded at the net
proceeds of $17,075 after deducting $12,925 paid to DPCAC for warrants of DPCAC
which were issued in conjunction with the Senior Exchangeable Preferred Stock.
The excess of the liquidation preference over the carrying value is being
accreted quarterly over a twelve year period ended September 30, 2007 by a
direct reduction to retained earnings.
Dividends on the Senior Exchangeable Preferred Stock are payable quarterly
at the rate of 14.25% per annum per share. Dividends on the Senior Exchangeable
Preferred Stock accrete to the liquidation value of the Senior Exchangeable
Preferred Stock and, at the option of the holders of a majority of the shares of
Senior Exchangeable Preferred Stock, may be paid through the issuance of
additional shares of Senior Exchangeable Preferred Stock on each dividend
payment date through September 30, 2000. The Company does not expect to pay
dividends on the Senior Exchangeable Preferred Stock in cash for any period
prior to September 30, 2000. Cumulative dividends on Senior Exchangeable
Preferred Stock that have not been paid at December 31, 1996 and 1997, and
September 30, 1998 (unaudited), are $5,739, $11,047 and $12,510, respectively
and are included in the carrying amount of the Senior Exchangeable Preferred
Stock. As of December 31, 1997, and September 30, 1998 (unaudited), the
cumulative accretion to redemption value and cumulative dividends on the Senior
Exchangeable 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 Exchangeable Preferred Stock with the
net proceeds of an initial public offering of its common stock at a redemption
price of 114% of the then liquidation value of the Senior Exchangeable Preferred
Stock, plus accrued and unpaid dividends. On and after September 30, 1998, and
prior to September 30, 2000, the Company is not precluded from purchasing in
whole or in part the Senior Exchangeable Preferred Stock on the open market at
prevailing prices. On and after September 30, 2000, the
F-14
<PAGE> 115
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company may, at its option, redeem the Senior Exchangeable Preferred Stock in
whole or in part at redemption prices per share set forth below, together with
accrued and unpaid dividends:
<TABLE>
<CAPTION>
YEAR PERCENT OF
BEGINNING LIQUIDATION
SEPTEMBER 30, VALUE
- ------------- -----------
<S> <C> <C>
2000............................................................... 107.125%
2001............................................................... 105.700
2002............................................................... 104.275
2003............................................................... 102.850
2004............................................................... 101.425
2005............................................................... 100.000
2006............................................................... 100.000
</TABLE>
The Company will be required to redeem all outstanding shares of Senior
Exchangeable Preferred Stock on September 30, 2007 at 100% of the then
liquidation value, together with accrued and unpaid dividends.
The Senior Exchangeable Preferred Stock will be exchangeable, in whole or
in part, at the option of the Company on any dividend payment date for 14.25%
Junior Subordinated Exchange Debentures.
In the event of a change of control, as defined, the holders of Senior
Exchangeable Preferred Stock have the right to require the Company to redeem
such Senior Exchangeable Preferred Stock, in whole or in part, at a price equal
to 101% of the then liquidation value together with any unpaid dividends.
The terms of the Senior Exchangeable Preferred Stock prohibit (i) the
payment of dividends on securities ranking on a parity with or junior to the
Senior Exchangeable Preferred Stock and (ii) redemption, repurchase or
acquisition of any Junior Securities with certain exceptions, in each case,
unless full cumulative dividends have been paid on the Senior Exchangeable
Preferred Stock.
Holders of the Senior Exchangeable Preferred Stock have limited voting
rights customary for preferred stock, and the right to elect two additional
directors upon certain events such as the Company failing to declare and pay
dividends on any six consecutive dividend payment dates.
(8) STOCK OPTION PLAN
Effective November 1, 1996, the Company's parent, Enterprises, adopted a
management stock option plan, as amended. Certain employees of the Company are
covered under this plan, and each stock option granted allows for the purchase
of one share of Enterprises common stock. The options vest based on the
attainment of certain performance levels as defined by the plan. The Company and
its parent have elected to continue to follow APB Opinion No. 25. For the nine
months ended September 30, 1998 (unaudited), the Company recorded compensation
expense of $250 as an addition to additional paid-in-capital in connection with
1998 stock option grants under the plan. No compensation expense was recorded in
fiscal 1996 and 1997 for grants in those years.
(9) 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 60%, respectively, of the Successor
Company's total revenue. The Company does not have a long-term contract with
this customer.
F-15
<PAGE> 116
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) 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.
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>
F-16
<PAGE> 117
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(11) 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.
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>
F-17
<PAGE> 118
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the accompanying balance sheets as of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits........................................... $ (7,940) $ (8,936)
======== ========
Accumulated benefits...................................... $ (8,172) $ (9,192)
======== ========
Projected benefits........................................ $(13,060) $(14,818)
Plan assets at fair value................................. 12,428 14,557
-------- --------
Projected benefit obligation in excess of plan
assets.......................................... (632) (261)
Items not yet recognized in earnings:
Unrecognized net loss (gain).............................. (45) (1,144)
Unrecognized net asset at December 31, 1986, being
recognized over 14.49 to 17.95 years................... 333 313
-------- --------
Pension liability recognized in the balance
sheet........................................... $ (344) $ (1,092)
======== ========
</TABLE>
The Company sponsors a defined contribution postretirement plan which
provides medical coverage for eligible retirees and their dependents (as defined
in the plan). On October 1, 1995, the Company adopted SFAS 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. The following sets
forth the plans' funded status reconciled with the amount shown in the Company's
consolidated balance sheets and consolidated statements of income on an accrual
basis rather than a pay-as-you-go (cash) basis as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents..................................... $ 825 $ 824
Fully eligible active plan participants..................... 356 382
Other active plan participants.............................. 316 363
------ ------
Accrued postretirement benefit cost......................... $1,497 $1,569
====== ======
</TABLE>
<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
F-18
<PAGE> 119
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The Windy Hill Pet Food Company, Inc. Profit Sharing and Savings
Plan also includes an employer matching contribution in an amount equal to 50%
of participant contribution, up to 6% of compensation. In addition, the plan
provides for contribution to participant accounts of amounts equal to 2 1/2% of
the employee's compensation.
(12) 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.
(13) 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 $20,646 $20,124
Income taxes paid
(refunded).................. 302 (51) 351 -- -- --
</TABLE>
F-19
<PAGE> 120
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) 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.
(15) 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>
(16) 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.
F-20
<PAGE> 121
DOANE PET CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) 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.
(18) SUBSEQUENT EVENTS (UNAUDITED)
Windy Hill Merger and Refinancing Transactions
On August 3, 1998, the Company's parent (Doane Pet Care Enterprises, Inc.)
acquired Windy Hill for approximately 1.6 million 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. This acquisition has been accounted for by the parent 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.
On November 12, 1998, Windy Hill was merged with and into the Company. In
connection with the merger, the Company refinanced the Senior Credit Facility,
the Windy Hill Credit Facility, a Windy Hill bridge loan facility, the Windy
Hill Subordinated Notes, and the Company's senior notes (the "Refinancing
Transactions"). The unaudited supplemental condensed combined financial
statements as of and for the nine months ended September 30, 1998 are included
giving effect to the merger of Doane Products Company and Windy Hill as of
August 3, 1998 as entities under common control.
F-21
<PAGE> 122
These are supplemental condensed combined financial statements for the nine
months ended September 30, 1998 and the related footnotes after giving effect to
the merger of Doane Pet Care Company and Windy Hill Pet Food Company, Inc. as of
August 3, 1998 as discussed in Note 18 in the Doane Pet Care Company Notes to
Consolidated Financial Statements.
DOANE PET CARE COMPANY
SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,833
Trade and other accounts receivable, net.................. 86,759
Inventories............................................... 52,901
Deferred income tax benefits.............................. 6,562
Prepaid expenses and other assets......................... 16,333
--------
Total current assets.............................. 166,388
Property and equipment, net................................. 201,665
Goodwill and other intangible assets, net................... 263,368
Other assets, net........................................... 33,431
--------
Total assets...................................... $664,852
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 8,859
Accounts payable.......................................... 64,782
Accrued liabilities....................................... 42,091
--------
Total current liabilities......................... 115,732
Long-term debt, excluding current liabilities............... 401,512
Post retirement benefit liability........................... 6,562
Deferred income tax liability............................... 22,744
Other long-term liabilities................................. 1,753
--------
Total liabilities................................. 548,303
--------
Senior exchangeable preferred stock, 3,000,000 shares
authorized, 1,200,000 shares issued....................... 35,898
--------
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized,
1,200,000 shares issued................................ --
Additional Paid-in capital................................ 86,841
Accumulated other comprehensive income.................... 472
Accumulated deficit....................................... (6,662)
--------
Total stockholder's equity........................ 80,651
--------
Total liabilities and stockholder's equity........ $664,852
========
</TABLE>
F-22
<PAGE> 123
DOANE PET CARE COMPANY
SUPPLEMENTAL CONDENSED COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1998
-------------
<S> <C>
Net sales................................................... $462,991
Cost of goods sold.......................................... 378,583
--------
Gross profit...................................... 84,408
--------
Operating expenses:
Promotion and distribution................................ 30,381
Selling, general and administrative....................... 20,855
Non-recurring transition expense.......................... 4,311
--------
Income from operations............................ 28,861
Interest expense, net..................................... 19,444
Equity in earnings of joint ventures...................... (111)
Other income, net......................................... (118)
--------
Income before taxes......................................... 9,646
Income tax expense........................................ 3,226
--------
Net income.................................................. $ 6,420
========
Net income applicable to common stock....................... $ 1,069
Basic net income per common share........................... $ 1,069
Weighted average shares outstanding......................... 1,000
========
</TABLE>
F-23
<PAGE> 124
DOANE PET CARE COMPANY
SUPPLEMENTAL CONDENSED COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1998
-------------
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 6,420
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization.......................... 11,450
Stock compensation expense............................. 250
Amortization of deferred debt issuance costs........... 942
Deferred tax expense................................... 2,871
Equity in foreign joint venture........................ (111)
Other.................................................. (304)
Changes in working capital components....................... (5,501)
--------
Net cash provided by operating activities................... 16,017
--------
Cash flows from investing activities:
Proceeds from the sale of property and equipment.......... 72
Capital expenditures, including interest capitalized...... (14,132)
Increase in debt issuance costs........................... --
Payment for the acquisition of business, net of cash
acquired............................................... (26,190)
Purchase of Industrial Development Bonds.................. (9,000)
Other..................................................... (2,723)
--------
Net cash used in investing activities....................... (51,973)
--------
Cash flows from financing activities:
Net borrowings under revolving credit agreement........... 9,710
Proceeds from issuance of long-term debt.................. 34,121
Principal payments on long-term debt...................... (5,614)
Contributed capital....................................... 1,347
--------
Net cash provided by financing activities................... 39,564
--------
Effect of exchange rate changes on cash..................... 225
--------
Increase in cash and cash equivalents....................... 3,833
Cash and cash equivalents, beginning of period.............. --
--------
Cash and cash equivalents, end of period.................... $ 3,833
========
</TABLE>
F-24
<PAGE> 125
DOANE PET CARE COMPANY
NOTES TO SUPPLEMENTAL CONDENSED COMBINED FINANCIAL STATEMENTS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
On August 3, 1998, Doane Products Company's parent, Doane Pet Care
Enterprises, Inc. ("Enterprises"), acquired Windy Hill Pet Food Holdings, Inc.
("Holdings"), the parent company of Windy Hill Pet Food Company, Inc. ("Windy
Hill"), for approximately 1,600 shares of common stock of Enterprises and the
assumption of approximately $183,500 of indebtedness. On November 12, 1998,
Enterprises contributed the shares of Windy Hill to Doane Products Company, and
Windy Hill was immediately merged with and into Doane Products Company, which
subsequently changed its name to Doane Pet Care Company (the "Company"), and is
the surviving entity after the merger. The transaction has been accounted for
under the purchase method of accounting. The interim supplemental condensed
combined financial statements of Doane Pet Care Company, included herein, give
retroactive effect to the merger of Doane Products Company and Windy Hill to
August 3, 1998 and will become the historical financial statements upon the
Company's filing of its report on Form 10-K for 1998.
The interim supplemental condensed combined financial statements of the
Company included herein, have not been audited by the Company's independent
accountants. The statements include all adjustments, such as normal recurring
accruals, which management considers necessary for a fair presentation of the
financial position and operating results of the Company for the periods
presented. The interim supplemental condensed combined financial statements 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 the
nine months ended September 30, 1998 are not necessarily indicative of results
to be expected for an entire year.
The Company's interim supplemental condensed combined financial statements
should be read in conjunction with the financial statements and notes thereto
contained in the Company's 1997 Form 10-K (including related exhibits) and Windy
Hill's 1997 Form 10-K.
2. INVENTORIES
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
COMBINED
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C>
Raw materials............................................... $11,466
Packaging materials......................................... 24,007
Finished goods.............................................. 17,428
-------
$52,901
=======
</TABLE>
3. LONG TERM DEBT
On April 13, 1998, the Company amended its senior credit facility pursuant
to the Second Amended and Restated Revolving Credit and Term Loan Agreement (the
"Senior Credit Facility"). Under the 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. The 'Revolving
Credit Facility' remained at $25,000.
F-25
<PAGE> 126
DOANE PET CARE COMPANY
NOTES TO SUPPLEMENTAL CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
On November 12, 1998 the Company refinanced the Senior Credit facility, a
Windy Hill bridge loan facility, Windy Hill Subordinated Notes and its Senior
Notes. See discussion of Subsequent Events in Note 6 below.
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 issuance 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 were
drawn down by the Company. The Bonds bear interest at the rate of 6.25%, and
accrued interest is 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 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. It is anticipated that DPC Funding Corp. will
attempt to sell the Bonds after information regarding the merger of the Company
and Windy Hill Pet Food Holdings, Inc. ("Windy Hill"), and the associated
refinancing of such companies, is completed. See Subsequent Events below.
4. ADOPTION OF ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. Comprehensive income includes
all changes in a company's equity, including, among other things, foreign
currency translation adjustments, notes receivable from employee stock ownership
plans, deferred gains (losses) on hedging activities, and unrealized gains
(losses) on marketable securities classified as available-for-sale. 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
SEPTEMBER 30, 1998
------------------
(UNAUDITED)
<S> <C>
Net income applicable to common stock....................... $1,069
Other comprehensive income.................................. 472
------
Total comprehensive income.................................. $1,541
======
</TABLE>
5. BUSINESS ACQUISITION
On April 17, 1998, the Company purchased 100% of the outstanding stock of
Ipes Iberica, S.A. ("Ipes") for approximately $26,190 (net of cash purchased of
$1,900) and the assumption of indebtedness of $1,900. Ipes is a private label
pet food manufacturer located in Spain with 1997 net sales of $21,100. The
Company financed the Ipes acquisition through non-recourse borrowings in Spain
for $21,300 of the purchase price and borrowings under the Company's Senior
Credit Facility for the remainder.
On August 3, 1998, Doane Products Company's parent, Enterprises, acquired
Windy Hill Pet Food Holdings, Inc. ("Holdings"), the parent company of Windy
Hill Pet Food Company, Inc. ("Windy Hill"), for approximately 1,600 shares of
common stock of Enterprises and the assumption of approximately $183,500 of
indebtedness. On November 12, 1998, Enterprises contributed the shares of Windy
Hill to Doane Products Company, and Windy Hill was immediately merged with and
into Doane Products Company, which subsequently changed its name to Doane Pet
Care Company, and is the surviving entity after the merger.
F-26
<PAGE> 127
DOANE PET CARE COMPANY
NOTES TO SUPPLEMENTAL CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
Both acquisitions were accounted for under the purchase method of
accounting. Accordingly, acquired assets and assumed liabilities were recorded
at their estimated fair values, which resulted in goodwill of approximately
$13,800 and $19,000 for the acquisition of Ipes and Windy Hill, respectively.
Goodwill is being amortized over 40 years.
Had the acquisitions taken place on January 1, 1998, the Company's
unaudited pro forma net sales, income before income taxes, and net income for
the nine months ended September 30, 1998 would have been as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
(UNAUDITED)
<S> <C>
Net sales................................................... $641,674
Income before income taxes.................................. 2,034
Net loss.................................................... (567)
</TABLE>
6. SUBSEQUENT EVENT
Concurrent with the Windy Hill merger transaction discussed in Note 5, the
Company refinanced its capital structure with a series of transactions (the
"Transactions") which included the following:
- An offer to exchange to certain institutional investors (the "Exchange
Offer") for its 9 3/4% Senior Subordinated Notes due 2007 (the "Exchange
Notes") the 9 3/4% Senior Subordinated Notes due 2007 of Windy Hill (the
"Windy Hill Notes") and a limited amount of the outstanding 10 5/8%
Senior Notes due 2006 of the Company;
- An offer to purchase (the "Doane Offer to Purchase") for cash all
outstanding 10 5/8% Senior Notes due 2006 of the Company (the "Doane
Notes");
- An offer to purchase (the "Change of Control Offer") for cash all
outstanding Windy Hill Notes due to a change in control of Windy Hill;
- Establishment by the Company of a bridge facility (the "Bridge Notes")
providing for up to $120,000 of financing for the purchase of Windy Hill
Notes pursuant to the Change of Control Offer, of which $47,324 was drawn
on October 15, 1998;
- The establishment by the Company of a new $345,000 credit facility (the
"New Credit Facility") providing for $245,000 of term loan borrowings and
$100,000 of revolving loan borrowings of which $292,000 in aggregate
principal amount was drawn at the closing of the Transactions;
- Obtaining the consent of the holders of 14.25% Senior Exchangeable
Preferred Stock due 2007 of the Company to the merger of Windy Hill into
the Company.
The primary uses of the securities issued in and the funds provided by, the
Transactions included:
- The repurchase of Windy Hill Notes pursuant to the Change of Control
Offer;
- The repurchase of Doane Notes pursuant to the Doane Offer to Purchase;
- The exchange of Windy Hill Notes and a limited amount of Doane Notes into
$150,000 of Exchange Notes pursuant to the Exchange Offer;
- The repayment of $95,779 in aggregate principal amounts outstanding under
the existing credit facilities of the Company and or Windy Hill;
- The repayment of $47,324 in principal amounts outstanding under the
Bridge Notes;
- The distribution by the Company to Enterprises of $13,449 for the
repayment of all of the outstanding principal amount and accrued interest
on convertible subordinated promissory notes of Holdings;
F-27
<PAGE> 128
DOANE PET CARE COMPANY
NOTES TO SUPPLEMENTAL CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
- The repayment of approximately $7,600 in accrued interest on all retired
debt;
- The payment of approximately $33,128 in prepayment premiums and discounts
related to the Doane Offer to Purchase, the Change of Control Offer and
the Exchange Offer;
- The payment of approximately $8,770 of advisory, legal, consent and other
fees and expenses related to the Transactions.
7. CAPITAL CONTRIBUTIONS
The Company received capital contributions of $1,347 from DPCAC, its parent
company, during the nine-month period ended September 30, 1998.
On November 12, 1998, Holdings was liquidated and DPCAC contributed the
shares of Windy Hill to the Company, which included $170,400 of the indebtedness
assumed by DPCAC in connection with the acquisition of Holdings. (See note 5).
8. 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 and does not apply
to 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 which can be caused by extreme weather conditions such as
drought and heat. Doane 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.
9. NON-RECURRING TRANSITION EXPENSE
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.
F-28
<PAGE> 129
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-29
<PAGE> 130
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-30
<PAGE> 131
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-31
<PAGE> 132
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-32
<PAGE> 133
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-33
<PAGE> 134
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-34
<PAGE> 135
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-35
<PAGE> 136
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-36
<PAGE> 137
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-37
<PAGE> 138
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-38
<PAGE> 139
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-39
<PAGE> 140
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-40
<PAGE> 141
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-41
<PAGE> 142
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-42
<PAGE> 143
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-43
<PAGE> 144
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-44
<PAGE> 145
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-45
<PAGE> 146
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-46
<PAGE> 147
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-47
<PAGE> 148
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-48
<PAGE> 149
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-49
<PAGE> 150
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-50
<PAGE> 151
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-51
<PAGE> 152
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-52
<PAGE> 153
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-53
<PAGE> 154
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-54
<PAGE> 155
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-55
<PAGE> 156
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-56
<PAGE> 157
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-57
<PAGE> 158
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-58
<PAGE> 159
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-59
<PAGE> 160
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-60
<PAGE> 161
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-61
<PAGE> 162
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-62
<PAGE> 163
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-63
<PAGE> 164
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 VI of the registrant's 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 Bylaws were adopted or as may be thereafter
amended.
Section 5 of Article VI of the registrant's 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 Tenth of the registrant's Certificate of Incorporation contains such a
provision.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Incorporation of Doane Pet Care Company
(incorporated by reference to Exhibit 3.1 to Doane Pet
Care Company's Registration Statement on Form S-1, Reg.
