Filed Pursuant to Rule 424(b)(3)
Registration No. 333-104767
Registration No. 333-104767-01
Registration No. 333-104767-02
PROSPECTUS
DOANE PET CARE COMPANY
[DPC LOGO]
OFFER TO EXCHANGE
UP TO $213,000,000 OF
10 3/4% SENIOR NOTES DUE 2010
FOR
UP TO $213,000,000 OF
10 3/4% SENIOR NOTES DUE 2010
THAT HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
TERMS OF THE NEW 10 3/4% SENIOR NOTES OFFERED IN THE EXCHANGE OFFER:
- The terms of the new notes are identical to the terms of the outstanding
notes, except that the new notes are registered under the Securities Act
of 1933 and will not contain restrictions on transfer, registration
rights or provisions for additional interest.
- The new notes, like the old notes, will not be listed on any securities
exchange.
TERMS OF THE EXCHANGE OFFER:
- We are offering to exchange up to $213,000,000 of our outstanding 10 3/4%
Senior Notes due 2010 for new notes with materially identical terms that
have been registered under the Securities Act of 1933 and are generally
freely tradable.
- We will exchange all outstanding notes that you validly tender and do not
validly withdraw before the exchange offer expires for an equal principal
amount of new notes.
- The exchange offer expires at 5:00 p.m., New York City time, on June 10,
2003, unless extended.
- Tenders of outstanding notes may be withdrawn at any time prior to the
expiration of the exchange offer.
- The exchange of new notes for outstanding notes will not be a taxable
event for U.S. federal income tax purposes.
---------------------
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 10 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 NEW 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 May 7, 2003.
TABLE OF CONTENTS
<Table>
<Caption>
Prospectus Summary.......................................... 1
Risk Factors................................................ 10
Forward-Looking Statements.................................. 20
Exchange Offer.............................................. 21
Use of Proceeds............................................. 30
Ratio of Earnings to Fixed Charges.......................... 30
Capitalization.............................................. 31
Selected Historical Financial and Operating Data............ 32
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 35
Business.................................................... 47
Management.................................................. 55
Executive Compensation...................................... 58
Certain Relationships and Related Transactions.............. 61
Principal Stockholders...................................... 63
Description of the Notes.................................... 66
Certain United States Federal Income Tax Considerations..... 103
Plan of Distribution........................................ 104
Legal Matters............................................... 105
Experts..................................................... 105
Where You Can Find More Information......................... 105
Index To Financial Statements............................... F-1
</Table>
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission. You should rely only on the information
contained in this prospectus and in the accompanying letter of transmittal. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date
hereof. Our business, financial condition, results of operations and prospects
may have changed since that date.
i
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus to help
you understand our business and the terms of the new notes. It does not contain
all of the information that may be important to you. We urge you to read all of
this prospectus carefully. You should pay special attention to the "Risk
Factors" section of this prospectus. In addition, certain statements in this
prospectus include forward-looking information that involves risks and
uncertainties. See "Forward-Looking Statements." In this prospectus, except as
otherwise indicated, "Doane," the "Company," "we," "us" and "our" refer to Doane
Pet Care Company and its subsidiaries, and the "notes" refers to both the new
notes offered hereby and the outstanding notes.
OUR COMPANY
We are the largest manufacturer of private label pet food and the second
largest manufacturer of dry pet food overall in the United States. We are also a
leading manufacturer of private label pet food in Europe. We sell to over 600
customers around the world and serve many of the top pet food retailers in the
United States, Europe and Japan. We offer our customers a full range of pet food
products for both dogs and cats, including dry, semi-moist, wet, treats and dog
biscuits. In 2002, we produced approximately 24% of the total dry pet food in
the United States. In fiscal 2002, we generated net sales of $887.3 million.
We categorize our sales into three product areas: (i) private label, (ii)
co-manufacturing and (iii) regional brands that we own. Our customers in private
label primarily include mass merchandisers, grocery chains, farm and fleet
companies and pet specialty stores. Our co-manufacturing customers include the
top five branded pet food companies in the world, for whom we produce and
package a portion of their products. A majority of our regional brand sales are
sold to the grocery and farm and fleet channels.
We have been the primary supplier of private label pet food to WalMart
Stores, Inc. since 1973 and have been a supplier to its Sam's Club division
since 1990. Collectively, we refer to them as Wal*Mart. We manufacture a wide
variety of products for Wal*Mart, including the majority of WalMart Stores,
Inc.'s top selling private label pet food brands, Ol' Roy and Special Kitty. Ol'
Roy is the number one selling brand of dry pet food in the United States by
volume. Our net sales to Wal*Mart accounted for 40%, 40% and 44% of our total
net sales for fiscal 2000, 2001 and 2002, respectively.
As the primary supplier of private label pet food to WalMart Stores, Inc.,
we jointly developed a cost-effective direct store delivery program, which we
refer to as DSD, to address certain logistical issues associated with
distributing dry pet food. Due to its size, bulk and weight, dry pet food bags
are not easily transferable to individual stores from WalMart Stores, Inc.'s
distribution centers. As part of DSD, we serve as a just-in-time supplier to
WalMart Stores, Inc. for dry pet food, whereby we load customized, store
specific pallets on WalMart Stores, Inc.'s private fleet trailers. DSD allows
WalMart Stores, Inc. to bypass its own distribution centers for the delivery of
our products directly to its stores. DSD also allows WalMart Stores, Inc. to
utilize its fleet more efficiently by reducing backhaul miles, lowering working
capital and handling costs and increasing inventory turns. As a result of DSD,
our products are shipped directly to a majority of the 2,800 U.S. stores of
WalMart Stores, Inc. and we ship to these stores an average of two times per
week with one to two days of lead time.
Doane Pet Care Company is a Delaware corporation. Our principal executive
offices are located at 210 Westwood Place South, Suite 400, Brentwood, Tennessee
37027, and our telephone number is (615) 373-7774.
Doane Pet Care Enterprises, Inc., our parent corporation, was formed in
1995 by a group of private equity investors led by Summit Capital, Inc., DLJ
Merchant Banking Partners, L.P., J.P. Morgan Partners (BHCA), L.P. and certain
members of management to acquire our company, formerly known as Doane Products
Company. Our parent has no other material assets or activities other than the
ownership of our common stock. Affiliates of Credit Suisse First Boston LLC and
affiliates of J.P. Morgan Securities Inc., the joint book-running managers for
the offering of the outstanding notes, own shares of common stock and warrants
to purchase common stock of Doane Pet Care Enterprises, Inc.
1
THE EXCHANGE OFFER
On February 28, 2003, we completed a private offering of the outstanding
notes. We entered into a registration rights agreement with the initial
purchasers in the private offering in which we agreed to deliver to you this
prospectus and to use our commercially reasonable efforts to complete the
exchange offer no later than 180 days after the date we issued the outstanding
notes.
Exchange offer................ We are offering to exchange new notes for
outstanding notes.
Expiration date............... The exchange offer will expire at 5:00 p.m.,
New York City time, on June 10, 2003, unless we
decide to extend it.
Conditions to the exchange
offer......................... The registration rights agreement does not
require us to accept outstanding notes for
exchange if:
- the exchange offer or the making of any
exchange by a holder of the outstanding notes
would violate any applicable law or
interpretation of the staff of the Securities
and Exchange Commission, or
- a holder tendering outstanding notes fails to
make the representations to us required by
the letter of transmittal or otherwise fails
to comply with the procedures contained in
the letter of transmittal to tender
outstanding notes.
The exchange offer is not conditioned on a
minimum aggregate principal amount of
outstanding notes being tendered.
Procedures for tendering
outstanding notes............. To participate in the exchange offer, you must
complete, sign and date the letter of
transmittal, or a facsimile of the letter of
transmittal, and transmit it together with all
other documents required by the letter of
transmittal, including the outstanding notes
that you wish to exchange, to Wilmington Trust
Company as exchange agent, at the address
indicated on the cover page of the letter of
transmittal. In the alternative, you can tender
your outstanding notes by following the
procedures for book-entry transfer described in
this prospectus.
If your outstanding notes are held through The
Depository Trust Company, or DTC, and you wish
to participate in the exchange offer, you may
do so through the automated tender offer
program of DTC. If you tender under this
program, you will agree to be bound by the
letter of transmittal that we are providing
with this prospectus as though you had signed
the letter of transmittal.
If a broker, dealer, commercial bank, trust
company or other nominee is the registered
holder of your outstanding notes, we urge you
to contact that person promptly to tender your
outstanding notes in the exchange offer.
For more information on tendering your
outstanding notes, please refer to the sections
in this prospectus entitled "Exchange offer --
Terms of the exchange offer," "-- Procedures
for tendering" and "-- Book-entry transfer."
Guaranteed delivery
procedures.................... If you wish to tender your outstanding notes
and you cannot get your required documents to
the exchange agent on time, you may tender your
outstanding notes according to the guaranteed
delivery procedures described in "Exchange
offer -- Guaranteed delivery procedures."
2
Withdrawal of tenders......... You may withdraw your tender of outstanding
notes at any time prior to the expiration date.
To withdraw, you must have delivered a written
or facsimile transmission notice of withdrawal
to the exchange agent at its address indicated
on the cover page of the letter of transmittal
before 5:00 p.m., New York City time, on the
expiration date of the exchange offer.
Acceptance of outstanding
notes and delivery of new
notes......................... If you fulfill all conditions required for
proper acceptance of outstanding notes, we will
accept any and all outstanding notes that you
properly tender in the exchange offer on or
before 5:00 p.m., New York City time, on the
expiration date. We will return any outstanding
notes that we do not accept for exchange to you
without expense as promptly as practicable
after the expiration date and acceptance of the
outstanding notes for exchange. Please refer to
the section in this prospectus entitled
"Exchange offer -- Terms of the exchange
offer."
Fees and expenses............. We will bear all expenses related to the
exchange offer. Please refer to the section in
this prospectus entitled "Exchange
offer -- Fees and expenses."
Use of proceeds............... The issuance of the new notes will not provide
us with any new proceeds. We are making this
exchange offer solely to satisfy our
obligations under the registration rights
agreement.
Consequences of failure to
Exchange outstanding notes.... If you do not exchange your outstanding notes
in this exchange offer, you will no longer be
able to require us to register the outstanding
notes under the Securities Act of 1933 except
in the limited circumstances provided under the
registration rights agreement. In addition, you
will not be able to resell, offer to resell or
otherwise transfer the outstanding notes unless
we have registered the outstanding notes under
the Securities Act of 1933, or unless you
resell, offer to resell or otherwise transfer
them under an exemption from the registration
requirements of, or in a transaction not
subject to, the Securities Act of 1933.
U.S. federal income tax
considerations................ The exchange of new notes for outstanding notes
in the exchange offer will not be a taxable
event for U.S. federal income tax purposes.
Please read "Certain United States federal
income tax consequences."
Exchange agent................ We have appointed Wilmington Trust Company as
exchange agent for the exchange offer. You
should direct questions and requests for
assistance, requests for additional copies of
this prospectus or the letter of transmittal
and requests for the notice of guaranteed
delivery to the exchange agent addressed as
follows: Wilmington Trust Company, 1100 North
Market Street, Rodney Square North, Wilmington,
Delaware 19890-1615, Attention: Corporate Trust
Operations. Eligible institutions may make
requests by facsimile at (302) 636-4145.
3
THE OFFERING
The new notes will be identical to the outstanding notes except that the
new notes are registered under the Securities Act of 1933 and will not have
restrictions on transfer, registration rights or provisions for additional
interest. The new notes will evidence the same debt as the outstanding notes,
and the same indenture will govern the new notes and the outstanding notes.
The following summary contains basic information about the new notes and is
not intended to be complete. It does not contain all of the information that is
important to you. For a more complete understanding of the new notes, please
refer to the section of this document entitled "Description of the notes."
Issuer........................ Doane Pet Care Company.
Notes offered................. $213.0 million aggregate principal amount of
10 3/4% Senior Notes due 2010.
Maturity date................. March 1, 2010.
Interest payment dates........ March 1 and September 1, commencing on
September 1, 2003. Interest on each new note
will accrue from the last interest payment date
on which interest was paid on the outstanding
note tendered in exchange therefore or, if no
interest has been paid on the outstanding note,
from the date of the original issue of the
outstanding note.
Interest computation.......... Interest on the new notes will be paid on the
basis of a 360-day year comprised of twelve
30-day months.
Reopening of debt
securities.................... The outstanding notes were offered in an
aggregate principal amount of $213.0 million
and the new notes will be issued in this
exchange offer in an aggregate principal amount
of up to $213.0 million. We may, without the
consent of the holders, offer additional notes
in the future on the same terms and conditions
as the outstanding notes and the new notes,
subject to complying with the covenants in our
senior credit facility and in the indentures
governing the notes and our 9 3/4% senior
subordinated notes.
Optional redemption........... The notes are redeemable at our option, in
whole or in part, at any time or from time to
time on or after March 1, 2007 at the
redemption prices set forth in this prospectus,
together with accrued and unpaid interest, if
any, to the date of redemption.
Before March 1, 2007, we may, at any time or
from time to time, redeem up to 35% of the
original principal amount of the notes with the
proceeds of one or more equity offerings of our
common stock at a redemption price of 110.75%
of the principal amount of the notes, together
with accrued and unpaid interest, if any, to
the date of redemption.
At any time on or prior to March 1, 2007, we
may redeem the notes, in whole but not in part,
upon the occurrence of a change of control at a
redemption price equal to 100% of the principal
amount of the notes plus an applicable premium,
together with accrued and unpaid interest, if
any, to the date of redemption.
Mandatory offers to
purchase...................... Upon the occurrence of a change of control,
holders of the notes have the right to require
us to repurchase all or a portion of their
notes at a price equal to 101% of their
principal amount, together with accrued and
unpaid interest, if any, to the date of
repurchase. Holders of our existing 9 3/4%
senior subordinated notes due 2007
4
and our senior preferred stock have similar
repurchase rights upon a change of control.
In connection with certain asset dispositions,
we may be required to use the proceeds from
those asset dispositions to make an offer to
repurchase the notes at 100% of their principal
amount, together with accrued and unpaid
interest, if any, to the date of repurchase if
the proceeds are not otherwise used within one
year to repay senior secured indebtedness or to
repay indebtedness under our senior credit
facility (with a corresponding reduction in
commitment) or to invest in assets related to
our business.
Guarantees.................... The new notes will be guaranteed by each of our
existing and future domestic restricted
subsidiaries and by our restricted subsidiaries
that guarantee obligations under any of our
indebtedness. The guarantees will be unsecured
senior indebtedness of our guarantors and will
have the same ranking with respect to
indebtedness of our guarantors as the new notes
will have with respect to our other
indebtedness.
Our non-guarantor subsidiaries represented 22%
of our net sales and 19% of our operating
income in fiscal 2002.
Ranking....................... The new notes will:
- be unsecured,
- be effectively junior to our secured debt,
- rank equally with all our existing and future
secured senior debt, and
- be senior to any existing and future senior
subordinated and subordinated debt (including
our 9 3/4% senior subordinated notes due
2007).
As of December 28, 2002, on an as adjusted
basis after giving effect to the offering of
the outstanding notes and the use of proceeds
therefrom and the amendments to our senior
credit facility effected contemporaneously with
the offering of the outstanding notes:
- we would have had approximately $577.0
million of total indebtedness; and
- we would have had approximately $428.6
million of senior indebtedness, $185.7
million of which is secured indebtedness
under our senior credit facility, and
availability of approximately $47.7 million
under our senior credit facility.
Our subsidiary guarantors have also guaranteed
our senior credit facility on a senior secured
basis and are guarantors under our 9 3/4%
senior subordinated notes.
In addition, the new notes would have been
structurally subordinated to approximately
$65.3 million of total liabilities of our non-
guarantor subsidiaries as of December 28, 2002.
This amount of total liabilities excludes
$160.4 million of intercompany obligations owed
to our guarantor subsidiaries.
Subject to complying with the covenants in our
senior credit facility and in the indentures
governing the notes and our 9 3/4%
5
senior subordinated notes, we and our
subsidiaries may incur additional debt.
Covenants..................... The indenture governing the notes contains
covenants that, among other things, limit our
ability and the ability of our restricted
subsidiaries to:
- incur additional debt,
- issue redeemable stock and preferred stock,
- pay dividends on stock,
- repurchase capital stock,
- make other restricted payments, such as
certain investments,
- create liens,
- redeem debt that is junior in right of
payment to the notes prior to the date that
is within one year of its stated maturity,
- enter into agreements that restrict dividends
from subsidiaries,
- sell or otherwise dispose of assets,
including capital stock of subsidiaries,
- enter into transactions with affiliates,
- enter into sale/leasebacks, and
- guarantee other indebtedness
These covenants are subject to important
exceptions and qualifications. For more
details, see "Description of the
notes -- Certain covenants."
Suspension of covenants....... The indenture provides that certain of these
covenants will be suspended if certain rating
agencies assign and maintain an investment
grade rating on the notes.
Transfer restrictions; absence
of a public market for the new
notes......................... The new notes generally will be freely
transferable, but will also be new securities
for which there will not initially be a market.
There can be no assurance as to the development
or liquidity of any market for the new notes.
We do not intend to apply for listing of the
new notes on any securities exchange or for the
quotation of the new notes in any automated
dealer quotation system.
Risk factors.................. See "Risk factors" and the other information
included in this prospectus for a discussion of
factors you should carefully consider before
deciding to participate in the exchange offer.
6
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The summary financial data presented below (except for pet food sold data)
was derived from our consolidated financial statements, which have been audited
by KPMG LLP, independent auditors. The summary data should be read in
conjunction with the accompanying audited consolidated financial statements and
the notes thereto contained elsewhere in this prospectus. Our fiscal year ends
on the Saturday nearest to the end of December; and therefore, fiscal 2000, 2001
and 2002 ended on December 30, 2000, December 29, 2001 and December 28, 2002,
respectively. Fiscal 2000 through 2002 were each 52-week years (tables in
thousands, except per share and ratio amounts).
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000(1) 2001(2) 2002
------------ ------------ ------------
STATEMENT OF INCOME DATA:
Net sales(3).......................................... $875,761 $895,830 $887,333
Cost of goods sold(3)................................. 687,799 749,092 701,418
-------- -------- --------
Gross profit....................................... 187,962 146,738 185,915
Operating expenses:
Promotion and distribution(3)...................... 52,285 58,993 53,525
Selling, general and administrative(3)............. 50,507 47,193 48,663
Amortization(4).................................... 12,779 13,743 3,552
Other operating expenses(3)(5)..................... 28,639 8,655 1,447
-------- -------- --------
Income from operations........................... 43,752 18,154 78,728
Interest expense, net................................. 51,223 57,020 62,395
Other (income) expense, net........................... (1,732) (757) (724)
-------- -------- --------
Income (loss) before income taxes..................... (5,739) (38,109) 17,057
Income tax expense (benefit).......................... (854) (16,171) 1,786
-------- -------- --------
Net income (loss).................................. $ (4,885) $(21,938) $ 15,271
======== ======== ========
</Table>
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000(1) 2001(2) 2002
------------ ------------ ------------
OTHER DATA:
Basic and diluted net income (loss) per common
share.............................................. $ (14,125) $(32,405) $ 3,393
Cash flows provided by (used in) operating
activities......................................... 45,388 (23,936) 78,773
Cash flows provided by (used in) investing
activities......................................... (181,316) 1,466 (25,902)
Cash flows provided by (used in) financing
activities......................................... 131,972 25,433 (51,731)
Depreciation and amortization......................... 36,334 41,430 32,164
Capital expenditures(6)............................... 35,347 17,316 24,348
Pet food sold (U.S. tons):
United States.................................... 1,710 1,653 1,705
Europe........................................... 207 282 258
</Table>
7
<Table>
<Caption>
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000(1) 2001(2) 2002
------------ ------------ ------------
BALANCE SHEET DATA:
Working capital....................................... $ 25,812 $ 46,995 $ 59,215
Total assets.......................................... 907,062 836,545 870,667
Total debt............................................ 573,165 587,823 554,020
Senior preferred stock (redeemable)................... 55,205 65,672 77,550
Stockholder's equity.................................. 70,881 37,926 58,503
</Table>
- ---------------
(1) Results for fiscal 2000 include the results of our acquisition on May 10,
2000 of A/S Arovit Petfood, headquartered in Esbjerg, Denmark, for
approximately $144.4 million and assumed indebtedness, net of cash, of
approximately $11.8 million. Arovit manufacturers and sells throughout
Europe a full range of pet food products for dogs and cats, including wet,
dry and treats, primarily through private label programs. See "Management's
discussion and analysis of financial condition and results of operations --
Results of operations."
(2) Results for fiscal 2001 include the results of two divestitures until the
date of sale: our Perham, Minnesota facility from December 31, 2000 to April
27, 2001 and our Deep Run domestic wet pet food business from December 31,
2000 to May 3, 2001. See "Management's discussion and analysis of financial
condition and results of operations -- Results of operations."
(3) Results for fiscal 2001 include $16.9 million of expenses associated with
strategic initiatives that commenced in fiscal 2001 and consist of $6.7
million of other operating expenses related to the divestitures and $10.2
million of Project Focus expenses. The Project Focus expenses were
classified as follows: (1) $0.3 million as a reduction in net sales; (2)
$6.6 million as cost of goods sold; (3) $0.9 million as promotion and
distribution expenses; (4) $0.4 million as selling, general and
administrative expenses; and (5) $2.0 million as other operating expenses.
See Note 16 -- "Other Operating and Project Focus Implementation Expenses"
to our accompanying audited consolidated financial statements included
herein.
(4) Effective December 30, 2001, we adopted Statement on Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. As a result, we
ceased amortization of goodwill and trademarks as of the beginning of fiscal
2002. See Note 2 -- "Changes in Accounting Principles" to our accompanying
audited consolidated financial statements included herein for our results of
operations for fiscal 2000 and 2001, as adjusted to give effect to SFAS 142
as if it were adopted on January 2, 2000.
(5) Other operating expenses of $28.6 million in fiscal 2000 include: (1)
restructuring costs of $22.3 million consisting of asset impairments of
$15.3 million related to closure of certain inefficient manufacturing
facilities, severance costs of $3.5 million related to these facility
closures and the elimination of corporate positions and $3.5 million of
shutdown expenses for these facility closures; and (2) transaction costs of
$6.3 million, consisting of a $4.6 million loss on a foreign currency
forward contract associated with the Arovit acquisition, a $1.5 million
charge for the write-off of costs for unconsummated acquisitions and $0.2
million of miscellaneous transaction costs. Other operating expenses of $8.7
million in fiscal 2001 include a $4.7 million net loss from the divestitures
and $4.0 million of restructuring costs consisting of (1) $2.0 million of
severance costs for the elimination of corporate positions following the
divestitures; and (2) $2.0 million of Project Focus related costs comprised
of $1.0 million of asset impairments and other plant closure costs for the
shutdown of an inefficient manufacturing facility and $1.0 million of
severance costs for the elimination of additional corporate positions in the
fourth quarter of fiscal 2001. Other operating expenses of $1.4 million in
fiscal 2002 include a $0.8 million write-off of costs related to our
postponed bond offering and $0.6 million write-off of costs related to our
abandoned European sale process. See Note 16 -- "Other Operating and Project
Focus Implementation Expenses" to our accompanying audited consolidated
financial statements included herein.
(6) Capital expenditures exclude payments for acquisitions.
8
RATIO OF EARNINGS TO FIXED CHARGES
For purposes of calculating the ratio of earnings to fixed charges,
earnings available for fixed charges (income (loss) before income taxes plus
fixed charges) is divided by fixed charges (interest expense, net, plus 33% of
rent expense).
<Table>
<Caption>
YEARS ENDED
----------------------------------------------------------------------
DECEMBER 31, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1998(1) 2000 2000(1) 2001(1) 2002
------------ ---------- ------------ ------------ ------------
Ratio of earnings to fixed
charges........................ (0.09)x 1.99x 0.89x 0.35x 1.26x
</Table>
- ---------------
(1) The amounts of the deficiency in earnings available for fixed charges from a
ratio of 1.0x (in thousands) are $34,288, $5,739, and $38,109 for the years
ended December 31, 1998, December 30, 2000 and December 29, 2001,
respectively.
9
RISK FACTORS
An investment in the notes involves a significant degree of risk, including
the risks described below. You should carefully consider the following risk
factors and the other information included in this prospectus before making an
investment decision. The risks described below are not the only ones facing us.
This prospectus also contains forward-looking statements that involve risks and
uncertainties. See "Forward-looking statements." Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of various factors, including the risks described below and elsewhere in this
prospectus.
RISKS RELATING TO THE NOTES AND OUR INDEBTEDNESS
IF YOU DO NOT PROPERLY TENDER YOUR OUTSTANDING NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED OUTSTANDING NOTES AND YOUR ABILITY TO TRANSFER OUTSTANDING NOTES
WILL REMAIN RESTRICTED AND MAY BE ADVERSELY AFFECTED.
We will only issue new notes in exchange for outstanding notes that you
timely and properly tender. Therefore, you should allow sufficient time to
ensure timely delivery of the outstanding notes and you should carefully follow
the instructions on how to tender your outstanding notes. Neither we nor the
exchange agent are required to tell you of any defects or irregularities with
respect to your tender of outstanding notes.
If you do not exchange your outstanding notes for new notes pursuant to the
exchange offer, the outstanding notes you hold will continue to be subject to
the existing transfer restrictions. In general, you may not offer or sell the
outstanding notes except under an exemption from, or in a transaction not
subject to, the Securities Act of 1933 and applicable state securities laws. We
do not plan to register outstanding notes under the Securities Act of 1933
unless our registration rights agreement with the initial purchasers of the
outstanding notes requires us to do so. Further, if you continue to hold any
outstanding notes after the exchange offer is consummated, you may have trouble
selling them because there will be fewer of those notes outstanding.
OUR LEVEL OF INDEBTEDNESS COULD NEGATIVELY IMPACT OUR FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND BUSINESS PROSPECTS AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS UNDER THE NOTES.
As of December 28, 2002, after giving effect to the offering of the
outstanding notes and the application of the net proceeds therefrom and the
amendments to our senior credit facility effected contemporaneously with the
offering of the outstanding notes, we would have had approximately $577.0
million of indebtedness outstanding, including $185.7 million of indebtedness
under our senior credit facility and $148.4 million of indebtedness pursuant to
our 9 3/4% senior subordinated notes due 2007. In addition, we would have had
approximately $47.7 million available for borrowings and letters of credit under
the revolving credit facility portion of our senior credit facility. Following
this exchange offer, we will be permitted to incur additional indebtedness,
including secured indebtedness and indebtedness that ranks equally with the
notes, if we meet certain requirements in our senior credit facility and in the
indentures governing the notes and our 9 3/4% senior subordinated notes. Our
ability to meet future debt service obligations, including our obligations under
the notes, will be dependent upon our future performance, which is subject to
general economic conditions and to financial, business and other factors
affecting our operations, many of which are beyond our control.
Our level of indebtedness could have important consequences on our
operations, including:
- making it more difficult for us to satisfy our obligations under the
notes or other debt which, if we fail to comply with the requirements of
any of our debt, could result in an event of default;
- requiring us to dedicate a substantial portion of our cash flow from
operations to make repayments on debt, thereby reducing the availability
of cash flow for working capital, capital expenditures, acquisitions and
other general business activities;
- limiting our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions and other general
business activities;
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
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- making us vulnerable to fluctuations in interest rates because
indebtedness under our senior credit facility is subject to variable
interest rates;
- detracting from our ability to withstand successfully a downturn in our
business or the general economy; and
- placing us at a competitive disadvantage against other less leveraged
competitors.