No. 33-98110 (the "Form S-1"))
3.2 -- Certificate of Amendment to Certificate of Incorporation
of Doane Pet Care Company (incorporated by reference to
Exhibit 3.2 to Doane Pet Care Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (the "1997
Form 10-K"))
3.3 -- Bylaws of Doane Pet Care Company (incorporated by
reference to Exhibit 3.2 to the Form S-1)
4.1 -- Indenture dated November 12, 1998 between Doane Pet Care
Company and Wilmington Trust Company (incorporated by
reference to Exhibit 10.10 of Doane Pet Care Enterprises,
Inc. Registration Statement on Form S-1, Reg. No. 333-
61027 ("Enterprises' Form S-1"))
**4.2 -- Registration Agreement among Doane Pet Care Company,
Donaldson, Lufkin & Jenrette Securities Corporation and
Chase Securities Inc. dated November 12, 1998
*5.1 -- Opinion of Vinson & Elkins L.L.P.
</TABLE>
II-1
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
9.1 -- Amended and Restated Investors' Agreement dated as of
August 3, 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 9.1 of Enterprises' Form S-1)
**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
10.1 -- Early Retirement Agreement and Release effective as of
June 30, 1998 between Doane Pet Care Company and Bob L.
Robinson (incorporated by reference to Exhibit 10.1 of
Enterprises' Form S-1)
10.2 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and Douglas J. Cahill (incorporated by
reference to Exhibit 10.3 to the 1997 Form 10-K)
10.3 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and Thomas R. Heidenthal (incorporated
by reference to Exhibit 10.4 to the 1997 Form 10-K)
**10.4 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and Richard D. Wohlschlaeger
**10.5 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and Richard A. Hannasch
**10.6 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and David L. Horton
10.7 -- Doane Pet Care Enterprises, Inc.'s 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to Doane Pet
Care Company's 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 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 1997 Form 10-K)
10.10 -- 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, Inc. on Form
10-Q filed on May 12, 1998)
10.11 -- Revolving Credit and Term Loan Agreement dated as of
November 12, 1998 among Doane Pet Care Company, Doane Pet
Care Enterprises, Inc., 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
(incorporated by reference to Exhibit 10.11 of
Enterprises' Form S-1)
**21.1 -- List of subsidiaries of Doane Pet Care Company
**23.1 -- Consent of KPMG LLP
*23.2 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1 hereto)
</TABLE>
II-2
<PAGE> 166
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
24.1 -- Powers of Attorney (included on the signature page of
this registration statement)
*25.1 -- Form of Statement of Eligibility of Trustee
**27.1 -- Financial Data Schedule
*99.1 -- Form of Letter of Transmittal
</TABLE>
- ------------------------------
* To be filed by amendment.
** Filed herewith.
(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 22. 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 of expenses
incurred or paid by a director, officer or controlling person of 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.
II-3
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 19th day of January, 1999.
DOANE PET CARE COMPANY
By /s/ THOMAS R. HEIDENTHAL
-----------------------------------
Thomas R. Heidenthal
Senior Vice President and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglas J. Cahill and Thomas R. Heidenthal, or
either of them, his true and lawful attorney-in-fact and agent, with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement and any registration statement for the same
offering filed pursuant to Rule 462 under the Securities Act of 1933, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ GEORGE B. KELLY Chairman of the Board and Director January 19, 1999
- -----------------------------------------------------
George B. Kelly
/s/ DOUGLAS J. CAHILL Chief Executive Officer, President January 19, 1999
- ----------------------------------------------------- and Director (Principal
Douglas J. Cahill Executive Officer)
/s/ THOMAS R. HEIDENTHAL Senior Vice President and Chief January 19, 1999
- ----------------------------------------------------- Financial Officer (Principal
Thomas R. Heidenthal Financial Officer and Principal
Accounting Officer)
/s/ PETER T. GRAUER Director January 19, 1999
- -----------------------------------------------------
Peter T. Grauer
/s/ M. WALID MANSUR Director January 19, 1999
- -----------------------------------------------------
M. Walid Mansur
/s/ BOB L. ROBINSON Director January 19, 1999
- -----------------------------------------------------
Bob L. Robinson
/s/ JEFFREY C. WALKER Director January 19, 1999
- -----------------------------------------------------
Jeffrey C. Walker
/s/ RAY CHUNG Director January 19, 1999
- -----------------------------------------------------
Ray Chung
Director January 19, 1999
- -----------------------------------------------------
Stephen C. Sherrill
</TABLE>
II-4
<PAGE> 168
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Incorporation of Doane Pet Care Company
(incorporated by reference to Exhibit 3.1 to Doane Pet
Care Company's Registration Statement on Form S-1, Reg.
No. 33-98110 (the "Form S-1"))
3.2 -- Certificate of Amendment to Certificate of Incorporation
of Doane Pet Care Company (incorporated by reference to
Exhibit 3.2 to Doane Pet Care Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (the "1997
Form 10-K"))
3.3 -- Bylaws of Doane Pet Care Company (incorporated by
reference to Exhibit 3.2 to the Form S-1)
4.1 -- Indenture dated November 12, 1998 between Doane Pet Care
Company and Wilmington Trust Company (incorporated by
reference to Exhibit 10.10 of Doane Pet Care Enterprises,
Inc. Registration Statement on Form S-1, Reg. No. 333-
61027 ("Enterprises' Form S-1"))
**4.2 -- Registration Agreement among Doane Pet Care Company,
Donaldson, Lufkin & Jenrette Securities Corporation and
Chase Securities Inc. dated November 12, 1998
*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 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 9.1 of Enterprises' Form S-1)
**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
10.1 -- Early Retirement Agreement and Release effective as of
June 30, 1998 between Doane Pet Care Company and Bob L.
Robinson (incorporated by reference to Exhibit 10.1 of
Enterprises' Form S-1)
10.2 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and Douglas J. Cahill (incorporated by
reference to Exhibit 10.3 to the 1997 Form 10-K)
10.3 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and Thomas R. Heidenthal (incorporated
by reference to Exhibit 10.4 to the 1997 Form 10-K)
**10.4 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and Richard D. Wohlschlaeger
**10.5 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and Richard A. Hannasch
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
**10.6 -- Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and David L. Horton
10.7 -- Doane Pet Care Enterprises, Inc.'s 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to Doane Pet
Care Company's 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 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 1997 Form 10-K)
10.10 -- 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, Inc. on Form
10-Q filed on May 12, 1998)
10.11 -- Revolving Credit and Term Loan Agreement dated as of
November 12, 1998 among Doane Pet Care Company, Doane Pet
Care Enterprises, Inc., 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
(incorporated by reference to Exhibit 10.11 of
Enterprises' Form S-1)
**21.1 -- List of subsidiaries of Doane Pet Care Company
**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 (included on the signature page of
this registration statement)
*25.1 -- Form of Statement of Eligibility of Trustee
**27.1 -- Financial Data Schedule
*99.1 -- Form of Letter of Transmittal
</TABLE>
- ------------------------------
* To be filed by amendment.
** Filed herewith.
<PAGE> 1
EXHIBIT 4.2
EXECUTION COPY
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated as of November 12, 1998
among
DOANE PET CARE COMPANY,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
and
CHASE SECURITIES INC.
- --------------------------------------------------------------------------------
<PAGE> 2
This Registration Rights Agreement (the "Agreement") is made and
entered into as of November 12, 1998 by and between DOANE PET CARE COMPANY, a
Delaware corporation (the "Issuer"), and DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION and CHASE SECURITIES INC. (the "Co-Dealer Managers"). This Agreement
is being entered into by the Co-Dealer Managers for the benefit of the holders
of $150 million of the 9 3/4% Senior Subordinated Notes due 2007 of the Issuer
acquired by such holders on November 12, 1998.
The Issuer and the Co-Dealer Managers hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
Act: The Securities Act of 1933, as amended, and the rules and
regulations promulgated by the Commission pursuant thereto.
Broker-Dealer: Any broker or dealer registered under the Exchange Act.
Business Day: As that term is defined in the Indenture.
Co-Dealer Managers: Donaldson, Lufkin & Jenrette Securities Corporation
and Chase Securities Inc.
Commission: The Securities and Exchange Commission.
Consummate: When used to qualify the term "Exchange Offer" shall mean
validly and lawfully to issue and deliver the Exchange Securities pursuant to
the Exchange Offer for all Transfer Restricted Securities validly tendered and
not validly withdrawn pursuant thereto in accordance with the terms of this
Agreement.
Effectiveness Target Date: As defined in Section 5 of this Agreement.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Commission pursuant thereto.
Exchange Offer: The registration under the Act by the Issuer of the New
Notes pursuant to a Registration Statement pursuant to which the Issuer offers
the Holders of all outstanding Old Notes that are Transfer Restricted Securities
the opportunity to exchange all such outstanding Old Notes that are Transfer
Restricted Securities held by such Holders for New Notes in an aggregate
principal amount equal to the aggregate principal amount of the Old Notes that
are Transfer Restricted Securities tendered in such exchange offer by such
Holders.
Exchange Offer Registration Statement: The Registration Statement
relating to the Exchange Offer, including the related Prospectus.
<PAGE> 3
Holders: As defined in Section 2(b) of this Agreement.
Indenture: The Indenture, dated as of November 12, 1998, by and between
the Issuer and Wilmington Trust as trustee (the "Trustee"), pursuant to which
the Notes are to be issued, as such Indenture is amended or supplemented from
time to time in accordance with its terms.
Interest Payment Date: As defined in the Notes.
Issue Date: The date the Old Notes are originally issued (November 12,
1998).
NASD: National Association of Securities Dealers, Inc.
New Notes: The 9 3/4% Senior Subordinated Notes due 2007 [,SERIES B],
of the Issuer to be issued pursuant to the Indenture in connection with the
Exchange Offer, having terms substantially identical in all material respects to
the Old Notes (except that the New Notes will not contain terms with respect to
transfer restrictions) and evidencing the same debt as the Old Notes.
Notes: Old Notes and New Notes.
Old Notes: The 9 3/4% Senior Subordinated Notes due 2007 [,SERIES A] of
the Issuer issued pursuant to the Indenture on the Issue Date.
Participating Broker Dealer: As defined in Section 6(a)(iii) of this
Agreement.
Person: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
Prospectus: The prospectus included in any Registration Statement, as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Transfer Restricted Securities or the New
Notes covered by such Registration Statement, and all other amendments and
supplements thereto, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference, if any, in
such Prospectus.
Registration Default: As defined in Section 5 of this Agreement.
Registration Statement: Any registration statement of the Issuer
relating to (a) an offering of New Notes pursuant to an Exchange Offer or (b)
the registration for resale of Transfer Restricted Securities pursuant to the
Shelf Registration Statement that is filed pursuant to the provisions of this
Agreement, in each case, including the Prospectus included therein, all
amendments and supplements thereto (including pre- and post-effective
amendments) and all exhibits and material incorporated by reference or deemed to
be incorporated by reference, if any, therein.
-2-
<PAGE> 4
Shelf Filing Deadline: As defined in Section 4(a) of this Agreement.
Shelf Registration Statement: As defined in Section 4(a) of this
Agreement.
Subsidiary: With respect to any Person, any other Person of which a
majority of the equity ownership or the voting securities is at the time owned,
directly or indirectly, by such Person or by one or more other subsidiaries of
such Person or a combination thereof.
TIA: The Trust Indenture Act of 1939, as amended, as in effect on the
date of the Indenture.
Transfer Restricted Securities: Each Old Note until, with respect to
each such Old Note, the earliest to occur of (i) the date on which each such Old
Note has been exchanged by a Person other than a Broker-Dealer for a New Note in
the Exchange Offer, (ii) following the exchange by a Broker-Dealer in the
Exchange Offer of an Old Note for a New Note, the date on which such New Note is
sold to a purchaser who receives from such Broker-Dealer on or prior to the date
of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Old Note has been
effectively registered under the Act and disposed of in accordance with the
Shelf Registration Statement or (iv) the date on which such Old Note is
distributed to the public pursuant to Rule 144 under the Act.
Underwritten Registration or Underwritten Offering: A registration in
which securities of the Issuer are sold to an underwriter for reoffering to the
public pursuant to an effective Registration Statement.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities entitled to the
benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. A Person is deemed to be
a holder of Transfer Restricted Securities (each, a "Holder") whenever such
Person beneficially owns Transfer Restricted Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
(a) To the extent not prohibited by applicable law or interpretation of
the staff of the Commission, the Issuer shall use its reasonable best efforts to
(i) cause to be filed with the Commission as soon as practicable, a Registration
Statement under the Act relating to the New Notes and the Exchange Offer and
(ii) cause such Registration Statement to be declared effective by the
Commission as soon as practicable. In connection with the foregoing, the Issuer
shall use its reasonable best efforts to (A) file all pre-effective amendments
to such Registration Statement as may be necessary to cause such Registration
Statement to become effective, (B) if applicable, file a post-effective
amendment to such Registration Statement pursuant to Rule 430A under the Act,
(C) cause all necessary filings in connection with the registration and
qualification of the New Notes
-3-
<PAGE> 5
to be made under the Blue Sky laws of such jurisdictions as are necessary to
permit Consummation of the Exchange Offer (provided, however, that the Issuer
shall not be obligated to qualify as a foreign corporation in any jurisdiction
in which it is not so qualified or to take any action that would subject it to
general service of process or taxation in any jurisdiction where it is not so
subject, except service of process with respect to the offering and sale of the
New Notes) and (D) upon the effectiveness of such Registration Statement,
commence the Exchange Offer and use its reasonable best efforts to issue New
Notes in exchange for all Old Notes tendered in the Exchange Offer, unless the
Exchange Offer would not be permitted by any applicable law or interpretation of
the staff of the Commission. The Exchange Offer shall be on the appropriate form
permitting registration of the New Notes to be offered in exchange for the
Transfer Restricted Securities and to permit resales of New Notes held by
Broker-Dealers as contemplated by Section 3(c) below. If, after such Exchange
Offer Registration Statement initially is declared effective by the Commission,
the Exchange Offer or the issuance of New Notes under the Exchange Offer or the
resale of New Notes received by Broker-Dealers in the Exchange Offer as
contemplated by Section 3(c) below is interfered with by any stop order,
injunction or other order or requirement of the Commission or any other
governmental agency or court, such Registration Statement shall be deemed not to
have become effective for purposes of this Agreement during the period that such
stop order, injunction or other similar order or requirement shall remain in
effect.
(b) The Issuer shall cause the Exchange Offer Registration Statement to
be effective continuously and shall keep the Exchange Offer open for a period of
not less than 30 days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the Holders. The Issuer shall cause
the Exchange Offer to comply with all applicable federal and state securities
laws. The Issuer shall only offer to exchange New Notes for Old Notes in the
Exchange Offer, and only the New Notes shall be registered under the Exchange
Offer Registration Statement.
(c) The Issuer shall indicate in a "Plan of Distribution" section
contained in the Prospectus included in the Exchange Offer Registration
Statement that any Broker-Dealer that holds Old Notes that are Transfer
Restricted Securities and that were acquired for its own account as a result of
market-making activities or other trading activities (other than Transfer
Restricted Securities acquired directly from the Issuer), may exchange such Old
Notes pursuant to the Exchange Offer; provided, however, that such Broker-Dealer
may be deemed to be an "underwriter" within the meaning of the Act and must,
therefore, deliver a prospectus meeting the requirements of the Act in
connection with any resales of the New Notes received by such Broker-Dealer in
the Exchange Offer. Such "Plan of Distribution" section shall allow the use of
the Prospectus by all Persons subject to the prospectus delivery requirements of
the Act, including Participating Broker-Dealers (as defined in Section 6(a)(ii)
hereof), and shall also contain all other information with respect to such
resales by Broker-Dealers that the Commission may require to permit such resales
pursuant thereto, but such "Plan of Distribution" shall not name any such
Broker-Dealer or disclose the amount of Notes held by any such Broker-Dealer
except to the extent required by the Commission.
(d) The Issuer may require each Holder of Transfer Restricted
Securities as a condition to its participation in the Exchange Offer to
represent to the Issuer and its counsel in writing (which
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may be contained in the applicable letter of transmittal) that at the time of
consummation of the Exchange Offer (i) any New Notes received by such holder
will be acquired in the ordinary course of its business, (ii) such holder will
have no arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the New Notes, (iii)
that such holder is not an "affiliate" of the Issuer, as defined in Rule 405 of
the Securities Act, and (iv) if the holder is not a broker-dealer or is a
broker-dealer but will not receive New Notes for its own account in exchange for
the Old Notes, neither the holder nor any such other person is engaged in or
intends to participate in a distribution of the New Notes. If the Holder is an
"affiliate," that it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the Holder is a
broker-dealer that will receive New Notes for its own account in exchange for
Old Notes, it will represent that the Old Notes to be exchanged for the New
Notes were acquired by it as a result of market-making activities or other
trading activities, and acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such New
Notes. It is understood that by acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes, the Holder is not admitting that
it is an "underwriter" within the meaning of the Securities Act.
The Issuer shall use its reasonable best efforts to keep the Exchange
Offer Registration Statement continuously effective, supplemented and amended as
required by the provisions of Section 6(c) below to the extent necessary to
ensure that it is available for resales of New Notes acquired by Broker-Dealers
for their own accounts as a result of market-making activities or other trading
activities, and to ensure that it conforms with the requirements of this
Agreement, the Act and the policies, rules and regulations of the Commission as
announced from time to time for such period of time as such Broker-Dealers must
comply with prospectus delivery requirements of the Exchange Act in order to
resell the New Notes. The Issuer shall provide sufficient copies of the latest
version of such Prospectus to Broker-Dealers promptly upon request at any time
during such period in order to facilitate such resales.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Issuer is not required to file an
Exchange Offer Registration Statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or applicable
interpretation of the staff of the Commission or (ii) for any reason the
Exchange Offer Registration Statement is not declared effective within 150 days
after the date of original issuance of the Old Notes or the Issuer does not
consummate the Exchange Offer within 45 days following the effectiveness date of
the Exchange Offer Registration Statement, or (iii) any Holder of Transfer
Restricted Securities shall notify the Issuer in writing within 20 Business Days
of the commencement of the Exchange Offer that such Holder, based on the advice
of counsel, (A) is prohibited by applicable law or Commission policy from
participating in the Exchange Offer, or (B) will not receive freely tradeable
New Notes in the Exchange Offer other than by reason of such Holder being an
affiliate of the Issuer (it being understood that the requirement that a
Participating Broker-Dealer deliver the prospectus contained in the Exchange
Offer Registration Statement in connection with sales of New Notes shall not
result in such New Notes being not
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<PAGE> 7
"freely tradeable"), then the Issuer shall use its reasonable best efforts to
(x) cause to be filed a shelf registration statement pursuant to Rule 415 under
the Act, which may be an amendment to the Exchange Offer Registration Statement
(in either event, the "Shelf Registration Statement"), as promptly as
practicable, which Shelf Registration Statement shall provide for resales of all
Transfer Restricted Securities the Holders of which shall have provided the
information required pursuant to Section 4(b) of this Agreement, and (y) use its
reasonable best efforts to cause such Shelf Registration Statement to be
declared effective by the Commission. The Issuer shall use its reasonable best
efforts to keep such Shelf Registration Statement continuously effective,
supplemented and amended as required by the provisions of Sections 6(b) and (c)
of this Agreement to the extent necessary to ensure that it is available for
resales of Notes by the Holders of Transfer Restricted Securities entitled to
the benefit of this Section 4(a) and to ensure that it conforms with the
requirements of this Agreement, the Act and the policies, rules and regulations
of the Commission as announced from time to time, for a continuous period of two
years following the date on which such Shelf Registration Statement becomes
effective under the Act or such shorter period that will terminate when all the
Notes covered by the Shelf Registration Statement have been sold pursuant to
such Shelf Registration Statement.
(b) Provision by Holders of Certain Information in Connection with the
Shelf Registration Statement. No Holder of Transfer Restricted Securities may
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Issuer in writing, within 15 business days after receipt of a request
therefor, such information regarding such Holder as the Issuer may reasonably
request for use in connection with any Shelf Registration Statement or
Prospectus or preliminary Prospectus included in such Shelf Registration
Statement. Each Holder as to which any Shelf Registration Statement is being
effected agrees to furnish promptly to the Issuer all information required to be
disclosed to make the information previously furnished to the Issuer by such
Holder not materially misleading and to be bound by provisions of this
Agreement.
SECTION 5. SPECIAL INTEREST
If (i) the Exchange Offer Registration Statement has not been filed
with the Commission on or prior to the 90th day following the Issue Date, (ii)
the Exchange Offer Registration Statement has not been declared effective on or
prior to the 150th day following Issue Date, (iii) the Exchange Offer has not
been consummated on or prior to the 45th day following the effective date of the
Exchange Offer Registration Statement, (iv) a Shelf Registration Statement has
not been filed on or prior to 30 days after the obligation to do so arises, or
(v) after either the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective, such Registration Statement
thereafter ceases to be effective or usable (subject to certain exceptions) in
connection with resales of Notes in accordance with and during the periods
specified in the Registration Agreement (each such event referred to in clauses
(i) through (v), a "Registration Default"), the Issuer hereby agrees to pay
liquidated damages to each Holder of Transfer Restricted Securities in an amount
equal to the additional interest ("Special Interest") which will accrue on the
Old Notes and the New Notes (in addition to the stated interest on the Old Notes
and the New Notes) from and including the date on which any such Registration
Default shall occur to, but excluding, the date on
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which all Registration Defaults have been cured. Such Special Interest will
accrue at a rate of 0.5% per annum during the 90-day period immediately
following the occurrence of any Registration Default and shall increase by 0.25%
per annum at the end of each subsequent 90-day period, but in no event shall
such rate exceed 1.5% per annum. Notwithstanding the foregoing, the Issuer shall
not be required to pay Special Interest to each Holder of Transfer Restricted
Securities if the Registration Default arises from the failure of the Issuer to
file, or cause to become effective, a Shelf Registration Statement within the
time period required by Section 4 of this Agreement and such Registration
Default is by reason of the failure of the Holders to provide the information
regarding the Holders reasonably requested by the Issuer, the NASD or any other
regulatory agency having jurisdiction over any of the Holders at least 10
Business Days prior to such Registration Default. All accrued Special Interest
shall be paid by the Issuer to the Holders in the same manner in which payments
of other interest are made pursuant to the Indenture. Following the cure of all
Registration Defaults relating to any particular Transfer Restricted Securities,
the accrual of liquidated damages with respect to such Transfer Restricted
Securities will cease.
All obligations of the Issuer set forth in the preceding paragraph that
are outstanding with respect to any Transfer Restricted Security at the time
such security ceases to be a Transfer Restricted Security shall survive until
such time as all such obligations with respect to such Transfer Restricted
Security shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection with the
Exchange Offer, the Issuer shall comply with all of the provisions of Section
6(c) below, shall use its reasonable best efforts to effect such exchange to
permit the sale of Transfer Restricted Securities being sold in accordance with
the intended method or methods of distribution thereof, and shall comply with
all of the following provisions:
(i) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer
Restricted Securities shall furnish, upon the request of the Issuer,
prior to the Consummation of the Exchange Offer, a written
representation to the Issuer (which may be contained in the letter of
transmittal contemplated by the Exchange Offer Registration Statement)
to the effect that (A) it is not an affiliate of the Issuer, (B) it is
not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a
distribution of the New Notes to be issued in the Exchange Offer and
(C) it is acquiring the New Notes in its ordinary course of business.
In addition, all such Holders of Transfer Restricted Securities shall
otherwise cooperate in the Issuer's preparations for the Exchange
Offer.
(ii) The Issuer and the Co-Dealer Managers acknowledge that
the staff of the Commission has taken the position that any
broker-dealer that owns New Notes that were received by such
broker-dealer for its own account in the Exchange Offer (a
"Participating Broker-Dealer") may be deemed to be an "underwriter"
within the meaning of the Act and must deliver a prospectus meeting the
requirements of the Act in connection with any resale
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<PAGE> 9
of such New Notes (other than a resale of an unsold allotment resulting
from the original offering of the Notes).
The Issuer and the Co-Dealer Managers also acknowledge that it is the
Commission staff's position that if the Prospectus contained in the Exchange
Offer Registration Statement includes a plan of distribution containing a
statement to the above effect and the means by which Participating
Broker-Dealers may resell the New Notes, without naming the Participating
Broker-Dealers or specifying the amount of New Notes owned by them, such
Prospectus may be delivered by Participating Broker-Dealers to satisfy their
prospectus delivery obligations under the Act in connection with resales of New
Notes for their own accounts, so long as the Prospectus otherwise meets the
requirements of the Act.
(b) Shelf Registration Statement. If a Shelf Registration Statement is
required by this Agreement, the Issuer shall comply with all the provisions of
Section 6(c) of this Agreement and shall use its reasonable best efforts to
effect such registration to permit the sale of the Transfer Restricted
Securities being sold in accordance with the intended method or methods of
distribution of such Transfer Restricted Securities and, in connection
therewith, the Issuer will as expeditiously as possible prepare and file with
the Commission a Shelf Registration Statement relating to the registration on
any appropriate form under the Act, which form shall be available for the sale
of the Transfer Restricted Securities in accordance with the intended method or
methods of distribution of such Transfer Restricted Securities.
(c) General Provisions. In connection with any Registration Statement
and any Prospectus required by this Agreement to permit the sale or resale of
Transfer Restricted Securities (including, without limitation, any Registration
Statement and the related Prospectus, to the extent that the same are required
to be available to permit resales of Notes by Broker-Dealers), the Issuer shall:
(i) use its reasonable best efforts to keep such Registration
Statement continuously effective for the applicable time period
required hereunder; upon the occurrence of any event that would cause
any such Registration Statement or the Prospectus contained therein (A)
to contain a material misstatement or omission or (B) not to be
effective and usable for resale of Transfer Restricted Securities
during the period required by this Agreement, the Issuer shall promptly
notify the Holders to suspend use of the Prospectus, and the Holders
shall suspend use of the Prospectus, and such Holders shall not
communicate non-public information to any third party, in violation of
the securities laws, until the Issuer has made an appropriate amendment
to such Registration Statement, in the case of clause (A), correcting
any such misstatement or omission, and, in the case of either clause
(A) or (B), the Issuer shall use its reasonable best efforts to cause
such amendment to be declared effective and such Registration Statement
and the related Prospectus to become usable for their intended
purpose(s) as soon as practicable thereafter;
(ii) prepare and file with the Commission such amendments and
post-effective amendments to such Registration Statement as may be
necessary to keep the Registration
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Statement effective for the applicable period set forth in Section 3 or
4 of this Agreement, as applicable, or such shorter period as will
terminate when all Transfer Restricted Securities covered by such
Registration Statement have been sold; cause the Prospectus to be
supplemented by any required Prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 under the Act during the
applicable time period required hereunder and to comply fully with the
applicable provisions of Rules 424 and 430A under the Act in a timely
manner; and comply with the provisions of the Act and the Exchange Act
with respect to the disposition of all Transfer Restricted Securities
covered by such Registration Statement during such period in accordance
with the intended method or methods of distribution by the sellers of
such securities set forth in such Registration Statement as so amended
or in such Prospectus as so supplemented;
(iii) advise the underwriter(s), if any, and, in the case of a
Shelf Registration Statement, each of the selling Holders promptly and,
if requested by such Persons, to confirm such advice in writing, (A)
when the Prospectus or any prospectus supplement or post-effective
amendment has been filed and, with respect to any Registration
Statement or any post-effective amendment thereto, when the same has
become effective, (B) of any request by the Commission for amendments
to the Registration Statement or amendments or supplements to the
Prospectus or for additional information relating to such Registration
Statement or Prospectus, (C) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement
under the Act or of the suspension by any state securities commission
of the qualification of the Transfer Restricted Securities for offering
or sale in any jurisdiction, or the initiation of any proceeding for
any of the preceding purposes, (D) of the existence of any fact or the
happening of any event that makes any statement of a material fact made
in the Registration Statement, the Prospectus, any amendment or
supplement to such Registration Statement or Prospectus, as the case
may be, or any document incorporated by reference in such Registration
Statement or Prospectus untrue in any material respect, or that
requires the making of any additions to or changes in the Registration
Statement or the Prospectus in order to make the statements in such
Registration Statement or Prospectus not misleading and that in the
case of the Prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading. If at any
time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, or any state securities
commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the
Transfer Restricted Securities under state securities or Blue Sky laws,
the Issuer shall use its reasonable best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time;
(iv) furnish to each of the underwriter(s), if any, and, in
the case of a Shelf Registration Statement, each of the selling Holders
before filing with the Commission, copies of any Registration Statement
or any Prospectus included in such Registration Statement or Prospectus
or any amendments or supplements to any such Registration Statement or
Prospectus (including all documents incorporated by reference after the
initial
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filing of such Registration Statement), which documents will be subject
to the reasonable review of such underwriter(s), if any, and such
Holders for a period of at least five Business Days in the case of a
Registration Statement or Prospectus and for a period of at least two
Business Days in the case of any amendment or supplement thereto, and
the Issuer will not file any such Registration Statement or Prospectus
or any amendment or supplement to any such Registration Statement or
Prospectus, as the case may be, (including all such documents
incorporated by reference) to which any underwriter, or selling Holder
shall reasonably object on a timely basis after the receipt of such
Registration Statement or Prospectus.
(v) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus,
(a) provide copies of such document to the selling Holders and to the
underwriter(s), if any, (b) make the Issuer's representatives available
for discussion of such document and other customary due diligence
matters; provided that such discussion and due diligence shall be
coordinated on behalf of the selling Holders by one counsel designated
by and on behalf of such selling Holders and (c) include such
information in such document prior to the filing of such document as
such selling Holders or underwriter(s), if any, may reasonably request;
(vi) make available at reasonable times for inspection by the
selling Holders, any underwriter participating in any disposition
pursuant to such Registration Statement and any attorney or accountant
retained by such selling Holders or any of the underwriter(s), if any,
at the offices where normally kept, during reasonable business hours,
all relevant financial and other records, pertinent corporate documents
and properties of the Issuer and cause the Issuer's officers, directors
and employees to supply all information reasonably requested by any
such Holder, underwriter, attorney or accountant in connection with
such Registration Statement subsequent to the filing thereof and prior
to its effectiveness; provided, however, that such persons shall first
agree in writing with the Issuer that any information that is
reasonably and in good faith designated by the Issuer in writing as
confidential at the time of delivery of such information shall be kept
confidential by such persons, unless and to the extent that (i)
disclosure of such information is required by court or administrative
order or is necessary to respond to inquiries of regulatory
authorities, (ii) disclosure of such information is required by law
(including any disclosure requirements pursuant to federal securities
laws in connection with the filing of the Shelf Registration Statement
or the use of any Prospectus), (iii) such information becomes generally
available to the public other than as a result of a disclosure or
failure to safeguard such information by such person or (iv) such
information becomes available to such person from a source other than
the Issuer and its Subsidiaries and such source is not bound by a
confidentiality agreement;
(vii) if requested by a majority of the Holders or the
underwriter(s), if any, promptly incorporate in any Registration
Statement or Prospectus, pursuant to a supplement or post-effective
amendment if necessary, such information as such selling Holders and
underwriter(s), if any, may reasonably request and agree to have
included therein, including, without limitation, information relating
to the "Plan of Distribution" of the Transfer Restricted Securities,
information with respect to the principal amount of Transfer Restricted
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Securities being sold to such underwriter(s), the purchase price being
paid for Transfer Restricted Securities and any other terms of the
offering of the Transfer Restricted Securities to be sold in such
offering; and make all required filings of such Prospectus supplement
or post-effective amendment as soon as practicable after the Issuer is
notified of the matters to be incorporated in such Prospectus
supplement or post-effective amendment; provided, however, that the
Issuer shall not be required to take any action pursuant to this
Section 6(c)(vii) that would, in the opinion of counsel for the Issuer,
violate applicable law;
(viii) furnish to each underwriter, if any, and upon request
to the Issuer to a selling Holder without charge, at least one
conformed copy of the Registration Statement, as first filed with the
Commission, and of each amendment thereto, including, upon the request
of such Person, all documents incorporated by reference therein and all
exhibits to the extent requested (including exhibits incorporated
therein by reference);
(ix) deliver to each selling Holder, and each of the
underwriter(s), if any, without charge, as many copies of the
Prospectus (including each preliminary prospectus) and any amendment or
supplement thereto as such Persons may reasonably request; the Issuer
hereby consents to the use of the Prospectus and any amendment or
supplement to the Prospectus by each of the selling Holders and each of
the underwriter(s), if any, in connection with the offering and the
sale of the Transfer Restricted Securities in accordance with the terms
thereof and with U.S. Federal securities laws and Blue Sky laws covered
by the Prospectus or any amendment or supplement thereto;
(x) enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in underwritten
offerings of securities of this type) and take all such other
reasonable actions in connection therewith in order to expedite or
facilitate the disposition of the Transfer Restricted Securities
pursuant to any Registration Statement contemplated by this Agreement,
all as may be reasonably requested by any Holder of Transfer Restricted
Securities or the underwriter(s), if any, in connection with any sale
or resale of Transfer Restricted Securities pursuant to any
Registration Statement contemplated by this Agreement; and whether or
not an underwriting agreement is entered into and whether or not the
registration is an Underwritten Registration, the Issuer shall (i) make
such representations and warranties to the Holders of such Transfer
Restricted Securities and the underwriters, if any, with respect to the
business of the Issuer and its Subsidiaries (including with respect to
businesses or assets acquired or to be acquired by any of them), and
the Shelf Registration Statement, Prospectus and documents, if any,
incorporated or deemed to be incorporated by reference therein, in each
case, in form, substance and scope as are customarily made by the
Issuer to underwriters in underwritten offerings, and confirm the same
if and when customarily requested; (ii) obtain opinions of counsel to
the Issuer and updates thereof (which counsel and opinions (in form,
scope and substance) shall be reasonably satisfactory to the
underwriters, if any, and special counsel to the Holders of the
Transfer Restricted Securities being sold), addressed to each selling
Holder of Transfer Restricted Securities and each of the underwriters,
if any, covering the matters customarily covered in opinions requested
in underwritten offerings and such other matters as may be reasonably
requested by such underwriters, if any, and special counsel to
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Holders of Transfer Restricted Securities; (iii) use its reasonable
best efforts to obtain customary "cold comfort" letters and updates
thereof from the independent certified public accountants of the Issuer
(and, if necessary, any other independent certified public accountants
of any subsidiary of the Issuer or of any business acquired by the
Issuer or any such subsidiary for which financial statements and
financial data is, or is required to be, included in the Registration
Statement), addressed (where reasonably possible) to each selling
Holder of Transfer Restricted Securities and each of the underwriters,
if any, such letters to be in customary form and covering matters of
the type customarily covered in "cold comfort" letters in connection
with underwritten offerings; (iv) if an underwriting agreement is
entered into, the same shall contain indemnification provisions and
procedures no less favorable to the selling Holders and the
underwriters, if any, than those set forth in Section 8 hereof (or such
other provisions and procedures acceptable to the Holders of a majority
in aggregate principal amount of Transfer Restricted Securities covered
by such Shelf Registration Statement and the underwriters, if any); and
(v) deliver such documents and certificates as may be reasonably
requested by the Holders of a majority in aggregate principal amount of
the Transfer Restricted Securities being sold and the underwriters, if
any, to evidence the continued validity of the representations and
warranties made pursuant to clause (i) above and to evidence compliance
with any customary conditions contained in the underwriting agreement
or other agreement entered into by the Issuer;
If at any time the representations and warranties of the
Issuer contemplated in clause (x)(i) above cease to be true and
correct, the Issuer shall so advise the underwriter(s), if any, and
each selling Holder promptly and, if requested by any of them, shall
confirm such advice in writing;
(xi) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, the underwriter(s), if
any, and their respective counsel in connection with the registration
and qualification (or exemption from such registration or
qualification) of the Transfer Restricted Securities for offer and sale
under the securities or Blue Sky laws of such jurisdictions as the
selling Holders and underwriter(s), if any, may reasonably request in
writing and do any and all other acts or things necessary or advisable
to enable the disposition in such jurisdictions of the Transfer
Restricted Securities covered by the Registration Statement; provided,
however, that the Issuer shall not be required to register or qualify
as a foreign corporation where it is not now so qualified or to take
any action that would subject it to the service of process or to
taxation, other than as to matters and transactions relating to the
Registration Statement, in any jurisdiction where it is not now so
subject;
(xii) if a Shelf Registration is filed pursuant to Section
4(b), cooperate with the selling Holders of Registrable Securities and
the managing Underwriters, if any, to facilitate the timely preparation
and delivery of certificates representing Transfer Restricted
Securities to be sold, which certificates shall not bear any
restrictive legends and shall be in a form eligible for deposit with
The Depository Trust Company; and enable such Transfer Restricted
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<PAGE> 14
Securities to be in such denominations and registered in such names as
the managing Underwriters, if any, or Holders may reasonably request;
(xiii) use its reasonable best efforts to cause the Transfer
Restricted Securities covered by the Registration Statement to be
registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the seller or sellers of such
Transfer Restricted Securities or the underwriter(s), if any, to
consummate the disposition of such Transfer Restricted Securities,
subject to the proviso contained in clause (xi) above, and except as
may be required as a consequence of the nature of such seller's
business, in which case the Issuer will cooperate in all reasonable
respects with the filing of such Registration Statement and the
granting of such approvals as may be necessary to enable the seller to
consummate the disposition of such Transfer Restricted Securities:
(xiv) if any fact or event contemplated by Section
6(c)(iii)(D) of this Agreement shall exist or have occurred, prepare a
supplement or post-effective amendment to the Registration Statement or
related Prospectus or any document incorporated in such Registration
Statement or Prospectus by reference or file any other required
document so that, as thereafter delivered to the purchasers of Transfer
Restricted Securities, the Registration Statement will not contain an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading and the
Prospectus will not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading;
(xv) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of the Registration
Statement and provide the Trustee under the Indenture with printed
certificates for the Transfer Restricted Securities that are in a form
eligible for deposit with The Depository Trust Company;
(xvi) cooperate and assist in any filings required to be made
with the NASD and in the performance of any due diligence investigation
by any underwriter (including any "qualified independent underwriter"
that is required to be retained in accordance with the rules and
regulations of the NASD);
(xvii) otherwise use its reasonable best efforts to comply
with all applicable rules and regulations of the Commission in regards
to any Registration Statement, and make generally available to its
securityholders, as soon as practicable, a consolidated earning
statement of the Issuer meeting the requirements of Rule 158 (which
need not be audited) for the twelve-month period (A) commencing at the
end of any fiscal quarter in which Transfer Restricted Securities are
sold to underwriters in a firm commitment or reasonable best efforts
Underwritten Offering or (B) if not sold to underwriters in such an
offering, beginning with the first month of the Issuer's first fiscal
quarter commencing after the effective date of the Registration
Statement; and
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(xviii) cause the Indenture to be qualified under the TIA not
later than the effective date of the first Registration Statement
required by this Agreement, and, in connection therewith, cooperate
with the Trustee and the Holders to effect such changes to the
Indenture, if any, as may be required for such Indenture to be so
qualified in accordance with the terms of the TIA; and execute, and use
its reasonable best efforts to cause the Trustee to execute, all
customary documents that may be required to effect such changes and all
other forms and documents required to be filed with the Commission to
enable such Indenture to be so qualified in a timely manner.
Each Holder agrees by acquisition of a Transfer Restricted Security
that, upon receipt of any notice from the Issuer of the existence of any fact of
the kind described in Section 6(c)(iii)(D) of this Agreement, such Holder will
forthwith discontinue disposition of Transfer Restricted Securities pursuant to
the applicable Registration Statement until such Holder's receipt of the copies
of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) of
this Agreement, or until it is advised in writing (the "Advice") by the Issuer
that the use of the Prospectus may be resumed, and has received copies of any
additional or supplemental filings that are incorporated by reference in the
Prospectus. If so directed by the Issuer, each Holder will deliver to the Issuer
(at the Issuer's expense) all copies, other than permanent file copies then in
such Holder's possession, of the Prospectus covering such Transfer Restricted
Securities that was current at the time of receipt of such notice. In the event
that the Issuer shall give any such notice, the time period regarding the
effectiveness of such Registration Statement set forth in Section 3 or 4 of this
Agreement, as applicable, shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 6(c)(iii)(D) of this Agreement to and including the date when each
selling Holder covered by such Registration Statement shall have received the
copies of the supplemented or amended Prospectus contemplated by Section
6(c)(xv) of this Agreement or shall have received the Advice.
SECTION 7. REGISTRATION EXPENSES
All fees and expenses incident to the Issuer's performance of or
compliance with this Agreement will be borne by the Issuer regardless of whether
a Registration Statement becomes effective, including without limitation: (i)
all registration and filing fees and expenses (including filings made with the
NASD (and, if applicable, the fees and expenses of any "qualified independent
underwriter" and its counsel that may be required by the rules and regulations
of the NASD)); (ii) all fees and expenses of compliance with federal securities
and state Blue Sky or securities laws; (iii) all expenses of printing (including
printing certificates for the New Notes to be issued in the Exchange Offer and
printing of Prospectuses); (iv) all fees and disbursements of counsel for the
Issuer; and (v) all fees and disbursements of independent certified public
accountants of the Issuer (including the expenses of any special audit and
comfort letters required by or incident to such performance).
The Issuer will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by it and
all expenses of legal counsel.
-14-
<PAGE> 16
Notwithstanding the foregoing or anything in this Agreement to the
contrary, each Holder of Transfer Restricted Notes shall pay all underwriting
discounts and commissions of any underwriters with respect to any Notes sold by
or on behalf of it and all expenses of legal counsel.