THE NOTES AND THE RELATED GUARANTEES ARE EFFECTIVELY SUBORDINATED TO ALL OF OUR
SECURED DEBT AS A RESULT OF LIENS GRANTED BY US, INCLUDING THE DEBT UNDER OUR
SENIOR CREDIT FACILITY, AND IF A DEFAULT OCCURS, WE MAY NOT HAVE SUFFICIENT
FUNDS TO FULFILL OUR OBLIGATIONS UNDER THE NOTES.
The notes and the related guarantees are not secured by any of our assets
and, therefore, are effectively subordinated to all of our and our guarantors'
secured debt to the extent of the value of the assets securing that debt. We
have pledged substantially all of our assets as collateral to secure our
indebtedness under our senior credit facility. As of December 28, 2002, after
giving effect to the offering of the outstanding notes and the application of
the net proceeds therefrom, we would have had approximately $185.7 million of
secured indebtedness under our senior credit facility to which the notes and the
related guarantees would have been effectively subordinated as a result of liens
granted by us. We also have secured indebtedness under our industrial
development revenue bonds and our foreign debt. We and our guarantors may also
incur additional secured indebtedness in the future.
In the event of our bankruptcy, liquidation, reorganization or other
winding up, our assets that secure our secured indebtedness will be available,
if at all, to pay obligations on the notes only after all secured indebtedness
has been repaid in full from those assets. Likewise, because our obligations
under our senior credit facility are secured obligations, our failure to comply
with the terms of our senior credit facility would entitle those lenders to
foreclose on substantially all of our assets that serve as their collateral. In
this event, these lenders would be entitled to be repaid in full from the
proceeds of the liquidation of those assets before those assets would be
available for distribution to other creditors, including holders of the notes.
Holders of the notes will participate in our remaining assets, if any, ratably
with all holders of our unsecured indebtedness that is deemed to be of the same
class as the notes, and potentially with all of our other general creditors.
There may not be sufficient assets remaining to pay amounts due on any or all
the notes then outstanding. The guarantees of the notes will similarly be
subordinated to secured indebtedness of the guarantors.
THE NOTES WILL BE STRUCTURALLY SUBORDINATED TO ALL INDEBTEDNESS OF OUR
SUBSIDIARIES THAT ARE NOT GUARANTORS OF THE NOTES.
You will not have any claim as a creditor against our subsidiaries that are
not guarantors of the notes, and indebtedness and other liabilities, including
trade payables, whether secured or unsecured, of those subsidiaries will
effectively be senior to your claims against the assets of those subsidiaries.
All obligations owed by our non-guarantor subsidiaries would have to be
satisfied before any of the assets of these subsidiaries would be available for
distribution, upon a liquidation or otherwise, to us or a subsidiary that is a
guarantor of the notes. Our non-guarantor subsidiaries represented 22% of our
net sales and 19% of our operating income in fiscal 2002. At December 28, 2002,
our non-guarantor subsidiaries represented 32% of our total assets (after
eliminations) and had $65.3 million of total liabilities. This amount of total
liabilities excludes $160.4 million of intercompany obligations owed to our
guarantor subsidiaries. These non-guarantor subsidiaries may incur additional
indebtedness in the future.
OUR OBLIGATIONS, WHICH MATURE PRIOR TO THE MATURITY OF THE NOTES, TO REPAY THE
OUTSTANDING PRINCIPAL ON OUR 9 3/4% SENIOR SUBORDINATED NOTES AND ON A PORTION
OF OUR FOREIGN DEBT AND TO REDEEM OUR SENIOR PREFERRED STOCK AND A PORTION OF
OUR INDUSTRIAL DEVELOPMENT REVENUE BONDS COULD ADVERSELY AFFECT OUR ABILITY TO
SATISFY OUR OBLIGATIONS UNDER THE NOTES.
As of December 28, 2002, we had outstanding $148.4 million of our 9 3/4%
senior subordinated notes due 2007, with a face value of $150.0 million, and
$77.6 million of our senior preferred stock due 2007. The outstanding principal
on our 9 3/4% senior subordinated notes matures on May 15, 2007. Our outstanding
senior preferred stock has a mandatory redemption date of September 30, 2007. We
also have outstanding industrial
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development revenue bonds, a portion of which may be subject to mandatory
redemption prior to the maturity of the notes, and we have outstanding foreign
debt that matures in 2008.
The notes do not mature until 2010, after these other obligations mature.
As a consequence, our payment of these other obligations may make it more
difficult for us to pay interest due on the notes or to repay the outstanding
principal on the notes at maturity in 2010. In addition, if we are unable to
satisfy the obligations on our 9 3/4% senior subordinated notes, we would be in
default under the indenture governing the 9 3/4% senior subordinated notes,
which may result in an event of default under any credit facility then in
effect, possibly allowing the lenders thereunder to accelerate the outstanding
debt. Moreover, all of the subsidiary guarantors of the notes are also
guarantors of the 9 3/4% senior subordinated notes. Accordingly, if we failed to
pay the 9 3/4% senior subordinated notes at maturity, these subsidiary
guarantors would be required to satisfy our payment obligation, possibly making
it more difficult for the guarantors to satisfy any obligations under their
guarantees of the notes.
EVEN IF A TRANSACTION CONSTITUTES A CHANGE OF CONTROL THAT WOULD OBLIGATE US TO
OFFER TO REPURCHASE THE NOTES, WE MAY NOT BE ABLE TO SATISFY OUR OBLIGATION TO
REPURCHASE THE NOTES.
Upon the occurrence of certain change of control events, holders of the
notes, our 9 3/4% senior subordinated notes and our shares of senior preferred
stock may require us to offer to repurchase all or part of their securities.
However, certain important corporate events, such as leveraged recapitalizations
that would increase the level of our indebtedness and transactions that do not
involve a sufficient change in voting power or beneficial ownership, would not
constitute a "change of control." Even if a transaction constitutes a change of
control, we may not have sufficient funds at the time of the change of control
to make the required repurchases of the notes. Additionally, restrictions in our
senior credit facility may not allow such repurchases and certain events that
would constitute a change of control as defined in the respective indentures or
the senior preferred stock would constitute an event of default under our senior
credit facility that would, if it should occur, permit the lenders to accelerate
the debt outstanding under our senior credit facility and that, in turn, would
cause an event of default under the indentures governing the notes and our
9 3/4% senior subordinated notes.
The source of funds for any repurchase required as a result of any change
of control will be our available cash or cash generated from our operations or
other sources, including borrowings, sales of assets, sales of equity or funds
provided by a new controlling entity. We cannot assure you, however, that
sufficient funds would be available at the time of any change of control to make
any required repurchases of the notes or shares of senior preferred stock
tendered and to repay debt under our senior credit facility. Furthermore, using
available cash to fund the potential consequences of a change of control may
impair our ability to obtain additional financing in the future. Any future
credit agreements or other agreements relating to debt to which we may become a
party will most likely contain similar restrictions on our ability to repurchase
the notes upon a change of control.
OUR DEBT AGREEMENTS LIMIT CERTAIN BUSINESS ACTIVITIES AND COULD MATERIALLY
AFFECT OUR OPERATIONS.
Our senior credit facility and the indentures governing the notes and our
9 3/4% senior subordinated notes limit our ability to take a number of actions
that we may otherwise desire to take, including:
- incurring additional indebtedness;
- incurring liens;
- paying dividends or making other restricted payments;
- selling assets;
- entering into transactions with affiliates;
- merging or consolidating with any other entity; and
- disposing of substantially all of our assets.
In addition, our senior credit facility requires us to maintain specified
financial ratios and satisfy certain financial condition tests. Our ability to
meet these financial ratios and tests can be affected by events beyond
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our control, such as prevailing economic, financial or industry conditions, and
we cannot assure you that we will meet the tests. We have experienced difficulty
in the past satisfying the financial covenants in our senior credit facility and
sought waivers from our lenders for fiscal 2000 and 2001. Our senior credit
facility, including these financial covenants, was amended contemporaneously
with the offering of the outstanding notes. If we violate these amended
covenants and are unable to obtain waivers from our lenders, we could be in
default and our lenders may accelerate our debt, and we would not be able to
draw upon additional availability under our senior credit facility to meet our
liquidity needs.
If we are unable to generate sufficient operating cash flows in the future
to service our indebtedness, to comply with covenants and to meet other
commitments, we may be required to take certain actions, such as selling
material assets or operations, reducing or delaying capital expenditures or
revising or delaying our strategic plans. We may not be able to take any of
these actions on a timely basis or on satisfactory terms or take actions that
would enable us to continue to satisfy our capital requirements. Certain of
these actions may be prohibited by the indentures governing the notes and our
9 3/4% senior subordinated notes or require the consent of the lenders under our
senior credit facility.
YOUR ABILITY TO TRANSFER THE NEW NOTES AT A TIME OR PRICE YOU DESIRE MAY BE
LIMITED BY THE ABSENCE OF AN ACTIVE TRADING MARKET, AND THERE IS NO ASSURANCE
THAT ANY ACTIVE TRADING MARKET WILL DEVELOP FOR THE NEW NOTES.
The new notes are a new issue of securities for which there is no
established public market. Although we have registered the new notes under the
Securities Act of 1933, we do not intend to have the new notes listed on a
national securities exchange or included in any automated dealer quotation
system. The initial purchasers of the outstanding notes have advised us that
they intend to make a market in the new notes after the exchange offer, as
permitted by applicable laws and regulations; however, the initial purchasers
are not obligated to make a market in the new notes, and they may discontinue
their market-making activities at any time without notice. An active market for
the new notes may not develop or, if developed, may not continue.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the new notes. The market, if any, for the new notes may not be free
from similar disruptions and such disruptions may adversely affect the prices at
which you may sell your new notes. In addition, subsequent to their initial
issuance, the new notes may trade at a discount from the initial offering price
of the outstanding notes exchanged therefor, depending upon prevailing interest
rates, the market for similar securities, our performance and other factors.
If a large number of holders of outstanding notes do not tender outstanding
notes or tender outstanding notes improperly, the limited number of new notes
that would be issued and outstanding after we consummate the exchange offer
could limit the development of a market for these new notes. In the absence of
an active trading market, you may not be able to transfer the new notes within
the time or at the price you desire.
A GUARANTEE OF THE NOTES COULD BE VOIDED OR SUBORDINATED BECAUSE OF FEDERAL
BANKRUPTCY LAW OR COMPARABLE STATE LAW PROVISIONS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, one or more of the guarantees of the notes could be
voided, or claims in respect of a guarantee could be subordinated to all other
debts of that guarantor if, among other things, the guarantor, at the time it
incurred the indebtedness evidenced by its guarantee received less than
reasonably equivalent value or fair consideration for the incurrence of such
guarantee; and
- was insolvent or rendered insolvent by reason of such incurrence;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, indebtedness beyond
its ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor or to a fund for the
benefit of the creditors of the guarantor.
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The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets;
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
A court may apply a different standard in making these determinations.
RISKS RELATING TO OUR BUSINESS OPERATIONS
ONE OF OUR CUSTOMERS ACCOUNTS FOR A SUBSTANTIAL PORTION OF OUR REVENUE AND THE
LOSS OF THIS CUSTOMER WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS AND REDUCE OUR ABILITY TO SERVICE OUR DEBT OBLIGATIONS.
Net sales to Wal*Mart accounted for 40%, 40% and 44% of our total net sales
for fiscal 2000, 2001 and 2002, respectively. We do not have a long-term
contract with Wal*Mart. A significant decrease or change in business from
Wal*Mart would have a material adverse effect on our results of operations,
financial condition and cash flows. In addition, our results of operations and
ability to service our debt obligations would be negatively impacted to the
extent that Wal*Mart is unable to make payments or does not make timely payments
on outstanding accounts receivable.
WE RELY ON A SMALL NUMBER OF CUSTOMERS, CERTAIN OF WHICH ARE ABLE TO MAKE
GREATER DEMANDS OF US.
We rely on a small number of customers to generate a substantial portion of
our net sales. As a result of the leading market positions of many of our
customers, they are able to exert pressure on us with respect to pricing,
promotions, new product introductions and other services that may affect our
results of operations. For our private label and co-manufactured business, we
rely on the strength of brands not owned by us and on the willingness of the
owners of such brands to promote them to increase sales volume. Our net sales
and results of operations may be increasingly sensitive to a deterioration in
the financial condition of, or other adverse developments with, one or more of
our customers.
INCREASES IN THE COSTS OF RAW MATERIALS, PACKAGING AND NATURAL GAS HAVE IN THE
PAST AND MAY IN THE FUTURE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND REDUCE
OUR ABILITY TO SERVICE OUR DEBT OBLIGATIONS.
Our financial results depend to a large extent on the costs of raw
materials, packaging and natural gas, and our ability to pass along increased
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 U.S. government farm support programs, changes in international
agricultural trading policies, impacts of disease outbreaks on protein sources
and the potential effect on supply and demand as well as weather conditions
during the growing and related harvesting seasons. Fluctuations in paper prices,
which affect our costs for packaging materials, have resulted from changes in
supply and demand, general economic conditions and other factors. In addition,
we have exposure to changes in pricing of natural gas, which affects our
manufacturing costs. Our results of operations have in the past been adversely
affected by volatility in the commodity and natural gas market and our results
of operations may be adversely affected in the future by this volatility. See
"Management's discussion and analysis of financial condition and results of
operations."
In the event of any increases in raw materials, packaging and natural gas
costs, we may be required to increase sales prices for our products to avoid
margin deterioration. We cannot assure you of the timing or extent of our
ability to implement future price adjustments in the event of increased raw
materials, packaging and natural gas costs or of whether any price increases
implemented by us may adversely affect the volumes of future purchases from our
customers.
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VOLATILITY IN THE COMMODITY MARKETS HAS IN THE PAST AND MAY IN THE FUTURE
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We seek to manage our commodity price risk associated with market
fluctuations by using derivative instruments for portions of our corn, soybean
meal, alternative proteins and natural gas purchases, principally through
exchange traded futures and options contracts. The terms of such contracts are
generally less than one year. During the term of a contract, we balance
positions daily with cash payments to or from the exchanges. At the termination
of a contract, we have the ability to settle financially or by exchange for the
physical commodity, in which case, we would deliver the contract against the
acquisition of the physical commodity. Our policy does not permit speculative
commodity trading.
At December 28, 2002, we had open commodity contracts with a fair value
loss of $5.7 million. Although we manage the price risk of market fluctuations
by hedging portions of our primary commodity product purchases, our results of
operations have been adversely affected in the past by these fluctuations and we
cannot assure you that in the future we will be successful or that our results
of operations will not be exposed to volatility in the commodity markets. See
"Management's discussion and analysis of financial condition and results of
operations."
The use of futures contracts also reduces our ability to take advantage of
short term reductions in raw material prices. If one or more of our competitors
is able to reduce their production costs by taking advantage of any reductions
in raw material prices, we may face pricing pressures from these competitors and
may be forced to reduce our prices or face a decline in net sales, either of
which could have a material adverse effect on our business, results of
operations and financial condition.
Effective January 1, 1999, our commodity derivative instruments were
measured at fair value in our consolidated financial statements under Financial
Accounting Standards Board's, or FASB's, Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
or SFAS 133. Our results of operations have been adversely affected in the past
by volatility in commodity prices under the SFAS 133 fair value accounting of
our commodity derivative instruments and our results of operations may be
adversely affected in the future by SFAS 133 accounting. See "Management's
discussion and analysis of financial condition and results of operations."
RESTRICTIONS IMPOSED IN REACTION TO OUTBREAKS OF "MAD COW DISEASE" AND
"FOOT-AND-MOUTH DISEASE" COULD ADVERSELY IMPACT THE COST AND AVAILABILITY OF OUR
RAW MATERIALS.
In the fourth quarter of fiscal 2000, the cost of our raw materials was
impacted by the publicity surrounding Bovine Spongiform Encephalopathy, or BSE,
in Europe, which is a terminal brain disease of cattle. BSE is also known as
"mad cow disease" and is generally believed to be caused by accumulation of
abnormal prions (proteins found in the brain that are transmitted by ingestion
of infected brains and spinal cord materials) found in cattle feed protein
supplements. As a result of the global publicity and restrictions imposed to
provide safeguards against the disease, the cost of alternative sources for our
raw material proteins, such as soybeans, increased significantly in the fourth
quarter of fiscal 2000. We can provide no assurance that BSE, or resulting
regulations or publicity, will not impact either the cost or availability of our
raw materials in the future. The risk of higher costs and/or supply disruption
would be significant if restrictions are placed on the use of meat and bone meal
in pet food.
In the first quarter of fiscal 2001, there was an outbreak of
foot-and-mouth disease, or FMD, in Europe. FMD affects animals with cloven
hooves, such as cattle, swine, sheep, goats, and deer. While FMD is not
considered a threat to humans, people who come in contact with the virus can
spread it to animals. Our operations could be adversely affected if the disease
were to spread throughout Europe or to the United States.
If BSE or FMD impacts the availability of our raw materials, we would be
required to locate alternative sources for our raw materials. We can give no
assurance that those sources would be available to sustain our volume sales or
that these alternative sources would not be more costly. If BSE or FMD impacts
the cost of our raw materials, or the cost of alternative raw materials compared
to current costs, we would be required to increase the sales price for our
products to avoid margin deterioration. We can give no assurance of the timing
or extent of our ability to implement future price adjustments in the event of
higher costs.
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OUR ACQUISITION ACTIVITIES, INCLUDING INTEGRATION, OPERATION AND MANAGEMENT OF
THESE BUSINESSES, MAY NOT BE SUCCESSFUL OR MAY SUBJECT US TO LOSSES.
Any acquisition we may pursue would be 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. 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. Acquisitions may also result in losses associated with discontinued
operations. For example, we recognized a net loss of $4.7 million in connection
with our divestitures in 2001 of our Perham, Minnesota facility and our Deep Run
domestic wet pet food business, both of which we acquired in our Windy Hill
acquisition.
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 have sufficient available capital resources to
execute potential acquisitions, and our ability to enter into acquisitions may
be limited by our senior credit facility and our indentures. 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.
Our operating results and financial condition could be materially and
adversely affected if any of the following occur:
- the expected operating efficiencies from the acquisitions do not
materialize;
- we fail to successfully integrate the acquisitions into our existing
operations; or
- the cost of the acquisition integrations exceeds expectations.
THE AMOUNT OF GOODWILL AND OTHER INTANGIBLE ASSETS WE HAVE RECORDED FROM OUR
ACQUISITIONS MAY NOT BE REALIZED, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR RESULTS OF OPERATIONS AND REDUCE OUR ABILITY TO SERVICE OUR DEBT
OBLIGATIONS.
At December 28, 2002, we had $363.1 million of goodwill and trademarks, net
of accumulated amortization. Goodwill has been recorded under the purchase
accounting method to represent the excess of the amount paid over the fair value
of the assets acquired and liabilities assumed. The assets associated with our
goodwill and trademarks may not be realized by us in the future. Goodwill and
trademarks represented 42% of our total assets as of December 28, 2002. Through
December 29, 2001, we amortized our goodwill over 20 and 40 years and trademarks
over 30 years.
Effective December 30, 2001, we adopted FASB's Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS 142,
which requires that goodwill and other intangible assets with indefinite lives
no longer be amortized. Our only intangible asset with an indefinite useful life
other than goodwill is our trademarks. SFAS 142 further requires that the fair
value of goodwill and other intangible assets with indefinite lives be tested
for impairment upon adoption of this statement, annually and upon the occurrence
of certain events, and be written down to fair value if considered impaired. In
the first quarter of fiscal 2002, we reassessed the useful lives and residual
values of all our intangible assets acquired in purchase business combinations
and our intangible assets having estimable useful lives that are classified in
other assets on our consolidated balance sheets, which resulted in no impact on
our accompanying audited consolidated financial statements. During the second
quarter of fiscal 2002, we completed the required transitional impairment tests
of goodwill and other intangible assets with indefinite lives and, based on the
results of the tests, determined no impairment to the carrying values of these
assets existed as of our adoption date for SFAS 142 on December 30, 2001. In the
fourth quarter of fiscal 2002, we performed our required annual assessment of
impairment and determined no such impairment was evident. The adoption of SFAS
142 resulted in the elimination of annual amortization related to goodwill and
trademarks. In fiscal 2001, such amortization was $10.3 million, or $7.6 million
net of income tax benefit. Our results of operations in future
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periods could be adversely affected if our goodwill and other intangible assets
are determined to be impaired under SFAS 142. See "Management's discussion and
analysis of financial condition and results of operations -- Recently issued
accounting pronouncements."
WE FACE SIGNIFICANT COMPETITION FROM NATIONAL, REGIONAL AND STORE BRAND
MANUFACTURERS, MANY OF WHOM ARE LARGER THAN WE ARE AND HAVE SIGNIFICANTLY
GREATER RESOURCES THAN WE DO.
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 us. Our store brand pet food
products compete for shelf space with national branded pet food products on the
basis of quality and price. In addition, certain national branded manufacturers
also manufacture store brands. National branded products compete principally
through advertising to create brand awareness and loyalty. We experience some
price competition from national branded products. To the extent significant
price competition from national branded products exists or the national branded
manufacturers significantly increase their store brand presence, our operating
results and cash flows could be adversely affected. We also compete with
regional branded manufacturers and other store brand manufacturers.
A PORTION OF OUR REVENUES IS DERIVED FROM OUR INTERNATIONAL OPERATIONS, WHICH
SUBJECT US TO ADDITIONAL BUSINESS, ECONOMIC AND POLITICAL RISKS AND COULD LIMIT
OUR ABILITY TO SUCCESSFULLY CARRY OUT OUR BUSINESS STRATEGY.
We operate a portion of our business and market products internationally.
As of December 28, 2002, we sold our products in more than 30 countries. We have
facilities in Austria, Denmark, the United Kingdom, Italy, Spain and Russia. In
fiscal 2002, our foreign subsidiaries had net sales of $195.1 million, or 22% of
our total net sales, with the majority of these sales in Europe. We are,
therefore, subject to the risks customarily attendant to international
operations and investments in foreign countries.
We currently have foreign currency exposures relating to buying, selling
and financing in currencies other than our functional currencies. We have
Euro-denominated debt outstanding and, therefore, are exposed to foreign
currency exchange risk. We also have foreign currency exposure related to
foreign denominated revenues and costs translated into U.S. dollars. These
exposures are primarily concentrated in the Euro, the Danish Krona and British
Pound Sterling. Fluctuations in foreign currency exchange rates may affect the
results of our operations and the value of our foreign assets, which in turn may
adversely affect reported earnings and the comparability of period-to-period
results of operations. We cannot assure you that management of our foreign
currency exposure will protect us from fluctuations in foreign currency exchange
rates. Fluctuations in foreign currency exchange rates could have a material
adverse effect on our business, results of operations and financial condition.
Other risks include:
- import and export license requirements;
- trade restrictions;
- foreign tax laws, tariffs and other foreign laws and regulations;
- limitation on repatriating earnings back to the United States;
- difficulties in staffing and managing international operations;
- nationalization;
- expropriation;
- restrictive actions by local governments;
- war and civil disturbance; and
- disruptions or delays in shipments.
17
Any of these events could have an adverse effect on our operations in
foreign countries. Interruption of our international operations could have a
material adverse effect on our financial condition and results of operations.
IF WE LOSE CERTAIN KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED
PERSONNEL, WE MAY NOT BE SUCCESSFUL.
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, the
loss could have a material adverse effect on our business, financial condition
and results of operations. We do not have key person life insurance covering any
of our employees. Our success also depends upon our ability to attract and
retain highly qualified employees.
WE ARE SUBJECT TO EXTENSIVE REGULATION, AND OUR COMPLIANCE WITH EXISTING OR
FUTURE LAWS AND REGULATIONS OR MAKING ANY PRODUCT RECALLS PURSUANT THERETO COULD
CAUSE US TO INCUR SUBSTANTIAL EXPENDITURES.
We are subject to a broad range of federal, state, local and foreign laws
and regulations intended to protect the public health and the environment,
including those governing discharges to the air and water, the storage of
petroleum substances and chemicals, the handling and disposal of solid or
hazardous wastes and the remediation of contamination associated with releases
of wastes or hazardous substances. Our U.S. operations are also subject to
regulation by the Occupational Safety and Health Administration, the Food and
Drug Administration, the Department of Agriculture and by various state and
local authorities regarding the processing, packaging, storage, distribution,
advertising and labeling of our products, including food safety standards. Our
foreign operations are subject to similar environmental and safety laws and
regulations that are enforced by governmental agencies, such as the European
Commissioner of Foods, which is the controlling body of the European Union. The
European Union is taking a much stronger role in both the regulation of raw
materials for manufacturing and the labeling of pet food. The European
Commissioner of Food is overseeing this movement towards heightened regulation
of pet food. Violations of any of these laws and regulations may result in
administrative, civil or criminal penalties being levied against us, permit
revocation or modification, performance of environmental investigatory or
remedial activities, or a cease and desist order against operations that are not
in compliance. See "Business -- Environmental and safety matters." On October
30, 1998, we initiated a voluntary product recall for certain dry dog food
manufactured at our Temple, Texas plant. The cost of the product recall was not
covered by insurance and we recognized a $3.0 million product recall charge in
the fourth quarter of fiscal 1998.
We cannot assure you that these laws and regulations will not change in the
future, that we will not incur material costs in the future to comply with
current or future laws and regulations or to effect future recalls, or that
these matters will not have a material adverse effect on our business.
THE BOARD OF DIRECTORS OF DOANE PET CARE ENTERPRISES, INC., OUR PARENT COMPANY,
AND OUR BOARD OF DIRECTORS ARE CONTROLLED BY CERTAIN STOCKHOLDERS AND THEIR
INTERESTS MAY BE DIFFERENT THAN YOURS.
Doane Pet Care Enterprises, Inc., our parent company, is a holding company
with no operations. We are its sole operating subsidiary. In connection with our
acquisition of Windy Hill Pet Food Company, Inc. in August 1998, we, Summit/DPC
Partners, L.P., Summit Capital, Inc., Chase Manhattan Investment Holdings, Inc.
(predecessor to J.P. Morgan Partners (BHCA), L.P.) and an affiliate thereof, DLJ
Merchant Banking Partners, L.P. 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
contains provisions providing certain of these parties with board designation
rights. The holders of our senior preferred stock also have the right to elect
two additional directors to our board of directors in certain circumstances. On
November 7, 2002, the holders of our senior preferred stock elected two
directors to our board. Through their control of the boards of directors of
Doane Pet Care Enterprises, Inc. and our company, these investors will be able
to control our policies, management and affairs and to effectively prevent or
cause a change in our control. Each of our significant stockholders, together
with its affiliates, has other business interests and activities in addition to
its ownership interest in us. It is possible that the significant
18
stockholders may exercise their control in ways that serve their individual
interests but do not serve the best interests of our other stockholders or our
noteholders. It is also possible that conflicts or disagreements among the
stockholders may make it difficult for us to take action important to the
achievement of our goals.
WE MAY BE SUBJECT TO WORK STOPPAGES AT OUR FACILITIES OR THOSE OF OUR PRINCIPAL
CUSTOMERS, WHICH COULD ADVERSELY IMPACT THE PROFITABILITY OF OUR BUSINESS.
A portion of our global work force is unionized. If our unionized workers
were to engage in a strike, work stoppage or other slowdown in the future, we
could experience a significant disruption of our operations, which could have a
material adverse effect on us. Furthermore, organizations responsible for
shipping our products may be impacted by strikes staged by the unions
representing transportation employees. Any interruption in the delivery of our
products could have a material adverse effect on us.