SECTION 8. INDEMNIFICATION
(a) The Issuer agrees to indemnify and hold harmless (i) each Holder of
Transfer Restricted Securities and each Participating Broker Dealer, (ii) each
person, if any, who controls any of the foregoing within the meaning of Section
15 of the Act or Section 20 of the Exchange Act (any of the persons referred to
in this clause (ii) being hereinafter referred to as a "controlling person") and
(iii) its agents, employees, officers and directors and the agents, employees,
officers and directors of any such controlling person (collectively, the
"Indemnified Persons") from and against any and all losses, liabilities, claims,
damages and expenses whatsoever (including but not limited to reasonable
attorneys' fees and expenses) to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the Issuer will not be liable in any such case to the extent, but only to
the extent, that any such loss, liability, claim, damage or expense arises out
of or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Issuer by or on behalf of any
Indemnified Person relating to such Indemnified Person expressly for use
therein. This indemnity agreement will be in addition to any liability that the
Issuer may otherwise have, including, but not limited to, liability under this
Agreement.
If any action is brought against any Indemnified Persons or any such
person in respect of which indemnity may be sought against the Issuer pursuant
to the foregoing paragraph, such Indemnified Persons or such person shall
promptly notify the indemnifying party in writing of the institution of such
action and the indemnifying party shall assume the defense of such action,
including the employment of counsel reasonably satisfactory to such indemnified
party and payment of all fees and expenses, provided, however, except to the
extent that the indemnifying party shall be materially prejudiced thereby
(through the forfeiture of substantive rights or defenses), that the omission to
so notify the indemnifying party shall not relieve the indemnifying party from
any liability which they may have to the Indemnified Persons or any such person
or otherwise. Such Indemnified Persons shall have the right to employ its own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such Indemnified Persons unless the employment of such counsel
shall have been authorized in writing by the indemnifying party in connection
with the defense of such action or the indemnifying party shall not have
employed counsel to have charge of the defense of such action or such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
-15-
<PAGE> 17
available to the indemnifying party (in which case the indemnifying party shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties, but such indemnifying party may employ counsel and
participate in the defense thereof but the fees and expenses of such counsel
shall be at the expense of such indemnifying party), in any of which events such
fees and expenses shall be borne by the indemnifying party and paid as incurred
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) in any one action or series of related actions in the same
jurisdiction representing the indemnified parties who are parties to such
action). Anything in this paragraph to the contrary notwithstanding, the
indemnifying party shall not be liable for any settlement of any such claim or
action effected without its written consent but if settled with the written
consent of the indemnifying party, the indemnifying party agrees to indemnify
and hold harmless any Indemnified Persons and any such person from and against
any loss or liability by reason of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(b) In connection with any Registration Statement pursuant to which a
Holder of Transfer Restricted Securities offers or sells Transfer Restricted
Securities, such Holder agrees, severally and not jointly, to indemnify and hold
harmless the Issuer, its directors and officers and any person controlling the
Issuer within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, and each of their agents, employees, officers and directors
from and against any losses, liabilities, claims, damages and expenses
whatsoever (including but not limited to reasonable attorneys' fees and
expenses) to which they or either of them may become subject under the Act, the
Exchange Act or otherwise insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or in any amendment thereof or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in each case to the extent, but only to the extent, that
any such loss, liability, claim, damage or expense arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information relating to such Holder furnished to the Issuer by such Holder
expressly for use in such Registration Statement.
If any action is brought against the Issuer or any such person in
respect of which indemnity may be sought against any Holder of Transfer
Restricted Securities pursuant to foregoing paragraph, the Issuer or such person
shall promptly notify such Holder in writing of the institution of such action
and such Holder shall assume the defense of such action, including the
employment of counsel reasonably satisfactory to such indemnified party and
payment of all fees and expenses, provided, however, except to the extent that
the indemnifying party shall be materially prejudiced thereby (through the
forfeiture of substantive rights or defenses), that the omission to so notify
such Holder shall not relieve such Holder from any liability which it may have
to the Issuer or any such
-16-
<PAGE> 18
person or otherwise. The Issuer or such person shall have the right to employ
its own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of the Issuer or such person unless the employment of
such counsel shall have been authorized in writing by such Holder of Transfer
Restricted Securities in connection with the defense of such action or such
Holder shall not have employed counsel to have charge of the defense of such
action or such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to such Holder (in which case such Holder shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties, but such Holder may employ counsel and participate
in the defense thereof but the fees and expenses of such counsel shall be at the
expense of such Holder), in any of which events such fees and expenses shall be
borne by such Holder and paid as incurred (it being understood, however, that
such Holder shall not be liable for the expenses of more than one separate
counsel (together with appropriate local counsel) in any one action or series of
related actions in the same jurisdiction representing the indemnified parties
who are parties to such action). Anything in this paragraph to the contrary
notwithstanding, any Holder of Transfer Restricted Securities shall not be
liable for any settlement of any such claim or action effected without the
written consent of such Holder but if settled with the written consent of such
Holder, such Holder agrees to indemnify and hold harmless the Issuer and any
such person from and against any loss or liability by reason of such settlement.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such proceeding.
(c) In order to provide for contribution in circumstances in which the
indemnification provided for in paragraphs (a) and (b) of this Section 8 is for
any reason held to be unavailable from the indemnifying party, or is
insufficient to hold harmless a party indemnified under this Section 8, the
Issuer and the Indemnified Parties shall contribute to the aggregate losses,
claims, damages, liabilities and expenses of the nature contemplated by such
indemnification provision (including any investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any action or
any claims asserted) to which the Issuer and the Indemnified Parties may be
subject, (i) in such proportion as is appropriate to reflect the relative
benefits received by the Issuer, on the one hand, and the Indemnified Parties,
on the other hand, from the offering of the Old Notes or, (ii) if such
allocation is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Issuer, on the one hand, and the
Indemnified Parties, on the other hand, in connection with the statements or
omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Issuer, on the one hand, and the Indemnified Parties,
on the other hand, shall be deemed to be in the same proportion as the total
proceeds from the offering of Old Notes (net of discounts but before deducting
expenses) received by the Issuer as set forth in the table on the cover page of
the Offering Memorandum bear to the total proceeds received by such Holder with
respect to its sale of Transfer Restricted Securities or New Notes. The relative
fault of the Issuer, on the one hand, and the Indemnified Parties, on the other
hand, shall be determined by reference to, among other things,
-17-
<PAGE> 19
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Issuer or the Indemnified Parties and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Issuer agrees, that it would not be just and equitable if
contribution pursuant to this paragraph (c) of this Section 8 were determined by
pro rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to above. Notwithstanding the
provisions of paragraph (c) of this Section 8, (i) in no case shall an
Indemnified Party be required to contribute any amount in excess of the amount
by which the total received by such Indemnified Party with respect to its sale
of its Transfer Restricted Securities or New Notes, as the case may be, exceeds
the amount of any damages that such Indemnified Party has otherwise been
required to pay by reason of any untrue or alleged untrue statement or omission
or alleged omission and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (c) of this Section 8, each
person, if any, who controls an Indemnified Party within the meaning of Section
15 of the Act or Section 20 of the Exchange Act shall have the same rights to
contribution as such Indemnified Party, and each person, if any, who controls
the Issuer within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as the Issuer, subject
to clauses (i) and (ii) of this paragraph. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any Action against
such party in respect of which a claim for contribution may be made against
another party or parties under this paragraph 8(c), notify such party or parties
from whom contribution may be sought, but, except to the extent that the
indemnifying party shall be materially prejudiced thereby (through the
forfeiture of substantive rights and defenses), the omission to so notify such
party or parties shall not relieve the party or parties from whom contribution
may be sought from any obligation it or they may have under this paragraph (c)
or otherwise. No party shall be liable for contribution with respect to any
action or claim settled without its written consent; provided, however, that
such written consent was not unreasonably withheld.
SECTION 9. RULE 144A
The Issuer shall use its reasonable best efforts, for so long as any
Transfer Restricted Securities remain outstanding, to make available to any
Holder or beneficial owner of Transfer Restricted Securities in connection with
any sale of such securities and any prospective purchaser of such Transfer
Restricted Securities from such Holder or beneficial owner, the information
required by Rule 144A(d)(4) under the Act in order to permit resales of such
Transfer Restricted Securities pursuant to Rule 144A.
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration under this
Agreement unless such Holder (a) agrees to sell such Holder's Transfer
Restricted Securities on the basis provided in
-18-
<PAGE> 20
any underwriting arrangements approved by the Persons entitled under this
Agreement to approve such arrangements and (b) completes and executes all
reasonable questionnaires, powers of attorneys, indemnities, underwriting
agreements, lock-up letters and other documents required under the terms of such
underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
The Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement who desire to do so may sell such Transfer Restricted
Securities in an Underwritten Offering. In any such Underwritten Offering, the
investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the Holders of a majority in
aggregate principal amount of the Transfer Restricted Securities included in
such offering; provided, that such investment bankers and managers must be
reasonably satisfactory to the Issuer.
SECTION 12. MISCELLANEOUS
(a) Remedies. In the event of a breach by the Issuer, or by a Holder of
Transfer Restricted Securities, of any of their obligations under this
Agreement, each Holder of Transfer Restricted Securities or the Issuer, as the
case may be, in addition to being entitled to exercise all rights provided in
this Agreement, in the Indenture, or granted by law, including recovery of
liquidated or other damages, will be entitled to specific performance of its
rights under this Agreement. The Issuer and each Holder of Transfer Restricted
Securities agree that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by it of the provisions of this
Agreement and hereby agrees to waive the defense in any Action for specific
performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Issuer will not on or after the
date of this Agreement enter into any agreement with respect to its securities
that is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions of this Agreement. The rights granted to
the Holders under this Agreement do not in any way conflict with and are not
inconsistent with the rights granted to the holders of the securities of the
Issuer under any agreement in effect on the date of this Agreement.
(c) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to or departures from the provisions of this Agreement
may not be given unless the Issuer has obtained the written consent of Holders
of a majority of the outstanding principal amount of Transfer Restricted
Securities. Notwithstanding the foregoing, a waiver or consent to departure from
the provisions of this Agreement that relates exclusively to the rights of
Holders whose securities are being sold or tendered pursuant to a Registration
Statement and that does not affect directly or indirectly the rights of other
Holders whose securities are not being sold or tendered pursuant to such
Registration Statement may be given by the Holders of a majority of the
outstanding principal amount of Transfer Restricted Securities being so sold or
tendered.
-19-
<PAGE> 21
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivering, first-class
mail (registered or certified, return receipt requested), telex, telecopier or
air courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the
records of the Registrar under the Indenture, with a copy to the
Registrar under the Indenture; and
(ii) if to the Issuer, at:
Doane Pet Care Company
103 Powell Court, Suite 200
Brentwood, Tennessee 37027
Facsimile: (615) 309-1191
Attention: Chief Financial Officer
with a copy to:
Vinson & Elkins L.L.P.
590 Madison Avenue
26th Floor
New York, New York 10022
Facsimile: (212)
Attention: Alan Baden
(iii) if to the Co-Dealer Managers at:
Donaldson, Lufkin &
Jenrette Securities Corporation
2900 Chase Tower
2200 Ross Avenue
Dallas, Texas 75201
Facsimile: (214) 979-4123
Attention: Michael Crow
and
Chase Securities, Inc.
270 Park Avenue
New York, New York 10017
Facsimile:
Attention:
All such notices and communications shall be deemed to have been duly
given: (i) at the time delivered by hand, if personally delivered; (ii) five
Business Days after being deposited in the mail, postage prepaid, if mailed;
(iii) when answered back, if telexed; (iv) when receipt
-20-
<PAGE> 22
acknowledged, if telecopied; and (v) on the next Business Day, if timely
delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(e) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties to this Agreement in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(g) Captions. The captions included in this Agreement are included
solely for convenience of reference and are not to be considered a part of this
Agreement.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(i) Submission to Jurisdiction. The Issuer irrevocably submits to the
nonexclusive jurisdiction of any State or Federal court sitting in New York over
any suit, action or proceeding arising out of or relating to this agreement. The
Issuer irrevocably waives, to the fullest extent permitted by law, any objection
it may now or thereafter have to the laying of venue of any such court and any
claim that any such suit, action or proceeding brought in such a court has been
brought in an inconvenient forum. The Issuer agrees that a final judgment in any
such suit, action or proceeding brought in any such court shall be conclusive
and binding upon the Issuer and may be enforced in any other courts to the
jurisdiction of which the Issuer is or may be subject, by suit upon such
judgment. The Issuer hereby appoints, without power of revocation, [CT
Corporation System] as its agent to accept and acknowledge on its behalf service
of any and all process which may be served in any suit, action or proceeding
arising out of or relating to this letter.
(j) Severability. In the event that any one or more of the provisions
contained in this Agreement, or the application of any such provision in any
circumstance, is held invalid, illegal or unenforceable, the validity, legality
and enforceability of any such provision in every other respect and of the
remaining provisions contained in this Agreement shall not be affected or
impaired thereby.
(k) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties to this Agreement in
respect of the subject matter contained in this Agreement. There are no
restrictions, promises, warranties or undertakings, other than those set
-21-
<PAGE> 23
forth or referred to in this Agreement with respect to the registration rights
granted by the Issuer with respect to the Transfer Restricted Securities. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to such subject matter.
(l) Third Party Beneficiaries. The Issuer hereby agrees that the
Holders of Old Notes shall be third party beneficiaries of the terms of this
Agreement.
-22-
<PAGE> 24
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
DOANE PET CARE COMPANY
By: /s/ THOMAS R. HEIDENTHAL
------------------------------------
Name: Thomas R. Heidenthal
----------------------------------
Title: Senior Vice President and CFO
---------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s MICHAEL L. CROW
------------------------------------
Name: Michael L. Crow
----------------------------------
Title: Senior Vice President
---------------------------------
CHASE SECURITIES INC.
By: /s/ JOSEPH C. PURELL
------------------------------------
Name: Joseph C. Purell
----------------------------------
Title: Vice President
---------------------------------
-23-
<PAGE> 1
EXHIBIT 9.2
FIRST AMENDMENT TO FIRST AMENDED
AND RESTATED INVESTORS' AGREEMENT
This First Amendment to the First Amended and Restated Investors'
Agreement (this "Agreement") dated as of October 14, 1998 is entered into by
and among (i) DPC Acquisition Corp. (the "Company"), (ii) Doane Products
Company (formerly known as DPC Transition Corp.) ("Doane"), (iii) Summit
Capital Inc. ("Summit"), (iv) Summit/DPC Partners, L.P. ("Summit/DPC"), (v)
Chase Manhattan Investment Holdings, Inc. ("Chase"), (vi) 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., (each of the
foregoing in this clause (vi), a "DLJ Entity," and collectively, the "DLJ
Entities") (vii) Dartford Partnership, L.L.C. ("Dartford"), (viii) Bruckmann,
Rosser, Sherrill & Co., L.P. ("BRS"), (ix) PNC Capital Corp ("PNC"), (x) Windy
Hill Pet Food Company, L.L.C. ("Windy Hill L.L.C."), (xi) Baseball Partners and
(xii) the other Persons listed on the signature pages hereto.
W I T N E S S E T H :
WHEREAS, certain stockholders and warrantholders of the Company are
parties to or bound by that certain First Amended and Restated Investors'
Agreement dated as of August 3, 1998 (the "Original Agreement"); and
WHEREAS, the undersigned, constituting the holders of more than 75% of
the shares of Common Stock of the Company (including the Warrants on an "as-if
exercised" basis) desire to amend the Original Agreement on the terms of this
Agreement and, except as amended by this Agreement, ratify the terms of the
Original Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in exchange for the mutual
covenants herein, the parties hereto agree as follows:
AGREEMENTS
1. Defined Terms. Capitalized terms used in this Agreement that are not
defined herein shall have the meanings given to them in the Original Agreement.
2. Amendments. The Original Agreement is amended as follows:
(a) Clause (ix) of the definition of "Permitted Transferee" is
hereby amended in its entirety to provide as follows:
"(ix) in the case of any other Shareholder, (A) the Issuer,
(B) a Person to whom Shares are transferred from such other
Shareholder (1) by will or the laws of descent and
distribution or (2) by gift without consideration of any kind;
provided that in the case of clause (2) preceding such
transferee is the
<PAGE> 2
spouse or the lineal descendant, sibling or parent of such
Shareholder, (C) a trust that is for the exclusive benefit of
such other Shareholder, its Permitted Transferees under (B)
above or any institution described in clause (D) following,
(D) any institution qualified as tax-exempt under Section
501(c)(3) of the Internal Revenue Code of 1986, as amended, or
(E) a partnership, limited liability company, corporation or
other business organization that is "controlled by" (as
defined in the definition of the term "Affiliate"), and a
majority of capital stock or interests entitled to a majority
of all distributions (including liquidating distributions) are
owned beneficially by, such other Shareholder and any one or
more of the persons described in clauses (B) through (D)
preceding."
(b) Section 2.1 is hereby amended by adding the following thereto:
"(c) At any time and for so long as the Bridge Parties (as
defined in that certain Bridge Financing Agreement dated
October 15, 1998 among Windy Hill, the Company, Pet Food
Funding, Inc. and The Chase Manhattan Bank (the "Bridge
Agreement")) are entitled to appoint an individual to serve on
the Board pursuant to the terms of the Bridge Agreement, each
Shareholder entitled to vote for the election of directors to
the Board agrees that it will vote its shares of Common Stock
or execute consents, as the case may be, and take all other
necessary action (including causing the Company to call a
special meeting of shareholders) to elect any designee of the
Bridge Parties to the Board.
(c) Section 4.5 is hereby amended by adding a clause (g) at the
end of the first sentence of such section, which clause shall provide as
follows:
"(g) any warrants issued pursuant to the Bridge Agreement and
any shares of Common Stock issuable upon exercise of such
warrants."
(d) The Original Agreement (including the relevant provisions of
Article 5 and Section 6.4) is hereby amended to the extent necessary to allow
the Company to honor fully the piggyback and demand registration rights
(including the priorities of such rights) and obligations as well as the
obligation to file a shelf registration statement, in each case, pursuant to
the Bridge Agreement and related documents.
3. Ratification. Except as expressly set forth herein, the terms and
provisions of the Original Agreement are hereby ratified and confirmed.
4. Miscellaneous. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
DPC ACQUISITION CORP.
By: /s/ TR HEIDENTHAL
-----------------------------
Name: TR Heidenthal
---------------------------
Title: Senior VP & CFO
--------------------------
DOANE PRODUCTS COMPANY
By: /s/ TR HEIDENTHAL
-----------------------------
Name: TR Heidenthal
---------------------------
Title: Senior VP & CFO
--------------------------
SUMMIT CAPITAL INC.
By: /s/ GEORGE B. KELLY
-----------------------------
Name: George B. Kelly
---------------------------
Title: Chairman
--------------------------
CHASE MANHATTAN INVESTMENT
HOLDINGS, INC.
By: /s/ Jeffrey C. Walker
-----------------------------
Name: Jeffrey C. Walker
---------------------------
Title: CEO
--------------------------
BASEBALL PARTNERS
By: /s/ Chris Behrens
-----------------------------
Name: Chris Behrens
---------------------------
Title: GP
--------------------------
3
<PAGE> 4
SUMMIT/DPC PARTNERS, L.P.
BY: SUMMIT CAPITAL, INC.,
its General Partner
By: /s/ GEORGE B. KELLY
-----------------------------
Name: George B. Kelly
Title: Chairman
DLJ MERCHANT BANKING PARTNERS, L.P.,
a Delaware Limited Partnership
BY DLJ MERCHANT BANKING, INC.
Managing General Partner
By: /s/ PETER GRAUER
-----------------------------
Name: Peter Grauer
---------------------------
Title: Managing Director
--------------------------
DLJ INTERNATIONAL PARTNERS, C.V.
BY DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ PETER GRAUER
-----------------------------
Name: Peter Grauer
---------------------------
Title: Managing Director
--------------------------
DLJ OFFSHORE PARTNERS, C.V.
BY DLJ MERCHANT BANKING, INC.
Advisory General Partner
By: /s/ PETER GRAUER
-----------------------------
Name: Peter Grauer
---------------------------
Title: Managing Director
--------------------------
4
<PAGE> 5
DLJ FIRST ESC, L.L.C.
By: /s/ PETER GRAUER
-----------------------------
Name: Peter Grauer
---------------------------
Title: Managing Director
--------------------------
DLJ MERCHANT BANKING FUNDING, INC.