IF THE INVESTMENTS IN OUR PENSION PLANS DO NOT PERFORM AS EXPECTED, WE MAY HAVE
TO CONTRIBUTE ADDITIONAL AMOUNTS TO THE PLANS.
We maintain a non-contributory pension plan covering hourly and salaried
workers of a predecessor company. The plan was frozen in 1998 and, as a result,
future benefits no longer accumulate and our annual service cost ceased as of
that date. Our only active plan covers 46 union employees at one facility. Due
to a decline in the market value of these plans' assets in 2002 and the decline
of interest rates used in discounting benefit liabilities, the pension assets at
the end of 2002 were $1.1 million less than the accumulated benefit obligations.
Under FASB's Statement on Financial Accounting Standards No. 87, Employers'
Accounting for Pensions, or SFAS 87, we were required to record a balance sheet
adjustment during the 2002 fourth quarter for the minimum pension liability. The
non-cash adjustment was a reduction of $9.1 million, or $5.6 million net of
deferred tax benefit, in accumulated other comprehensive income (loss) in the
accompanying audited consolidated financial statements included herein. Under
federal law, we were not required to make any cash contributions to the inactive
plan in fiscal 2000 through 2002 and do not expect to make any cash contribution
in fiscal 2003. Our contributions to the active plan in fiscal 2000 through 2002
were less than $0.1 million each year and we expect to contribute less than $0.1
million in 2003. However, if underperformance of the plans' investments
continues, we may be required in the future to contribute additional funds to
ensure that the pension plans will be able to pay out benefits as scheduled.
Such an increase in funding could result in a decrease in our available cash
flow, which would limit our ability to fund our business activities or pay
principal or interest on our debt.
19
FORWARD-LOOKING STATEMENTS
The information in this prospectus contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Some of these statements can be
identified by terms and phrases such as "anticipate," "believe," "assume,"
"intend," "estimate," "expect," "continue," "could," "may," "plan," "project,"
"predict," "will" and similar expressions. These statements appear in a number
of places and include statements regarding our plans, beliefs or current
expectations, including those plans, beliefs and expectations of our officers
and directors, with respect to, among other things:
- reliance on a few customers for a large portion of our sales and our
ability to maintain our relationships with these customers;
- future capital expenditures and our ability to finance these capital
expenditures;
- our ability to finance our debt service requirements under our senior
credit facility and our other debt and to comply with our financial
covenants relating to our senior credit facility;
- our future financial condition or results of operations;
- our business strategies and other plans and objectives for future
operations;
- general economic and business conditions;
- business opportunities that may be presented to and pursued by us from
time to time;
- our exposure to, and our ability to manage, our market risks;
- the impact of existing or new accounting pronouncements; and
- risks related to our international operations.
These forward-looking statements are based on our assumptions and analyses
and are not guarantees of our future performance. These statements are subject
to risks, many of which are beyond our control, that could cause our actual
results to differ materially from those contained in our forward-looking
statements. Factors that could cause results to differ materially include
without limitation: decreases or changes in demand for our products, changes in
market trends, general competitive pressures from existing and new competitors,
price volatility of commodities, natural gas, other raw materials and packaging,
foreign currency exchange rate fluctuations, future investment returns on our
pension plans, changes in laws and regulations, adverse changes in operating
performance, adverse economic conditions and other factors described under "Risk
factors."
We undertake no obligation to revise the forward-looking statements to
reflect any future events or circumstances.
All forward-looking statements attributable to us are expressly qualified
in their entirety by this cautionary statement.
20
EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the issuance of the outstanding notes, we entered into a
registration rights agreement. The following description of the registration
rights agreement is a summary of the material provisions of the registration
rights agreement. It is not complete and does not describe all of the provisions
of the registration rights agreement. For more information, you should review
the provisions of the registration rights agreement that we filed with the
Securities and Exchange Commission as an exhibit to the registration statement
of which this prospectus is a part.
Under the registration rights agreement, we agreed that, promptly after the
effectiveness of the registration statement of which this prospectus is a part,
we would offer to the holders of outstanding notes who are not prohibited by any
law or policy of the Securities and Exchange Commission from participating in
the exchange offer, the opportunity to exchange their outstanding notes for a
new series of notes, which we refer to as the new notes, that are identical in
all material respects to the outstanding notes, except that these new notes will
not contain transfer restrictions and will be registered under the Securities
Act of 1933 and they will not contain provisions regarding the payment of
additional interest or be subject to further registration rights. We agreed to
keep the exchange offer open for not less than 20 business days, or longer if
required by applicable law, after the date on which notice of the exchange offer
is mailed to the holders of the outstanding notes.
If:
- we are not permitted to effect the exchange offer as contemplated in this
prospectus because of any change in law or applicable interpretations of
the law by the staff of the Securities and Exchange Commission;
- for any other reason the exchange offer is not consummated by the 180th
day after the date of issuance of the outstanding notes;
- any initial purchaser of the outstanding notes so requests with respect
to outstanding notes held by the initial purchaser that are not eligible
to be exchanged for new notes in the exchange offer; or
- any applicable law or interpretations do not permit any holder of
outstanding notes to participate in the exchange offer, or any holder of
outstanding notes that participates in the exchange offer does not
receive freely transferable new notes in exchange for tendered
outstanding notes and any such holder so requests in writing,
then we agreed to file promptly with the Securities and Exchange Commission, but
in no event more than 45 days after the date on which any of the conditions
described in the bullet list above occurs, which is referred to as the shelf
filing date, a shelf registration statement to cover resales of the outstanding
notes by those holders who satisfy various conditions relating to the provision
of information in connection with the shelf registration statement. We agreed to
use our commercially reasonable efforts to have the shelf registration statement
declared effective by the Securities and Exchange Commission no later than 140
days after the date on which any such condition occurs, which we refer to as the
shelf effectiveness deadline. We agreed to use our commercially reasonable
efforts to keep the shelf registration statement effective for a period ending
upon the expiration of the period referred to in Rule 144(k) under the
Securities Act of 1933 or, if earlier, the date when all of the outstanding
notes covered by the shelf registration statement have been sold pursuant
thereto or cease to be restricted securities or to be outstanding or otherwise
to be registrable securities under the registration rights agreement.
If any of the following events occur, each of which is referred to as a
registration default:
- the exchange offer is not consummated on or before 180 days after the
date of issuance of the outstanding notes;
- the shelf registration statement, if applicable, is not declared
effective on or prior to the shelf effectiveness deadline; or
21
- subject to certain exceptions, the registration statement of which this
prospectus is a part or the shelf registration statement, if applicable,
is filed and declared effective but thereafter ceases to be effective or
it or the related prospectus becomes unusable, in either case for more
than 30 days in any 12-month period,
then we will be obligated to pay additional interest on the outstanding notes,
during the period of one or more registration defaults, in an amount equal to
1.0% per annum. All accrued additional interest will be payable to holders in
the same manner as interest payments on the outstanding notes on semi-annual
payment dates that correspond to interest payment dates for the outstanding
notes. Additional interest only accrues during a registration default.
The registration rights agreement also provides that we are obligated to:
- make available a prospectus meeting the requirements of the Securities
Act of 1933 to any broker-dealer, and other persons, if any, subject to
similar prospectus delivery requirements, for use in connection with any
resale of any new notes; and
- pay all expenses incident to our performance of or compliance with the
registration rights agreement, and will indemnify holders of the
outstanding notes, including any broker-dealer, against certain
liabilities, including liabilities under the Securities Act of 1933.
Each holder of outstanding notes who wishes to exchange its outstanding
notes for new notes in the exchange offer will be required to make
representations, including representations that:
- any new notes to be received by it will be acquired in the ordinary
course of its business;
- it has no arrangement or understanding with any person to participate in
the distribution, as defined by the Securities Act of 1933, of the new
notes; and
- it is not our "affiliate," as defined in Rule 405 under the Securities
Act of 1933, or a broker-dealer that acquired outstanding notes directly
from us for its own account.
If the holder is a broker-dealer that will receive new notes for its own
account in exchange for outstanding notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
its new notes. A broker-dealer that delivers a prospectus to purchasers in
connection with resales of the new notes will be subject to certain of the civil
liability provisions under the Securities Act of 1933 and will be bound by the
provisions of the registration rights agreement that are applicable to it,
including indemnification obligations.
Holders of the outstanding notes will also be required to deliver
information to be used in connection with any shelf registration statement to
have their outstanding notes included in the shelf registration statement and
benefit from the provisions regarding additional interest set forth in the
preceding paragraphs. A holder who sells outstanding notes pursuant to the shelf
registration statement generally will be required to be named as a selling
securityholder 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 of 1933 in connection with these sales and will be bound by
the provisions of the registration rights agreement that are applicable to such
a holder, including indemnification obligations.
RESALE OF THE NEW NOTES
Based on no-action letters of the Securities and Exchange Commission staff
issued to third parties, we believe that new notes may be offered for resale,
resold and otherwise transferred by you without further compliance with the
registration and prospectus delivery provisions of the Securities Act of 1933
if:
- you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act of 1933 or a broker-dealer that acquired outstanding notes
directly from us for its own account;
- those new notes are acquired in the ordinary course of your business; and
- you do not intend to participate in a distribution of the new notes.
22
The Securities and Exchange Commission, however, has not considered the
exchange offer for the new notes in the context of a no-action letter, and the
Securities and Exchange Commission may not make a similar determination as in
the no-action letters issued to these third parties.
If you tender in the exchange offer with the intention of participating in
any manner in a distribution of the new notes or otherwise do not satisfy the
foregoing criteria, you
- cannot rely on such interpretations by the Securities and Exchange
Commission staff;
- will not be able to exchange your outstanding notes for new notes in the
exchange offer; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act of 1933 in connection with a secondary resale
transaction, unless the resale is made pursuant to an exemption from, or
is otherwise not subject to, those requirements.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act of 1933. This registration
statement should contain the selling security holder's information required by
Item 507 of Regulation S-K under the Securities Act of 1933. This prospectus may
be used for an offer to resell, resale or other transfer of new notes only as
specifically described in this prospectus. Only broker-dealers that acquired the
outstanding notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives new notes for its own account in exchange for outstanding notes, where
such outstanding notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge in the
letter of transmittal that it will deliver a prospectus in connection with any
resale of the new notes. Please read the section captioned "Plan of
distribution" for more details regarding the transfer of new notes.
TERMS OF THE EXCHANGE OFFER
Subject to the terms and conditions described in this prospectus and in the
letter of transmittal, we will accept for exchange any outstanding notes
properly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the expiration date. We will issue new notes in principal amount equal to the
principal amount of outstanding notes surrendered in the exchange offer.
Outstanding notes may be tendered only for new notes and only in integral
multiples of $1,000.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered for exchange.
As of the date of this prospectus, $213,000,000 in aggregate principal
amount of the outstanding notes are outstanding. This prospectus and the letter
of transmittal are being sent to all registered holders of outstanding notes.
There will be no fixed record date for determining registered holders of
outstanding notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions
of the registration rights agreement, the applicable requirements of the
Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission. Outstanding notes that
the holders thereof do not tender for exchange in the exchange offer will remain
outstanding and continue to accrue interest. These outstanding notes will
continue to be entitled to the rights and benefits such holders have under the
indenture relating to the notes.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance to
the exchange agent and complied with the applicable provisions of the
registration rights agreement. The exchange agent will act as agent for the
tendering holders for the purposes of receiving the new notes from us.
If you tender outstanding notes in the exchange offer, you will not be
required to pay brokerage commissions or fees or, subject to the letter of
transmittal, transfer taxes with respect to the exchange of outstanding notes.
We will pay all charges and expenses, other than certain applicable taxes
described below, in connecting with the exchange offer. It is important that you
read the section labeled "-- Fees and expenses" for more details regarding fees
and expenses incurred in the exchange offer.
23
We will return any outstanding notes that we do not accept for exchange for
any reason without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
EXPIRATION DATE
The exchange offer will expire at 5:00 p.m., New York City time, on June
10, 2003, unless, in our sole discretion, we extend it.
EXTENSIONS, DELAYS IN ACCEPTANCE, TERMINATION OR AMENDMENT
We expressly reserve the right, at any time or various times, to extend the
period of time during which the exchange offer is open. We may delay acceptance
of any outstanding notes by giving oral or written notice of such extension to
their holders. During any such extensions, all outstanding notes previously
tendered will remain subject to the exchange offer, and we may accept them for
exchange.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders of
outstanding notes of the extension no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date.
If any of the conditions described below under "-- Conditions to the
exchange offer" have not been satisfied, we reserve the right, in our sole
discretion
- to delay accepting for exchange any outstanding notes,
- to extend the exchange offer, or
- to terminate the exchange offer,
by giving oral or written notice of such delay, extension or termination to the
exchange agent. Subject to the terms of the registration rights agreement, we
also reserve the right to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of outstanding notes. If we amend the exchange offer in a
manner that we determine to constitute a material change, we will promptly
disclose such amendment by means of a prospectus supplement. The supplement will
be distributed to the registered holders of the outstanding notes. Depending
upon the significance of the amendment and the manner of disclosure to the
registered holders, we may extend the exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
We will not be required to accept for exchange, or exchange any new notes
for, any outstanding notes if the exchange offer, or the making of any exchange
by a holder of outstanding notes, would violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission.
In addition, we will not be obligated to accept for exchange the
outstanding notes of any holder that has not made to us the representations
described under "-- Purpose and effect of the exchange offer," "-- Procedures
for tendering" and "Plan of distribution" and such other representations as may
be reasonably necessary under applicable Securities and Exchange Commission
rules, regulations or interpretations to allow us to use an appropriate form to
register the new notes under the Securities Act of 1933, or if a holder
tendering outstanding notes fails to comply with the procedures contained in the
letter of transmittal to tender outstanding notes.
We expressly reserve the right to extend, amend or terminate the exchange
offer, and to reject for exchange any outstanding notes not previously accepted
for exchange, upon the failure to be satisfied of any of the conditions to the
exchange offer specified herein or in the letter of transmittal. We will give
oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the outstanding notes as promptly as practicable.
These conditions are for our sole benefit, and we may assert them or waive
them in whole or in part at any time or at various times in our sole discretion.
If we fail at any time to exercise any of these rights, this failure will not
mean that we have waived our rights. Each such right will be deemed an ongoing
right that we may assert at any time or at various times.
24
In addition, we will not accept for exchange any outstanding notes
tendered, and will not issue new notes in exchange for any such outstanding
notes, if at such time any stop order has been threatened or is in effect with
respect to the registration statement of which this prospectus constitutes a
part or the qualification of the indenture relating to the notes under the Trust
Indenture Act of 1939.
PROCEDURES FOR TENDERING
HOW TO TENDER GENERALLY
Only a holder of outstanding notes may tender such outstanding notes in the
exchange offer. To tender in the exchange offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal;
- have the signature on the letter of transmittal guaranteed if the letter
of transmittal so requires; and
- mail or deliver such letter of transmittal or facsimile to the exchange
agent prior to 5:00 p.m., New York City time, on the expiration date; or
- comply with the automated tender offer program procedures of DTC
described below.
In addition, either:
- the exchange agent must receive outstanding notes along with the letter
of transmittal;
- the exchange agent must receive, prior to 5:00 p.m., New York City time,
on the expiration date, a timely confirmation of book-entry transfer of
such outstanding notes into the exchange agent's account at DTC according
to the procedure for book-entry transfer described below or a properly
transmitted agent's message; or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address indicated on the cover page of the letter of transmittal. The exchange
agent must receive such documents prior to 5:00 p.m., New York City time, on the
expiration date.
The tender by a holder that is not withdrawn prior to 5:00 p.m., New York
City time, on the expiration date will constitute an agreement between the
holder and us in accordance with the terms and subject to the conditions
described in this prospectus and in the letter of transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND RISK.
RATHER THAN MAIL THESE ITEMS, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE. YOU SHOULD NOT SEND THE LETTER OF TRANSMITTAL OR OUTSTANDING
NOTES TO US. YOU MAY REQUEST YOUR BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR YOU.
HOW TO TENDER IF YOU ARE A BENEFICIAL OWNER
If you beneficially own outstanding notes that are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee and you
wish to tender those notes, you should contact the registered holder promptly
and instruct it to tender on your behalf. If you are a beneficial owner and wish
to tender on your own behalf, you must, prior to completing and executing the
letter of transmittal and delivering your outstanding notes, either:
- make appropriate arrangements to register ownership of the outstanding
notes in your name; or
- obtain a properly completed bond power from the registered holder of
outstanding notes.
25
The transfer of registered ownership, if permitted under the indenture for
the notes, may take considerable time and may not be completed prior to the
expiration date.
SIGNATURES AND SIGNATURE GUARANTEES
You must have signatures on a letter of transmittal or a notice of
withdrawal (as described below) guaranteed by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934. In
addition, such entity must be a member of one of the recognized signature
guarantee programs identified in the letter of transmittal.
WHEN YOU NEED ENDORSEMENTS OR BOND POWERS
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes, the outstanding notes must be
endorsed or accompanied by a properly completed bond power. The bond power must
be signed by the registered holder as the registered holder's name appears on
the outstanding notes. A member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States, or an eligible guarantor institution must guarantee the signature on the
bond power.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing. Unless waived by us,
they should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.
TENDERING THROUGH DTC'S AUTOMATED TENDER OFFER PROGRAM
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's automated tender offer
program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so by causing DTC to transfer the outstanding notes to the exchange
agent in accordance with its 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, to the
effect that:
- DTC has received an express acknowledgment from a participant in its
automated tender offer program that is tendering outstanding notes that
are the subject of such book-entry confirmation;
- such participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that such participant has received and agrees to be
bound by the applicable notice of guaranteed delivery; and
- the agreement may be enforced against such participant.
DETERMINATIONS UNDER THE EXCHANGE OFFER
We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered outstanding notes and
withdrawal of tendered outstanding notes. Our determination will be final and
binding. We reserve the absolute right to reject any outstanding notes not
properly tendered or any outstanding notes our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the right to waive any
defect, irregularities or conditions of tender as to particular outstanding
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 on all parties. Unless waived, all defects or irregularities in
connection with tenders of outstanding notes must be cured within such time as
we shall determine. Although we intend to notify holders of defects or
irregularities with respect to tenders of outstanding notes, neither we, the
exchange agent nor any other person will incur any liability for failure to give
such notification. Tenders of outstanding notes will not be deemed made until
such defects or irregularities have been cured or waived. Any
26
outstanding notes received by the exchange agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived will
be returned to the tendering holder, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
WHEN WE WILL ISSUE NEW NOTES
In all cases, we will issue new notes for outstanding notes that we have
accepted for exchange in the exchange offer only after the exchange agent timely
receives:
- outstanding notes or a timely book-entry confirmation of such outstanding
notes into the exchange agent's account at DTC; and
- a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
RETURN OF OUTSTANDING NOTES NOT ACCEPTED OR EXCHANGED
If we do not accept any tendered outstanding notes for exchange or if
outstanding notes are submitted for a greater principal amount than the holder
desires to exchange, the unaccepted or non-exchanged outstanding notes will be
returned without expense to their tendering holder. In the case of outstanding
notes tendered by book-entry transfer in the exchange agent's account at DTC
according to the procedures described below, such non-exchanged outstanding
notes will be credited to an account maintained with DTC. These actions will
occur as promptly as practicable after the expiration or termination of the
exchange offer.
YOUR REPRESENTATIONS TO US
By signing or agreeing to be bound by the letter of transmittal, you will
represent to us that, among other things:
- any new 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 new notes;
- you are not engaged in and do not intend to engage in the distribution of
the new notes;
- if you are a broker-dealer that will receive new notes for your own
account in exchange for outstanding notes, you acquired those outstanding
notes as a result of market-making activities or other trading activities
and you will deliver a prospectus, as required by law, in connection with
any resale of such new notes; and
- you are not our "affiliate," as defined in Rule 405 of the Securities Act
of 1933.
BOOK-ENTRY TRANSFER
The exchange agent will establish an account with respect to the
outstanding notes at DTC for purposes of the exchange offer promptly after the
date of this prospectus. Any financial institution participating in DTC's system
may make book-entry delivery of outstanding notes by causing DTC to transfer
such outstanding notes into the exchange agent's account at DTC in accordance
with DTC's procedures for transfer. Holders of outstanding notes who are unable
to deliver confirmation of the book-entry tender of their outstanding notes into
the exchange agent's account at DTC or all other documents required by the
letter of transmittal to the exchange agent on or prior to 5:00 p.m., New York
City time, on the expiration date must tender their outstanding notes according
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your outstanding notes but your outstanding notes are
not immediately available or you cannot deliver your outstanding notes, the
letter of transmittal or any other required documents to the
27
exchange agent or comply with the applicable procedures under DTC's automated
tender offer program prior to the expiration date, you may tender if:
- the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an eligible guarantor institution,
- prior to the expiration date, the exchange agent receives from such
member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., commercial bank or
trust company having a office or correspondent in the United States, or
eligible guarantor institution either a properly completed and duly
executed notice of guaranteed delivery by facsimile transmission, mail or
hand delivery or a properly transmitted agent's message and notice of
guaranteed delivery:
-- setting forth your name and address, the registered number(s) of your
outstanding notes and the principal amount of outstanding notes
tendered,
-- stating that the tender is being made thereby, and
-- guaranteeing that, within three (3) New York Stock Exchange, or NYSE,
trading days after the expiration date, the letter of transmittal or
facsimile thereof, together with the outstanding notes or a book-entry
confirmation, and any other documents required by the letter of
transmittal will be deposited by the eligible guarantor institution
with the exchange agent, and
- the exchange agent receives such properly completed and executed letter
of transmittal or facsimile thereof, as well as all tendered outstanding
notes in proper form for transfer or a book-entry confirmation, and all
other documents required by the letter of transmittal, within three (3)
NYSE trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent you if you wish to tender your outstanding notes according to the
guaranteed delivery procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw your
tender at any time prior to 5:00 p.m., New York City time, on the expiration
date.
For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at the
address indicated on the cover page of the letter of transmittal, 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 outstanding notes to be
withdrawn, and
- identify the outstanding notes to be withdrawn, including the principal
amount of such withdrawn outstanding notes.
If outstanding notes have been tendered under 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 withdrawn outstanding 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. Our determination shall be final and
binding on all parties. We will deem any outstanding notes so withdrawn not to
have been validly tendered for exchange for purposes of the exchange offer.
Any outstanding 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. In the case of outstanding notes tendered by book-entry transfer into
the exchange agent's account at DTC according to the procedures described above,
such outstanding notes will be credited to an account maintained with DTC for
the outstanding notes. This return or crediting will take place as soon as
practicable after withdrawal, rejection of tender or termination of the
28
exchange offer. You may retender properly withdrawn outstanding notes by
following one of the procedures described under "-- Procedures for tendering"
above at any time on or prior to the expiration date.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
facsimile, telephone, electronic mail or in person by our officers and regular
employees and those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the
exchange offer. They include:
- Securities and Exchange Commission registration fees;
- fees and expenses of the exchange agent and trustee;
- accounting and legal fees and printing costs; and
- related fees and expenses.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. The tendering holder, however, will
be required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if:
- certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered;
- tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of
outstanding notes under in the exchange offer.
If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of such
transfer taxes will be billed directly to that tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange new notes for your outstanding notes under the
exchange offer, you will remain subject to the existing restrictions on transfer
of the outstanding notes. In general, you may not offer or sell the outstanding
notes unless they are registered under the Securities Act of 1933, or unless the
offer or sale is exempt from the registration requirements under the Securities
Act of 1933 and applicable state securities laws. Except as required by the
registration rights agreement, we do not intend to register resales of the
outstanding notes under the Securities Act of 1933.
ACCOUNTING TREATMENT
We will record the new notes in our accounting records at the same carrying
value as the outstanding notes. This carrying value is the aggregate principal
amount of the outstanding notes less any bond discount, as reflected in our
accounting records on the date of exchange. Accordingly, we will not recognize
any gain or loss for accounting purposes in connection with the exchange offer.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
29
We may in the future seek to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plans to acquire any outstanding notes that are
not tendered in the exchange offer or to file a registration statement to permit
resales of any untendered outstanding notes.
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the new notes. We are
making this exchange offer solely to satisfy our obligations under our
registration rights agreement. In consideration for issuing the new notes as
contemplated by this prospectus, we will receive outstanding notes in a like
principal amount. The form and terms of the new notes are identical in all
material respects to the form and terms of the outstanding notes, except the new
notes will be registered under the Securities Act of 1933 and will not contain
restrictions on transfer, registration rights or provisions for additional
interest. Outstanding notes surrendered in exchange for the new notes will be
retired and cancelled and will not be reissued. Accordingly, the issuance of the
new notes will not result in any change in our outstanding indebtedness.
RATIO OF EARNINGS TO FIXED CHARGES
For purposes of calculating the ratio of earnings to fixed charges,
earnings available for fixed charges (income (loss) before income taxes plus
fixed charges) is divided by fixed charges (interest expense, net, plus 33% of
rent expense).
<Table>
<Caption>
YEARS ENDED
----------------------------------------------------------------------
DECEMBER 31, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1998(1) 2000 2000(1) 2001(1) 2002
------------ ---------- ------------ ------------ ------------
Ratio of earnings to fixed
charges........................ (0.09)x 1.99x 0.89x 0.35x 1.26x
</Table>
- ---------------
(1) The amounts of the deficiency in earnings available for fixed charges from a
ratio of 1.0x (in thousands) are $34,288, $5,739, and $38,109 for the years
ended December 31, 1998, December 30, 2000 and December 29, 2001,
respectively.
30
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization as of December 28, 2002, on an actual and as adjusted basis to
reflect the application of the net proceeds of the offering of the outstanding
notes. You should read this table in conjunction with our accompanying audited
consolidated financial statements and notes thereto contained elsewhere in this
prospectus (table in thousands, except par value and share amounts).
<Table>
<Caption>
DECEMBER 28, 2002
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash and cash equivalents................................... $ 7,596 $ 7,596
======== ========
Total debt:
Senior credit facility:
Revolving credit facility.............................. $ 15,000 $ 9,778
Term loans............................................. 340,924 175,921
10 3/4% senior notes due 2010............................. -- 210,444
9 3/4% senior subordinated notes due 2007................. 148,430 148,430
Sponsor facility.......................................... 17,245 --
Industrial development revenue bonds...................... 14,471 14,471
Debt of foreign subsidiaries.............................. 17,950 17,950
-------- --------
Total debt............................................. 554,020 576,994
-------- --------
Senior preferred stock (redeemable), 3,000,000 shares
authorized; 1,200,000 shares issued and outstanding(1).... 77,550 77,550
-------- --------
Stockholder's equity:
Common stock, $0.01 par value, 1,000 shares authorized,
issued and outstanding................................. -- --
Additional paid-in-capital................................ 115,674 115,674
Accumulated other comprehensive income(2)................. 9,558 14,411
Accumulated deficit(2).................................... (66,729) (72,826)
-------- --------
Total stockholder's equity............................. 58,503 57,259
-------- --------
Total capitalization................................... $690,073 $711,803
======== ========
</Table>
- ---------------
(1) See Note 11 -- "Senior Preferred Stock (Redeemable)" to our accompanying
audited consolidated financial statements included elsewhere in this
prospectus.
(2) On an as adjusted basis, after giving effect to the application of the net
proceeds of the offering of the outstanding notes, the accumulated deficit
is increased due to the impact on net income of a charge of $10.1 million,
or $6.1 million net of deferred tax benefit. The charge includes: (1) a $4.1
million write-off of deferred financing costs primarily related to our
senior credit facility; (2) a charge of $7.8 million for the accretion of
the sponsor facility to face value; (3) a charge of $4.9 million realized
translation loss as a result of retiring a portion of our Euro-denominated
debt along with a corresponding credit to accumulated other comprehensive
income; and (4) a credit of $6.7 million for the reversal of an excess
leverage fee.
31
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The selected financial data presented below (except for pet food sold data)
was derived from our consolidated financial statements, which have been audited
by KPMG LLP, independent auditors. The selected data should be read in
conjunction with our accompanying audited consolidated financial statements and
the notes thereto contained elsewhere in this prospectus. Effective January 1,
1999, we changed our fiscal year so that it ends on the Saturday nearest to the
end of December; and therefore, fiscal 1999, 2000, 2001 and 2002 ended on
January 1, 2000, December 30, 2000, December 29, 2001 and December 28, 2002,
respectively. Fiscal 1999 through 2002 were each 52-week years (tables in
thousands, except per share amounts).
<Table>
<Caption>
YEARS ENDED
----------------------------------------------------------------------
DECEMBER 31, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1998(1) 2000(2) 2000(3) 2001(4) 2002
------------ ---------- ------------ ------------ ------------
STATEMENT OF INCOME DATA:
Net sales(5)......................... $674,638 $754,343 $875,761 $895,830 $887,333
Cost of goods sold(5)................ 556,249 579,124 687,799 749,092 701,418
-------- -------- -------- -------- --------
Gross profit....................... 118,389 175,219 187,962 146,738 185,915
Operating expenses:
Promotion and distribution(5)...... 31,212 42,306 52,285 58,993 53,525
Selling, general and
administrative(5)............... 26,266 40,912 50,507 47,193 48,663
Amortization(6).................... 6,468 10,357 12,779 13,743 3,552
Other operating expenses(5)(7)..... 10,043 2,539 28,639 8,655 1,447
-------- -------- -------- -------- --------
Income from operations.......... 44,400 79,105 43,752 18,154 78,728
Interest expense, net................ 31,136 39,739 51,223 57,020 62,395
Amortization of bridge loan financing
charges(8)......................... 4,599 -- -- -- --
Loss from debt extinguishment(9)..... 42,789 -- -- -- --
Other (income) expense, net.......... 164 (1,201) (1,732) (757) (724)
-------- -------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle............... (34,288) 40,567 (5,739) (38,109) 17,057
Income tax expense (benefit)......... (12,399) 16,858 (854) (16,171) 1,786
-------- -------- -------- -------- --------
Income (loss) before cumulative
effect of a change in accounting
principle.......................... (21,889) 23,709 (4,885) (21,938) 15,271
Cumulative effect at adoption on
January 1, 1999 of a change in
accounting for commodity derivative
instruments, net of income tax
benefit of $1,440(10).............. -- (2,263) -- -- --
-------- -------- -------- -------- --------
Net income (loss).................. $(21,889) $ 21,446 $ (4,885) $(21,938) $ 15,271
======== ======== ======== ======== ========
</Table>
32
<Table>
<Caption>
YEARS ENDED
----------------------------------------------------------------------
DECEMBER 31, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1998(1) 2000(2) 2000(3) 2001(4) 2002
------------ ---------- ------------ ------------ ------------
OTHER DATA:
Basic and diluted net income (loss)
per common share................... $(29,136) $ 13,273 $ (14,125) $(32,405) $ 3,393
Cash flows provided by (used in)
operating activities............... 33,992 59,938 45,388 (23,936) 78,773
Cash flows provided by (used in)
investing activities............... (56,300) (34,458) (181,316) 1,466 (25,902)
Cash flows provided by (used in)
financing activities............... 25,432 (21,531) 131,972 25,433 (51,731)
Depreciation and amortization........ 17,877 26,083 36,334 41,430 32,164
Capital expenditures(11)............. 23,327 26,668 35,347 17,316 24,348
Pet food sold (U.S. tons):
United States...................... 1,471 1,669 1,710 1,653 1,705
Europe............................. 42 72 207 282 258
</Table>
<Table>
<Caption>
YEARS ENDED
----------------------------------------------------------------------
DECEMBER 31, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1998(1) 2000(2) 2000(3) 2001(4) 2002
------------ ---------- ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital.................... $ 39,947 $ 32,832 $ 25,812 $ 46,995 $ 59,215
Total assets....................... 710,879 693,296 907,062 836,545 870,667
Total debt......................... 461,974 427,922 573,165 587,823 554,020
Senior preferred stock
(redeemable).................... 37,792 45,965 55,205 65,672 77,550
Stockholder's equity............... 69,294 82,946 70,881 37,926 58,503
</Table>
- ---------------
(1) Results for fiscal 1998 include the results of our acquisition on August 3,
1998 of Windy Hill Pet Food Company, Inc. and our acquisition on April 17,
1998 of Ipes Iberica, S.A.
(2) Results for fiscal 1999 include the results of our acquisition on October
14, 1999 of the Larkshall Extrusions, division of Buxted Chicken Limited
for approximately $5.0 million in cash.
(3) Results for fiscal 2000 include the results of our acquisition on May 10,
2000 of A/S Arovit Petfood, headquartered in Esbjerg, Denmark, for
approximately $144.4 million and assumed indebtedness, net of cash, of
approximately $11.8 million. Arovit manufacturers and sells throughout
Europe a full range of pet food products for dogs and cats, including wet,
dry and treats, primarily through private label programs. See "Management's
discussion and analysis of financial condition and results of operations --
Results of operations."
(4) Results for fiscal 2001 include the results of two divestitures until the
date of sale: our Perham, Minnesota facility from December 31, 2000 to
April 27, 2001 and our Deep Run domestic wet pet food business from
December 31, 2000 to May 3, 2001. See "Management's discussion and analysis
of financial condition and results of operations -- Results of operations."
(5) Results for fiscal 2001 include $16.9 million of expenses associated with
strategic initiatives that commenced in fiscal 2001 and consist of $6.7
million of other operating expenses related to the divestitures and $10.2
million of Project Focus expenses. The Project Focus expenses were
classified as follows: (1) $0.3 million as a reduction in net sales; (2)
$6.6 million as cost of goods sold; (3) $0.9 million as promotion and
distribution expenses; (4) $0.4 million as selling, general and
administrative expenses; and (5) $2.0 million as other operating expenses.
See Note 16 -- "Other Operating and Project Focus Implementation Expenses"
to our accompanying audited consolidated financial statements included
herein.
(6) Effective December 30, 2001, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. As a result, we
ceased amortization of goodwill and trademarks
33
as of the beginning of fiscal 2002. See Note 2 -- "Changes in Accounting
Principles" to our accompanying audited consolidated financial statements
included herein for our results of operations for fiscal 2000 and 2001, as
adjusted to give effect to SFAS 142 as if it were adopted on January 2,
2000. Net income (loss) for fiscal 1998 and 1999, as adjusted to give
effect to the adoption of SFAS 142 on January 1, 1998, would be $(18.6)
million and $27.9 million, respectively.
(7) Other operating expenses of $10.0 million in fiscal 1998 include transition
expenses of $7.0 million in connection with the Windy Hill acquisition and
a $3.0 million charge related to a product recall. Other operating expenses
of $2.5 million in fiscal 1999 include $1.1 million of transition expenses
in connection with the Windy Hill acquisition and $1.4 million of expenses
related to the proposed initial public offering by our parent, which was
subsequently withdrawn. Other operating expenses of $28.6 million in fiscal
2000 include: (1) restructuring costs of $22.3 million consisting of asset
impairments of $15.3 million related to closure of certain inefficient
manufacturing facilities, severance costs of $3.5 million related to these
facility closures and the elimination of corporate positions and $3.5
million of shutdown expenses for these facility closures; and (2)
transaction costs of $6.3 million, consisting of a $4.6 million loss on a
foreign currency forward contract associated with the Arovit acquisition, a
$1.5 million charge for the write-off of costs for unconsummated
acquisitions and $0.2 million of miscellaneous transaction costs. Other
operating expenses of $8.7 million in fiscal 2001 include a $4.7 million
net loss from the divestitures and $4.0 million of restructuring costs
consisting of (1) $2.0 million of severance costs for the elimination of
corporate positions following the divestitures; and (2) $2.0 million of
Project Focus related costs comprised of $1.0 million of asset impairments
and other plant closure costs for the shutdown of an inefficient
manufacturing facility and $1.0 million of severance costs for the
elimination of additional corporate positions in the fourth quarter of
fiscal 2001. Other operating expenses of $1.4 million in fiscal 2002
include a $0.8 million write-off of costs related to our postponed bond
offering and $0.6 million write-off of costs related to our abandoned
European sale process. See Note 16 -- "Other Operating and Project Focus
Implementation Expenses" to our accompanying audited consolidated financial
statements included herein.
(8) This charge includes $4.6 million of interim bridge financing costs
incurred in conjunction with our refinancing transactions.
(9) The loss represents finance charges associated with the early
extinguishment of debt incurred in connection with our refinancing
transactions. With the adoption of FASB's Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, or SFAS 145,
as of the beginning of fiscal 2003, the loss on early extinguishment of
debt for fiscal 1998 has been reclassified in the above table from an
extraordinary loss to a charge to continuing operations.
(10) The cumulative effect of a change in accounting principle as of January 1,
1999 relates to a change in accounting for derivative instruments in
accordance with SFAS 133.
(11) Capital expenditures exclude payments for acquisitions.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying audited consolidated financial statements and related notes
included elsewhere in this prospectus.
BASIS OF PRESENTATION
Our fiscal year ends on the Saturday nearest to the end of December; and
therefore, fiscal 2000, 2001 and 2002 ended on December 30, 2000, December 29,
2001 and December 28, 2002, respectively. Each month and quarter also ends on
the Saturday nearest to the end of the month. Fiscal 2000 through 2002 were each
52-week years.
CRITICAL ACCOUNTING POLICIES
Accounts receivable allowances. As of December 28, 2002, our gross
accounts receivable were $134.6 million. We had a valuation allowance of $5.3
million at December 28, 2002, primarily for outstanding deductions with
customers. Our policy is to estimate our allowance by applying a recovery
percentage based on historical collection experience and performing a specific
identification review of customer account balances. We may revise our allowances
against accounts receivable as we receive more information on this matter or as
we assess other factors impacting the realizability of our accounts receivable.
Inventories valuation allowance. As of December 28, 2002, our gross
inventories were $68.3 million. We had a valuation allowance for obsolescence of
$4.7 million at December 28, 2002, primarily related to packaging inventories.
Our policy is to estimate our allowance based on specific identification of
obsolete stock keeping units, or SKUs, or probable SKUs to be rationalized. We
may revise our allowance against inventories as we receive more information on
this matter or as we assess other factors impacting the realizability of our
inventories.
Deferred tax assets. As of December 28, 2002, our federal net operating
loss, or NOL, carryforwards were approximately $77.3 million and our foreign NOL
carryforwards totaled approximately $5.8 million. Our deferred tax assets
related to federal, foreign, state and local NOL carryforwards totaled
approximately $32.1 million as of December 28, 2002. As of December 28, 2002, we
had net deferred tax liabilities, excluding the NOL carryforwards, of
approximately $32.9 million. The realization of our deferred tax assets depends
upon the future reversal of our net deferred tax liabilities and upon our
ability to generate sufficient taxable income during the periods in which our
deferred tax assets may be utilized. Although realization is not assured, we
believe that it is more likely than not that our deferred tax assets will be
realized, with the exception of certain foreign NOL carryforwards against which
we have recorded a valuation allowance of $0.6 million.
Goodwill and trademarks. As of December 28, 2002, our goodwill and
trademarks, net of accumulated amortization, totaled $363.1 million. Our policy
is to test goodwill and other intangible assets for impairment in accordance
with SFAS 142, which we adopted as of the beginning of fiscal 2002. See "--
Recently issued accounting pronouncements."
RESULTS OF OPERATIONS
General. We derive substantially all of our revenue from the sale of dry
and wet pet food. Historically, approximately 75% of our cost of goods sold has
been comprised of raw material and packaging costs with the remainder primarily
comprised of salaries, wages and related fringe benefits, utilities and
depreciation. Our operating expenses consist of promotion and distribution
expenses and selling, general and administrative expenses. Promotion and
distribution expenses are primarily comprised of promotions, freight, brokerage
fees and warehousing expenses. Selling, general and administrative expenses
primarily include salaries and related fringe benefits, amortization and other
corporate overhead costs, which typically do not increase proportionately with
increases in volume and product sales.
Expenses related to 2001 strategic initiatives. In fiscal 2001, we
commenced strategic initiatives that resulted in expenses totaling $16.9
million, which consisted of $6.7 million of other operating expenses related to
two divestitures and $10.2 million of expenses related to Project Focus,
including $2.0 million of other operating expenses.
35
In April 2001, we sold our Perham, Minnesota dry dog and cat food facility
and related assets, including the Tuffy's brand, for $7.0 million. In May 2001,
we sold our Deep Run domestic wet pet food business and related assets, other
than real estate, for $13.9 million. We recognized a $4.7 million net loss on
the sale of these businesses. In addition, we recognized $2.0 million of
severance costs for the elimination of certain corporate positions following
these divestitures. Each of these expenses was classified as other operating
expenses.
In October 2001, we initiated a new market and operational strategy,
Project Focus, which is designed to better focus our resources on providing
"best-in-class" services and products to our customers. Our goal is to continue
to permanently reduce our cost structure by streamlining our available product
offerings and thereby significantly reducing SKUs, increasing the efficiency of
our production facilities and reducing our workforce. We believe the changes
will benefit our customers by simplifying and distinguishing our product
offerings and associated pricing, improving our planning and marketing support
services, and reducing the complexity of our operations. We also plan to
continue to improve our margins by focusing on initiatives that enhance our
customer mix and/or product mix. We seek to be the high quality, low cost global
producer of customer branded pet food in our highly competitive markets. See
Note 4 -- "Divestitures" and Note 16 -- "Other Operating and Project Focus
Implementation Expenses" to our accompanying audited consolidated financial
statements included herein.
In connection with Project Focus, we closed one manufacturing facility and
had a corporate workforce reduction, which resulted in the termination of 45
employees in the fourth quarter of fiscal 2001. We recorded a fourth quarter
charge related to these actions of $10.2 million classified as follows:
- $0.3 million as a reduction in net sales;
- $6.6 million as cost of goods sold;
- $0.9 million as promotion and distribution expenses;
- $0.4 million as selling, general and administrative expenses; and
- $2.0 million as other operating expenses, comprised of $1.0 million of
asset impairments and other plant closure costs for the shutdown of an
inefficient manufacturing facility and $1.0 million of severance costs
for the elimination of corporate positions.
Statement of income data. The following table sets forth our statement of
income data expressed as a percentage of net sales for the periods indicated
(table in thousands, except percentages):
<Table>
<Caption>
YEARS ENDED
----------------------------------------------------------------
DECEMBER 30, 2000 DECEMBER 29, 2001 DECEMBER 28, 2002
------------------ ------------------ ------------------
Net sales.......................... $875,761 100.0% $895,830 100.0% $887,333 100.0%
Cost of goods sold................. 687,799 78.5 749,092 83.6 701,418 79.0
-------- ----- -------- ----- -------- -----
Gross profit.................. 187,962 21.5 146,738 16.4 185,915 21.0
Operating expenses:
Promotion and distribution....... 52,285 6.0 58,993 6.6 53,525 6.0
Selling, general and
administrative................ 50,507 5.8 47,193 5.3 48,663 5.5
Amortization..................... 12,779 1.4 13,743 1.5 3,552 0.4
Other operating expenses......... 28,639 3.3 8,655 1.0 1,447 0.2
-------- ----- -------- ----- -------- -----
Income from operations........ 43,752 5.0 18,154 2.0 78,728 8.9
Interest expense, net.............. 51,223 5.9 57,020 6.4 62,395 7.0
Other income, net.................. (1,732) (0.2) (757) (0.1) (724) --
-------- ----- -------- ----- -------- -----
Income (loss) before income
taxes....................... (5,739) (0.7) (38,109) (4.3) 17,057 1.9
Income tax expense (benefit)....... (854) (0.1) (16,171) (1.8) 1,786 0.2
-------- ----- -------- ----- -------- -----
Net income (loss)............. $ (4,885) (0.6)% $(21,938) (2.5)% $ 15,271 1.7%
======== ===== ======== ===== ======== =====
</Table>
36
FISCAL YEAR ENDED DECEMBER 28, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 29,
2001
Net sales. Net sales for fiscal 2002 decreased 0.9% to $887.3 million from
$895.8 million in fiscal 2001. Net sales in fiscal 2001 included $16.6 million
of net sales from our Deep Run and Perham businesses prior to their divestiture
in the second quarter of 2001. Excluding the fiscal 2001 net sales associated
with these divestitures, our net sales for fiscal 2002 increased 0.9%, or $8.1
million. This increase was primarily due to the increase in our sales volume as
a result of new business awards, partially offset by lower sales volume from
Project Focus implementation.
Gross profit. Gross profit for fiscal 2002 increased 26.7%, or $39.2
million, to $185.9 million from $146.7 million in fiscal 2001 partially due to
the favorable impact caused by the volatility of commodity prices as recognized
under the SFAS 133 fair value accounting of our commodity derivative
instruments. Such accounting resulted in a $4.9 million reduction in our cost of
goods sold in fiscal 2002 compared to a $12.6 million increase in our cost of
goods sold in fiscal 2001, which accounts for $17.5 million of the $39.2 million
increase in gross profit. Also, our fiscal 2001 gross profit was impacted by the
implementation of Project Focus. Of the total $10.2 million Project Focus
related charges, $6.9 million negatively impacted gross profit and was primarily
due to the write-down in packaging inventories. See Note 16 - "Other Operating
and Project Focus Implementation Expenses" to our accompanying audited
consolidated financial statements included herein. The remaining increase in our
gross profit is primarily due to Project Focus implementation, including
improvements in manufacturing efficiencies, customer mix and/or product mix, and
our European operations. Wage inflation was offset by lower natural gas costs.
Promotion and distribution. Promotion and distribution expenses for fiscal
2002 decreased 9.3% to $53.5 million from $59.0 million in fiscal 2001 primarily
due to Project Focus mix improvement, freight outsourcing and improved cost
control measures.
Selling, general and administrative. Selling, general and administrative
expenses for fiscal 2002 increased 3.2% to $48.7 million from $47.1 million in
fiscal 2001 primarily due to higher variable compensation incentives tied to our
business performance and higher fringe benefit costs, partially offset by lower
costs resulting from Project Focus cost savings initiatives.
Amortization. Amortization expense for fiscal 2001 decreased 74.2% to $3.6
million from $13.7 million in fiscal 2001 primarily due to goodwill and
trademarks no longer being amortized. See "-- Recently issued accounting
pronouncements."
Other operating expenses. Other operating expenses of $1.4 million for
fiscal 2002 consist of a $0.8 million write-off of costs related to our
postponed bond offering and a $0.6 million write-off of costs related to our
abandoned European sale process. Fiscal 2001 other operating expenses of $8.7
million included a $4.7 million net loss from the divestitures and $4.0 million
of restructuring costs. These restructuring costs consist of: (1) $2.0 million
of severance costs for the elimination of corporate positions following the
divestitures; and (2) $2.0 million of Project Focus related costs comprised of
$1.0 million of asset impairments and other plant closure costs for the shutdown
of an inefficient manufacturing facility and $1.0 million of severance costs for
the elimination of additional corporate positions in the fourth quarter of
fiscal 2001.
Interest expense, net. Interest expense, net of interest income, for
fiscal 2002 increased 9.4% to $62.4 million from $57.0 million in fiscal 2001
primarily due to a $6.7 million accrual of non-cash interest expense for the
excess leverage fee under our senior credit facility, partially offset by a
decrease in interest rates associated with our floating rate debt in fiscal 2002
compared to fiscal 2001.
Income tax expense (benefit). We recognized income tax expense of $1.8
million for fiscal 2002 compared to an income tax benefit of $16.2 million in
fiscal 2001. Our effective tax rate was different from the combined U.S. federal
and state statutory rate of 38.9% due to the difference between U.S. and foreign
effective tax rates which results primarily from certain items being deductible
in the United States and also in certain foreign jurisdictions. In addition, our
effective tax rate in fiscal 2001 was impacted by certain goodwill amortization
that was not deductible for income tax purposes. We may not recognize additional
deferred tax assets in 2003 and beyond unless we generate significant current
taxable income. Accordingly, the effective tax rate in 2003 could increase.
37
FISCAL YEAR ENDED DECEMBER 29, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
2000
Net sales. Net sales for fiscal 2001 increased 2.3% to $895.8 million from
$875.8 million in fiscal 2000 primarily due to the impact of the Arovit
acquisition in May 2000 and the price increase implemented in the first quarter
of fiscal 2001, partially offset by the impact of the divestitures of the Deep
Run and Perham businesses as well as lower sales volume. Excluding the impact of
the Arovit acquisition, net sales for fiscal 2001 decreased 4.4% from fiscal
2000. See "-- Inflation and changes in prices." The lower sales volume was
impacted by unusually warm weather in the fourth quarter of fiscal 2001, lost
sales volume with WalMart Stores, Inc., competitive pricing issues related to
the price increase implemented in fiscal 2001 and a decline in promotional
activity.
Gross profit. Gross profit for fiscal 2001 decreased 21.9%, or $41.3
million, to $146.7 million from $188.0 million in fiscal 2000 partially due to
the unfavorable impact caused by the volatility of commodity prices as
recognized under the SFAS 133 fair value accounting of our commodity derivative
instruments. Such accounting resulted in a $12.6 million increase in our cost of
goods sold in fiscal 2001 compared to a $9.0 million reduction in our cost of
goods sold in fiscal 2000, which accounts for $21.6 million of the $41.3 million
reduction in gross profit. Also, our gross profit was impacted by the
implementation of Project Focus. Of the total $10.2 million Project Focus
related charges, $6.9 million affected gross profit and was primarily due to the
write-down in packaging inventories. See Note 16 -- "Other Operating and Project
Focus Implementation Expenses" to our accompanying audited consolidated
financial statements included herein. In addition, our gross profit was
negatively affected by significantly higher ingredient costs in fiscal 2001, a
substantial increase in natural gas and healthcare costs, increases in annual
wages as well as an unfavorable global sales mix. The favorable impact of the
Arovit acquisition in fiscal 2001, a price increase implemented in the first
quarter of fiscal 2001, the closure of certain inefficient manufacturing
facilities in both fiscal 2000 and 2001, as well as manufacturing efficiencies
achieved at our remaining plants, partially offset our gross profit decrease.
Excluding the impact of the Arovit acquisition, gross profit for fiscal 2001
decreased $56.4 million.
Promotion and distribution. Promotion and distribution expenses for fiscal
2001 increased 12.8% to $59.0 million from $52.3 million in fiscal 2000
primarily due to the Arovit acquisition. Excluding the impact of the Arovit
acquisition, promotion and distribution expenses for fiscal 2001 decreased 1.2%.
Selling, general and administrative. Selling, general and administrative
expenses for fiscal 2001 decreased 6.6% to $47.2 million from $50.5 million in
fiscal 2000 due to lower costs resulting from corporate restructurings and other
cost savings initiatives, partially offset by the impact of the Arovit
acquisition, increases in annual salaries and higher healthcare costs. Excluding
the impact of the Arovit acquisition, selling, general and administrative
expenses for fiscal 2001 decreased 15.7%.
Amortization. Amortization expense for fiscal 2001 increased 7.5% to $13.7
million from $12.8 million in fiscal 2000 primarily due to the Arovit
acquisition. Excluding the impact of the Arovit acquisition, amortization
expense for fiscal 2001 increased 1.9%.
Other operating expenses. Other operating expenses of $8.7 million for
fiscal 2001 included a $4.7 million net loss from the divestitures of the Deep
Run and Perham businesses and $4.0 million of restructuring costs. These
restructuring costs consist of: (1) $2.0 million of severance costs for the
elimination of corporate positions following these divestitures; and (2) $2.0
million of Project Focus related costs, comprised of $1.0 million of asset
impairments and other plant closure costs for the shutdown of an inefficient
manufacturing facility and $1.0 million of severance costs for the elimination
of additional corporate positions.
Fiscal 2000 other operating expenses of $28.6 million included: (1)
restructuring costs of $22.3 million consisting of asset impairments of $15.3
million related to closure of certain inefficient manufacturing facilities,
severance costs of $3.5 million related to these facility closures and the
elimination of corporate positions and $3.5 million of shutdown expenses for
these facility closures; and (2) transaction costs of $6.3 million, consisting
of a loss of $4.6 million on a foreign currency forward contract related to the
Arovit acquisition, unconsummated acquisition costs of $1.5 million and
miscellaneous transaction costs of $0.2 million.
Interest expense, net. Interest expense, net of interest income, for
fiscal 2001 increased 11.3% to $57.0 million from $51.2 million in fiscal 2000
primarily due to the borrowings obtained in May 2000 to
38
finance the Arovit acquisition. In addition, this increase was partially due to
the issuance of long-term debt under the our sponsor facility in March 2001. See
Note 9 -- "Long-Term Debt and Liquidity" to our accompanying audited
consolidated financial statements included herein. The impact of this increase
in our outstanding indebtedness on interest expense was partially offset by a
decrease in interest rates associated with our floating rate debt in fiscal 2001
compared to fiscal 2000.
Income tax benefit. We recognized an income tax benefit of $16.2 million
for fiscal 2001 compared to $0.9 million in fiscal 2000. Our effective tax rate
was different from the combined U.S. federal and state statutory rate of 38.9%
due to the difference between U.S. and foreign effective tax rates. In addition,
our effective tax rate was impacted by certain goodwill amortization that was
not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and
working capital requirements with cash flows from operations, bank borrowings
and industrial development revenue bonds. At December 28, 2002, we had working
capital of $59.2 million.
CASH FLOWS
Net cash provided by our operating activities was $78.8 million for fiscal
2002 compared to net cash used in our operating activities of $23.9 million in
fiscal 2001. This increase was due to higher income before depreciation,
amortization, deferred taxes and non-cash charges as well as improved working
capital management.
Net cash used in our investing activities was $25.9 million for fiscal 2002
compared to net cash provided by our investing activities of $1.5 million in
fiscal 2001. This decrease is primarily associated with the proceeds received in
fiscal 2001 related to the divestitures of our Deep Run and Perham businesses.
Capital expenditures for fiscal 2002 were $24.3 million compared to $17.3
million in fiscal 2001.
Net cash used in financing activities was $51.7 million for fiscal 2002
compared to net cash provided by our financing activities of $25.4 million in
fiscal 2001. The favorable reduction in long-term debt in fiscal 2002 is
primarily due to higher cash flow from operations. In addition to $28.7 million
of principal payments on long-term debt, net of debt issuance costs and
refinancing activities, we reduced our revolving credit facility borrowings by
$23.0 million, or reduced our total long-term debt by $51.7 million. In addition
we borrowed $25.0 million under the sponsor facility in fiscal 2001.
REFINANCING
Use of proceeds from note offering. On February 28, 2003, we issued $213.0
million aggregate principal amount of the outstanding notes. We used
approximately $169.0 million of the net proceeds from the sale of the
outstanding notes to repay a portion of our senior credit facility and we used
the remaining net proceeds to repay our sponsor facility in full.
Amendments to senior credit facility. In conjunction with the issuance of
the outstanding notes, we amended our senior credit facility, effective as of
February 28, 2003. The amendments provided for, among other things: (1) the
concurrent issuance of the outstanding notes and repayment of our sponsor
facility; (2) the repayment of a portion of the term loans and revolving credit
facility under our senior credit facility in order of forward maturity; (3) less
restrictive covenants on capital expenditures, investments and certain other
activities; (4) the elimination of certain financial covenants and the revision
of other financial covenants; (5) the elimination of the excess leverage fee;
(6) the elimination of the fixed rate debt percentage requirement; and (7) the
permanent reduction in our revolving credit facility from $75.0 million to $60.0
million.