By: /s/ PETER GRAUER
-----------------------------
Name: Peter Grauer
---------------------------
Title: Managing Director
--------------------------
THE ROSENTHAL 1989 TRUST
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
By: /s/ DICK H. WEBER
--------------------------------------
Dick H. Weber
By: /s/ TERRY W. BECHTEL
--------------------------------------
Terry W. Bechtel
By: /s/ BOB L. ROBINSON
--------------------------------------
Bob L. Robinson
By:
--------------------------------------
Roy E. Hess
By: /s/ EARL R. CLEMENTS
--------------------------------------
Earl R. Clements
By:
--------------------------------------
J. David Heaney
5
<PAGE> 6
By: /s/ LAURA HAWKINS MANSUR
--------------------------------------
Laura Hawkins Mansur
By:
--------------------------------------
Gary L. Rosenthal
By:
--------------------------------------
Lee H. Rosenthal
By:
--------------------------------------
Fred A. Rosenthal
6
<PAGE> 7
The following signatories are the "Windy Hill Investors:"
DARTFORD PARTNERSHIP, L.L.C.
By: /s/ Ray Chung
--------------------------
Name: Ray Chung
---------------------------
Title: Partner
--------------------------
BRUCKMANN, ROSSER, SHERRILL & CO., L.P.
By: /s/ Stephen C. Sherrill
--------------------------
Name: Stephen C. Sherrill
---------------------------
Title: Managing Director
--------------------------
PNC CAPITAL CORP
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
WINDY HILL PET FOOD COMPANY L.L.C.
By: /s/ Ray Chung
-----------------------------
Name: Ray Chung
---------------------------
Title: Executive Vice President
---------------------------
-----------------------------
Robert V. Dale
----------------------------
F. Donald Cowan, Jr.
7
<PAGE> 8
--------------------------------
Donald L. Gadd
--------------------------------
Henry G. Hurd, Jr.
--------------------------------
Ben W. McCrory
--------------------------------
Vaughn R. Oakley
--------------------------------
Charles Dunleavy
8
<PAGE> 9
BCB PARTNERSHIP, BRUCE C.
BRUCKMANN, DONALD J.
BRUCKMANN, PAUL D. KAMINSKI, NAZ
PARTNERSHIP, HAROLD O. ROSSER, H.
VIRGIL SHERRILL, STEPHEN C.
SHERRILL, NANCY A. ZWENG,
ELIZABETH MCSHANE, BEVERLY
PLACE, BY THE FOLLOWING PERSONS:
By: /s/ Stephen C. Sherrill
--------------------------------------
Stephen C. Sherrill, Attorney-in-Fact
/s/ Stephen C. Sherrill
-----------------------------------------
Stepehn C. Sherrill, INDIVIDUALLY
9
<PAGE> 1
STRICTLY CONFIDENTIAL
EMPLOYMENT AGREEMENT
BETWEEN
DOANE PRODUCTS COMPANY
AND
RICHARD D. WOHLSCHLAEGER
THIS EMPLOYMENT AGREEMENT dated January 1, 1998 is made between Doane
Products Company (the "Company"), a Delaware corporation, and Richard D.
Wohlschlaeger (the "Executive"). This Agreement is made with reference to the
following facts and objectives:
R E C I T A L S
A. The Executive shall be the Vice President - Customer Development of
the Company and has served the Company as an employee continuously during the
past four years;
B. The Executive acknowledges that the services previously provided by
him to the Company and the services to be performed by him under this Agreement
are of a special and unique character; the business of the Company is currently
international in scope and the Company has plans to continue to expand its
business throughout the world; and the Company competes with other persons that
are or could be located in any part of the world; and in order to assure the
Company that the Company will retain its value and the Company's business as a
going concern, it is necessary that the Executive undertake not to utilize his
special knowledge of the Company, its business and its relationships with
customers and suppliers to compete with the Company if the Executive were to
leave the Company.
C. The Executive further acknowledges that, during his employment to
date by the Company, he has occupied a position of trust and confidence with the
Company and, during such employment, the Company has compensated him, among
other purposes, to develop and preserve customer relationships and other
goodwill exclusively for the Company's benefit and that, as a result, he has
developed customer relationships and goodwill that are valuable and important to
the Company, and has become familiar with the Company's trade secrets,
including, without limitation, its profit margins, customer preferences and
requirements, and with other proprietary and confidential information concerning
the Company and its business.
<PAGE> 2
D. The Executive further acknowledges that, throughout his employment
under this Agreement, he is expected to continue to occupy a position of trust
and confidence with the Company. In return, the Company will continue to
compensate him, among other purposes, to develop and preserve customer
relationships and goodwill exclusively for the Company's benefit, which will be
valuable and important to the Company. Further, he will likely continue to be
familiar with the Company's trade secrets, including, without limitation, its
profit margins, customer preferences and requirements, and with other
confidential and proprietary information concerning the Company and its
business.
E. The Executive further acknowledges that the use by him for his own
benefit or that of others of such goodwill, trade secrets or proprietary and
confidential information or the solicitation of and/or doing business with any
of the Company's customers and potential customers would have a material adverse
effect on the Company and its business, and would place the Company at a
substantial competitive disadvantage.
F. The Executive further acknowledges that the agreements and covenants
contained in this Agreement, and, in particular, sections 6 (Non-Competition
Covenants) and 7 (Confidentiality and Proprietary Information), are essential to
protect the Company and the goodwill of the Company's business, are a condition
precedent to the Company's willingness to enter this Agreement and to pay the
consideration set forth in this Agreement, and are necessary and reasonable in
light of the particular business of the Company, his knowledge thereof and the
services he has previously performed and will perform under this Agreement.
THE PARTIES ACCORDINGLY AGREE AS FOLLOWS:
AGREEMENT
1. EMPLOYMENT. The Company hereby agrees to employ the Executive, and
the Executive hereby accepts employment by the Company, on the terms and
conditions of this Agreement.
2. EMPLOYMENT TERM
(a) Subject to section 9 (Termination of Employment), the term
of the Executive's employment under this Agreement begins on the date of this
Agreement and ends on the third anniversary of that date; provided, however,
that, commencing on the third anniversary of the date of this Agreement and each
subsequent anniversary, the term shall be extended for an additional one year
period unless either the Executive or the Company gives the other party written
notice at least thirty (30) days before such anniversary that this Agreement
shall terminate on the then scheduled expiration date (the "non-extension
notice"). If such non-extension notice is given, this Agreement shall
automatically terminate on such expiration date.
<PAGE> 3
(b) The actual term of the Executive's employment under this
Agreement, including any extension, continuation or earlier termination of the
original term, is referred to in this Agreement as the "employment term."
3. RESPONSIBILITIES. During the employment term, the Executive shall
serve as Vice President Customer Development, or in any other position or
capacity to which he may from time to time be elected or appointed, and shall
perform such services for the Company as are reasonably required by the Company,
and as may be required by virtue of the offices and positions held by the
Executive. The Executive agrees that, as a part of his duties under this
Agreement, he may be required from time to time to perform services for
affiliates of the Company. The Executive will not be required to relocate his
residence outside the continental United States, but will be available for such
travel as his responsibilities under this Agreement may reasonably require. The
Executive shall devote his full time and best efforts to the performance of all
responsibilities to the Company and its affiliates and to further their
respective businesses and interests.
4. COMPENSATION
(a) The Company agrees to pay the Executive throughout the
employment term an initial base salary at the rate of $133,333.00 per annum (as
adjusted pursuant to the provision of this paragraph 4(a)) (the "base salary")
payable in equal installments in accordance with Company payroll practices from
time to time in effect. Executive's base salary will be reviewed and may be
adjusted annually by the president of the Company or by the board of directors
of the Company (or the compensation committee thereof) (the "board"), after
taking into consideration the recommendations of the president of the Company,
provided that Executive's base salary may not be decreased below his initial
base salary.
(b) Subject to Section 9 (Termination of Employment), the Company
agrees to pay the Executive throughout the employment term an annual bonus (the
"annual bonus") calculated pursuant to Exhibit A attached hereto. The amount of
the annual bonus payable to the Executive shall be prorated for the portion of a
year the Executive is employed by multiplying the annual bonus determined
pursuant to Exhibit A by a fraction with a numerator equal to the number of days
of the fiscal year during which the Executive was employed, and with a
denominator of 365.
5. OTHER EXECUTIVE BENEFITS
(a) The Executive shall, during the employment term, be eligible to
participate in such pension, profit sharing, bonus, life insurance,
hospitalization and major medical and other employee benefit plans of the
Company in effect from time to time, to the extent that he is eligible under and
complies with the terms of those plans, but the allocation of benefits under any
plan that provides that allocations thereunder shall be in the discretion of the
board shall be as determined from time to time solely by the board in its
discretion.
<PAGE> 4
(b) The Executive shall also participate in the Company's paid
vacation plan but in no event shall Executive's annual entitlement be less than
4 weeks. Vacation not used by the end of a year shall be forfeited and shall not
be eligible to be carried over to another year or eligible for reimbursement
except as otherwise provided by Company policies.
6. NON-COMPETITION COVENANTS. Throughout the employment term and
commencing with the date of this Agreement and ending on the later of the end of
the period that Executive receives severance pay from the Company pursuant to
Section 9 or the first anniversary of the date on which the Executive ceases to
be employed by the Company for any reason whatsoever, (the "Non-Compete
Period"), the Executive promises and agrees that he will not: (a) directly or
indirectly assist in, engage in, have any financial interest in, or participate
in any way in, as an owner, partner, employee, agent, board member, or
shareholder, any business that involves, in whole or in part, the design,
manufacture, distribution or sale of dry pet foods (or any other business in
which the Company may engage or begin preparation to engage during the
employment term) or make preparation with any person to do any of the foregoing;
provided, however, that the Executive may own, solely as an investment, up to
1.0% of any class of securities of any person if such securities are listed on
any national or regional securities exchange; (b) call upon or have any contact
with any person or any successor in interest to any person who was at any time
during the Executive's last three years of employment with the Company, a
customer of the Company, or call upon or have any contact with any person or any
successor in interest to any person who is a prospective customer of the
Company, and with whom the Executive dealt, or on whose account the Executive
worked, at any time during the Executive's last three years of employment with
the Company, for the purpose of (i) diverting any business of such person from
the Company, or (ii) selling or offering to sell to any such customer any
product or service that is of the same general type or that performs similar
functions as any product or service which has been sold, provided or offered for
sale by the Company at any time during the Executive's last three years of
employment with the Company, (c) solicit any employee of the Company to
terminate his or her employment with the Company or employ any such individual
during his or her employment with the Company and for a period of twelve months
after such individual terminates his or her employment with the Company, or (d)
without the prior written consent of the Company's board of directors, acquire
or discuss the acquisition of any ownership interest in or warrant or right to
acquire any such interest, or acquire any employment or other pecuniary benefit
from any person that, at the time, is a prospective candidate for or was a party
to a control transaction. The term "control transaction" means any transaction
or series of transactions whereby the Company or a controlling interest in the
Company is acquired by another Person (whether by purchase, merger,
consolidation or sale of all or substantially all of the Company's consolidated
assets). The Executive acknowledges and agrees that the consideration and
benefits to be provided to the Executive under this Agreement have been
bargained and negotiated in exchange for, and in consideration of, Executive's
agreement to abide by the terms and provisions of this section 6 and section 7
(Confidentiality and Proprietary Information). The Executive acknowledges and
agrees that all of the Executive's duties and obligations under this section 6
shall survive the expiration or termination of the Executive's employment with
the Company, regardless of the causes therefor.
<PAGE> 5
7. CONFIDENTIALITY AND PROPRIETARY INFORMATION. In addition to any
common-law restriction upon the Executive's use, disclosure or exploitation of
confidential, proprietary or secret information of the Company, the Executive
covenants and agrees that, without prior written consent of the Company, he will
not at any time during or after the employment term use for himself or disclose
to or use for any other person, directly or indirectly, any secret, confidential
or proprietary information of the Company, including, without limitation, the
Company's processes, formulas, techniques, customer identities, preferences,
requirements, reports and other sensitive customer information, servicing
methods, profit margins, analyses, employee, vendor and supplier information,
business or marketing plans or strategies, financial data and presentation or
sales materials, technologies, computer programs, software, designs and
inventions (collectively, the "confidential information"); provided, however,
that the term confidential information does not include or refer to any
information that is in the public domain (other than by a breach of this
Agreement). The Executive acknowledges that the confidential information is
vital, sensitive, confidential and proprietary to the Company. The Executive
covenants and agrees that all files, reports, lists, materials, records,
documents, notes, memoranda, specifications, product or other formulas,
equipment and other items, and any originals, copies, recordings, abstracts or
notes thereof, relating to the confidential information or the Company business
that the Executive is or was either provided, prepares or prepared himself, uses
or used or simply acquires or acquired during this employment with the Company
(either before or during the employment term), are and shall remain the sole and
exclusive property of the Company and shall be immediately returned to the
Company at any time upon demand and, in all events, immediately at the end of
the employment term. The Executive acknowledges and agrees that all of the
Executive's duties and obligations under this section 7 shall survive the
expiration or termination of the Executive's employment with the Company,
regardless of the cause therefor.
8. REMEDIES FOR BREACH. In the event of a breach or threatened breach
of any of the Executive's duties and obligations under sections 6
(Non-Competition Covenants) or 7 (Confidentiality and Proprietary Information),
the Company shall be entitled, in addition to any other legal or equitable
remedies the Company may have in that connection (including any right to
damages that the Company may suffer), to a temporary, preliminary, and/or
permanent injunction restraining such breach or threatened breach. The
Executive hereby expressly acknowledges that the harm that might result to the
Company's goodwill or its relationships with customers, or as a result of the
disclosure or use of the confidential information, is largely irreparable. The
Executive specifically agrees that, in the event there is a question as to the
enforceability of sections 6 (Non-Competition Covenants) or 7 (Confidentiality
and Proprietary Information), the Executive will not engage in any conduct
inconsistent with or contrary to either of such sections until after the
question has been resolved by a non-appealable final judgement.
<PAGE> 6
9. TERMINATION OF EMPLOYMENT
(a) The employment term and the Executive's employment by the
Company shall terminate: (i) upon the death of the Executive; (ii) upon the
disability of the Executive (as defined in section 9(b)(2)) upon thirty (30)
days prior written notice given by the Company to the Executive; (iii) for cause
(as defined in section 9(b)(1)), immediately upon the giving of written notice
thereof by the Company to the Executive or at such later time as the notice may
specify; (iv) without cause, upon not less than thirty (30) days prior written
notice given by the Company to the Executive, or (v) voluntarily by the
Executive upon not less than thirty (30) days prior written notice given to the
Company by the Executive.
(b) In this section 9:
(1) "Cause" means; (a) the Executive has been indicted for or
convicted of a felony; (b) the commission of any act by
Executive constituting financial dishonesty against the Company
(including fraud or embezzlement); (c) gross dereliction of duty
to the Company (other than by reason of death or disability)
after Executive has been advised by the board of directors or
the Company's president of any such dereliction of duty (whether
of the same or similar nature) and has been given an opportunity
to correct his performance; (d) commission of an act involving
moral turpitude which (i) brings the Company into public
disrepute or disgrace, or (ii) causes material injury to the
customer relations, operations or the business prospects of the
Company; (e) the repeated refusal or failure by Executive to
follow the lawful directives of the board of directors or the
president of the Company; or (f) the material breach by
Executive of the provisions of this Agreement.
(2) "Disability" refers to any circumstances in which the
Executive, by reason of illness, incapacity or other disability,
has failed to perform his duties or fulfill his obligations
under this Agreement for a cumulative total of 180 days in any
12-month period.
(c) Upon the termination of the Executive's employment under the
Agreement, the employment term shall end and all rights of the Executive under
this Agreement shall terminate, except that the Executive shall nonetheless be
entitled to receive the following:
(1) If the termination occurs by reason of the death or
disability of the Executive, the Executive shall be entitled to
receive the base salary accrued through the date of termination
and annual bonus prorated through the date of termination.
<PAGE> 7
(2) If the termination is made by the Company without cause, or
as a result of the Company delivering a non-extension notice
(but not as a result of the Executive delivering a non-extension
notice to the Company), the Executive shall be entitled to
receive severance pay equivalent to his base salary and annual
bonus, if and as each would have been payable if the Executive
had not been so terminated, for the period commencing on the
first day after the date of termination and terminating on the
first anniversary of the date on which Executive ceases to be
employed by the Company. With respect to the annual bonus, for
the year in which the termination of employment occurred, the
Executive shall receive the annual bonus the Executive would
have been entitled to receive if the Executive had remained
employed for the entire year, and for the last calendar year in
which the executive is receiving severance payments, the
Executive shall receive a pro rata portion of the annual bonus
the Executive would have been entitled to receive if the
Executive had remained employed for the entire year with such
pro rata portion being equal to a fraction with a numerator
equal to the number of days of the fiscal year during which the
Executive receives severance pay and with a denominator of 365.
(3) If the termination is made by the Company without cause, or
as a result of the Company delivering a non-extension notice,
and such termination occurs after a control transaction whereby
Ralston Purina Company or any of its subsidiaries or affiliates
has acquired the Company, the Executive shall be entitled to
receive severance pay equal to his base pay and annual bonus,
with such amounts being calculated in the same manner as set
forth above, except that the annual bonus for each of such years
shall be 50% of the annual base salary at the time of
termination of employment, for the period commencing on this
first day after the date of termination and terminating on the
third anniversary of the date the Executive ceases to be
employed by the Company.
(4) If the termination is made by the Company for cause, or
voluntarily by Executive, the Executive shall be entitled to
receive his base salary through the date of termination. If any
termination for cause made by the Company is ever ultimately
determined by an court, agency or other tribunal to have been
without cause, then the Company's sole liability under the
Agreement or otherwise at law or in equity shall be to pay the
Executive those amounts that would have otherwise been paid to
the Executive under section 9(c)(2) (Termination of Employment,
without cause) and the reasonable attorney's fees and costs
incurred by the Executive in successfully obtaining this
determination from the court, agency or other tribunal.
<PAGE> 8
(5) To the extent permitted by law or group insurance plans
maintained for the Company's employees, Executive will be
entitled to continue coverage under any health, disability and
life insurance program during the period Executive is receiving
severance payments in accordance with paragraphs 9(c)(1) through
(4), at no cost to the Executive. The Executive's rights will
continue under benefit programs that, by their own terms or by
law, extend beyond the date of termination or continued coverage
provided for in the preceding sentence, including, without
limitation, health care under COBRA, pension, stock purchase or
stock option agreements, and non-qualified salary continuation
agreements.
10. NOTICE. Any notice required or permitted to be given under this
agreement must be in writing and is effectively given:
(1) To the Company, when signed by the Executive and delivered in
person to the chairman of the board, president, or secretary
(excluding the Executive) of the Company, or, one day after the
date sent by national commercial courier for next day delivery, or
two days after the date mailed, by certified or registered mail,
postage prepaid, in either case to the address set forth below, or
at such other address as the Company may designate for this purpose
in a notice given to the Executive.
Attn: Chief Executive Officer
Doane Products Company
P.O. Box 879
West 20th & State Line Road
Joplin, MO 64802
(2) To the Executive, when signed by an officer of the Company
(excluding the Executive) and delivered to the Executive in person,
or, one day after the date sent by national commercial courier for
next day delivery, or two days after the date mailed, by certified
or registered mail, postage prepaid, in either case to the address
set forth under the Executive's signature at the end of this
Agreement or at such other address as the Executive may designate
for this purpose in a notice given to the Company.
11. INVALIDITY OF PROVISIONS. If any provision of this Agreement is
adjudicated to be invalid or unenforceable under applicable law, the validity or
enforceability of the remaining provisions shall be unaffected. To the extent
that any provision of this agreement is adjudicated to be invalid or
unenforceable because it is over broad, that provision shall not be void but
rather shall be limited only to the extent required by applicable law and
enforced as so limited.
12. ENTIRE AGREEMENT; WRITTEN MODIFICATIONS. This Agreement contains
the entire agreement between the parties and supersedes all prior or
contemporaneous representations, promises, understandings and agreements
between the Executive and the Company. This Agreement may not be changed except
by written agreement of the parties.
<PAGE> 9
13. GOVERNING LAW. In light of the Company's contacts with the state of
Missouri and its significant interest in insuring that disputes as to the
validity and enforceability of section 6 (Non-Competition Covenants) and 7
(Confidentiality and Proprietary Information) of this Agreement are resolved on
a uniform basis, the Executive and the Company agree that any litigation
involving noncompliance with or alleged breach of sections 6 (Non-Competition
Covenants) or 7 (Confidentiality and Proprietary Information) must be filed and
conducted in Missouri and the Executive and the Company consent to the personal
jurisdiction of the federal and state courts sitting in Missouri for purposes of
any such litigation. This Agreement shall be governed by the internal laws of
the State of Missouri without regard to Missouri conflict of laws principles.
14. CERTAIN DEFINED TERMS. In this agreement:
(1) "Affiliate" of the Company means any person controlling,
controlled by or under common control with the Company.
(2) "Annual bonus" is defined in section 4(b).
(3) "Base salary" is defined in section 4(a).
(4) "Board" is defined in section 4(a).