DEBT
We are highly leveraged and have significant cash requirements for debt
service relating to our senior credit facility, the notes, our 9 3/4% senior
subordinated notes, our industrial development revenue bonds and
39
our foreign debt. Our ability to borrow is limited by our senior credit facility
and the limitations on the incurrence of additional indebtedness in the
indentures governing the notes and our 9 3/4% senior subordinated notes.
We entered into an amended and restated senior credit facility dated as of
May 8, 2000 with a syndicate of banks and other institutional investors, as
lenders, and JPMorgan Chase Bank, as administrative agent. Our senior credit
facility was amended in March 2001, March 2002 and February 2003 as discussed
above.
The following summary of certain provisions of our senior credit facility
reflects the application of the net proceeds of our offering of the outstanding
notes and the amendments to our senior credit facility in February 2003.
The facilities. As of February 28, 2003, taking into account the
application on such date of the net proceeds of the outstanding notes, our
senior credit facility provided for total commitments as follows:
- a Euro 34.8 million ($37.7 million assuming a USD to Euro exchange rate
of 1.0825) Euro term loan facility; and
- $201.6 million, consisting of
-- a $141.6 million USD term loan facility; and
-- a $60.0 million revolving credit facility, with a $20.0 million
sub-limit for issuance of letters of credit.
Availability of funds under our senior credit facility is subject to
certain customary terms and conditions.
Interest rates. All loans under our senior credit facility bear interest
at the higher of the Euro dollar rate plus 4.75%, or the prime rate of the
administrative agent plus 3.75%, until maturity.
Amortization of outstanding indebtedness. As of February 28, 2003, the
principal amount due under the Euro term loan facility was approximately Euro
34.8 million in 2005; and the principal amounts due under the USD term loan
facility were approximately (i) $10.7 million in 2004, (ii) $88.3 million in
2005, and (iii) $42.6 million in 2006. We had approximately $9.0 million
outstanding under our revolving credit facility and $2.5 million of letters of
credit outstanding, resulting in approximately $48.5 million of availability
under our revolving credit facility.
Maturity. The Euro term loan facility has a final maturity of December 30,
2005. The USD term loan facility consists of three tranches with final
maturities of March 31, 2005, December 31, 2005 and December 31, 2006,
respectively, unless terminated sooner upon an event of default. The revolving
credit facility has a final maturity of March 31, 2005.
Prepayments. The loans may be prepaid and commitments may be reduced in
certain specified minimum amounts. Optional prepayments of the term loans are
generally applied pro rata to the four tranches and ratably to the respective
installments thereof. Optional prepayments of the term loans may not be
reborrowed.
Our senior credit facility also provides for mandatory prepayments of the
borrowings upon certain specified events and in certain specified percentages,
including:
- 100% of the net cash proceeds received by our parent, us or any of our
restricted subsidiaries from the issuance of indebtedness not currently
expressly permitted by our senior credit facility;
- 100% of the net cash proceeds of any sale or other disposition of any
assets, subject to certain exceptions;
- 50% of excess cash flow; and
- 100% of the net proceeds of any sale or issuance of equity, subject to
certain exceptions.
Guarantees; collateral. We, our parent company and our restricted domestic
subsidiaries are required to guarantee amounts outstanding under our senior
credit facility. In order to secure the indebtedness and
40
obligations under our senior credit facility, we, our parent company and our
restricted domestic subsidiaries have pledged the following U.S. assets:
- substantially all of our personal property assets, subject to certain
exceptions;
- substantially all of our real property assets and any subsequently
acquired real property having a fair market value in excess of $0.5
million, subject to certain exceptions;
- substantially all of our intellectual property assets; and
- substantially all of the stock owned or subsequently acquired by each of
us in each of our respective domestic subsidiaries and 65% of the foreign
subsidiaries owned directly by us or a domestic subsidiary.
In addition, pursuant to the pledge agreement between DPC Investment Corp.
and Doane Pet Care Europe (ApS), 65% of the capital stock of Doane Pet Care
Europe (ApS) is pledged to secure the obligations under our senior credit
facility.
Covenants. Our senior credit facility contains financial and other
covenants that we believe are usual and customary for a secured credit
agreement, including covenants that limit our and our restricted subsidiaries'
abilities to, among other things:
- incur indebtedness or issue guarantees;
- grant liens;
- make investments;
- make certain capital expenditures;
- make certain restricted payments; and
- enter into certain lines of business.
Our senior credit facility also contains the following financial covenant
requirements:
- our consolidated leverage ratio as of certain specified periods must not
exceed ratios ranging from 6.30:1.00 at the end of the first quarter of
2003 to 5.50:1.00 at the end of the first quarter of 2006 and thereafter
until maturity;
- our consolidated senior secured debt ratio as of certain specified
periods must not exceed ratios ranging from 2.25:1.00 at the end of the
first quarter of 2003 to 2.00:1.00 at the end of the first quarter of
2004 and thereafter until maturity;
- our consolidated interest coverage ratio as of certain specified periods
must meet or exceed ratios ranging from 1.50:1.00 at the end of the first
quarter of 2003 to 1.55:1.00 at the end of the third quarter of 2003 and
thereafter until maturity; and
- our consolidated fixed charge coverage ratio as of the last day of any
period of four consecutive fiscal quarters must meet or exceed 1.00:1.00.
We have experienced difficulty in the past satisfying financial covenants
in our senior credit facility and sought waivers in fiscal 2001 and 2002. Our
senior credit facility, including these financial covenants, was amended
effective February 28, 2003 concurrently with the sale of the outstanding notes.
We may experience difficulty satisfying these amended covenants in the future,
which, if we were unable to secure a waiver from our lenders, could result in an
event of default under our senior credit facility and permit a majority of the
lenders to accelerate outstanding debt under our senior credit facility and
permit a majority of our lenders under our revolving credit facility to
terminate our revolving credit commitment (without acceleration of such debt).
Such acceleration would result in a cross-default under the indentures governing
the notes and our 9 3/4% senior subordinated notes.
Events of default. Our senior credit facility contains default provisions
that we believe are customary for facilities and transactions of this type,
including default provisions relating to:
- our failure to pay principal or interest when and as due or any other
amount under our senior credit facility within five days after such
amount becomes due;
- representations or warranties being inaccurate in any material respect
when made;
41
- cross-default to certain other indebtedness and agreements (including the
new notes offered hereby);
- bankruptcy or insolvency;
- actual invalidity, or invalidity asserted by us, of any security
document;
- material judgments;
- ERISA events; and
- change of control or ownership.
Liquidity after our refinancing
As of February 28, 2003, we had approximately $48.5 million of remaining
availability under the revolving credit facility portion of our senior credit
facility out of a total availability of $60.0 million. We believe that cash
flows generated from our business, together with future borrowings, will be
sufficient for the foreseeable future to enable us to make interest payments on
our debt and to provide us with the necessary liquidity for operational and
capital requirements in the current operating environment. We may be required,
however, to refinance all or a portion of the principal amount of our
outstanding debt on or prior to maturity or a mandatory redemption date. We also
believe the capital expenditures permitted under our senior credit facility are
sufficient to provide us with the necessary flexibility to spend required
maintenance capital and at the same time fund the planned expansion and customer
requirements for fiscal 2003.
As of December 28, 2002, the expected future payout of our accrued
restructuring cost was $2.5 million in fiscal 2003 and $0.3 million in fiscal
2004.
Any future acquisitions, joint ventures or similar transactions will likely
require additional capital and we may not have such capital available to us on
commercially reasonable terms, on terms acceptable to us, or at all. Our
business may not generate sufficient cash flows or future borrowings may not be
available in an amount sufficient to enable us to make principal and interest
payments on our debt, including the notes and our 9 3/4% senior subordinated
notes, or to fund our other liquidity needs and, as a result, we may not be able
to comply with the financial covenants in our senior credit facility.
CONTRACTUAL OBLIGATIONS
The following tables show the maturities of our contractual obligations and
other commercial obligations as of December 28, 2002 (in thousands):
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
--------------------------------------------
2008 AND
2003 2004-2005 2006-2007 THEREAFTER TOTAL
------- --------- --------- ---------- --------
Contractual obligations:
Long-term debt.......................... $29,840 $259,236 $248,983 $15,961 $554,020
Operating leases........................ 4,072 7,866 4,552 2,550 19,040
Construction in progress................ 5,897 -- -- -- 5,897
------- -------- -------- ------- --------
Total contractual obligations........ $39,809 $267,102 $253,535 $18,511 $578,957
======= ======== ======== ======= ========
</Table>
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
--------------------------------------------
2008 AND
2003 2004-2005 2006-2007 THEREAFTER TOTAL
------- --------- --------- ---------- -------
Other commercial obligations:
Lines of credit.......................... $13,814 $ -- $ -- $ -- $13,814
Standby letters of credit................ 2,456 -- -- -- 2,456
------- -------- -------- ------- -------
Total commercial commitments.......... $16,270 $ -- $ -- $ -- $16,270
======= ======== ======== ======= =======
</Table>
The following table shows the maturities of our contractual obligations as
of December 28, 2002, as adjusted to reflect the issuance of the outstanding
notes and the use of the proceeds therefrom and the
42
amendments to our senior credit facility that were effected contemporaneously
with the issuance of the outstanding notes (in thousands):
<Table>
<Caption>
AS ADJUSTED PAYMENTS DUE BY PERIOD
--------------------------------------------
2008 AND
2003 2004-2005 2006-2007 THEREAFTER TOTAL
------- --------- --------- ---------- --------
Long-term debt........................... $ 5,720 $150,074 $194,795 $226,405 $576,994
Operating leases......................... 4,072 7,866 4,552 2,550 19,040
Construction in progress................. 5,897 -- -- -- 5,897
------- -------- -------- -------- --------
Total contractual obligations....... $15,689 $157,940 $199,347 $228,955 $601,931
======= ======== ======== ======== ========
</Table>
COMMITMENTS AND CONTINGENCIES
We believe our operations are in compliance in all material respects with
environmental, safety and other regulatory requirements; however, these
requirements may change in the future and, if they do, we may incur material
costs in the future to comply with these requirements, including to effect
future recalls, or in connection with the effect of these matters on our
business. See "Business -- Environmental and safety matters."
In 1996 and 1997, we entered into partial guarantees of certain third-party
loans made to 11 employees in connection with their purchase of our parent's
common stock under our parent's 1996 and 1997 Management Stock Purchase Plans.
We guaranteed to cover up to a maximum of $0.3 million of such loans in the
event one or more of the employees default in their loan repayment. None of the
individuals who received such loans currently serve as one of our executive
officers.
INFLATION AND CHANGES IN PRICES
Our financial results depend to a large extent on the costs of raw
materials and packaging and our ability to pass along increased 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 U.S.
government farm support programs, changes in international agricultural trading
policies, impacts of disease outbreaks on protein sources and the potential
effect on supply and demand, as well as weather conditions during the growing
and related harvesting seasons. Fluctuations in paper prices, which affect our
costs for packaging materials, have resulted from changes in supply and demand,
general economic conditions and other factors. In addition, we have exposure to
changes in pricing of natural gas, which affects our manufacturing costs. Our
results of operations may be exposed to volatility in the commodity and natural
gas market.
In the event of any increases in raw materials, packaging and natural gas
costs, we may be required to increase sales prices for our products to avoid
margin deterioration. The timing or extent of our ability to implement future
price adjustments in the event of increased raw materials, packaging and natural
gas costs or any price increases implemented by us may affect the volumes of
future purchases from our customers.
SEASONALITY
Our sales are moderately seasonal. We normally experience an increase in
net sales during the first and fourth quarters of each year, which is typical in
the pet food industry. Generally, cooler weather results in increased dog food
consumption.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective December 30, 2001, we adopted FASB's Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, which
requires that goodwill and other intangible assets with indefinite lives no
longer be amortized. Our only intangible asset with an indefinite useful life
other than goodwill is our trademarks. SFAS 142 further requires that the fair
value of goodwill and other intangible assets with indefinite lives be tested
for impairment upon adoption of this statement, annually and upon the occurrence
of certain events, and be written down to fair value if considered impaired. In
the first quarter of fiscal 2002, we reassessed the useful lives and residual
values of all our intangible assets acquired in purchase business combinations
and our intangible assets having estimable useful lives that are classified in
other assets
43
on our balance sheets, which resulted in no impact on our accompanying audited
consolidated financial statements included herein. During the second quarter of
2002, we completed the required transitional impairment tests of goodwill and
other intangible assets with indefinite lives and, based on the results of the
tests, determined no impairment to the carrying values of these assets existed
as of the beginning of fiscal 2002. In the fourth quarter of fiscal 2002, we
performed our required annual assessment of impairment and determined no such
impairment was evident. The adoption of SFAS 142 resulted in the elimination of
annual amortization related to our goodwill and trademarks. In fiscal 2001, such
amortization was $10.3 million, or $7.6 million net of income tax benefit. Our
results of operations in future periods could be adversely affected if our
goodwill and trademarks are determined to be impaired under SFAS 142.
Effective December 29, 2002, we adopted FASB's Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement Obligations, or
SFAS 143, which requires companies to record the fair value of an asset
retirement obligation as a liability in the period in which they incur a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal use of the
assets. SFAS 143 also requires companies to record a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
an asset retirement obligation, SFAS 143 requires the obligation to be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The adoption of SFAS 143
had no material impact on our consolidated financial statements.
Effective December 30, 2001, we adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, or SFAS 144, which requires that long-lived assets to be disposed of by
sale be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
SFAS 144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The adoption of SFAS 144 had no material
impact on our financial position or results of operations.
Effective December 29, 2002, we adopted FASB's Statement of Financial
Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, or SFAS 145,
which amends existing authoritative pronouncements to make various technical
corrections, clarify meanings and describe their applicability under changed
conditions. SFAS 145 requires gains and losses from the extinguishment of debt
to be classified as extraordinary items only if they meet the criteria of
unusual or infrequent or they meet the criteria for classification as an
extraordinary item. In accordance with SFAS 145, we will recognize a charge to
net income in the first quarter of fiscal 2003 associated with the issuance of
senior notes in February 2003 that does not meet the criteria for classification
as an extraordinary item. See Note 26 -- "Subsequent Events" to our accompanying
audited consolidated financial statements. In addition, we reclassified the
extraordinary loss from debt extinguishment which occurred in fiscal 1998 from
an extraordinary loss to a charge to continuing operations.
Effective December 29, 2002, we adopted FASB's Statement of Financial
Accounting Standards No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, or SFAS 146, which addresses significant issues regarding
the recognition, measurement and reporting of costs that are associated with
exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the Emerging Issues Task
Force, or EITF, has set forth in EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
these costs are incurred rather than at the date of a commitment to an exit or
disposal plan. The scope of SFAS 146 also includes costs related to terminating
a contract that is not a capital lease and termination benefits that employees
who are involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual deferred
compensation contract. The adoption of SFAS 146 had no material impact on our
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, or FIN 45, which
44
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair value, or market value, of the obligations it
assumes under the guarantee and must disclose that information in its interim
and annual financial statements. The provisions related to recognizing a
liability at inception of the guarantee for the fair value of the guarantor's
obligations does not apply to product warranties or to guarantees accounted for
as derivatives. The initial recognition and initial measurement provisions apply
on a prospective basis to guarantees issued or modified after December 31, 2002.
Effective December 30, 2001, we adopted FASB's Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure, an Amendment of FASB Statement No.
123, or SFAS 148, which amends Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, or SFAS 123, to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications were required for fiscal 2002 and are included in Note
13 -- "Stock Option Plan of Parent" in the accompanying audited consolidated
financial statements included herein.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which may give rise to losses from adverse
changes in market prices and rates. Our market risks could arise from changes in
commodity prices, interest rates and foreign currency exchange rates.
Commodity price risk. We seek to manage our commodity price risk
associated with market fluctuations by using derivative instruments for portions
of our corn, soybean meal, alternative proteins and natural gas purchases,
principally through exchange traded futures and options contracts. The terms of
such contracts are generally less than one year. During the term of a contract,
we balance positions daily with cash payments to or from the exchanges. At the
termination of a contract, we have the ability to settle financially or by
exchange for the physical commodity, in which case, we would deliver the
contract against the acquisition of the physical commodity. Our policy does not
permit speculative commodity trading. At December 28, 2002, we had open
commodity contracts with a fair value loss of $5.7 million.
Based upon an analysis we completed as of December 28, 2002 in which we
utilized our actual derivative contractual volumes and assumed a 5% adverse
movement in commodity prices, we determined the potential decrease in the fair
value of our commodity derivative instruments would be approximately $3.8
million, or $2.3 million net of deferred tax benefit.
Although we seek to manage the price risk of market fluctuations by hedging
portions of our primary commodity product purchases, our results of operations
have been adversely affected in the past by these fluctuations and may in the
future. Our results of operations may be exposed to volatility in the commodity
markets. The use of futures contracts also reduces our ability to take advantage
of short term reductions in raw material prices. If one or more of our
competitors is able to reduce their production costs by taking advantage of any
reductions in raw material prices, we may face pricing pressures from these
competitors and may be forced to reduce our prices or face a decline in net
sales either of which could have a material adverse effect on our business,
results of operations and financial condition.
Our commodity derivative instruments are measured at fair value under SFAS
133 in our accompanying audited consolidated financial statements included
herein. Our results of operations have been adversely affected in the past by
volatility in commodity prices under the SFAS 133 fair value accounting of our
commodity derivative instruments and our results of operations may be adversely
affected in the future by SFAS 133 accounting.
Interest rate risk. We are exposed to market risk related to changes in
interest rates. We periodically use interest rate swap and cap contracts to
limit our exposure to the interest rate risk associated with our domestic
floating rate debt, which totaled $355.9 million at December 28, 2002. Of that
amount, $60.0 million of our domestic floating rate debt was hedged by interest
rate swap contracts and $50.0 million was hedged by an
45
interest rate cap contract. Changes in market values of these financial
instruments are highly correlated with changes in market values of the hedged
item both at inception and over the life of the contract. Amounts received or
paid under interest rate swap contracts and interest rate cap contracts are
recorded as interest income (expense) in our consolidated financial statements.
Changes in fair value of interest rate swap contracts that qualify for hedge
accounting are recorded in accumulated other comprehensive income (loss), net of
deferred taxes, in our consolidated balance sheets until they are realized, at
which point, they are recognized in interest expense, net, in the accompanying
consolidated statements of income. As of December 28, 2002, we had a cumulative
unrealized loss on our interest rate swap contracts of $2.2 million, or $1.3
million net of deferred tax benefit, that has been recognized in accumulated
other comprehensive income (loss) in our accompanying audited consolidated
financial statements included herein.
Accordingly, our net income is affected by changes in interest rates.
Assuming a 100 basis point increase in interest rates on our current floating
rate debt and interest rate swap and cap contracts, our net income would
decrease by approximately $2.5 million, or $1.5 million net of income tax
benefit, for fiscal 2002. In addition, such a change would result in a decrease
of approximately $7.1 million in the fair value of our fixed rate debt at
December 28, 2002. In the event of an adverse change in interest rates, we could
take action to mitigate our exposure; however, due to the uncertainty of these
potential actions and their possible effects, our analysis assumes no such
actions. Furthermore, our analysis does not consider the effect of any changes
in the level of overall economic activity that may exist in such an environment.
Foreign currency exchange risk. Our financial position and results of
operations are affected by foreign currency exchange rate fluctuations. We
currently have European operations that sell pet food products throughout
Europe. In connection with our acquisition of Arovit on May 10, 2000, we funded
a portion of the acquisition with Euro-denominated debt and designated our
Euro-denominated debt as a hedge of our net investment in Europe. The cumulative
translation adjustment for the net investment in our foreign operations is
recorded in accumulated other comprehensive income (loss) in our consolidated
financial statements. As of December 28, 2002, we had a cumulative translation
gain of $16.5 million, which included an unrealized cumulative loss of $10.0
million for the translation of our Euro-denominated debt to U.S. dollars, that
has been recognized in our accompanying audited consolidated financial
statements included herein.
We are exposed to foreign currency exchange risk arising from transactions
in the normal course of business in Europe. To mitigate the risk from foreign
currency exchange rate fluctuations in those transactions, we enter into foreign
currency forward contracts for the purchase or sale of a currency. Accordingly,
changes in market values of these financial instruments are highly correlated
with changes in the market values of the hedged items both at inception and over
the life of the contracts. Changes in fair value of foreign currency forward
contracts that qualify for hedge accounting are recorded in accumulated other
comprehensive income (loss), net of deferred taxes, in our consolidated balance
sheets until they are realized, at which point, they are recognized in other
income, net, in the accompanying consolidated statements of income. All other
gains and losses on foreign currency forward contracts are recorded as an
increase or decrease in net sales in our consolidated statements of income as
they occur. At December 28, 2002, the Company had an open foreign currency
forward contract that matures within the next 12 months with a notional value of
$3.1 million and a fair value loss of $0.2 million that has been recognized in
the accompanying audited consolidated statements of income included herein.
46
BUSINESS
GENERAL
We are the largest manufacturer of private label pet food and the second
largest manufacturer of dry pet food overall in the United States. We are also a
leading manufacturer of private label pet food in Europe. We sell to over 600
customers around the world and serve many of the top pet food retailers in the
United States, Europe and Japan. We offer our customers a full range of pet food
products for both dogs and cats, including dry, semi-moist, wet, treats and dog
biscuits. In 2002, we produced approximately 24% of the total dry pet food in
the United States. In fiscal 2002, we generated net sales of $887.3 million.
We categorize our sales into three product areas: (i) private label, (ii)
co-manufacturing and (iii) regional brands that we own. Our customers in private
label primarily include mass merchandisers, grocery chains, farm and fleet
companies and pet specialty stores. Our co-manufacturing customers include the
top five branded pet food companies in the world, for whom we produce and
package a portion of their products. A majority of our regional brand sales are
sold to the grocery and farm and fleet channels.
We have been the primary supplier of private label pet food to WalMart
Stores, Inc. since 1973 and have been a supplier to its Sam's Club division
since 1990. Collectively, we refer to them as Wal*Mart. We manufacture a wide
variety of products for Wal*Mart, including the majority of WalMart Stores,
Inc.'s top selling private label pet food brands, Ol' Roy and Special Kitty. Ol'
Roy is the number one selling brand of dry pet food in the United States by
volume. Our net sales to Wal*Mart accounted for 40%, 40% and 44% of our total
net sales for fiscal 2000, 2001 and 2002, respectively.
As the primary supplier of private label pet food to WalMart Stores, Inc.,
we jointly developed a cost-effective direct store delivery program, which we
refer to as DSD, to address certain logistical issues associated with
distributing dry pet food. Due to its size, bulk and weight, dry pet food bags
are not easily transferable to individual stores from WalMart Stores, Inc.'s
distribution centers. As part of DSD, we serve as a just-in-time supplier to
WalMart Stores, Inc. for dry pet food, whereby we load customized, store
specific pallets on WalMart Stores, Inc.'s private fleet trailers. DSD allows
WalMart Stores, Inc. to bypass its own distribution centers for the delivery of
our products directly to its stores. DSD also allows WalMart Stores, Inc. to
utilize its fleet more efficiently by reducing backhaul miles, lowering working
capital and handling costs and increasing inventory turns. As a result of DSD,
our products are shipped directly to a majority of the 2,800 U.S. stores of
WalMart Stores, Inc. and we ship to these stores an average of two times per
week with one to two days of lead time.
Doane Pet Care Company is a Delaware corporation formed on September 22,
1995. Our principal executive offices are located at 210 Westwood Place South,
Suite 400, Brentwood, Tennessee 37027 and our telephone number is (615)
373-7774.
Doane Pet Care Enterprises, Inc., our parent corporation, was formed in
1995 by a group of private equity investors led by Summit Capital, Inc., DLJ
Merchant Banking Partners, L.P., J.P. Morgan Partners (BHCA), L.P. and certain
members of management to acquire our company, formerly known as Doane Products
Company. Our parent has no other material assets or activities other than the
ownership of our common stock.
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;
- packaging design services; and
- pricing, formulation and marketing strategy in connection with our
customers' store brand programs.
Our store brand program involves the formulation and supply of a wide
variety of high quality pet food products, including dry, semi-moist, soft dry,
soft treats and dog biscuits as well as wet products in Europe. We believe that
these products are comparable in quality to competing branded pet food products,
except we offer
47
them at a lower price. For our national branded customers, we manufacture dry
pet food, soft treats and dog biscuits to meet those customers' specifications
and quality standards. Our regional brands are generally economically priced and
marketed by our customers as a complement to their other pet food offerings.
In the United States, we manufacture dry pet food under approximately 175
store brands, including Canine Club, Dura Life, Exceed, Hy Vee, Maxximum
Nutrition, NutraCare, Ol' Roy, Pathmark, Pet Club, PMI-Nutrition, Retriever, and
Special Kitty. Our regional brands, which include Country Prime, Kozy Kitten,
and TrailBlazer, allow our customers to broaden their product offerings. We also
offer Bonkers and Pet Lovers branded treats to our retailers. In Europe, we
manufacture pet food for over 150 customers.
A description of each of our product lines is set forth below:
- Dry pet food (74% of our 2002 net sales). We are the second largest
manufacturer of dry pet food in the United States. We produce, market and
distribute a wide selection of high quality dry pet food products,
predominately for dogs and cats. Our dry pet food product lines include
high protein, chunk style, premium-blended, puppy food, gravy style and
super premium meat inclusion products for dogs, and regular and blended
products for cats.
- Biscuits and treats (10% of our 2002 net sales). We are the largest
manufacturer of dog biscuits in the world and a leading supplier of soft
treats. Dog biscuits undergo a different manufacturing process from dry
pet food, which primarily involves baking rather than the use of
extruders.
- Wet, semi-moist and other (16% of our 2002 net sales). These products
are distinguishable from dry pet food based on their higher moisture
level content, the technology used to manufacture such products and their
higher packaging costs. Europe has a much stronger market for wet
products than the United States. To meet this demand, we manufacture and
sell throughout Europe wet products in all forms, including chunks and
gravy, pate and loaf, and packages, such as cans, alucups and pouches.
In addition to manufacturing pet food products, we maintain an in-house
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, to a lesser
extent, for third parties. The engineering services group maintains repair staff
that service and repair machinery and equipment at our production facilities,
giving us the ability to make timely repairs and reduce downtime. Our in-house
engineers generally design and supervise plant construction, thereby reducing
plant construction costs and resulting in consistency in manufacturing processes
and quality control. We believe our engineering services group provides us with
services at a lower cost and more timely and efficiently than we could obtain
from third parties.
SEASONALITY
Our sales are moderately seasonal. We normally experience an increase in
net sales during the first and fourth quarters of each year, which is typical in
the pet food industry. Generally, cooler weather results in increased dog food
consumption.
SALES AND DISTRIBUTION
Our direct sales force seeks new customers and works directly with mass
merchandisers, membership clubs, farm and fleet stores, pet specialty stores and
grocery chains. We also use independent food brokers. We generate new business,
in part, through the expansion of our product lines and the development of new
marketing programs to existing customers.
A substantial amount 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. Proximity to certain of our customers' distribution
centers and retail locations is a key consideration in deciding the location of
our manufacturing and distribution facilities and, we believe, is a significant
competitive advantage. Our customers' trailers can be loaded for shipment either
directly to individual stores or to their own distribution centers. Those
customers that have products shipped directly from our manufacturing and
distribution facilities to their retail stores are able to reduce their
inventory, freight and handling costs by avoiding shipment to their own
distribution centers. Those customers that use
48
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.
For customers that do not utilize their own transportation fleet, we
provide transportation on a contract basis through common carriers or those
customers can arrange their own transportation. We do not own or operate any
transportation equipment.
We provide vendor managed inventory fulfillment services for both direct
store and warehouse deliveries. We communicate on-line with our customers'
inventory management systems, evaluate their inventory levels and place orders
on their behalf to meet their just-in-time inventory requirements and manage
their inventory levels. We believe this provides our customers with a
significant competitive advantage, which includes shorter lead-time
requirements, higher inventory turns and reduced out-of-stock positions.
FACILITIES
Our corporate headquarters are located in Brentwood, Tennessee. We own 23
combined manufacturing and distribution facilities in the following states: one
each in Alabama, Colorado, Georgia, Indiana, Iowa, Minnesota, New York, Ohio,
South Carolina, Tennessee, Texas and Virginia; two each in California, Oklahoma,
Pennsylvania and Wisconsin; and three in Missouri. In Europe, we own six
combined manufacturing and distribution facilities in the following countries:
one each in Austria, Spain and the United Kingdom, and three in Denmark. In
addition, we own or lease three product distribution warehouses in the United
States and we lease a manufacturing and warehouse facility in Russia. We also
have joint venture interests relating to combined manufacturing and distribution
facilities located in Texas and Italy.
Our manufacturing facilities are generally located in rural areas in close
proximity to our customers, raw materials and transportation networks, including
rail transportation. We believe the broad number of strategically located
facilities enhances our position as a low cost provider by reducing freight
costs for raw materials and finished goods and facilitating direct delivery
programs. The rural locations also reduce land and labor costs. We believe we
can construct new manufacturing facilities at a lower cost than competitors by
using our engineering services group to design and construct most of the
necessary production equipment.
The following table shows our domestic and European manufacturing,
warehouse and distribution facilities:
<Table>
<Caption>
LOCATION PRINCIPAL PRODUCTS SQUARE FOOTAGE
- --------------------------------------------------- ------------------------------ --------------
Domestic manufacturing and warehouse facilities:
Allentown, PA.................................... Dry dog/cat food 70,000
Birmingham, AL................................... Dry dog/cat food 114,600
Butler, MO....................................... Dry dog/cat food 55,000
Cartersville, GA................................. Dry dog/cat food 42,000
Clinton, OK...................................... Dry dog/cat food 218,000
Delavan, WI...................................... Semi-moist food; treats 55,000
Dexter, MO....................................... Dry dog/cat food 70,000
Everson, PA...................................... Dry dog/cat food 74,000
Hillburn, NY..................................... Dog biscuits 95,000
Joplin, MO....................................... Dry dog/cat food; dog biscuits 307,600
LeSueur, MN...................................... Dry dog/cat food; dog biscuits 160,000
Manassas, VA..................................... Dry dog/cat food 80,000
McKenzie, TN..................................... Dry dog/cat food 90,000
Miami, OK........................................ Dog and cat treats 76,400
Muscatine, IA.................................... Dry dog/cat food 99,500
Orangeburg, SC................................... Dry dog/cat food 138,500
Portland, IN..................................... Dry dog/cat food; dog biscuits 120,000
Pueblo, CO....................................... Dry dog/cat food 125,000
San Bernardino, CA............................... Dry dog/cat food 169,000
</Table>
49
<Table>
<Caption>
LOCATION PRINCIPAL PRODUCTS SQUARE FOOTAGE
- --------------------------------------------------- ------------------------------ --------------
Temple, TX....................................... Dry dog/cat food 110,000
Tomah, WI........................................ Dry dog/cat food 98,000
Tracy, CA........................................ Dry dog/cat food 110,000
Washington Courthouse, OH........................ Dry dog/cat food; dog biscuits 190,000
Domestic distribution warehouses:
Alexandria, LA................................... N/A 35,000
Johnstown, NY(1)................................. N/A 41,000
Ocala, FL........................................ N/A 76,000
European manufacturing and warehouse facilities:
Carat, Austria (Arovit).......................... Wet dog/cat food 31,000
Esbjerg, Denmark (Arovit)........................ Wet dog/cat food; treats 487,000
Norwich, England (Larkshall)..................... Dry dog/cat food 81,000
Tver, Russia(1).................................. Dry dog/cat food 14,800
Valladolid, Spain (Ipes)......................... Dry dog/cat food 112,000
Vejen, Denmark (Arovit).......................... Dry dog/cat food 151,000
Vra, Denmark (Arovit)............................ Wet dog/cat food 120,000
Joint venture facilities:(2)
Hereford, TX..................................... Dry dog/cat food 42,000
Milano, Italy (Effeffe).......................... Dry dog/cat food 67,000
</Table>
- ---------------
(1) These facilities are leased. All other facilities are owned by us, other
than the joint venture facilities.
(2) We have a joint venture interest relating to these facilities.
CUSTOMERS
We manufacture products for over 600 customers globally. Store brand
customers in the United States include mass merchandisers, such as Wal*Mart and
Costco, pet specialty stores, such as PetsMart, grocery chains, such as
Albertson's, Food Lion, Kroger, Publix, Royal Ahold and Safeway, and farm and
fleet stores, such as Tractor Supply, Mid-States and Purina Mills. In addition,
we manufacture products for many of the largest national branded pet food
companies in the United States. Our European customer base is similar to the
United States. We sell to many of the leading retailers, pet specialty stores
and farm and fleet outlets, as well as several branded customers.
Net sales to Wal*Mart accounted for 40%, 40% and 44% of our total net sales
for fiscal 2000, 2001 and 2002, respectively. We have been the primary supplier
of private label dry pet food products to WalMart Stores, Inc. since 1973 and to
its Sam's Club division since 1990. We utilize a computerized order and
distribution system to ship products directly to substantially all domestic
Wal*Mart stores, a majority of which are located within 250 miles of one of our
facilities. We also offer direct delivery programs and electronic data
interchange systems to other customers who see these services as beneficial.
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 us. Our store brand pet food
products compete for shelf space with national branded pet food products on the
basis of quality and price. In addition, certain national branded companies also
manufacture store brands. National branded products compete principally through
advertising to create brand awareness and loyalty. We experience some price
competition from national branded products. Significant price competition from
national branded products or considerably increased store brand presence by the
national branded manufacturers could adversely affect our operating results and
cash flows. We also compete with regional branded manufacturers and other
regional store brand manufacturers.
50
We believe we differentiate our company from the national branded pet food
manufacturers by offering comparable, lower-priced products tailored to each
retailer's needs. This provides retailers with the opportunity to increase pet
food category profitability and provides a destination purchase item in this
important consumer category. In addition, we believe we differentiate our
company from other store brand pet food manufacturers by offering higher quality
products and national production and distribution capabilities.
RAW MATERIALS AND PACKAGING
The principal raw materials required for our manufacturing operations,
which we purchase from large national commodity companies and local grain
cooperatives, are bulk commodity grains and foodstocks, including corn, soybean
meal, wheat middling, poultry meal, meat and bone meal, and corn gluten meal. We
generally purchase or lock-in prices on raw materials from one to 12 months in
advance. We purchase the raw material requirements of each of our manufacturing
facilities locally due to the high freight costs of transporting bulk commodity
products. As a result, raw material costs may vary substantially among our
manufacturing facilities due to the impact of local supply and demand and
varying freight costs. While we do not maintain long-term contracts with any of
our suppliers, we believe alternative suppliers are readily available. Our
European operations purchase similar raw materials noted above for the
manufacturing of dry pet food. Manufacturing of our wet food in Europe requires
fresh or frozen pork, beef and poultry products.
We manage our commodity price risk associated with market fluctuations by
using derivative instruments for portions of our corn, soybean meal, alternative
proteins and natural gas purchases, principally through exchange traded futures
and options contracts. The terms of such contracts are generally less than one
year. Our policy does not permit speculative commodity trading. See
"Management's discussion and analysis of financial condition and results of
operations -- Quantitative and qualitative disclosures about market risk."
Packaging is a significant component of our material costs. We have five
main packaging suppliers in the United States and believe that additional
packaging suppliers are readily available. Approximately 40% of our packaging
requirements are covered by contracts with maturities through December 2003.
Our pricing strategy for pet food is based on the costs of raw materials,
packaging and certain other costs plus a conversion charge, which includes a
profit factor. We periodically adjust our prices based on fluctuations in raw
material and packaging costs. We can give no assurance that future selling price
increases will be acceptable to our customers in the event of increased material
costs. See "Management's discussion and analysis of financial condition and
results of operations -- Inflation and changes in prices" and "Risk
factors -- Risks relating to our business operations -- Increases in the costs
of raw materials, packaging and natural gas have in the past and may in the
future adversely affect our results of operations and reduce our ability to
service our debt obligations."
RESEARCH AND DEVELOPMENT
We continuously strive to develop new and improved products and processes.
Our research and development department includes a full-time staff of food
technologists, chemists and companion animal nutritionists, a central laboratory
used for research and development, and quality control laboratories at each of
our production facilities. Our research and development team formulates new
recipes, comprised of raw materials, vitamins and minerals, and tests the
nutritional content of new products. We also use independent commercial kennels
and catteries for comparison taste tests with national branded products to seek
to achieve comparable digestibility and palatability and to substantiate the
nutritional claims of new products.
QUALITY ASSURANCE
We maintain a comprehensive program for qualifying new supplies, testing
raw materials for nutritional adequacy and screening to detect 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
specifications, formula and regulatory requirements. Packaging is inspected for
print quality, proper dimensions, construction and compliance with labeling
regulations.
51
ENVIRONMENTAL AND SAFETY MATTERS
We are subject to a broad range of federal, state, local and foreign
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 investigation or 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
criminal penalties, permit revocation and modification, performance of
investigatory or remedial activities, 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 over the years and we believe the trend
of more expansive and stricter environmental laws and regulations will continue.
While we believe we are in substantial compliance with applicable environmental,
safety and public health laws, there can be no assurance that additional costs
for compliance will not be incurred in the future or such costs will not be
material.
Our U.S. operations involve 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 soils, groundwater and surface water impacted by
releases from such existing or abandoned aboveground or underground storage
tanks.
Our U.S. operations are also subject to laws and regulations governing
remediation, recycling or disposal. The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, also known as CERCLA or 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 and retroactive liability for the costs of environmental
response measures, and natural resource damages, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment. We also generate wastes that are subject to the federal
Resource Conservation and Recovery Act, also known as RCRA, and comparable state
statutes. The U.S. Environmental Protection Agency, or EPA, and various state
agencies have limited the approved methods of disposal for certain hazardous and
nonhazardous wastes and any future changes to such methods that are more
rigorous or restrictive can increase the operating and disposal requirements
incurred by us as well as by the industry in general. 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.
In the United States, we currently own or lease properties and through
acquisitions in the future could own or lease additional 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, in some locations
environmentally sensitive materials were 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, RCRA, and analogous state laws. Under
such laws, we can 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
previously operated underground storage tanks or existing aboveground bulk
petroleum storage facilities). It is possible
52
that we could incur additional environmental response costs in the future at
existing manufacturing facilities or at other sites where waste material impacts
resulting from historical or ongoing operations may be identified.
Our U.S. operations are also subject to the federal Clean Water Act and
analogous state laws relating to the discharge of pollutants to state and
federal waters. These laws also regulate the discharge of stormwater in process
areas. Local sewerage authorities have established regulations governing
connections to and discharges into their sewer systems and treatment plants.
Pursuant to these laws and regulations, we are required to obtain and maintain
approvals or permits at a number of our facilities for the discharge of our
wastewater and stormwater and develop and implement spill prevention control and
countermeasure plans, also referred to as "SPCC" plans, in connection with
on-site storage of greater than threshold quantities of oil. As part of the
regular overall evaluation of our ongoing operations, we are updating the
stormwater discharge permitting coverage at certain of our facilities. Moreover,
from time to time, we are required to make capital improvements or make certain
operational upgrades at certain of our facilities to assure compliance with
regulatory and permit conditions relating to our wastewaters discharged offsite
as well as our other operating activities. In July 2002, the EPA issued a
revised SPCC rule, whereby SPCC plans are subject to more rigorous review and
certification procedures. While the EPA has delayed the effect of the revised
SPCC rule to April 17, 2003 and has further signed an SPCC rule extension on
April 10, 2003 designed to postpone the effect of the SPCC rule to August 17,
2004, this rule nevertheless will eventually require us to make certain
expenditures to update our SPCC plans at certain of our facilities where the
plans are required. Failure to comply with these laws, regulations and permit
conditions may result in the imposition of administrative, civil and criminal
penalties. We believe that our operations are in substantial compliance with the
Clean Water Act and analogous state and local requirements, and that the
installation of any wastewater discharge capital improvements will not have a
material adverse effect on our operations or financial position.
Our U.S. operations are subject to the federal, state and local
requirements pertaining to air emissions. We have been required from time to
time to install air emission control or odor control devices to satisfy
applicable air requirements. It is possible that in the future, additional air
emission or odor control devices may be required to be installed at facilities
of ours as deemed necessary to satisfy existing or future requirements.
The manufacturing and marketing of our products in the United States are
subject to regulation by federal regulatory agencies, including the Occupational
Safety and Health Administration, the Food and Drug Administration and the
Department of Agriculture, and by various state and local authorities. The Food
and Drug Administration also regulates the labeling of our products. Substantial
administrative, civil and criminal penalties may be imposed for violations of
Occupational Safety and Health Administration, Food and Drug Administration and
Department of Agriculture regulations, and violations may be restrained through
injunction proceedings. We procure and maintain the necessary permits and
licenses to operate our U.S. facilities and consider our company to be in
material compliance with applicable Occupational Safety and Health
Administration, Food and Drug Administration and Department of Agriculture
requirements.
Our manufacturing, distributing and other operating facilities outside of
the United States are potentially subject to similar foreign governmental
controls and restrictions pertaining to the environment, safety, and public
health. Among the controls and restrictions imposed on our facilities outside of
the United States are requirements for obtaining necessary environmental
permits, cleanup of subsurface conditions beneath our facilities arising from
primarily historical operations, control of odors resulting from our operations,
limitation of pollutants that are contained in wastewater effluent discharged or
otherwise transported from our facilities, and development and implementation or
upgrading of environmental management systems at our facilities to assure
compliance with applicable laws and regulations.
We believe our U.S. and foreign operations are in compliance in all
material respects with applicable current environmental, safety and public
health laws and regulations; nevertheless, those laws and regulations may change
in the future and we may incur significant costs in the future to comply with
those laws and regulations or in connection with the effect of these matters on
our business.
TRADEMARKS
Certain of our brands are protected by trademark registrations in the
United States and in certain foreign markets. We believe our registered
trademarks are adequate to protect such brand names.
53
EMPLOYEES
As of March 1, 2003, our global workforce consisted of 2,718 employees. We
had 1,860 employees in the United States and 858 employees in Europe, comprised
of 750 management and administrative personnel and 1,968 manufacturing
personnel. Of our workforce, approximately 359 employees are represented by
labor unions at four of our U.S. plants. The collective bargaining agreement
with the Muscatine, Iowa plant covered 51 employees as of December 28, 2002 and
expires on December 4, 2003. The collective bargaining agreement with the
Hillburn, New York plant covered 33 employees as of December 28, 2002 and
expires on May 1, 2004. The collective bargaining agreement with the Birmingham,
Alabama plant covered 77 employees as of December 28, 2002 and expires on
January 22, 2005. The collective bargaining agreement with the Joplin, Missouri
plant covered 198 employees as of December 28, 2002 and expires on February 4,
2006. We consider relations with our employees to be satisfactory.
LEGAL PROCEEDINGS
We have been named as a defendant in a case styled Petguard, Inc. v. Doane
Pet Care Company, which was filed on May 3, 2002 in the U.S. District Court for
the Middle District of Florida, Jacksonville Division. The plaintiff alleges
breach of contract, breach of express warranty, breach of implied warranty and
fraud regarding alleged defects in canned pet food that was manufactured by us
at our former Deep Run facility and sold to the plaintiff. For each of the four
counts, the plaintiff claims compensatory damages in excess of the $75,000
jurisdictional limit and unspecified punitive damages. In April 2003, the
plaintiff filed its expert's report alleging compensatory damages in the amount
of approximately $2.7 million. We have filed a counterclaim in the amount of
approximately $85,000 for unpaid invoices owed to us by the plaintiff. We
believe that we have valid defenses to the claims asserted by the plaintiff, and
that this proceeding will not have a material adverse effect on our financial
position, results of operations or cash flow.
We are also a party to other legal proceedings in the ordinary course of
business. The resolution of such matters is not expected to have a material
adverse effect on our financial position, results of operations or cash flow.
FOREIGN OPERATIONS
For a discussion of our segment data relating to our United States
(domestic) and European (international) operations, see Note 20 -- "Segment
Data" to our accompanying audited consolidated financial statements included
herein.
54
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and titles of our current
directors and executive officers. Our board of directors includes seven
directors who are designated pursuant to an investors' agreement. See "Certain
relationships and related transactions -- Investors' agreement." Except as
indicated below, each of the members of the board of directors of Doane named
below also serves on the board of directors of Doane Pet Care Enterprises, Inc.
Additionally, as of November 7, 2002, the board of directors of Doane approved
the addition of two new board members designated by a majority of holders of our
senior preferred stock. These board members will remain as board members until
the next annual meeting, at which time the holders of our preferred stock will
vote to fill such director seats. Officers serve at the discretion of the boards
of directors.
<Table>
<Caption>
NAME AGE POSITION
- --------------------------------- --- ---------------------------------------------
George B. Kelly.................. 53 Chairman of the Board
Douglas J. Cahill(1)............. 43 Chief Executive Officer, President and
Director
Philip K. Woodlief(1)............ 49 Vice President, Finance and Chief Financial
Officer
David L. Horton.................. 42 Vice President and General Manager, North
American Operations
Joseph J. Meyers................. 41 Vice President, Supply Chain, Quality and
Chief Information Officer
Tonny Carstensen................. 47 Vice President and Managing Director of
European Operations
Richard A. Hannasch.............. 49 Vice President, Co-Manufacturing and
Specialty
Debra J. Shecterle............... 50 Vice President, People
Lawrence S. Benjamin............. 47 Director
Edward H. D'Alelio(2)............ 50 Director
Jerry W. Finney, Jr. ............ 34 Director
Mathew J. Lori................... 39 Director
Terry R. Peets................... 58 Director
Stephen C. Sherrill.............. 50 Director
Paul E. Suckow(2)................ 55 Director
Jeffrey C. Walker................ 47 Director
</Table>
- ---------------
(1) These executive officers hold the same positions at Doane and Doane Pet Care
Enterprises, Inc.
(2) Does not serve on the board of directors of Doane Pet Care Enterprises, Inc.
Set forth below is a brief description of the business experience of the
directors and executive officers of Doane and Doane Pet Care Enterprises, Inc.
Each of the directors of Doane Pet Care Enterprises, Inc. is elected to serve a
three-year term. The terms of Messrs. Sherrill and Peets expire in 2003. The
terms of Messrs. Benjamin, Cahill and Lori expire in 2004. The terms of Messrs.
Kelly, Finney and Walker have expired but they continue to serve as directors
pending the annual meeting of shareholders of Doane Pet Care Enterprises, Inc.
The directors of Doane are elected at each annual meeting to serve for the
ensuing year.
George B. Kelly has served as 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 is Chairman of The CapStreet Group, LLC (formerly known as
Summit Capital Group, LLC), Summit Capital, Inc., and Jackson Products, Inc.,
and is a director of FS Strategies, Switch & Data Facilities Company, Inc.,
Susser Holdings and other privately held companies.
Douglas J. Cahill became Chief Operating Officer of Doane and Doane Pet
Care Enterprises, Inc. in December 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 December
1998 and currently serves as the Chairman of the Pet Food Institute. Prior to
joining us, Mr. Cahill served as President of Olin
55
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 December 1997.
Philip K. Woodlief became Vice President, Finance and Chief Financial
Officer of Doane and Doane Pet Care Enterprises, Inc. in June 2000 and served as
Vice President, Finance for Doane from February 1999 to June 2000. Prior to
joining us, Mr. Woodlief was an independent financial consultant from June 1998
to January 1999. From April 1997 to May 1998, Mr. Woodlief was Vice President
and Corporate Controller of Insilco Corporation, a diversified consumer and
industrial products manufacturing company, and served as Corporate Controller of
Insilco from January 1989 to April 1997.
David L. Horton joined Doane in December 1997, began serving as Vice
President and General Manager of North American Operations in June 2001, served
as Vice President, Manufacturing, Engineering, and Quality from January 1999 to
June 2001 and Vice President, Fulfillment from December 1997 to January 1999.
Prior to joining us, Mr. Horton served as Vice President of Manufacturing and
Engineering for Olin Corporation's Winchester Division and held various other
positions with Olin Corporation from January 1984 to November 1997.
Joseph J. Meyers became Chief Information Officer of Doane in August 1998,
and began serving as Vice President Supply Chain, Quality in June 2001 and
served as Vice President, Fulfillment from January 1999 to June 2001. Prior to
joining us, Mr. Meyers held various information technology positions at Realtime
Consulting, PricewaterhouseCoopers LLP and Olin Corporation from 1992 to 1998.
Tonny F. Carstensen became Vice President and Managing Director of European
Operations in June 2001. At that time, he also became Managing Director of our
wholly-owned subsidiary, A/S Arovit Petfood. Mr. Carstensen joined Arovit in
1979 as Purchasing Manager, served as Logistic Director from 1992 to 1995 and
from 1995 to June 2001 served as Director, and as a member of the Board of
Directors of Arovit, with responsibility for purchasing, product development and
logistics.
Richard A. Hannasch joined Doane in October 1996, began serving as Vice
President, Co-Manufacturing and Specialty in March 2000, served as Vice
President, Business Integration from August 1999 to March 2000, Vice President,
Fulfillment from January 1999 to October 1999, Vice President, Strategic
Planning from June 1998 to January 1999 and Vice President, 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
December 1978 to October 1996.
Debra J. Shecterle began serving as Vice President, People in January 2000
and served as Director of Human Resources from December 1998 to January 2000.
Prior to joining us, Ms. Shecterle was Vice President of Human Resources for
DeKalb Genetics from 1997 to 1998 and held various human resources positions
with Wisconsin Power and Light and Ameritech from 1991 to 1997.
Lawrence S. Benjamin became a director of Doane and Doane Pet Care
Enterprises, Inc. in May 2002. Since October 2002, Mr. Benjamin has been chief
executive officer of The NutraSweet Company. Mr. Benjamin was a partner with
Roark Capital Group, a private equity investment firm, and president of Lake
Field Partners, a private equity advisory firm. He held these positions from
June 2002 and April 2001, respectively, to October 2002. Mr. Benjamin also
worked for Oak Hill Capital Management, a private equity fund, and its
predecessor funds between August 1994 and May 2002. During that time, Mr.
Benjamin was President and Chief Executive Officer of Specialty Foods
Corporation from January 1997 to March 2001 and Stella Foods from August 1994 to
January 1997. Mr. Benjamin also served in a number of senior executive positions
with Kraft Foods from June 1986 to August 1994, including as President of Budget
Gourmet/ Birdseye, a division of Kraft Foods.
Edward H. D'Alelio became a director of Doane in November 2002. Mr.
D'Alelio has served as an Executive in Residence at the School of Management of
the University of Massachusetts. From 1989 until 2002, Mr. D'Alelio was a
Managing Director of Putnam Investments, where he also served as the Chief
Investment Officer of the Taxable Fixed Income area. Mr. D'Alelio is also a
director of Archibald Candy Corporation. Mr. D'Alelio is also a member of the
board of trustees of the Newman School, St Mary's Woman's and Infant's Center
and Caritas Christi Health Care System.
56
Jerry W. Finney, Jr. became a director of Doane and Doane Pet Care
Enterprises, Inc. in August 2001. He is a director of the Private Equity Group
of Credit Suisse First Boston, which includes DLJ Merchant Banking Partners,
L.P. In November 2000, Credit Suisse Group acquired Donaldson, Lufkin &
Jenrette, Inc. Prior to the acquisition, Mr. Finney was a principal of Credit
Suisse First Boston Equity Partners since May 2000. Previously, he was a Vice
President in the Mergers & Acquisitions Group of Credit Suisse First Boston,
Inc. from 1999 to 2000 and an associate from 1995 to 1999.
Mathew J. Lori became a director of Doane and Doane Pet Care Enterprises,
Inc. in March 2001 and currently serves as a principal of J.P. Morgan Partners,
LLC, the private equity investment arm of J.P. Morgan Chase & Co. Mr. Lori
joined the predecessor of J.P. Morgan Partners, LLC in 1993 after completing his
M.B.A. from Kellogg Graduate School of Management at Northwestern University.
Prior to receiving his M.B.A., he worked in the Corporate Finance Group at Ernst
& Young in Toronto. Mr. Lori is also a director of Berry Plastics Corporation.
Terry R. Peets became a director of Doane and Doane Pet Care Enterprises,
Inc. in October 2001. Mr. Peets is currently a consultant to JPMorgan Partners.
Over the past 25 years, Mr. Peets has served as Chairman of Bruno's
Supermarkets, Inc., Executive Vice President of Vons Grocery Company, Executive
Vice President of Ralphs Grocery Company, and President and CEO of PIA
Merchandising, Inc. Mr. Peets is a director of Diamond Brands, Inc., PSC, Inc.,
the Park City Group, the City of Hope and the Children's Museum of Orange
County.
Stephen C. Sherrill became a director of Doane and Doane Pet Care
Enterprises, Inc. in August 1998. He has been a Managing Director of Bruckmann,
Rosser, Sherrill & Co., Inc. since its formation in 1995. Bruckmann, Rosser,
Sherrill & Co., Inc. is the management company for Bruckmann, Rosser, Sherrill &
Co., L.P. 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., B
& G Foods, Inc., HealthPlus Corporation and Alliance Laundry Systems, L.L.C.
Paul E. Suckow became a director of Doane in November 2002. Mr. Suckow is
an adjunct professor of economics and finance at Villanova University and
Widener University. Prior to his teaching career, he spent 25 years in the
investment management industry, retiring in 1999. Mr. Suckow held positions as
Executive Vice President, Chief Investment Officer-Fixed Income at Delaware
Investment Advisers, Inc. and Executive Vice President, Director of Fixed Income
Securities at Oppenheimer Management Corporation. He is a director of Ascent
Assurance, Inc., Prandium, Inc. and Dunwoody Village, a non-profit continuing
care community.
Jeffrey C. Walker has been a director of Doane and Doane Pet Care
Enterprises, Inc. since April 1996. Mr. Walker is Vice Chairman of J.P. Morgan
Chase & Co. and has been Managing Partner of J.P. Morgan Partners, LLC, the
private equity investment arm of J.P. Morgan Chase & Co., since 1988 and a
General Partner thereof since 1984. Mr. Walker is a director of 1-800-Flowers
..com, Inc. and Guitar Center, Inc. He is also a director of a number of
privately held companies.
Messrs. Peets, Sherrill and Walker serve on our Audit Committee, and
Messrs. Cahill, Kelly and Walker serve on our Compensation Committee.