(5) "Company" as used in sections 6 (Non-Competition Covenants)
and 7 (Confidentiality and Proprietary Information), includes
each affiliate of the Company for which the Executive performs
services at any time during his employment if the affiliate is
engaged in any business that involves, in whole or in part, the
design, manufacture, distribution or sale of dry pet foods (or
any other business in which the Company may engage or begin
preparation to engage during the employment term).
(6) "Control transaction" is defined in section 6(d).
(7) "Employment term" is defined in section 2(b).
(8) "Non-extension notice" is defined in section 2(a).
(9) "Person" includes any individual, trust, estate, business
trust, partnership, corporation, unincorporated association,
governmental entity, limited liability company and any other
juridical person.
<PAGE> 10
15. COMPANY'S AND EXECUTIVE'S RIGHT TO RECOVER COSTS. The Company and
the Executive undertake and agree that, if either party breaches or threatens to
breach any provision of this Agreement, the breaching party shall be liable for
reasonable attorneys' fees and costs incurred by the other party in enforcing
its rights under this Agreement.
16. RULE OF CONSTRUCTION. The rule of construction to the effect that
ambiguities are to be resolved against the drafting party shall not be employed
in interpreting this Agreement.
17. TOLLING. In view of the parties' recognition and agreement that the
Company is entitled after the expiration or termination of the employment term
to certain limited protection from competition by the Executive, the Executive
and the Company agree that the running of the period set forth in section 6
(Non-Competition Covenants) shall be tolled during any period of time in which
the Executive violates that section.
18. SUCCESSORS AND ASSIGNS. The Company may assign this Agreement or
any right or interest under this Agreement to any person that hereafter becomes
an affiliate of the Company or to any person to which the Company sells all or
any substantial part of its assets and, in such event, the Company shall,
automatically upon the assignee's assumption of the Company's obligations
hereunder, be released from any such obligations. This Agreement shall inure to
the benefit of the Company, and its successors and assigns.
19. NONWAIVER OF RIGHTS. The Company's or the Executive's failure to
enforce at any time any of the provisions of this Agreement or to require at any
time performance by the other party of any of the provisions hereof shall in no
way be construed to be a waiver of such provisions or to affect either the
validity of this Agreement, or any part hereof, or the right of the Company or
the Executive thereafter to enforce each and every provision in accordance with
the terms of this Agreement.
- The remainder of this page is intentionally left blank -
<PAGE> 11
PLEASE NOTE: BY SIGNING THIS AGREEMENT, THE EXECUTIVE IS HEREBY CERTIFYING THAT
THE EXECUTIVE (A) RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW AND STUDY BEFORE
EXECUTING IT; (B) READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C) HAD
SUFFICIENT OPPORTUNITY BEFORE SIGNING THIS AGREEMENT TO ASK ANY QUESTIONS THE
EXECUTIVE HAD ABOUT THIS AGREEMENT AND RECEIVED SATISFACTORY ANSWERS TO ALL SUCH
QUESTIONS; (D) UNDERSTANDS THE EXECUTIVE'S RIGHTS AND OBLIGATIONS UNDER THIS
AGREEMENT; AND (E) EXECUTED AND DELIVERED THIS AGREEMENT AT THE OFFICES OF THE
COMPANY IN JOPLIN, MISSOURI.
EXECUTED AND EFFECTIVE as of the date first written above.
WITNESS: DOANE PRODUCTS COMPANY
/s/ Michael Wohlschlaeger /s/ Bob L. Robinson
- ---------------------------------- ------------------------------
Bob L. Robinson
President and CEO
WITNESS: EXECUTIVE:
/s/ Carol L. Wohlschlaeger /s/ Richard D. Wohlschlaeger
- ---------------------------------- ------------------------------
3418 Westberry Sq.
------------------------------
Street Address
Joplin, MO 64804
------------------------------
City, State, Zip Code
<PAGE> 12
EXHIBIT A
DOANE PRODUCTS COMPANY
ANNUAL BONUS PROGRAM
1. For each fiscal year of the Company during the employment term, the
board, after taking into consideration the recommendations of the president of
the Company, will establish objectives comprised of both corporate and
individual goals (each goal will be referred to herein as a "Target"), as well
as the percentage weighting (the "weight") that will apply to each Target,
wherein the sum of the weights shall equal 100%.
2. For the Company's 1998 fiscal year, the board will set an EBITDA
Target for the Company and its subsidiaries which will be weighted at 100% for
the calculation of the bonus payable under this program for the 1998 fiscal
year. The term "EBITDA" will have the same meaning as set forth in the DPC
Acquisition Corp. Option Agreements granted under the DPC Acquisition Corp. 1996
Stock Option Plan.
3. For purposes of computing the Executive's annual bonus, the bonus
will be equal to 50% of his base salary in effect at the end of the fiscal year
(the "base bonus") and the annual bonus will be computed by summing the
percentages earned for each Target, as determined by computing the sum of
paragraphs in 3(a) through 3(d) below for each Target that has been assigned a
weight, and then multiplying that sum times the base bonus.
(a) Where the actual performance exceeds 85% of the Target
for such fiscal year, Executive will receive 55% of the weight
assigned for the Target.
<PAGE> 13
(b) For each of the first full 15 percentage points by
which actual performance exceeds 85% of the Target, Executive will
receive 3% of the weight assigned for the Target. The maximum which
Executive may receive under this paragraph 3(b) cannot exceed 45% of
the weight assigned for the Target.
(c) For each of the first full 15 percentage points by which
the actual performance exceeds 100% of the Target, Executive will
receive 6% of the weight assigned for the Target. The maximum which
Executive may receive under this paragraph 3(c) cannot exceed 90% of
the weight assigned for the Target.
(d) For each full percentage point by which the actual
performance exceeds 115% of the Target, Executive will receive 9% of
the weight assigned for the target.
For illustrative purposes, assume the Executive's base bonus is $30,000
and his weighting is as follows:
<TABLE>
<CAPTION>
Target Weight Description of Target
------ ------ ---------------------
<S> <C> <C>
1 50% Corporate EBITDA
2 35% Territory Margin Contribution
3 15% Expense Control
</TABLE>
<TABLE>
<CAPTION>
Bonus Calculation:
-----------------
Assumed % Earned Weighted
Target Performance for Target Weight % Earned
------ ----------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
1 95% 85% x 50% = 42.5%
2 120% 235% x 35% = 82.3%
3 80% 0 x 15% = 0
--------
% of base bonus earned 124.8%
Base bonus $30,000
Bonus earned $37,440
</TABLE>
<PAGE> 14
4. In the event that, after the setting of the Targets, the Company or
any of its subsidiaries acquires additional assets, entities or subsidiaries
that produce the same or similar products, which acquisition, either singly or
together with one or more other acquisitions, the board determines in good faith
may significantly affect the Targets for the fiscal year, the board may, in good
faith, either (a) adjust such Targets to reflect the projected effect of such
acquisition or acquisitions on any Targets or (b) exclude the effects of such
acquisition or acquisitions on the Targets for purposes of determining
Executive's annual bonus by calculating the Targets for such fiscal year on a
pro forma basis as though such acquisition or acquisitions had not been
consummated. Similarly, in the event that, after setting the Targets, the
Company is acquired by another Person (whether by purchase, merger,
consolidation or sale of all or substantially all of the Company's consolidated
assets) and the board determines in good faith that such acquisition may
significantly affect the Targets for the fiscal year, the board may, in good
faith, either (x) adjust such Targets to reflect the projected effect of such
acquisition on any Target or (y) exclude the effects of such acquisition on the
Targets for purposes of determining Executive's annual bonus by calculating the
Targets for such fiscal year on a pro forma basis as though such acquisition had
not been consummated.
5. The annual bonus payable for any fiscal year will be paid within 30
days after the delivery of the Company's audited financial statements for such
fiscal year. In the event of any dispute between the Company and Executive as to
the amount of the bonus for any fiscal year, such dispute will be resolved by
the
<PAGE> 15
Company's auditors or any one of Price Waterhouse, Arthur Andersen, or Ernst
& Young, or their successors, as selected by the board, by having such
accounting firm calculate the amount of the bonus for such fiscal year utilizing
the Company's audited financial statements for such fiscal year. The decision of
such accounting firm will be final and binding on the Company and Executive.
6. Except as otherwise provided herein, capitalized terms used herein
which are not defined herein have the meanings given to such terms under the
Employment Agreement to which this Annual Bonus Program is attached.
<PAGE> 1
STRICTLY CONFIDENTIAL
EMPLOYMENT AGREEMENT
BETWEEN
DOANE PRODUCTS COMPANY
AND
RICHARD A. HANNASCH
THIS EMPLOYMENT AGREEMENT dated January 1, 1998 is made between Doane
Products Company (the "Company"), a Delaware corporation, and Richard A.
Hannasch (the "Executive"). This Agreement is made with reference to the
following facts and objectives:
R E C I T A L S
A. The Executive shall be the Vice President - Marketing and New
Products of the Company and has served the Company as an employee continuously
during the past one year;
B. The Executive acknowledges that the services previously
provided by him to the Company and the services to be performed by him under
this Agreement are of a special and unique character; the business of the
Company is currently international in scope and the Company has plans to
continue to expand its business throughout the world; and the Company competes
with other persons that are or could be located in any part of the world; and in
order to assure the Company that the Company will retain its value and the
Company's business as a going concern, it is necessary that the Executive
undertake not to utilize his special knowledge of the Company, its business and
its relationships with customers and suppliers to compete with the Company if
the Executive were to leave the Company.
C. The Executive further acknowledges that, during his employment
to date by the Company, he has occupied a position of trust and confidence with
the Company and, during such employment, the Company has compensated him, among
other purposes, to develop and preserve customer relationships and other
goodwill exclusively for the Company's benefit and that, as a result, he has
developed customer relationships and goodwill that are valuable and important to
the Company, and has become familiar with the Company's trade secrets,
including, without limitation, its profit margins, customer preferences and
requirements, and with other proprietary and confidential information concerning
the Company and its business.
<PAGE> 2
D. The Executive further acknowledges that, throughout his
employment under this Agreement, he is expected to continue to occupy a position
of trust and confidence with the Company. In return, the Company will continue
to compensate him, among other purposes, to develop and preserve customer
relationships and goodwill exclusively for the Company's benefit, which will be
valuable and important to the Company. Further, he will likely continue to be
familiar with the Company's trade secrets, including, without limitation, its
profit margins, customer preferences and requirements, and with other
confidential and proprietary information concerning the Company and its
business.
E. The Executive further acknowledges that the use by him for his
own benefit or that of others of such goodwill, trade secrets or proprietary and
confidential information or the solicitation of and/or doing business with any
of the Company's customers and potential customers would have a material adverse
effect on the Company and its business, and would place the Company at a
substantial competitive disadvantage.
F. The Executive further acknowledges that the agreements and
covenants contained in this Agreement, and, in particular, sections 6
(Non-Competition Covenants) and 7 (Confidentiality and Proprietary Information),
are essential to protect the Company and the goodwill of the Company's business,
are a condition precedent to the Company's willingness to enter this Agreement
and to pay the consideration set forth in this Agreement, and are necessary and
reasonable in light of the particular business of the Company, his knowledge
thereof and the services he has previously performed and will perform under this
Agreement.
THE PARTIES ACCORDINGLY AGREE AS FOLLOWS:
AGREEMENT
1. EMPLOYMENT The Company hereby agrees to employ the
Executive, and the Executive hereby accepts employment by the Company, on the
terms and conditions of this Agreement.
2. EMPLOYMENT TERM
(a) Subject to section 9 (Termination of Employment),
the term of the Executive's employment under this Agreement begins on the date
of this Agreement and ends on the third anniversary of that date; provided,
however, that, commencing on the third anniversary of the date of this Agreement
and each subsequent anniversary, the term shall be extended for an additional
one year period unless either the Executive or the Company gives the other party
written notice at least thirty (30) days before such anniversary that this
Agreement shall terminate on the then scheduled expiration date (the
"non-extension notice"). If such non-extension notice is given, this Agreement
shall automatically terminate on such expiration date.
<PAGE> 3
(b) The actual term of the Executive's employment under
this Agreement, including any extension, continuation or earlier termination of
the original term, is referred to in this Agreement as the "employment term."
3. RESPONSIBILITIES During the employment term, the Executive
shall serve as Vice President - Marketing and New Products, or in any other
position or capacity to which he may from time to time be elected or appointed,
and shall perform such services for the Company as are reasonably required by
the Company, and as may be required by virtue of the offices and positions held
by the Executive. The Executive agrees that, as a part of his duties under this
Agreement, he may be required from time to time to perform services for
affiliates of the Company. The Executive will not be required to relocate his
residence outside the continental United States, but will be available for such
travel as his responsibilities under this Agreement may reasonably require. The
Executive shall devote his full time and best efforts to the performance of all
responsibilities to the Company and its affiliates and to further their
respective businesses and interests.
4. COMPENSATION
(a) The Company agrees to pay the Executive throughout
the employment term an initial base salary at the rate of $120,000.00 per annum
(as adjusted pursuant to the provision of this paragraph 4(a)) (the "base
salary") payable in equal installments in accordance with Company payroll
practices from time to time in effect. Executive's base salary will be reviewed
and may be adjusted annually by the president of the Company or by the board of
directors of the Company (or the compensation committee thereof) (the "board"),
after taking into consideration the recommendations of the president of the
Company, provided that Executive's base salary may not be decreased below his
initial base salary.
(b) Subject to Section 9 (Termination of Employment),
the Company agrees to pay the Executive throughout the employment term an annual
bonus (the "annual bonus") calculated pursuant to Exhibit A attached hereto. The
amount of the annual bonus payable to the Executive shall be prorated for the
portion of a year the Executive is employed by multiplying the annual bonus
determined pursuant to Exhibit A by a fraction with a numerator equal to the
number of days of the fiscal year during which the Executive was employed, and
with a denominator of 365.
5. OTHER EXECUTIVE BENEFITS
(a) The Executive shall, during the employment term, be
eligible to participate in such pension, profit sharing, bonus, life insurance,
hospitalization and major medical and other employee benefit plans of the
Company in effect from time to time, to the extent that he is eligible under and
complies with the terms of those plans, but the allocation of benefits under any
plan that provides that allocations thereunder shall be in the discretion of the
board shall be as determined from time to time solely by the board in its
discretion.
<PAGE> 4
(b) The Executive shall also participate in the
Company's paid vacation plan but in no event shall Executive's annual
entitlement be less than 4 weeks. Vacation not used by the end of a year shall
be forfeited and shall not be eligible to be carried over to another year or
eligible for reimbursement except as otherwise provided by Company policies.
6. NON-COMPETITION COVENANTS Throughout the employment term
and commencing with the date of this Agreement and ending on the later of the
end of the period that Executive receives severance pay from the Company
pursuant to Section 9 or the first anniversary of the date on which the
Executive ceases to be employed by the Company for any reason whatsoever, (the
"Non-Compete Period"), the Executive promises and agrees that he will not: (a)
directly or indirectly assist in, engage in, have any financial interest in, or
participate in any way in, as an owner, partner, employee, agent, board member,
or shareholder, any business that involves, in whole or in part, the design,
manufacture, distribution or sale of dry pet foods (or any other business in
which the Company may engage or begin preparation to engage during the
employment term) or make preparation with any person to do any of the foregoing;
provided, however, that the Executive may own, solely as an investment, up to
1.0% of any class of securities of any person if such securities are listed on
any national or regional securities exchange; (b) call upon or have any contact
with any person or any successor in interest to any person who was at any time
during the Executive's last three years of employment with the Company, a
customer of the Company, or call upon or have any contact with any person or any
successor in interest to any person who is a prospective customer of the
Company, and with whom the Executive dealt, or on whose account the Executive
worked, at any time during the Executive's last three years of employment with
the Company, for the purpose of (i) diverting any business of such person from
the Company, or (ii) selling or offering to sell to any such customer any
product or service that is of the same general type or that performs similar
functions as any product or service which has been sold, provided or offered for
sale by the Company at any time during the Executive's last three years of
employment with the Company, (c) solicit any employee of the Company to
terminate his or her employment with the Company or employ any such individual
during his or her employment with the Company and for a period of twelve months
after such individual terminates his or her employment with the Company, or (d)
without the prior written consent of the Company's board of directors, acquire
or discuss the acquisition of any ownership interest in or warrant or right to
acquire any such interest, or acquire any employment or other pecuniary benefit
from any person that, at the time, is a prospective candidate for or was a party
to a control transaction. The term "control transaction" means any transaction
or series of transactions whereby the Company or a controlling interest in the
Company is acquired by another Person (whether by purchase, merger,
consolidation or sale of all or substantially all of the Company's consolidated
assets). The Executive acknowledges and agrees that the consideration and
benefits to be provided to the Executive under this Agreement have been
bargained and negotiated in exchange for, and in consideration of, Executive's
agreement to abide by the terms and provisions of this section 6 and section 7
(Confidentiality and Proprietary Information). The Executive acknowledges and
agrees that all of the Executive's duties and obligations under this section 6
shall survive the expiration or termination of the Executive's employment with
the Company, regardless of the causes therefor.
<PAGE> 5
7. CONFIDENTIALITY AND PROPRIETARY INFORMATION In addition to
any common-law restriction upon the Executive's use, disclosure or exploitation
of confidential, proprietary or secret information of the Company, the Executive
covenants and agrees that, without prior written consent of the Company, he will
not at any time during or after the employment term use for himself or disclose
to or use for any other person, directly or indirectly, any secret, confidential
or proprietary information of the Company, including, without limitation, the
Company's processes, formulas, techniques, customer identities, preferences,
requirements, reports and other sensitive customer information, servicing
methods, profit margins, analyses, employee, vendor and supplier information,
business or marketing plans or strategies, financial data and presentation or
sales materials, technologies, computer programs, software, designs and
inventions (collectively, the "confidential information"); provided, however,
that the term confidential information does not include or refer to any
information that is in the public domain (other than by a breach of this
Agreement). The Executive acknowledges that the confidential information is
vital, sensitive, confidential and proprietary to the Company. The Executive
covenants and agrees that all files, reports, lists, materials, records,
documents, notes, memoranda, specifications, product or other formulas,
equipment and other items, and any originals, copies, recordings, abstracts or
notes thereof, relating to the confidential information or the Company business
that the Executive is or was either provided, prepares or prepared himself, uses
or used or simply acquires or acquired during this employment with the Company
(either before or during the employment term), are and shall remain the sole and
exclusive property of the Company and shall be immediately returned to the
Company at any time upon demand and, in all events, immediately at the end of
the employment term. The Executive acknowledges and agrees that all of the
Executive's duties and obligations under this section 7 shall survive the
expiration or termination of the Executive's employment with the Company,
regardless of the cause therefor.
8. REMEDIES FOR BREACH In the event of a breach or threatened
breach of any of the Executive's duties and obligations under sections 6
(Non-Competition Covenants) or 7 (Confidentiality and Proprietary Information),
the Company shall be entitled, in addition to any other legal or equitable
remedies the Company may have in that connection (including any right to damages
that the Company may suffer), to a temporary, preliminary, and/or permanent
injunction restraining such breach or threatened breach. The Executive hereby
expressly acknowledges that the harm that might result to the Company's goodwill
or its relationships with customers, or as a result of the disclosure or use of
the confidential information, is largely irreparable. The Executive specifically
agrees that, in the event there is a question as to the enforceability of
sections 6 (Non-Competition Covenants) or 7 (Confidentiality and Proprietary
Information), the Executive will not engage in any conduct inconsistent with or
contrary to either of such sections until after the question has been resolved
by a non-appealable final judgement.
<PAGE> 6
9. TERMINATION OF EMPLOYMENT
(a) The employment term and the Executive's employment
by the Company shall terminate: (i) upon the death of the Executive; (ii) upon
the disability of the Executive (as defined in section 9(b)(2)) upon thirty (30)
days prior written notice given by the Company to the Executive; (iii) for cause
(as defined in section 9(b)(1)), immediately upon the giving of written notice
thereof by the Company to the Executive or at such later time as the notice may
specify; (iv) without cause, upon not less than thirty (30) days prior written
notice given by the Company to the Executive, or (v) voluntarily by the
Executive upon not less than thirty (30) days prior written notice given to the
Company by the Executive.
(b) In this section 9:
(1) "Cause" means; (a) the Executive has been
indicted for or convicted of a felony; (b) the
commission of any act by Executive constituting
financial dishonesty against the Company (including
fraud or embezzlement); (c) gross dereliction of duty
to the Company (other than by reason of death or
disability) after Executive has been advised by the
board of directors or the Company's president of any
such dereliction of duty (whether of the same or
similar nature) and has been given an opportunity to
correct his performance; (d) commission of an act
involving moral turpitude which (i) brings the
Company into public disrepute or disgrace, or (ii)
causes material injury to the customer relations,
operations or the business prospects of the Company;
(e) the repeated refusal or failure by Executive to
follow the lawful directives of the board of
directors or the president of the Company; or (f) the
material breach by Executive of the provisions of
this Agreement.
(2) "Disability" refers to any circumstances in
which the Executive, by reason of illness, incapacity
or other disability, has failed to perform his duties
or fulfill his obligations under this Agreement for a
cumulative total of 180 days in any 12-month period.
(c) Upon the termination of the Executive's employment
under the Agreement, the employment term shall end and all rights of the
Executive under this Agreement shall terminate, except that the Executive shall
nonetheless be entitled to receive the following:
(1) If the termination occurs by reason of the
death or disability of the Executive, the Executive
shall be entitled to receive the base salary accrued
through the date of termination and annual bonus
prorated through the date of termination.
<PAGE> 7
(2) If the termination is made by the Company
without cause, or as a result of the Company
delivering a non-extension notice (but not as a
result of the Executive delivering a non-extension
notice to the Company), the Executive shall be
entitled to receive severance pay equivalent to his
base salary and annual bonus, if and as each would
have been payable if the Executive had not been so
terminated, for the period commencing on the first
day after the date of termination and terminating on
the first anniversary of the date on which Executive
ceases to be employed by the Company. With respect to
the annual bonus, for the year in which the
termination of employment occurred, the Executive
shall receive the annual bonus the Executive would
have been entitled to receive if the Executive had
remained employed for the entire year, and for the
last calendar year in which the Executive is
receiving severance payments, the Executive shall
receive a pro rata portion of the annual bonus the
Executive would have been entitled to receive if the
Executive had remained employed for the entire year
with such pro rata portion being equal to a fraction
with a numerator equal to the number of days of the
fiscal year during which the Executive receives
severance pay and with a denominator of 365.
(3) If the termination is made by the Company
without cause, or as a result of the Company
delivering a non-extension notice, and such
termination occurs after a control transaction
whereby Ralston Purina Company or any of its
subsidiaries or affiliates has acquired the Company,
the Executive shall be entitled to receive severance
pay equal to his base pay and annual bonus, with such
amounts being calculated in the same manner as set
forth above, except that the annual bonus for each of
such years shall be 50% of the annual base salary at
the time of termination of employment, for the period
commencing on this first day after the date of
termination and terminating on the third anniversary
of the date the Executive ceases to be employed by
the Company.
(4) If the termination is made by the Company for
cause, or voluntarily by Executive, the Executive
shall be entitled to receive his base salary through
the date of termination. If any termination for cause
made by the Company is ever ultimately determined by
an court, agency or other tribunal to have been
without cause, then the Company's sole liability
under the Agreement or otherwise at law or in equity
shall be to pay the Executive those amounts that
would have otherwise been paid to the Executive under
section 9(c)(2) (Termination of Employment, without
cause) and the reasonable attorney's fees and costs
incurred by the Executive in successfully obtaining
this determination from the court, agency or other
tribunal.
<PAGE> 8
(5) To the extent permitted by law or group
insurance plans maintained for the Company's
employees, Executive will be entitled to continue
coverage under any health, disability and life
insurance program during the period Executive is
receiving severance payments in accordance with
paragraphs 9(c)(1) through (4), at no cost to the
Executive. The Executive's rights will continue under
benefit programs that, by their own terms or by law,
extend beyond the date of termination or continued
coverage provided for in the preceding sentence,
including, without limitation, health care under
COBRA, pension, stock purchase or stock option
agreements, and non-qualified salary continuation
agreements.
10. NOTICE Any notice required or permitted to be given under
this agreement must be in writing and is effectively given:
(1) To the Company, when signed by the Executive and delivered in
person to the chairman of the board, president, or secretary
(excluding the Executive) of the Company, or, one day after
the date sent by national commercial courier for next day
delivery, or two days after the date mailed, by certified or
registered mail, postage prepaid, in either case to the
address set forth below, or at such other address as the
Company may designate for this purpose in a notice given to
the Executive.
Attn: Chief Executive Officer
Doane Products Company
P.O. Box 879
West 20th & State Line Road
Joplin, MO 64802
(2) To the Executive, when signed by an officer of the Company
(excluding the Executive) and delivered to the Executive in
person, or, one day after the date sent by national commercial
courier for next day delivery, or two days after the date
mailed, by certified or registered mail, postage prepaid, in
either case to the address set forth under the Executive's
signature at the end of this Agreement or at such other
address as the Executive may designate for this purpose in a
notice given to the Company.
11. INVALIDITY OF PROVISIONS If any provision of this Agreement
is adjudicated to be invalid or unenforceable under applicable law, the validity
or enforceability of the remaining provisions shall be unaffected. To the extent
that any provision of this agreement is adjudicated to be invalid or
unenforceable because it is over broad, that provision shall not be void but
rather shall be limited only to the extent required by applicable law and
enforced as so limited.
12. ENTIRE AGREEMENT; WRITTEN MODIFICATIONS This Agreement
contains the entire agreement between the parties and supersedes all prior or
<PAGE> 9
contemporaneous representations, promises, understandings and agreements between
the Executive and the Company. This Agreement may not be changed except by
written agreement of the parties.
13. GOVERNING LAW In light of the Company's contacts with the
state of Missouri and its significant interest in insuring that disputes as to
the validity and enforceability of section 6 (Non-Competition Covenants) and 7
(Confidentiality and Proprietary Information) of this Agreement are resolved on
a uniform basis, the Executive and the Company agree that any litigation
involving noncompliance with or alleged breach of sections 6 (Non-Competition
Covenants) or 7 (Confidentiality and Proprietary Information) must be filed and
conducted in Missouri and the Executive and the Company consent to the personal
jurisdiction of the federal and state courts sitting in Missouri for purposes of
any such litigation. This Agreement shall be governed by the internal laws of
the State of Missouri without regard to Missouri conflict of laws principles.
14. CERTAIN DEFINED TERMS In this agreement:
(1) "Affiliate" of the Company means any person
controlling, controlled by or under common control
with the Company.
(2) "Annual bonus" is defined in section 4(b).
(3) "Base salary" is defined in section 4(a).
(4) "Board" is defined in section 4(a).
(5) "Company" as used in sections 6
(Non-Competition Covenants) and 7 (Confidentiality
and Proprietary Information), includes each affiliate
of the Company for which the Executive performs
services at any time during his employment if the
affiliate is engaged in any business that involves,
in whole or in part, the design, manufacture,
distribution or sale of dry pet foods (or any other
business in which the Company may engage or begin
preparation to engage during the employment term).
(6) "Control transaction" is defined in section
6(d).
(7) "Employment term" is defined in section 2(b).
(8) "Non-extension notice" is defined in section
2(a).
(9) "Person" includes any individual, trust,
estate, business trust, partnership, corporation,
unincorporated association, governmental entity,
limited liability company and any other juridical
person.
<PAGE> 10
15. COMPANY'S AND EXECUTIVE'S RIGHT TO RECOVER COSTS The
Company and the Executive undertake and agree that, if either party breaches or
threatens to breach any provision of this Agreement, the breaching party shall
be liable for reasonable attorneys' fees and costs incurred by the other party
in enforcing its rights under this Agreement.
16. RULE OF CONSTRUCTION The rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
employed in interpreting this Agreement.
17. TOLLING In view of the parties' recognition and agreement
that the Company is entitled after the expiration or termination of the
employment term to certain limited protection from competition by the Executive,
the Executive and the Company agree that the running of the period set forth in
section 6 (Non-Competition Covenants) shall be tolled during any period of time
in which the Executive violates that section.
18. SUCCESSORS AND ASSIGNS The Company may assign this
Agreement or any right or interest under this Agreement to any person that
hereafter becomes an affiliate of the Company or to any person to which the
Company sells all or any substantial part of its assets and, in such event, the
Company shall, automatically upon the assignee's assumption of the Company's
obligations hereunder, be released from any such obligations. This Agreement
shall inure to the benefit of the Company, and its successors and assigns.
19. NONWAIVER OF RIGHTS The Company's or the Executive's
failure to enforce at any time any of the provisions of this Agreement or to
require at any time performance by the other party of any of the provisions
hereof shall in no way be construed to be a waiver of such provisions or to
affect either the validity of this Agreement, or any part hereof, or the right
of the Company or the Executive thereafter to enforce each and every provision
in accordance with the terms of this Agreement.
- The remainder of this page is intentionally left blank -
<PAGE> 11
PLEASE NOTE: BY SIGNING THIS AGREEMENT, THE EXECUTIVE IS
HEREBY CERTIFYING THAT THE EXECUTIVE (A) RECEIVED A COPY OF THIS
AGREEMENT FOR REVIEW AND STUDY BEFORE EXECUTING IT; (B) READ
THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C) HAD SUFFICIENT
OPPORTUNITY BEFORE SIGNING THIS AGREEMENT TO ASK ANY QUESTIONS
THE EXECUTIVE HAD ABOUT THIS AGREEMENT AND RECEIVED
SATISFACTORY ANSWERS TO ALL SUCH QUESTIONS; (D) UNDERSTANDS
THE EXECUTIVE'S RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT;
AND (E) EXECUTED AND DELIVERED THIS AGREEMENT AT THE OFFICES OF
THE COMPANY IN JOPLIN, MISSOURI.
EXECUTED AND EFFECTIVE as of the date first written above.
WITNESS: DOANE PRODUCTS COMPANY
/s/ Barbara McKee /s/ Bob L. Robinson
- ---------------------------------- ------------------------------------
Bob L. Robinson
President and CEO
WITNESS: EXECUTIVE:
/s/ Sherry Williams /s/ Richard A. Hannasch
- ---------------------------------- ------------------------------------
2514 E. 12th
------------------------------------
Street Address
Joplin, MO 64801
------------------------------------
City, State, Zip Code
<PAGE> 12
EXHIBIT A
DOANE PRODUCTS COMPANY
ANNUAL BONUS PROGRAM
1. For each fiscal year of the Company during the employment term, the
board, after taking into consideration the recommendations of the president of
the Company, will establish objectives comprised of both corporate and
individual goals (each goal will be referred to herein as a "Target"), as well
as the percentage weighting (the "weight") that will apply to each Target,
wherein the sum of the weights shall equal 100%.
2. For the Company's 1998 fiscal year, the board will set an EBITDA
Target for the Company and its subsidiaries which will be weighted at 100% for
the calculation of the bonus payable under this program for the 1998 fiscal
year. The term "EBITDA" will have the same meaning as set forth in the DPC
Acquisition Corp. Option Agreements granted under the DPC Acquisition Corp. 1996
Stock Option Plan.
3. For purposes of computing the Executive's annual bonus, the bonus
will be equal to 50% of his base salary in effect at the end of the fiscal year
(the "base bonus") and the annual bonus will be computed by summing the
percentages earned for each Target, as determined by computing the sum of
paragraphs in 3(a) through 3(d) below for each Target that has been assigned a
weight, and then multiplying that sum times the base bonus.
(a) Where the actual performance exceeds 85% of the
Target for such fiscal year, Executive will receive 55% of the
weight assigned for the Target.
<PAGE> 13
(b) For each of the first full 15 percentage points
by which actual performance exceeds 85% of the Target,
Executive will receive 3% of the weight assigned for the
Target. The maximum which Executive may receive under this
paragraph 3(b) cannot exceed 45% of the weight assigned for
the Target.
(c) For each of the first full 15 percentage points
by which the actual performance exceeds 100% of the Target,
Executive will receive 6% of the weight assigned for the
Target. The maximum which Executive may receive under this
paragraph 3(c) cannot exceed 90% of the weight assigned for
the Target.
(d) For each full percentage point by which the
actual performance exceeds 115% of the Target, Executive will
receive 9% of the weight assigned for the target.
For illustrative purposes, assume the Executive's base bonus is $30,000
and his weighting is as follows:
<TABLE>
<CAPTION>
Target Weight Description of Target
------ ------ ---------------------
<S> <C> <C>
1 50% Corporate EBITDA
2 35% Territory Margin Contribution
3 15% Expense Control
</TABLE>
Bonus Calculation:
<TABLE>
<CAPTION>
Assumed % Earned Weighted
Target Performance for Target Weight % Earned
------ ----------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
1 95% 85% x 50% = 42.5%
2 120% 235% x 35% = 82.3%
3 80% 0 x 15% = 0
--------
% of base bonus earned 124.8%
Base bonus $30,000
Bonus earned $37,440
</TABLE>
<PAGE> 14
4. In the event that, after the setting of the Targets, the Company or
any of its subsidiaries acquires additional assets, entities or subsidiaries
that produce the same or similar products, which acquisition, either singly or
together with one or more other acquisitions, the board determines in good faith
may significantly affect the Targets for the fiscal year, the board may, in good
faith, either (a) adjust such Targets to reflect the projected effect of such
acquisition or acquisitions on any Targets or (b) exclude the effects of such
acquisition or acquisitions on the Targets for purposes of determining
Executive's annual bonus by calculating the Targets for such fiscal year on a
pro forma basis as though such acquisition or acquisitions had not been
consummated. Similarly, in the event that, after setting the Targets, the
Company is acquired by another Person (whether by purchase, merger,
consolidation or sale of all or substantially all of the Company's consolidated
assets) and the board determines in good faith that such acquisition may
significantly affect the Targets for the fiscal year, the board may, in good
faith, either (x) adjust such Targets to reflect the projected effect of such
acquisition on any Target or (y) exclude the effects of such acquisition on the
Targets for purposes of determining Executive's annual bonus by calculating the
Targets for such fiscal year on a pro forma basis as though such acquisition had
not been consummated.
5. The annual bonus payable for any fiscal year will be paid within 30
days after the delivery of the Company's audited financial statements for such
fiscal year. In the event of any dispute between the Company and Executive as to
the amount of the bonus for any fiscal year, such dispute will be resolved by
the
<PAGE> 15
Company's auditors or any one of Price Waterhouse, Arthur Andersen, or Ernst
& Young, or their successors, as selected by the board, by having such
accounting firm calculate the amount of the bonus for such fiscal year utilizing
the Company's audited financial statements for such fiscal year. The decision of
such accounting firm will be final and binding on the Company and Executive.
6. Except as otherwise provided herein, capitalized terms used herein
which are not defined herein have the meanings given to such terms under the
Employment Agreement to which this Annual Bonus Program is attached.
<PAGE> 1
STRICTLY CONFIDENTIAL
EMPLOYMENT AGREEMENT
BETWEEN
DOANE PRODUCTS COMPANY
AND
DAVID L. HORTON
THIS EMPLOYMENT AGREEMENT dated January 1, 1998 is made between Doane
Products Company (the "Company"), a Delaware corporation, and David L. Horton
(the "Executive"). This Agreement is made with reference to the following facts
and objectives:
R E C I T A L S
A. The Executive shall be the Vice President - Fulfillment of the
Company and has served the Company as an employee continuously during the past
one month;
B. The Executive acknowledges that the services previously
provided by him to the Company and the services to be performed by him under
this Agreement are of a special and unique character; the business of the
Company is currently international in scope and the Company has plans to
continue to expand its business throughout the world; and the Company competes
with other persons that are or could be located in any part of the world; and in
order to assure the Company that the Company will retain its value and the
Company's business as a going concern, it is necessary that the Executive
undertake not to utilize his special knowledge of the Company, its business and
its relationships with customers and suppliers to compete with the Company if
the Executive were to leave the Company.
C. The Executive further acknowledges that, during his employment
to date by the Company, he has occupied a position of trust and confidence with
the Company and, during such employment, the Company has compensated him, among
other purposes, to develop and preserve customer relationships and other
goodwill exclusively for the Company's benefit and that, as a result, he has
developed customer relationships and goodwill that are valuable and important to
the Company, and has become familiar with the Company's trade secrets,
including, without limitation, its profit margins, customer preferences and
requirements, and with other proprietary and confidential information concerning
the Company and its business.
<PAGE> 2
D. The Executive further acknowledges that, throughout his
employment under this Agreement, he is expected to continue to occupy a position
of trust and confidence with the Company. In return, the Company will continue
to compensate him, among other purposes, to develop and preserve customer
relationships and goodwill exclusively for the Company's benefit, which will be
valuable and important to the Company. Further, he will likely continue to be
familiar with the Company's trade secrets, including, without limitation, its
profit margins, customer preferences and requirements, and with other
confidential and proprietary information concerning the Company and its
business.
E. The Executive further acknowledges that the use by him for his
own benefit or that of others of such goodwill, trade secrets or proprietary and
confidential information or the solicitation of and/or doing business with any
of the Company's customers and potential customers would have a material adverse
effect on the Company and its business, and would place the Company at a
substantial competitive disadvantage.
F. The Executive further acknowledges that the agreements and
covenants contained in this Agreement, and, in particular, sections 6
(Non-Competition Covenants) and 7 (Confidentiality and Proprietary Information),
are essential to protect the Company and the goodwill of the Company's business,
are a condition precedent to the Company's willingness to enter this Agreement
and to pay the consideration set forth in this Agreement, and are necessary and
reasonable in light of the particular business of the Company, his knowledge
thereof and the services he has previously performed and will perform under this
Agreement.
THE PARTIES ACCORDINGLY AGREE AS FOLLOWS:
AGREEMENT
1. EMPLOYMENT The Company hereby agrees to employ the
Executive, and the Executive hereby accepts employment by the Company, on the
terms and conditions of this Agreement.
2. EMPLOYMENT TERM
(a) Subject to section 9 (Termination of Employment), the term
of the Executive's employment under this Agreement begins on the date of this
Agreement and ends on the third anniversary of that date; provided, however,
that, commencing on the third anniversary of the date of this Agreement and each
subsequent anniversary, the term shall be extended for an additional one year
period unless either the Executive or the Company gives the other party written
notice at least thirty (30) days before such anniversary that this Agreement
shall terminate on the then scheduled expiration date (the "non-extension
notice"). If such non-extension notice is given, this Agreement shall
automatically terminate on such expiration date.
<PAGE> 3
(b) The actual term of the Executive's employment under this
Agreement, including any extension, continuation or earlier termination of the
original term, is referred to in this Agreement as the "employment term."
3. RESPONSIBILITIES During the employment term, the
Executive shall serve as Vice President - Fulfillment or in any other position
or capacity to which he may from time to time be elected or appointed, and shall
perform such services for the Company as are reasonably required by the Company,
and as may be required by virtue of the offices and positions held by the
Executive. The Executive agrees that, as a part of his duties under this
Agreement, he may be required from time to time to perform services for
affiliates of the Company. The Executive will not be required to relocate his
residence outside the continental United States, but will be available for such
travel as his responsibilities under this Agreement may reasonably require. The
Executive shall devote his full time and best efforts to the performance of all
responsibilities to the Company and its affiliates and to further their
respective businesses and interests.
4. COMPENSATION
(a) The Company agrees to pay the Executive throughout the
employment term an initial base salary at the rate of $140,000.00 per annum (as
adjusted pursuant to the provision of this paragraph 4(a)) (the "base salary")
payable in equal installments in accordance with Company payroll practices from
time to time in effect. Executive's base salary will be reviewed and may be
adjusted annually by the president of the Company or by the board of directors
of the Company (or the compensation committee thereof) (the "board"), after
taking into consideration the recommendations of the president of the Company,
provided that Executive's base salary may not be decreased below his initial
base salary.
(b) Subject to Section 9 (Termination of Employment), the
Company agrees to pay the Executive throughout the employment term an annual
bonus (the "annual bonus") calculated pursuant to Exhibit A attached hereto. The
amount of the annual bonus payable to the Executive shall be prorated for the
portion of a year the Executive is employed by multiplying the annual bonus
determined pursuant to Exhibit A by a fraction with a numerator equal to the
number of days of the fiscal year during which the Executive was employed, and
with a denominator of 365.
5. OTHER EXECUTIVE BENEFITS
(a) The Executive shall, during the employment term, be
eligible to participate in such pension, profit sharing, bonus, life insurance,
hospitalization and major medical and other employee benefit plans of the
Company in effect from time to time, to the extent that he is eligible under and
complies with the terms of those plans, but the allocation of benefits under any
plan that provides that allocations thereunder shall be in the discretion of the
board shall be as determined from time to time solely by the board in its
discretion.
<PAGE> 4
(b) The Executive shall also participate in the Company's paid
vacation plan but in no event shall Executive's annual entitlement be less than
4 weeks. Vacation not used by the end of a year shall be forfeited and shall not
be eligible to be carried over to another year or eligible for reimbursement
except as otherwise provided by Company policies.