57
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain historical compensation information
with respect to the Chief Executive Officer of Doane and the other four most
highly compensated individuals serving as executive officers for the fiscal year
ended December 28, 2002 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 OF
ANNUAL COMPENSATION(1) SECURITIES
---------------------------------- UNDERLYING
FISCAL OTHER ANNUAL OPTIONS/SARS
NAME AND PRINCIPAL POSITION AT DOANE YEAR SALARY BONUS COMPENSATION (#) ALL OTHER COMPENSATION
- ------------------------------------ ------ -------- -------- ------------ ------------ ------------------------
Douglas J. Cahill...................... 2002 $400,000 $480,000 $ -- -- $207,506 (2)(3)(4)(5)
President and Chief 2001 400,000 -- -- 298,000 7,006 (2)(3)(4)
Executive Officer 2000 400,000 -- -- 158,500 7,656 (2)(3)(4)
Philip K. Woodlief..................... 2002 225,000 135,000 -- -- 61,139 (2)(3)(4)(5)
Vice President, Finance and 2001 220,833 -- -- 135,000 4,164 (2)(3)(4)
Chief Financial Officer 2000 175,000 -- 5,600(6) 50,000 44,523 (2)(3)(4)(7)(8)
David L. Horton........................ 2002 225,000 135,000 -- -- 62,973 (2)(3)(4)(5)
Vice President and General Manager 2001 200,000 -- -- 135,000 6,782 (2)(3)(4)
of North American Operations 2000 175,000 -- -- 50,000 7,548 (2)(3)(4)
Joseph J. Meyers....................... 2002 200,000 120,000 -- -- 57,053 (2)(3)(4)(5)
Vice President, Supply Chain, Quality 2001 187,500 -- -- 100,000 6,768 (2)(3)(4)
and Chief Information Officer 2000 175,000 -- -- 50,000 7,146 (2)(3)(4)
Terry W. Bechtel (10).................. 2002 200,000 120,000 -- -- 102,324 (3)(4)(5)(9)
Vice President, Wal*Mart 2001 183,999 -- -- 75,000 119,020 (3)(4)(9)
2000 168,000 -- -- 21,200 72,978 (2)(3)(4)(9)
</Table>
- ---------------
(1) Amounts exclude perquisites and other personal benefits that did not exceed
the lesser of either $50,000 or 10% of the total annual salary and bonus
reported for each executive officer.
(2) Amounts include a company match and profit sharing contribution under the
Doane Pet Care Retirement Savings Plan as follows: Mr. Cahill -- $5,650 in
2000, $5,000 in 2001 and $5,500 in 2002; Mr. Woodlief -- $7,518 in 2000,
$2,250 in 2001 and $2,969 in 2002; Mr. Horton -- $5,650 in 2000, $4,875 in
2001 and $4,803 in 2002; Mr. Meyers -- $5,248 in 2000, $4,865 in 2001 and
$5,144 in 2002; and Mr. Bechtel -- $400 in 2000.
(3) Amounts include term life insurance premiums as follows: Mr. Cahill -- $192
in 2000, 2001 and 2002; Mr. Woodlief -- $84 in 2000, $100 in 2001 and $106
in 2002; Mr. Horton -- $84 in 2000, $93 in 2001 and $106 in 2002; Mr.
Meyers -- $84 in 2000, $89 in 2001 and $94 in 2002; and Mr. Bechtel -- $84
in 2000, $86 in 2001 and $94 in 2002.
(4) Amounts include disability insurance premiums in 2000, 2001 and 2002 of
$1,814.
(5) Amounts include retention bonuses paid as follows: Mr. Cahill -- $200,000;
Mr. Woodlief -- $56,250; Mr. Horton -- $56,250; Mr. Meyers -- $50,000; and
Mr. Bechtel -- $50,000.
(6) Amount includes reimbursement for the payment of taxes associated with
relocation.
(7) Amount includes bonus received in connection with the acquisition of Arovit
in 2000 for Mr. Woodlief of $25,000.
(8) Amounts include relocation expenses for Mr. Woodlief of $10,107.
(9) Amount includes annual vested benefit under the non-qualified salary
continuation agreement for Mr. Bechtel of $70,680 in 2000, $117,120 in 2001
and $33,600 in 2002.
(10) Mr. Bechtel retired effective March 31, 2003.
58
EMPLOYMENT AND RETIREMENT AGREEMENTS
We entered into employment agreements with Messrs. Cahill and Horton
effective January 1, 1998, Mr. Meyers effective August 17, 1998 and Mr. Woodlief
effective February 15, 1999, all of which renew annually. The terms of their
employment agreements are substantially similar except for salary and bonus
amounts. The target bonus for Mr. Cahill is 100% of his annual base salary
amount and the target bonuses for each of Messrs. Woodlief, Horton and Meyers
are 50% of their respective annual base salary amounts. The agreements are
subject to early termination for cause without severance. The employment
agreements for Messrs. Woodlief, Horton and Meyers provide (1) that terminations
without cause entitle the executive to receive severance payments equal to two
year's base salary and bonus and (2) for a two year non-competition agreement
commencing upon termination for any reason. The employment agreement with Mr.
Cahill contains similar provisions except that the severance and non-competition
terms are three years.
We entered into an employment agreement with Mr. Bechtel effective January
1, 1998. Mr. Bechtel retired effective on March 31, 2003. In connection with Mr.
Bechtel's retirement, we entered into a retirement agreement with him. The
retirement agreement provides for a three year non-competition agreement in
exchange for the continued payment to Mr. Bechtel of an amount equal to his
current base salary during the first year following his retirement and the
payment of an amount equal to one-half of his current base salary during the
second and third years following his retirement.
Each of the Named Executive Officers was awarded a retention bonus in an
amount equal to their annual bonus target amount. One-half of the bonus was paid
in fiscal 2002 and the other one-half will be paid on June 30, 2003 if the
officer is still employed by us. Pursuant to the terms of his retirement
agreement, Mr. Bechtel will receive the second half of his retention bonus on
June 30, 2003.
COMPENSATION OF DIRECTORS
Lawrence S. Benjamin and Terry R. Peets serve as independent directors of
Doane and Doane Pet Care Enterprises, Inc. Pursuant to agreements entered at the
time of their appointments, Mr. Benjamin and Mr. Peets are paid a $1,500 per
month retainer fee and $2,000 for each board of directors meeting they attend
and each informal operations meeting of Doane Pet Care Enterprises, Inc. they
attend. Pursuant to these agreements, Mr. Benjamin and Mr. Peets were also
granted stock options covering 20,000 shares under the 1999 Stock Incentive
Plan. These options have a "time-vesting" schedule pursuant to which one-third
of the stock options will vest after each of the first three years following the
grant date. Edward H. D'Alelio and Paul E. Suckow serve as independent directors
of Doane. Mr. D'Alelio and Mr. Suckow are paid $2,000 for each board of
directors meeting they attend. In fiscal 2002, Messrs, Peets, Benjamin, D'Alelio
and Suckow were paid $34,000, $22,500, $2,000 and $2,000, respectively. No
compensation was paid by us to our other directors.
STOCK OPTION PLANS
Effective November 1, 1996, our parent adopted its 1996 Stock Option Plan,
as amended. On July 14, 1999, our parent adopted the 1999 Stock Incentive Plan.
In connection with the adoption of the 1999 Stock Incentive Plan, no new grants
can be made under the 1996 Stock Option Plan. Effective October 31, 2001, our
parent approved the "repricing" of all vested and unvested stock options under
the 1996 Stock Option Plan and the 1999 Stock Incentive Plan that had an
exercise price exceeding $2.50 per share. All such eligible stock options were
given a new exercise price of $2.50 per share. However, because there was a
change in the vesting of the stock options, with all eligible stock options
being put on a new "time-vesting" schedule, the repricing involved a surrender
of the eligible stock options in exchange for a grant of new stock options
covering an equivalent number of shares at the new exercise price. Stock options
covering 566,000 shares under the 1996 Stock Option Plan and stock options
covering 950,300 shares under the 1999 Stock Incentive Plan were surrendered.
Stock options covering a total of 1,516,300 shares were granted at the $2.50 per
share exercise price, and all such grants were made under the 1999 Stock
Incentive Plan and are accounted for as variable plan awards. Since the fair
value of our Parent's Class A common stock was less than $2.50 per share at
December 29, 2001, no compensation expense was recorded in fiscal 2001 for these
variable awards. While the estimated fair value of our Parent's Class A common
stock exceeded $2.50 per share at December 28, 2002, the compensation expense in
fiscal 2002 was minimal. Pursuant to the time-vesting schedule for the stock
options granted to our employees, 50% of an individual's stock options will vest
two years after the grant date,
59
25% will vest after the third year, and the remaining 25% will vest after the
fourth year. Generally, all stock options vest upon a change of control of our
parent. Under the 1996 Stock Option Plan, 594,200 shares were outstanding at
December 28, 2002. Under the 1999 Stock Incentive Plan, 4,200,000 shares are
authorized for issuance, and as of December 28, 2002, options covering 3,209,800
shares had been granted and remain outstanding.
STOCK OPTION GRANTS
No stock options were granted to the Named Executive Officers during fiscal
2002.
STOCK OPTION EXERCISES
The following table sets forth certain information with respect to
exercises of stock options during fiscal 2002 by the Named Executive Officers
and the number of shares underlying unexercised stock options held by such
officers as of December 28, 2002:
<Table>
<Caption>
VALUE OF SHARES UNDERLYING
NUMBER OF NUMBER OF SHARES UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS UNEXERCISED OPTIONS
ACQUIRED ON --------------------------- ---------------------------
NAME EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ------------- ----------- -------------
Douglas J. Cahill.......... -- -- 900,200 $ -- $72,016
Philip K. Woodlief......... -- -- 241,200 -- 19,296
David L. Horton............ -- -- 281,200 -- 22,496
Joseph J. Meyers........... -- -- 221,200 -- 17,696
Terry W. Bechtel........... -- 79,601 165,799 6,368 13,264
</Table>
The value of the exercisable and unexercisable options is calculated based
on the difference between the option exercise price and the fair market value as
of December 28, 2002.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Douglas J. Cahill, our President and Chief Executive Officer, served as a
member of our Compensation Committee in fiscal 2002. Messrs. Kelly and Walker
also served on our Compensation Committee in fiscal 2002.
OTHER COMPENSATORY ARRANGEMENTS
401(k) plans. We currently have two active plans. On January 1, 2000, we
adopted the Doane Pet Care Retirement Savings Plan, which was formed through the
merger of two predecessor plans. The merged plan was amended and restated and is
intended to be a qualified plan under the Internal Revenue Code. The plan
provides coverage for eligible employees and permits employee contributions from
1% to 60% of pre-tax earnings, subject to annual dollar limits set by the IRS.
We match 50% of the first 6% of the participant's contribution with a provision
for other contributions at the board of directors' discretion. Employer
contributions are vested 25% per year for each full year of service.
The Doane Pet Care Savings and Investment Plan -- Union Plan covers
eligible union employees at the Joplin, Missouri and Muscatine, Iowa plants.
This plan is intended to be a qualified retirement plan under the Internal
Revenue Code and permits employee contributions between 1% and 60% of pre-tax
earnings, subject to annual dollar limits set by the IRS, and provides for a
variety of investment options.
Non-qualified salary continuation agreements. Doane has entered into
agreements with all of the Named Executive Officers to provide benefits to those
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 10 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 as set forth in the agreement. 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. Assuming that the
Named Executive Officers remain employed with Doane until age 65, they will
receive the following annual amounts for ten years: Mr. Cahill -- $160,000; Mr.
Woodlief -- $90,000; Mr. Horton -- $90,000; and Mr. Meyers --
60
$80,000. In connection with Mr. Bechtel's retirement, which was effective on
March 31, 2003, he will receive an annual amount of $60,656 for ten years. Under
the terms of the agreements, each employee may, with the consent of Doane, elect
to receive the benefit in a lump-sum payment equal to the actuarial equivalent
of the installment payments discounted at a 6% interest rate.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INVESTORS' AGREEMENT
Doane Pet Care Enterprises, Inc., Doane, Summit Capital, Inc., J.P. Morgan
Partners (BHCA), L.P. and an affiliate thereof, DLJ Merchant Banking Partners,
L.P. and certain of its affiliates, Bruckmann, Rosser, Sherrill & Co., L.P. and
certain affiliated entities and individuals, all of the former stockholders of
Windy Hill and certain other stockholders of Doane are parties to a second
amended and restated investors' agreement. The investors' agreement contains
provisions concerning our governance and the governance of Doane Pet Care
Enterprises, Inc., restrictions on the transferability of our securities and
those of Doane Pet Care Enterprises, Inc. and registration rights for such
securities.
The governance provisions of the investors' agreement provide that our
board of directors and the board of directors of Doane Pet Care Enterprises,
Inc. each consist of at least seven members. The investors' agreement provides
that at any time the number of shares of common stock (which, for the purposes
of the investors' agreement, includes warrants on an as-if-exercised basis) of
Doane Pet Care Enterprises, Inc. owned of record by:
- J.P. Morgan Partners (BHCA), L.P. is 5% or more, it will have the right
to designate two individuals as directors.
- DLJ Merchant Banking Partners, L.P. is 5% or more, it will have the right
to designate one individual as director.
- the former investors in Summit/DPC Partners, L.P. (including after its
dissolution and the distribution of its shares) is 50% or more of the
number of shares of common stock of Doane Pet Care Enterprises, Inc. it
owned as of August 3, 1998, Summit Capital, Inc. will have the right to
designate one individual as director.
- the Windy Hill investors is 50% or more of the number of shares of common
stock of Doane Pet Care Enterprises, Inc. owned by them as of August 3,
1998, Bruckmann, Rosser, Sherrill & Co., L.P. will have the right to
designate one individual.
Additionally, one designee as director is required to be the Chief
Executive Officer of Doane Pet Care Enterprises, Inc. and one is required to be
an independent director designated by a majority of the board of directors.
SPONSOR FACILITY
In March 2001, we refinanced $25.0 million of indebtedness under our senior
credit facility with loans from shareholders of our parent and Messrs. Cahill,
Woodlief and Horton, and certain other executive officers. Approximately $33.7
million of the net proceeds of the sale of the outstanding notes was used to
repay the sponsor facility in full. Our parent issued warrants in connection
with the sponsor facility that give the warrantholders the right to purchase 30%
of the outstanding stock of our parent for a nominal amount.
TRANSACTIONS WITH DLJ MERCHANT BANKING PARTNERS, L.P. AND ITS AFFILIATES
DLJ Merchant Banking Partners, L.P. and certain other affiliates of Credit
Suisse First Boston LLC are the owners of 351,428 shares of common stock and
warrants to purchase 4,514,928 shares of Doane Pet Care Enterprises, Inc. Credit
Suisse First Boston LLC was one of the joint book-running managers in the
offering of the outstanding notes. Credit Suisse First Boston LLC and its
affiliates have received certain payments of fees, including fees for various
investment banking and commercial banking services provided to us and to Doane
Pet Care Enterprises, Inc. DLJ Capital Funding, Inc., an affiliate of Credit
Suisse First Boston LLC, is the syndication agent and a lender under our senior
credit facility and received a portion of our repayment of loans under our
senior credit facility from the net proceeds of the sale of the outstanding
notes. In connection with
61
the sale of the outstanding notes, Credit Suisse First Boston LLC and its
affiliates received fees of approximately $3.3 million. There are currently no
agreements to make any such additional payments.
DLJ Merchant Banking Partners, L.P. and certain other affiliates of Credit
Suisse First Boston LLC are parties to the investors' agreement. In accordance
with the investors' agreement, DLJ Merchant Banking Partners, L.P. has
designated Mr. Finney to the boards of directors of Doane and Doane Pet Care
Enterprises, Inc.
TRANSACTIONS WITH J.P. MORGAN PARTNERS (BHCA), L.P. AND ITS AFFILIATES
J.P. Morgan Partners (BHCA), L.P. is an affiliate of JPMorgan Chase Bank
and J.P. Morgan Securities Inc. J.P. Morgan Partners (BHCA), L.P. and one of its
affiliates own:
- 200,000 shares of our senior preferred stock;
- 428,000 shares of Class A Common Stock of Doane Pet Care Enterprises,
Inc. and 2,560,093 shares of Class B (non-voting) Common Stock of Doane
Pet Care Enterprises, Inc.; and
- warrants to purchase 6,694,153 shares of common stock of Doane Pet Care
Enterprises, Inc.
JPMorgan Chase Bank, J.P. Morgan Securities Inc. and their affiliates
perform various commercial banking and investment banking services from time to
time for us and our affiliates. J.P. Morgan Securities Inc. was one of the joint
book-running managers in the offering of the outstanding notes. Affiliates of
J.P. Morgan Securities Inc. were holders of promissory notes under our sponsor
facility. These affiliates received approximately $16.9 million of the net
proceeds from the sale of the outstanding notes. JPMorgan Chase Bank serves as
the administrative agent and a lender under our senior credit facility and
received a portion of our repayment of loans under our senior credit facility
from the net proceeds of the sale of the outstanding notes. Since the beginning
of fiscal 2002 through March 31, 2003, JPMorgan Chase Bank, J.P. Morgan
Securities Inc. and their affiliates have received a total of $1.0 million for
acting in the foregoing capacities, excluding interest and other charges earned
generally by all lenders under our senior credit facility. JPMorgan Chase Bank
received a $0.5 million fee in connection with the amendments to our senior
credit facility effected contemporaneously with the sale of the outstanding
notes. In connection with the sale of the outstanding notes, J.P. Morgan
Securities Inc. and its affiliates received fees of approximately $1.6 million.
There are currently no agreements to make any additional commercial banking or
investment banking payments to JPMorgan Chase Bank, J.P. Morgan Securities Inc.
or their affiliates, except that J. P. Morgan Securities Inc. may receive
investment banking fees in the future, under certain circumstances, if we were
to decide to sell our European business.
J.P. Morgan Partners (BHCA), L.P. is a party to the investors' agreement.
In accordance with the investors' agreement, it has designated Messrs. Walker
and Lori to the boards of directors of Doane and Doane Pet Care Enterprises,
Inc.
REPAYMENT OF SPONSOR FACILITY NOTES HELD BY CERTAIN BENEFICIAL OWNERS
In addition to the affiliates of J.P. Morgan Securities Inc. that held
promissory notes under our sponsor facility, as discussed above, affiliates of
other persons known to us to beneficially own more than 5% of the common stock
of Doane Pet Care Enterprises, Inc. also held promissory notes under our sponsor
facility and received payments from us from the net proceeds of the sale of the
outstanding notes. Bruckmann, Rosser, Sherrill & Co., L.P. and its affiliates
received approximately $7.5 million, Summit Capital, Inc. and its affiliates
received approximately $2.3 million and PNC Capital Corp. and its affiliates
received approximately $1.2 million of the net proceeds from the sale of the
outstanding notes. Additionally, Messrs. Cahill, Woodlief and Horton each
received $0.1 million from the repayment of their promissory notes under our
sponsor facility in connection with the sale of the outstanding notes.
62
PRINCIPAL STOCKHOLDERS
All of our issued and outstanding shares of common stock are held by Doane
Pet Care Enterprises, Inc. As of March 1, 2003, we had 1,200,000 shares of
senior preferred stock issued and outstanding, 200,000 of which were held by
J.P. Morgan Partners (BHCA), L.P. and one of its affiliates and 1,000,000 of
which were held by qualified institutional buyers, as defined in Rule 144A under
the Securities Act. The following table sets forth certain information regarding
the beneficial ownership of Doane Pet Care Enterprises, Inc.'s common stock as
of March 1, 2003 by:
- each director of Doane;
- each Named Executive Officer;
- each person who is known by us to own beneficially more than 5% of the
common stock of Doane Pet Care Enterprises, Inc.;
- all parties to the investors' agreement as a group; and
- all directors and executive officers as a group.
Unless otherwise indicated, each person has sole voting and dispositive
power over the shares indicated as owned by that person. Certain of Doane Pet
Care Enterprises, Inc.'s principal stockholders are parties to the investors'
agreement. See "Certain relationships and related transactions -- Investors'
agreement."
<Table>
<Caption>
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER(1) OWNED BENEFICIALLY OF CLASS(2)
- --------------------------- ------------------ -----------
J.P. Morgan Partners (BHCA), L.P.(3)........................ 9,682,246 34.9
Bruckmann, Rosser, Sherrill & Co., L.P.(4).................. 6,162,868 26.1
DLJ Merchant Banking Partners, L.P.(5)...................... 4,866,356 19.1
Equus II Inc. .............................................. 1,943,598 9.2
Summit Capital, Inc.(6)..................................... 1,892,769 9.0
Laura Hawkins Mansur(7)..................................... 1,781,000 8.5
Bob L. Robinson(8).......................................... 1,181,546 5.6
PNC Capital Corp.(9)........................................ 1,111,304 5.2
Jeffrey C. Walker(3)........................................ 9,682,246 34.9
Stephen C. Sherrill(4)...................................... 6,162,868 26.1
Lawrence S. Benjamin........................................ -- *
Jerry W. Finney, Jr.(5)..................................... 4,866,356 19.1
George B. Kelly(6).......................................... 1,892,769 9.0
Mathew J. Lori(10).......................................... -- *
Edward H. D'Alelio(11)...................................... -- *
Paul E. Suckow(11).......................................... -- *
Terry R. Peets(12).......................................... 6,666 *
Douglas J. Cahill(12)....................................... 245,562 1.2
Philip K. Woodlief(12)...................................... 27,781 *
David L. Horton(12)......................................... 47,781 *
Joseph J. Meyers............................................ -- *
Terry W. Bechtel(12)(13).................................... 306,819 1.5
All parties to the investors' agreement as a group.......... 33,808,751 95.5
All executive officers and directors as a group (17
persons).................................................. 23,342,541 66.7
</Table>
- ---------------
* Represents less than one percent.
(1) The address of J.P. Morgan Partners (BHCA), L.P. and Messrs. Walker and
Lori is 1221 Avenue of the Americas, New York, New York 10020. The address
of Bruckmann, Rosser, Sherrill & Co., L.P. and Mr. Sherrill is 126 East
56th Street, New York, New York 10022. The address of DLJ Merchant Banking
Partners, L.P. and Mr. Finney is 11 Madison Avenue, 16th Floor, New York,
New York 10010.
63
The address of Equus II Inc. is 2929 Allen Parkway, Suite 2500, Houston,
Texas 77019. The address of Summit Capital, Inc. and Mr. Kelly is 600
Travis, Suite 6110, Houston, Texas 77002. The address of Mrs. Mansur is
5602 Indian Circle, Houston, Texas 77056. The address of Mr. Robinson is
8591 SE Highway 166, Baxter Springs, Kansas 66713. The address of PNC
Capital Corp. is 3150 CNG Tower, 625 Liberty Avenue, Pittsburgh,
Pennsylvania 15222. The address of Mr. Benjamin is 200 South Wacker Drive,
Suite 3100, Chicago, Illinois 60606. The address of Mr. Peets is 327 Coral
Avenue, Balboa Island, Newport Beach, California 92662. The address of
Messrs. Cahill, Woodlief, Horton, Meyers and Bechtel is 210 Westwood Place
South, Suite 400, Brentwood, Tennessee 37027. The address of Mr. D'Alelio
is 7 Ringbolt Road, Hingman, Massachusetts 02043. The address of Mr. Suckow
is 1219 Denbigh Lane, Radnor, Pennsylvania 19087.
(2) In accordance with Rule 13d-3(d) under the Securities Exchange Act of 1934,
the calculation of this percentage assumes that securities subject to
options, warrants, rights or conversion privileges are outstanding for the
purpose of computing the percentage of outstanding securities of the class
owned by each beneficial owner, but such securities subject to options,
warrants, rights or conversion privileges are not deemed to be outstanding
for the purpose of computing the percentage of the class owned by any other
person.
(3) Amount represents shares held by J.P. Morgan Partners (BHCA), L.P. and
related parties. Of the 9,682,246 shares indicated as owned by J.P. Morgan
Partners (BHCA), L.P., (i) 428,000 represent shares of Class A Common
Stock; (ii) 2,560,093 represent shares of Class B Common Stock; and (iii)
6,694,153 are shares issuable within 60 days upon exercise of warrants. Mr.
Walker, a director of Doane, serves as President of JPMP Capital Corp., the
general partner of JPMP Master Fund Manager, L.P., the general partner of
J.P. Morgan Partners (BHCA), L.P. As such, Mr. Walker may be deemed to
beneficially own the shares indicated as owned by J.P. Morgan Partners
(BHCA), L.P. Mr. Walker disclaims beneficial ownership of these shares
within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934.
(4) Amount includes shares held by Bruckmann, Rosser, Sherrill & Co., L.P. and
certain other entities and individuals affiliated with it. Of the 6,162,868
shares indicated as owned by Bruckmann, Rosser, Sherrill & Co., L.P., (i)
3,585,822 represent shares of Class A Common Stock and (ii) 2,577,046 are
shares issuable within 60 days upon exercise of warrants. Of the shares
indicated as owned by Bruckmann, Rosser, Sherrill & Co., L.P., (i) 60,617
shares of Class A Common Stock and (ii) 44,042 shares issuable within 60
days upon exercise of warrants are owned individually by Mr. Sherrill, a
director of Doane. Mr. Sherrill may be deemed to beneficially own 5,924,484
shares beneficially owned by Bruckmann, Rosser, Sherrill & Co., L.P. and
certain other entities and individuals affiliated with it. Mr. Sherrill
disclaims beneficial ownership of 238,384 of such shares within the meaning
of Rule 13d-3 of the Securities Exchange Act of 1934.
(5) Amount represents shares held by DLJ Merchant Banking Partners, L.P. and
related parties. Of the 4,866,356 shares held by DLJ Merchant Banking
Partners, L.P., (i) 351,428 represents shares of Class A common stock and
(ii) 4,514,928 are shares issuable within 60 days upon the exercise of
warrants. Of the shares indicated, 150,494 shares, 80,135 shares, 81,474
shares, 34,917 shares and 4,408 shares are held by DLJ Merchant Banking
Partners, L.P., DLJ International Partners, C.V., DLJ ESC II, L.P., DLJ
Merchant Banking Funding, Inc. and DLJ Offshore Partners, C.V.,
respectively. Of the warrants indicated, warrants to purchase 2,126,748
shares, 950,960 shares, 524,444 shares, 857,640 and 55,136 shares are held
by DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V.,
DLJ First ESC L.P., DLJ Merchant Banking Funding, Inc., and DLJ Offshore
Partners, C.V., respectively. In November 2000, Credit Suisse First Boston,
Inc. acquired Donaldson, Lufkin & Jenrette, Inc. DLJ Merchant Banking
Partners, L.P. is a limited partnership, the general partner of which is
DLJ Merchant Banking, Inc., an indirect affiliate of Credit Suisse First
Boston, Inc. and Credit Suisse Group. Mr. Finney is a director of Doane and
serves as a Director of the Private Equity Group of Credit Suisse First
Boston and as such may be deemed to beneficially own such shares. Mr.
Finney disclaims beneficial ownership of such shares within the meaning of
Rule 13d-3 of the Securities Exchange Act of 1934.
64
(6) Amount includes shares held by Summit Capital, Inc. Summit/DPC Partners,
L.P. was dissolved in 2001 and all of the shares it held were distributed
to its partners, including Summit Capital, Inc. Mr. Kelly, a director of
Doane, is Chairman of the Board and a stockholder of Summit Capital, Inc.
Mr. Kelly may be deemed to beneficially own the shares indicated. Mr. Kelly
disclaims beneficial ownership of 24,006 shares within the meaning of Rule
13d-3 of the Securities Exchange Act of 1934.
(7) Of the shares indicated as owned by Mrs. Mansur, 634,500 are held by the
estate of Walid Mansur, 846,500 are owned by Mrs. Mansur and 300,000 are
held in trust for their children.
(8) Of the shares indicated as owned by Mr. Robinson, 264,566 are held in Mr.
Robinson's name, 560,000 are held in a limited partnership of which Mr.
Robinson is the Managing Partner, 150,371 are held in trust for Mr.
Robinson, 150,371 are held in trust for Mr. Robinson's wife, Jeanine L.
Robinson, and 56,238 are held in Mrs. Robinson's name.