6. NON-COMPETITION COVENANTS Throughout the employment term
and commencing with the date of this Agreement and ending on the later of the
end of the period that Executive receives severance pay from the Company
pursuant to Section 9 or the first anniversary of the date on which the
Executive ceases to be employed by the Company for any reason whatsoever, (the
"Non-Compete Period"), the Executive promises and agrees that he will not: (a)
directly or indirectly assist in, engage in, have any financial interest in, or
participate in any way in, as an owner, partner, employee, agent, board member,
or shareholder, any business that involves, in whole or in part, the design,
manufacture, distribution or sale of dry pet foods (or any other business in
which the Company may engage or begin preparation to engage during the
employment term) or make preparation with any person to do any of the foregoing;
provided, however, that the Executive may own, solely as an investment, up to
1.0% of any class of securities of any person if such securities are listed on
any national or regional securities exchange; (b) call upon or have any contact
with any person or any successor in interest to any person who was at any time
during the Executive's last three years of employment with the Company, a
customer of the Company, or call upon or have any contact with any person or any
successor in interest to any person who is a prospective customer of the
Company, and with whom the Executive dealt, or on whose account the Executive
worked, at any time during the Executive's last three years of employment with
the Company, for the purpose of (i) diverting any business of such person from
the Company, or (ii) selling or offering to sell to any such customer any
product or service that is of the same general type or that performs similar
functions as any product or service which has been sold, provided or offered for
sale by the Company at any time during the Executive's last three years of
employment with the Company, (c) solicit any employee of the Company to
terminate his or her employment with the Company or employ any such individual
during his or her employment with the Company and for a period of twelve months
after such individual terminates his or her employment with the Company, or (d)
without the prior written consent of the Company's board of directors, acquire
or discuss the acquisition of any ownership interest in or warrant or right to
acquire any such interest, or acquire any employment or other pecuniary benefit
from any person that, at the time, is a prospective candidate for or was a party
to a control transaction. The term "control transaction" means any transaction
or series of transactions whereby the Company or a controlling interest in the
Company is acquired by another Person (whether by purchase, merger,
consolidation or sale of all or substantially all of the Company's consolidated
assets). The Executive acknowledges and agrees that the consideration and
benefits to be provided to the Executive under this Agreement have been
bargained and negotiated in exchange for, and in consideration of, Executive's
agreement to abide by the terms and provisions of this section 6 and section 7
(Confidentiality and Proprietary Information). The Executive acknowledges and
agrees that all of the Executive's duties and obligations under this section 6
shall survive the expiration or termination of the Executive's employment with
the Company, regardless of the causes therefor.
<PAGE> 5
7. CONFIDENTIALITY AND PROPRIETARY INFORMATION In addition
to any common-law restriction upon the Executive's use, disclosure or
exploitation of confidential, proprietary or secret information of the Company,
the Executive covenants and agrees that, without prior written consent of the
Company, he will not at any time during or after the employment term use for
himself or disclose to or use for any other person, directly or indirectly, any
secret, confidential or proprietary information of the Company, including,
without limitation, the Company's processes, formulas, techniques, customer
identities, preferences, requirements, reports and other sensitive customer
information, servicing methods, profit margins, analyses, employee, vendor and
supplier information, business or marketing plans or strategies, financial data
and presentation or sales materials, technologies, computer programs, software,
designs and inventions (collectively, the "confidential information"); provided,
however, that the term confidential information does not include or refer to any
information that is in the public domain (other than by a breach of this
Agreement). The Executive acknowledges that the confidential information is
vital, sensitive, confidential and proprietary to the Company. The Executive
covenants and agrees that all files, reports, lists, materials, records,
documents, notes, memoranda, specifications, product or other formulas,
equipment and other items, and any originals, copies, recordings, abstracts or
notes thereof, relating to the confidential information or the Company business
that the Executive is or was either provided, prepares or prepared himself, uses
or used or simply acquires or acquired during this employment with the Company
(either before or during the employment term), are and shall remain the sole and
exclusive property of the Company and shall be immediately returned to the
Company at any time upon demand and, in all events, immediately at the end of
the employment term. The Executive acknowledges and agrees that all of the
Executive's duties and obligations under this section 7 shall survive the
expiration or termination of the Executive's employment with the Company,
regardless of the cause therefor.
8. REMEDIES FOR BREACH In the event of a breach or
threatened breach of any of the Executive's duties and obligations under
sections 6 (Non-Competition Covenants) or 7 (Confidentiality and Proprietary
Information), the Company shall be entitled, in addition to any other legal or
equitable remedies the Company may have in that connection (including any right
to damages that the Company may suffer), to a temporary, preliminary, and/or
permanent injunction restraining such breach or threatened breach. The Executive
hereby expressly acknowledges that the harm that might result to the Company's
goodwill or its relationships with customers, or as a result of the disclosure
or use of the confidential information, is largely irreparable. The Executive
specifically agrees that, in the event there is a question as to the
enforceability of sections 6 (Non-Competition Covenants) or 7 (Confidentiality
and Proprietary Information), the Executive will not engage in any conduct
inconsistent with or contrary to either of such sections until after the
question has been resolved by a non-appealable final judgement.
<PAGE> 6
9. TERMINATION OF EMPLOYMENT
(a) The employment term and the Executive's employment by the
Company shall terminate: (i) upon the death of the Executive; (ii) upon the
disability of the Executive (as defined in section 9(b)(2)) upon thirty (30)
days prior written notice given by the Company to the Executive; (iii) for cause
(as defined in section 9(b)(1)), immediately upon the giving of written notice
thereof by the Company to the Executive or at such later time as the notice may
specify; (iv) without cause, upon not less than thirty (30) days prior written
notice given by the Company to the Executive, or (v) voluntarily by the
Executive upon not less than thirty (30) days prior written notice given to the
Company by the Executive.
(b) In this section 9:
(1) "Cause" means; (a) the Executive has been
indicted for or convicted of a felony; (b) the
commission of any act by Executive constituting
financial dishonesty against the Company (including
fraud or embezzlement); (c) gross dereliction of duty
to the Company (other than by reason of death or
disability) after Executive has been advised by the
board of directors or the Company's president of any
such dereliction of duty (whether of the same or
similar nature) and has been given an opportunity to
correct his performance; (d) commission of an act
involving moral turpitude which (i) brings the
Company into public disrepute or disgrace, or (ii)
causes material injury to the customer relations,
operations or the business prospects of the Company;
(e) the repeated refusal or failure by Executive to
follow the lawful directives of the board of
directors or the president of the Company; or (f) the
material breach by Executive of the provisions of
this Agreement.
(2) "Disability" refers to any circumstances in which
the Executive, by reason of illness, incapacity or
other disability, has failed to perform his duties or
fulfill his obligations under this Agreement for a
cumulative total of 180 days in any 12-month period.
(c) Upon the termination of the Executive's employment under
the Agreement, the employment term shall end and all rights of the Executive
under this Agreement shall terminate, except that the Executive shall
nonetheless be entitled to receive the following:
(1) If the termination occurs by reason of the death
or disability of the Executive, the Executive shall
be entitled to receive the base salary accrued
through the date of termination and annual bonus
prorated through the date of termination.
(2) If the termination is made by the Company without
cause, or as a result of the Company delivering a
non-extension notice
<PAGE> 7
(but not as a result of the Executive delivering a
non-extension notice to the Company), the Executive
shall be entitled to receive severance pay equivalent
to his base salary and annual bonus, if and as each
would have been payable if the Executive had not been
so terminated, for the period commencing on the first
day after the date of termination and terminating on
the first anniversary of the date on which Executive
ceases to be employed by the Company. With respect to
the annual bonus, for the year in which the
termination of employment occurred, the Executive
shall receive the annual bonus the Executive would
have been entitled to receive if the Executive had
remained employed for the entire year, and for the
last calendar year in which the Executive is
receiving severance payments, the Executive shall
receive a pro rata portion of the annual bonus the
Executive would have been entitled to receive if the
Executive had remained employed for the entire year
with such pro rata portion being equal to a fraction
with a numerator equal to the number of days of the
fiscal year during which the Executive receives
severance pay and with a denominator of 365.
(3) If the termination is made by the Company for
cause, or voluntarily by Executive, the Executive
shall be entitled to receive his base salary through
the date of termination. If any termination for cause
made by the Company is ever ultimately determined by
an court, agency or other tribunal to have been
without cause, then the Company's sole liability
under the Agreement or otherwise at law or in equity
shall be to pay the Executive those amounts that
would have otherwise been paid to the Executive under
section 9(c)(2) (Termination of Employment, without
cause) and the reasonable attorney's fees and costs
incurred by the Executive in successfully obtaining
this determination from the court, agency or other
tribunal.
(4) To the extent permitted by law or group insurance
plans maintained for the Company's employees,
Executive will be entitled to continue coverage under
any health, disability and life insurance program
during the period Executive is receiving severance
payments in accordance with paragraphs 9(c)(1), (2)
or (3), at no cost to the Executive. The Executive's
rights will continue under benefit programs that, by
their own terms or by law, extend beyond the date of
termination or continued coverage provided for in the
preceding sentence, including, without limitation,
health care under COBRA, pension, stock purchase or
stock option agreements, and non-qualified salary
continuation agreements.
10. NOTICE Any notice required or permitted to be given under
this agreement must be in writing and is effectively given:
<PAGE> 8
(1) To the Company, when signed by the Executive and delivered in
person to the chairman of the board, president, or secretary
(excluding the Executive) of the Company, or, one day after the
date sent by national commercial courier for next day delivery, or
two days after the date mailed, by certified or registered mail,
postage prepaid, in either case to the address set forth below, or
at such other address as the Company may designate for this
purpose in a notice given to the Executive.
Attn: Chief Executive Officer
Doane Products Company
P.O. Box 879
West 20th & State Line Road
Joplin, MO 64802
(2) To the Executive, when signed by an officer of the Company
(excluding the Executive) and delivered to the Executive in
person, or, one day after the date sent by national commercial
courier for next day delivery, or two days after the date mailed,
by certified or registered mail, postage prepaid, in either case
to the address set forth under the Executive's signature at the
end of this Agreement or at such other address as the Executive
may designate for this purpose in a notice given to the Company.
11. INVALIDITY OF PROVISIONS If any provision of this
Agreement is adjudicated to be invalid or unenforceable under applicable law,
the validity or enforceability of the remaining provisions shall be unaffected.
To the extent that any provision of this agreement is adjudicated to be invalid
or unenforceable because it is over broad, that provision shall not be void but
rather shall be limited only to the extent required by applicable law and
enforced as so limited.
12. ENTIRE AGREEMENT; WRITTEN MODIFICATIONS This Agreement
contains the entire agreement between the parties and supersedes all prior or
contemporaneous representations, promises, understandings and agreements between
the Executive and the Company. This Agreement may not be changed except by
written agreement of the parties.
13. GOVERNING LAW In light of the Company's contacts with the
state of Missouri and its significant interest in insuring that disputes as to
the validity and enforceability of section 6 (Non-Competition Covenants) and 7
(Confidentiality and Proprietary Information) of this Agreement are resolved on
a uniform basis, the Executive and the Company agree that any litigation
involving noncompliance with or alleged breach of sections 6 (Non-Competition
Covenants) or 7 (Confidentiality and Proprietary Information) must be filed and
conducted in Missouri and the Executive and the Company consent to the personal
jurisdiction of the federal and state courts sitting in Missouri for purposes of
any such litigation. This Agreement shall be governed by the internal laws of
the State of Missouri without regard to Missouri conflict of laws principles.
<PAGE> 9
14. CERTAIN DEFINED TERMS In this agreement:
(1) "Affiliate" of the Company means any person
controlling, controlled by or under common control
with the Company.
(2) "Annual bonus" is defined in section 4(b).
(3) "Base salary" is defined in section 4(a).
(4) "Board" is defined in section 4(a).
(5) "Company" as used in sections 6 (Non-Competition
Covenants) and 7 (Confidentiality and Proprietary
Information), includes each affiliate of the Company
for which the Executive performs services at any time
during his employment if the affiliate is engaged in
any business that involves, in whole or in part, the
design, manufacture, distribution or sale of dry pet
foods (or any other business in which the Company may
engage or begin preparation to engage during the
employment term).
(6) "Control transaction" is defined in section 6(d).
(7) "Employment term" is defined in section 2(b).
(8) "Non-extension notice" is defined in section
2(a).
(9) "Person" includes any individual, trust, estate,
business trust, partnership, corporation,
unincorporated association, governmental entity,
limited liability company and any other juridical
person.
15. COMPANY'S AND EXECUTIVE'S RIGHT TO RECOVER COSTS The
Company and the Executive undertake and agree that, if either party breaches or
threatens to breach any provision of this Agreement, the breaching party shall
be liable for reasonable attorneys' fees and costs incurred by the other party
in enforcing its rights under this Agreement.
16. RULE OF CONSTRUCTION The rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be employed in interpreting this Agreement.
17. TOLLING In view of the parties' recognition and
agreement that the Company is entitled after the expiration or termination of
the employment term to certain limited protection from competition by the
Executive, the Executive and the Company agree that the running of the period
set forth in section 6 (Non-Competition
<PAGE> 10
Covenants) shall be tolled during any period of time in which the Executive
violates that section.
18. SUCCESSORS AND ASSIGNS The Company may assign this
Agreement or any right or interest under this Agreement to any person that
hereafter becomes an affiliate of the Company or to any person to which the
Company sells all or any substantial part of its assets and, in such event, the
Company shall, automatically upon the assignee's assumption of the Company's
obligations hereunder, be released from any such obligations. This Agreement
shall inure to the benefit of the Company, and its successors and assigns.
19. NONWAIVER OF RIGHTS The Company's or the Executive's
failure to enforce at any time any of the provisions of this Agreement or to
require at any time performance by the other party of any of the provisions
hereof shall in no way be construed to be a waiver of such provisions or to
affect either the validity of this Agreement, or any part hereof, or the right
of the Company or the Executive thereafter to enforce each and every provision
in accordance with the terms of this Agreement.
- The remainder of this page is intentionally left blank -
<PAGE> 11
PLEASE NOTE: BY SIGNING THIS AGREEMENT, THE EXECUTIVE IS HEREBY
CERTIFYING THAT THE EXECUTIVE (A) RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW
AND STUDY BEFORE EXECUTING IT; (B) READ THIS AGREEMENT CAREFULLY BEFORE SIGNING
IT; (C) HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THIS AGREEMENT TO ASK ANY
QUESTIONS THE EXECUTIVE HAD ABOUT THIS AGREEMENT AND RECEIVED SATISFACTORY
ANSWERS TO ALL SUCH QUESTIONS; (D) UNDERSTANDS THE EXECUTIVE'S RIGHTS AND
OBLIGATIONS UNDER THIS AGREEMENT; AND (E) EXECUTED AND DELIVERED THIS AGREEMENT
AT THE OFFICES OF THE COMPANY IN JOPLIN, MISSOURI.
EXECUTED AND EFFECTIVE as of the date first written above.
WITNESS: DOANE PRODUCTS COMPANY
/s/ Angie Stone /s/ Bob L. Robinson
- ---------------------------------- ----------------------------------
Bob L. Robinson
President and CEO
WITNESS: EXECUTIVE:
/s/ Sherry Williams /s/ David L. Horton
- ---------------------------------- ----------------------------------
44 Waterford Lane
----------------------------------
Street Address
Glen Carbon, IL 62034
----------------------------------
City, State, Zip Code
<PAGE> 12
EXHIBIT A
DOANE PRODUCTS COMPANY
ANNUAL BONUS PROGRAM
1. For each fiscal year of the Company during the employment term, the
board, after taking into consideration the recommendations of the president of
the Company, will establish objectives comprised of both corporate and
individual goals (each goal will be referred to herein as a "Target"), as well
as the percentage weighting (the "weight") that will apply to each Target,
wherein the sum of the weights shall equal 100%.
2. For the Company's 1998 fiscal year, the board will set an EBITDA
Target for the Company and its subsidiaries which will be weighted at 100% for
the calculation of the bonus payable under this program for the 1998 fiscal
year. The term "EBITDA" will have the same meaning as set forth in the DPC
Acquisition Corp. Option Agreements granted under the DPC Acquisition Corp. 1996
Stock Option Plan.
3. For purposes of computing the Executive's annual bonus, the bonus
will be equal to 50% of his base salary in effect at the end of the fiscal year
(the "base bonus") and the annual bonus will be computed by summing the
percentages earned for each Target, as determined by computing the sum of
paragraphs in 3(a) through 3(d) below for each Target that has been assigned a
weight, and then multiplying that sum times the base bonus.
(a) Where the actual performance exceeds 85% of the
Target for such fiscal year, Executive will receive 55% of the
weight assigned for the Target.
<PAGE> 13
(b) For each of the first full 15 percentage points
by which actual performance exceeds 85% of the Target,
Executive will receive 3% of the weight assigned for the
Target. The maximum which Executive may receive under this
paragraph 3(b) cannot exceed 45% of the weight assigned for
the Target.
(c) For each of the first full 15 percentage points
by which the actual performance exceeds 100% of the Target,
Executive will receive 6% of the weight assigned for the
Target. The maximum which Executive may receive under this
paragraph 3(c) cannot exceed 90% of the weight assigned for
the Target.
(d) For each full percentage point by which the
actual performance exceeds 115% of the Target, Executive will
receive 9% of the weight assigned for the target.
For illustrative purposes, assume the Executive's base bonus is $30,000
and his weighting is as follows:
<TABLE>
<CAPTION>
Target Weight Description of Target
------ ------ ---------------------
<S> <C> <C>
1 50% Corporate EBITDA
2 35% Territory Margin Contribution
3 15% Expense Control
</TABLE>
<TABLE>
<CAPTION>
Bonus Calculation:
------------------
Assumed % Earned Weighted
Target Performance for Target Weight % Earned
------ ----------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
1 95% 85% x 50% = 42.5%
2 120% 235% x 35% = 82.3%
3 80% 0 x 15% = 0
-------
% of base bonus earned 124.8%
Base bonus $30,000
Bonus earned $37,440
</TABLE>
<PAGE> 14
4. In the event that, after the setting of the Targets, the Company or
any of its subsidiaries acquires additional assets, entities or subsidiaries
that produce the same or similar products, which acquisition, either singly or
together with one or more other acquisitions, the board determines in good faith
may significantly affect the Targets for the fiscal year, the board may, in good
faith, either (a) adjust such Targets to reflect the projected effect of such
acquisition or acquisitions on any Targets or (b) exclude the effects of such
acquisition or acquisitions on the Targets for purposes of determining
Executive's annual bonus by calculating the Targets for such fiscal year on a
pro forma basis as though such acquisition or acquisitions had not been
consummated. Similarly, in the event that, after setting the Targets, the
Company is acquired by another Person (whether by purchase, merger,
consolidation or sale of all or substantially all of the Company's consolidated
assets) and the board determines in good faith that such acquisition may
significantly affect the Targets for the fiscal year, the board may, in good
faith, either (x) adjust such Targets to reflect the projected effect of such
acquisition on any Target or (y) exclude the effects of such acquisition on the
Targets for purposes of determining Executive's annual bonus by calculating the
Targets for such fiscal year on a pro forma basis as though such acquisition had
not been consummated.
5. The annual bonus payable for any fiscal year will be paid within 30
days after the delivery of the Company's audited financial statements for such
fiscal year. In the event of any dispute between the Company and Executive as to
the amount of the bonus for any fiscal year, such dispute will be resolved by
the
<PAGE> 15
Company's auditors or any one of Price Waterhouse, Arthur Andersen, or Ernst &
Young, or their successors, as selected by the board, by having such accounting
firm calculate the amount of the bonus for such fiscal year utilizing the
Company's audited financial statements for such fiscal year. The decision of
such accounting firm will be final and binding on the Company and Executive.
6. Except as otherwise provided herein, capitalized terms used herein
which are not defined herein have the meanings given to such terms under the
Employment Agreement to which this Annual Bonus Program is attached.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF DOANE PET CARE COMPANY
<TABLE>
<CAPTION>
Name of Subsidiary Place of Incorporation/Organization
------------------ -----------------------------------
<S> <C>
DPC International Limited United Kingdom
Doane Pet Care Spain, S.A. Spain
IPES IBERICA, S.A. Spain
Effeffe, S.p.a. Spain
Doane/Windy Hill Delaware
Joint Venture Corp.
Doane/Windy Hill Joint Texas
Venture, LLC
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Doane Pet Care Company
We consent to the use of our reports (dated February 13, 1998 with
respect to Doane Pet Care Company, 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
Houston, Texas
January 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5 <LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DOANE
PET CARE COMPANY UNAUDITED INTERIM SUPPLEMENTARY CONDENSED COMBINED FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,833
<SECURITIES> 0
<RECEIVABLES> 87,259
<ALLOWANCES> (500)
<INVENTORY> 52,901
<CURRENT-ASSETS> 166,388
<PP&E> 235,898
<DEPRECIATION> (34,233)
<TOTAL-ASSETS> 664,852
<CURRENT-LIABILITIES> 115,732
<BONDS> 280,000
0
35,898
<COMMON> 0
<OTHER-SE> 67,356
<TOTAL-LIABILITY-AND-EQUITY> 664,852
<SALES> 462,991
<TOTAL-REVENUES> 462,991
<CGS> 378,583
<TOTAL-COSTS> 434,130
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,444
<INCOME-PRETAX> 9,646
<INCOME-TAX> 3,226
<INCOME-CONTINUING> 6,420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,420
<EPS-PRIMARY> 1069
<EPS-DILUTED> 1069
</TABLE>