(9) Amount represents shares held by PNC Capital Corp. and related entities. Of
the 1,111,304 shares indicated as owned by PNC Capital Corp., (i) 711,384
represent shares of Class A Common Stock; and (ii) 399,920 are shares
issuable within 60 days upon the exercise of warrants.
(10) Amount excludes shares held by J.P. Morgan Partners (BHCA), L.P. and
related parties. Mr. Lori, a director of Doane, is a limited partner of
JPMP Master Fund Manager, L.P., the general partner of J.P. Morgan Partners
(BHCA), L.P. As such, Mr. Lori is not deemed to beneficially own the shares
indicated as owned by J.P. Morgan Partners (BHCA), L.P.
(11) These directors serve only on our board of directors, and not on the board
of directors of Doane Pet Care Enterprises, Inc.
(12) Amounts include shares which are issuable within 60 days upon exercise of
warrants as follows:, Mr. Cahill -- 45,562; Mr. Woodlief -- 22,781; and Mr.
Horton -- 22,781. In addition, amount includes 79,601 options which are
exerciseable within 60 days for Mr. Bechtel and 6,666 options which are
exercisable within 60 days by Mr. Peets.
(13) Mr. Bechtel retired effective March 31, 2003.
65
DESCRIPTION OF THE NOTES
The Company will issue the new notes under an indenture dated as of
February 28, 2003 (the "Indenture") among itself, the Subsidiary Guarantors (as
defined in the Indenture) and Wilmington Trust Company, as trustee (the
"Trustee"). This is the same indenture pursuant to which we issued the
outstanding notes. The terms of the new notes include those expressly set forth
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Indenture is
unlimited in aggregate principal amount, although the issuance of the
outstanding notes was limited to $213.0 million and the new notes will be issued
in this exchange offer in an aggregate principal amount of up to $213.0 million.
We may issue an unlimited principal amount of additional notes having identical
terms and conditions as the notes (the "Additional Notes"). We will only be
permitted to issue such Additional Notes if at the time of such issuance, we
were in compliance with the covenants contained in the Indenture. Any Additional
Notes will be part of the same issue as the outstanding notes and new notes and
will vote on all matters with the holders of the outstanding notes and new
notes.
This description is intended to be a useful overview of the material
provisions of the notes, the Subsidiary Guarantees and the Indenture. Since this
description is only a summary, you should refer to the Indenture for a complete
description of the obligations of the Company, the Subsidiary Guarantors and
your rights. The Indenture is filed as an exhibit to the registration statement
of which this prospectus is a part.
If the exchange offer contemplated by this prospectus is consummated, the
holders of outstanding notes who do not exchange outstanding notes for new notes
in the exchange offer will vote together as a single class with holders of new
notes for all relevant purposes 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
outstanding notes that remain outstanding after the exchange offer will be
aggregated with the new notes.
You will find the definitions of capitalized terms used in this description
under the heading "Certain definitions." For purposes of this description,
references to "the Company," "we," "our" and "us" refer only to Doane Pet Care
Company and not to its Subsidiaries and references to the "Notes" refer to both
the new notes and the outstanding notes.
GENERAL
THE NEW NOTES
The new notes:
- will be general unsecured, senior obligations of the Company;
- will be effectively subordinated to all of our secured debt;
- will be senior to all of our existing and future Subordinated Debt,
including, without limitation, the 1998 Notes;
- will be effectively subordinated to all liabilities (including trade
payables) of each Subsidiary of the Company that is not a Subsidiary
Guarantor;
- will be issued in this exchange offer in an aggregate principal amount of
up to $213.0 million;
- mature on March 1, 2010;
- will be issued in denominations of $1,000 and integral multiples of
$1,000;
- will be represented by one or more registered notes in global form, but
in certain circumstances may be represented by notes in definitive form.
See "-- Book-entry; delivery and form"; and
- will be unconditionally Guaranteed on a senior basis by DPC Investment
Corp. and Doane/Windy Hill Joint Venture, L.L.C., representing each
Domestic Subsidiary of the Company as of the date of this prospectus. See
"-- Subsidiary guarantees."
As of the date of this prospectus, all of our Domestic Subsidiaries are
"Restricted Subsidiaries." However, under the circumstances described below
under the subheading "-- Certain covenants -- Designation of restricted and
unrestricted subsidiaries," we will be permitted to designate certain of our
Subsidiaries as
66
"Unrestricted Subsidiaries." Our Unrestricted Subsidiaries will not be subject
to the restrictive covenants in the Indenture. Our Unrestricted Subsidiaries
will not guarantee the Notes.
INTEREST
Interest on the new notes will:
- accrue at the rate of 10 3/4% per annum;
- accrue from the date of original issuance or if interest has already been
paid, from the most recent interest payment date;
- be payable in cash semi-annually in arrears on March 1 and September 1,
commencing on September 1, 2003;
- be payable to the holders of record on the February 15 and August 15
immediately preceding the related interest payment dates; and
- be computed on the basis of a 360-day year comprised of twelve 30-day
months.
PAYMENTS ON THE NOTES; PAYING AGENT AND REGISTRAR
We will pay principal of, premium, if any, and interest on the Notes at the
office or agency designated by the Company in the Borough of Manhattan, The City
of New York, except that we may, at our option, pay interest on the Notes by
check mailed to holders of the Notes at their registered address as it appears
in the Registrar's books. We have initially designated the corporate trust
office of the Trustee in New York, New York to act as our Paying Agent and
Registrar. We may, however, change the Paying Agent or Registrar without prior
notice to the holders of the Notes, and the Company or any of its Subsidiaries
may act as Paying Agent or Registrar.
We will pay principal of, premium, if any, and interest on, Notes in global
form registered in the name of or held by The Depository Trust Company or its
nominee in immediately available funds to The Depository Trust Company or its
nominee, as the case may be, as the registered holder of such global Note.
TRANSFER AND EXCHANGE
A holder of Notes may transfer or exchange Notes at the office of the
Registrar in accordance with the Indenture. The Registrar and the Trustee may
require a holder, among other things, to furnish appropriate endorsements and
transfer documents. No service charge will be imposed by the Company, the
Trustee or the Registrar for any registration of transfer or exchange of Notes,
but the Company may require a holder to pay a sum sufficient to cover any
transfer tax or other similar governmental charges or fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
OPTIONAL REDEMPTION
Except as described below, the Notes are not redeemable until March 1,
2007. On and after March 1, 2007, the Company may redeem all or, from time to
time, a part of the Notes upon not less than 30 nor more than 60 days' notice,
at the following redemption prices (expressed as a percentage of principal
amount) plus accrued and unpaid interest on the Notes, if any, to the applicable
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 beginning on March 1 of the years indicated
below:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2007..................................................... 105.375%
2008..................................................... 102.688%
2009 and thereafter...................................... 100.000%
</Table>
67
Notwithstanding the foregoing, prior to March 1, 2007, the Company may on
any one or more occasions redeem up to 35% of the original principal amount of
the Notes with the Net Cash Proceeds of one or more Equity Offerings at a
redemption price of 110.75% of the principal amount thereof, 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 that:
(1) at least 65% of the original aggregate principal amount of the Notes
remains outstanding after each such redemption; and
(2) the redemption occurs within 60 days after the closing of such Equity
Offering.
If the optional redemption date is on or after an interest record date and
on or before the related interest payment date, the accrued and unpaid interest,
if any, will be paid to the Person in whose name the Note is registered at the
close of business on such record date, and no additional interest will be
payable to holders whose Notes will be subject to redemption by the Company.
In the case of any partial redemption, the Trustee will select the Notes
for redemption in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not listed, then on a pro rata basis, by lot or by such other method as the
Trustee in its sole discretion will deem to be fair and appropriate, although no
Note of $1,000 in original principal amount or less will be redeemed in part. If
any Note is to be redeemed in part only, the notice of redemption relating to
that Note will state the portion of the principal amount thereof to be redeemed.
A new 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 Note.
Notices of any redemption shall be mailed by first class mail at least 30 but
not more than 60 days prior to the redemption date to each holder of Notes to be
redeemed at its registered address. If money sufficient to pay the redemption
price of and any accrued and unpaid interest on the Notes (or portions thereof)
to be redeemed is deposited with the Paying Agent on the redemption date,
interest shall cease to accrue on such Notes (or portions thereof) called for
redemption.
At any time on or prior to March 1, 2007, we (or a third party) may redeem
the Notes as a whole at our (or their) option 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 the 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 a Note at any redemption date,
the greater of 1.0% of the principal amount of that Note and the excess of the
present value at that time of the redemption price of the Note at March 1, 2007
(which redemption price is described in the table above), plus all required
interest payments due on the Notes through March 1, 2007, computed using a
discount rate equal to the Treasury Rate plus 50 basis points over the principal
amount of the 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) that
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 March 1, 2007; provided, however, that if the period from
the redemption date to March 1, 2007 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.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption payments or
sinking fund payments with respect to the Notes.
68
RANKING
The Notes are general unsecured obligations of the Company that rank senior
in right of payment to all existing and future Indebtedness that is expressly
subordinated in right of payment to the Notes including, without limitation, the
1998 Notes. The Notes rank equally in right of payment with all existing and
future liabilities of the Company that are not so subordinated and are
effectively subordinated to all of our Secured Indebtedness. In the event of
bankruptcy, liquidation, reorganization or other winding up of the Company or
its Subsidiary Guarantors or upon a default in payment with respect to, or the
acceleration of, any Indebtedness under the Senior Credit Agreement or other
Secured Indebtedness, the assets of the Company and its Subsidiary Guarantors
that secure such Secured Indebtedness will be available, if at all, to pay
obligations on the Notes and the Subsidiary Guarantees only after all
Indebtedness under the Senior Credit Agreement and other Secured Indebtedness
has been repaid in full from such assets. We advise you that there may not be
sufficient assets remaining to pay amounts due on any or all the Notes and the
Subsidiary Guarantees then outstanding.
SUBSIDIARY GUARANTEES
The Company's obligations under the Indenture and the Notes will be, on a
joint and several basis, unconditionally Guaranteed on a senior unsecured basis
by the Company's existing and future Domestic Subsidiaries that are Restricted
Subsidiaries. The Subsidiary Guarantees will be general unsecured obligations of
the Subsidiary Guarantors that rank senior in right of payment to all existing
and future Indebtedness of such Subsidiary Guarantor that is expressly
subordinated in right of payment to such Subsidiary Guarantee including, without
limitation, the Guarantees of the 1998 Notes. The Subsidiary Guarantees will
rank equally in right of payment with all existing and future liabilities of the
Subsidiary Guarantors that are not so subordinated and will be effectively
subordinated to all Secured Indebtedness of such Subsidiary Guarantor. In the
event of bankruptcy, liquidation, reorganization or other winding up of the
Company or its Subsidiary Guarantors or upon a default in payment with respect
to, or the acceleration of, any Indebtedness under the Senior Credit Agreement
or other Secured Indebtedness, the assets of the Company and its Subsidiary
Guarantors that secure such Secured Indebtedness will be available, if at all,
to pay obligations on the Notes and the Subsidiary Guarantees only after all
Indebtedness under the Senior Credit Agreement and other Secured Indebtedness
has been repaid in full from such assets. We advise you that there may not be
sufficient assets remaining to pay amounts due on any or all the Notes and the
Subsidiary Guarantees then outstanding.
The Subsidiary Guarantors have also Guaranteed obligations under the Senior
Credit Agreement and the 1998 Notes.
Although the Indenture will limit the amount of Indebtedness that the
Company and its Restricted Subsidiaries may Incur, such Indebtedness may be
substantial and all of it may be Indebtedness of Subsidiary Guarantors. The
Company's Subsidiaries that are not Subsidiary Guarantors may also Incur
additional Indebtedness.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
will be limited as necessary to prevent that Subsidiary Guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.
In addition, a Subsidiary Guarantor will be released from its obligations
under the Indenture, the Subsidiary Guarantee and the Registration Rights
Agreement:
(1) upon the legal defeasance or covenant defeasance of the Notes as
described under the section entitled "Defeasance," and
(2) if the Company designates any Restricted Subsidiary that is a Guarantor
as an Unrestricted Subsidiary in accordance with the applicable
provisions of the Indenture.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, unless the Company has
exercised its right to redeem the Notes as described under "Optional
redemption," each holder of Notes will have the right to require the Company to
repurchase all or any part of that holder's Notes at a purchase price in cash
equal to 101% of the
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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.
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes in
connection with the Change of Control, the Company shall mail a notice to each
holder of record of the Notes and to the Trustee stating:
- that a Change of Control has occurred and that the holder has the right
to require the Company to purchase its 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
the Change of Control;
- the repurchase date, which shall be no earlier than 30 days nor later
than 60 days from the date the notice is mailed; and
- the procedures determined by the Company, consistent with the Indenture,
that a holder must follow in order to have its 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 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 will not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The provisions described above that require the Company to make an offer to
repurchase Notes as provided by this covenant (a "Change of Control Offer")
following a Change of Control will be applicable whether or not any other
provisions of the Indenture are applicable. Except as described above with
respect to a Change of Control, the Indenture will not contain provisions that
permit the holders of the Notes to require that the Company repurchase or redeem
the Notes in the event of a takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes properly tendered and not withdrawn under the Change of
Control Offer.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Senior Credit Agreement.
Furthermore, the Company is required upon the occurrence of certain change of
control events (including but not limited to, certain events which would
constitute a Change of Control under the Indenture) to make an offer to
repurchase the 1998 Notes. Future Indebtedness of the Company and its
Subsidiaries may contain prohibitions on certain events that would constitute a
Change of Control or require such Indebtedness to be repurchased upon a Change
of Control. Moreover, the exercise by the holders of the Notes of their right to
require the Company to repurchase the Notes or the 1998 Notes could cause a
default under such Indebtedness, even if the Change of Control itself does not,
due to other covenants and events of default contained in the agreements
pursuant to which such Indebtedness was issued and due to the financial effect
of such repurchases 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. We cannot assure you that sufficient funds will be
available when necessary to make any required repurchases. Even if sufficient
funds were otherwise available, the terms of the Senior Credit Agreement
generally prohibit the Company's prepayment of the Notes prior to their
scheduled maturity. Consequently, if the Company is not able to prepay the
Senior Credit Agreement and any other 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 the
Notes exercise their repurchase rights following a Change of Control, thereby
resulting in a Default under the Indenture.
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CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS
(1) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that the Company and
its Restricted Subsidiaries may Incur Indebtedness if on the date thereof:
(a) the Consolidated Coverage Ratio would be greater than 2.00:1.00;
and
(b) no Default or Event of Default will have occurred or be continuing
or would occur as a consequence of Incurring Indebtedness.
(2) Paragraph (1) above will not prohibit the Incurrence of the following
Indebtedness:
(a) Bank Indebtedness of the Company or its Restricted Subsidiaries;
provided that the aggregate principal amount of Indebtedness
Incurred pursuant to this clause (a) does not exceed an amount
outstanding at any time equal to $280.0 million less the aggregate
amount of permanent reductions of commitments to extend credit
thereunder and repayments of principal thereof after the Issue
Date, in each case without duplication of repayments required as a
result of such reductions of commitments;
(b) Indebtedness of the Company owed to any Wholly Owned Restricted
Subsidiary and of any Restricted Subsidiary owed to the Company or
any Wholly Owned Restricted Subsidiary; provided, however,
(i) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in
full in cash of all obligations with respect to the Notes;
(ii) if a Restricted Subsidiary is the obligor on such
Indebtedness, such Indebtedness is made pursuant to an
intercompany note;
(iii) if a Restricted Subsidiary is the obligor on such
Indebtedness and the Company is not the obligee, such
Indebtedness is subordinated in right of payment to the
Subsidiary Guarantee of such Restricted Subsidiary; and
(iv)(x) any subsequent issuance or transfer of Capital Stock or any
other event which results in any such Indebtedness being
beneficially held by a Person other than the Company or a
Wholly-Owned Restricted Subsidiary (other than as
collateral to secure Bank Indebtedness) of the Company; and
(y) any sale or other transfer of any such Indebtedness to a
Person other than the Company or a Wholly-Owned Restricted
Subsidiary of the Company shall be deemed, in each case, to
constitute an Incurrence of such Indebtedness by the
Company or such Restricted Subsidiary, as the case may be;
(c) Indebtedness represented by the Notes, any Indebtedness (other
than the Indebtedness described in clauses (a), (b) or (f))
outstanding on the Issue Date, including the 1998 Notes and the
Guarantees related thereto, and any Refinancing Indebtedness
Incurred in respect of any Indebtedness described in this clause
(c) or paragraph (1);
(d) Indebtedness represented by the Subsidiary Guarantees and other
Guarantees by the Subsidiary Guarantors of Indebtedness Incurred
in accordance with the provisions of the Indenture; provided that
in the event such Indebtedness that is being Guaranteed is a
Subordinated Obligation or a Guarantor Subordinated Obligation,
then the related Guarantee shall be subordinated in right of
payment to the Subsidiary Guarantee;
(e) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations;
(f) Indebtedness of Foreign Subsidiaries in an aggregate principal
amount at any one time outstanding not to exceed the greater of
(x) 40% of Foreign Consolidated Net Tangible Assets and (y) $40.0
million; and
71
(g) Indebtedness of the Company and its Restricted Subsidiaries, which
may comprise Bank Indebtedness, in an aggregate principal amount
which, when taken together with the principal amount of all other
Indebtedness Incurred pursuant to this clause (g) and then
outstanding, will not exceed $25.0 million.
Notwithstanding any other provision of this covenant, except as set forth
in the proviso hereto, the Company and its Restricted Subsidiaries 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 Obligation or Guarantor Subordinated
Obligation, as the case may be, unless such Indebtedness constitutes Refinancing
Indebtedness; provided, however, that the Company and its Restricted
Subsidiaries shall be permitted to Incur such Indebtedness pursuant to paragraph
(2) above if such Indebtedness is incurred for the purpose of making payments
set forth in paragraph 2(i) under the covenant, "Limitation on restricted
payments."
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness Incurred pursuant to, and in compliance
with, this covenant:
(1) in the event that an item of proposed Indebtedness meets the criteria
of more than one of the categories of Indebtedness described in
paragraph (2) of this covenant, or is entitled to be Incurred pursuant
to paragraph (1) of this covenant, the Company will be permitted to
classify such item of Indebtedness on the date of its incurrence, or
later reclassify all or a portion of such item of Indebtedness, in any
manner that complies with this covenant;
(2) all Indebtedness outstanding on the date of the Indenture under the
Senior Credit Agreement shall be deemed outstanding under clause (a) of
paragraph (2) of this covenant;
(3) all Indebtedness under Foreign Credit Agreements outstanding on the
Issue Date shall be deemed outstanding under clause (f) of paragraph
(2) of this covenant (notwithstanding Clause (1) above);
(4) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability
in respect thereof determined in accordance with GAAP; and
(5) the principal amount of any Disqualified Stock of the Company or a
Subsidiary or Preferred Stock of a Subsidiary will be equal to the
liquidation preference thereof, together with any dividend thereon that
is more than 30 days past due.
Accrual of interest, accrual of dividends, the accretion of accreted value,
the payment of interest in the form of additional Indebtedness and the payment
of dividends in the form of additional shares of Preferred Stock will not be
deemed to be an Incurrence of Indebtedness for purposes of this covenant.
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was Incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness; provided that if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S.
dollar-denominated restriction to be exceeded if calculated at the relevant
currency exchange rate in effect on the date of such refinancing, such U.S.
dollar-denominated restriction shall be deemed not to have been exceeded so long
as the principal amount of such refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced. Notwithstanding any
other provision of this covenant, the maximum amount of Indebtedness that the
Company may Incur pursuant to this covenant shall not be deemed to be exceeded
solely as a result of fluctuations in the exchange rate of currencies. The
principal amount of any Indebtedness Incurred to refinance other Indebtedness,
if Incurred in a different currency from the Indebtedness being refinanced,
shall be calculated based on the currency exchange rate applicable to the
currencies in which such Refinancing Indebtedness is denominated that is in
effect on the date of such refinancing.
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LIMITATION ON RESTRICTED PAYMENTS
(1) The Company shall not, and shall not permit any of its Restricted
Subsidiaries, directly or indirectly, after the Issue Date to:
(a) 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 (i)
dividends or distributions payable in its Capital Stock, other
than Disqualified Stock, and (ii) dividends or distributions
payable to the Company or another Restricted Subsidiary, and, if
the Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, to its other holders of common Capital Stock on a pro
rata basis;
(b) purchase, redeem, retire or otherwise acquire for value any
Capital Stock (including, without limitation, Disqualified Stock)
of the Company held by Persons other than the Company or another
Restricted Subsidiary;
(c) 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 or
Guarantor Subordinated Obligations, other than the purchase,
repurchase, redemption, defeasance or other acquisition of
Subordinated Obligations or Guarantor Subordinated Obligations in
anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of
the date of purchase, repurchase, redemption, defeasance or
acquisition; or
(d) 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 the Restricted Subsidiary makes the
Restricted Payment: a Default shall have occurred and be
continuing, or would result therefrom; the Company could not Incur
at least an additional $1.00 of Indebtedness pursuant to paragraph
(1) under the covenant "-- Limitation on indebtedness" after
giving effect, on a pro forma basis, to such Restricted Payment;
or the aggregate amount of the Restricted Payment and all other
Restricted Payments declared or made on or subsequent to the Issue
Date would exceed the sum of:
(i) 50% of the Consolidated Net Income, accrued during the period
(treated as one accounting period) from the Issue Date to the
end of the most recent fiscal quarter ending prior to the date
of the Restricted Payment as to which financial results are
available, but in no event more than 135 days prior to the
date of the Restricted Payment, or, in case the Consolidated
Net Income shall be a deficit, minus 100% of that deficit;
(ii) 100% of 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 the Issue Date, 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;
(iii) 100% of the aggregate Net Cash Proceeds received by the
Company from the issue or sale of its Capital Stock to an
employee stock ownership plan or similar trust subsequent to
the Issue Date; provided, however, that if the plan or trust
Incurs any Indebtedness to or Guaranteed by the Company to
finance the acquisition of such Capital Stock, the aggregate
amount shall be limited to any increase in the Consolidated
Net Tangible Worth of the Company resulting from principal
repayments made by the plan or trust with respect to
Indebtedness Incurred by it to finance the purchase of such
Capital Stock; and
(iv) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's balance
sheet upon the conversion or exchange, other than by a
Restricted Subsidiary of the Company, subsequent to the Issue
Date of any Indebtedness of the Company or its Restricted
Subsidiaries convertible or exchangeable for Capital
73
Stock, other than Disqualified Stock, of the Company, less the
amount of any of its cash, or other property, distributed by the
Company or any of its Subsidiaries upon the conversion or
exchange.
(2) The provisions of paragraph (1) shall not prohibit:
(a) any purchase, retirement, prepayment, defeasance or redemption of
Capital Stock, Disqualified Stock or Subordinated Obligations of
the Company or Guarantor Subordinated Obligations 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 Restricted
Subsidiary or an employee stock ownership plan or other trust
established by the Company or any of its Restricted Subsidiaries;
provided, however, that the purchase, retirement, prepayment,
defeasance or redemption shall be excluded in the calculation of
the amount of Restricted Payments and the Net Cash Proceeds from
the sale shall be excluded from clause (d)(ii) of paragraph (1)
above;
(b) any purchase, retirement, prepayment, defeasance or redemption of
Subordinated Obligations of the Company or Guarantor Subordinated
Obligations made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Subordinated Obligations of the
Company or Guarantor Subordinated Obligations, as the case may be,
that in each case constitute Refinancing Indebtedness; provided,
however, that the purchase, retirement, prepayment, defeasance or
redemption shall be excluded in the calculation of the amount of
Restricted Payments;
(c) any purchase, retirement, prepayment, defeasance or redemption of
Disqualified Stock made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Disqualified Stock of the
issuer of such refinanced Disqualified Stock; provided, however,
that the purchase, retirement, prepayment, defeasance or
redemption shall be excluded in the calculation of the amount of
Restricted Payments;
(d) so long as no Default or Event of Default has occurred and is
continuing, any purchase, retirement, prepayment, defeasance or
redemption of Subordinated Obligations or Guarantor Subordinated
Obligations from Net Available Cash to the extent permitted under
"-- Limitation on sales of assets" below; provided, however, that
the purchase or redemption shall be excluded in the calculation of
the amount of Restricted Payments;
(e) dividends paid within 60 days after the date of declaration if at
such date of declaration the dividend would have complied with
this provision; provided, however, that such dividends shall be
included in the calculations of the amount of Restricted Payments;
(f) payment of dividends or other distributions by the Company for the
purposes set forth in clauses (i) through (iii) below; provided,
however, that any dividend or distribution described in clauses
(i) and (ii) will be excluded in the calculation of the amount of
Restricted Payments and any dividend or distribution described in
clause (iii) will be included in the calculation of the amount of
Restricted Payments:
(i) in amounts equal to the amounts required for Holdings 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;
(ii) in amounts equal to amounts required for Holdings to pay
federal, state and local income taxes to the extent those
income taxes are attributable to the income of the Company
and its Restricted Subsidiaries; and
(iii) in amounts equal to amounts expended by the Company or
Holdings to repurchase Capital Stock of the Company or
Holdings owned by employees, officers and directors,
including former employees, officers and directors, 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 (iii) shall not, in the
aggregate, exceed the sum of
74
$3.0 million plus any amounts contributed by Holdings to the
Company as a result of resales of the repurchased shares of
Capital Stock;
(g) any repurchase of any Capital Stock deemed to occur upon exercise
of stock options or warrants if that Capital Stock represents a
portion of the exercise price of the options or warrants;
provided, however, that such repurchases will be excluded from
subsequent calculations of the amount of Restricted Payments;
(h) the repurchase, redemption or other acquisition or retirement for
value of any Subordinated Obligation of the Company or any
Guarantor Subordinated Obligation of any of the Subsidiary
Guarantors pursuant to a "change of control" covenant set forth in
the indenture pursuant to which the same is issued and such
"change of control" covenant is substantially identical in all
material respects to the comparable provisions included in the
Indenture; provided that such repurchase, redemption or other
acquisition or retirement for value shall only be permitted if all
of the terms and conditions in such provisions have been complied
with and such repurchases, redemptions or other acquisitions or
retirements for value are made in accordance with such indenture
pursuant to which the same is issued and provided further that the
Company has repurchased all Notes required to be repurchased by
the Company pursuant to the terms and conditions described under
the caption "Change of control" prior to the repurchase,
redemption or other acquisition or retirement for value of such
Subordinated Obligation or Guarantor Subordinated Obligation
pursuant to the "change of control" covenant included in such
indenture; provided that such repurchase, redemption or other
acquisition shall be excluded in subsequent calculations of the
amount of Restricted Payments;
(i) payments in an aggregate amount not to exceed $5.0 million for
the purchase, retirement, prepayment, defeasance or redemption of
a portion of the 1998 Notes, on any one or more occasions, within
270 days of the date of the Indenture; provided, however, that
such purchase, retirement, prepayment, defeasance or redemption
of the 1998 Notes shall be excluded in the calculation of the
amount of Restricted Payments; or
(j) Restricted Payments in an amount not to exceed $5.0 million.
The amount of all Restricted Payments (other than cash) shall be the Fair
Market Value on the date of such Restricted Payment of the asset(s) or
securities proposed to be paid, transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment.
The Fair Market Value of any cash Restricted Payment shall be its face amount
and any non-cash Restricted Payment shall be determined conclusively by the
board of directors of the Company acting in good faith, whose resolution with
respect thereto shall be delivered to the Trustee, such determination to be
based upon an opinion or appraisal issued by an accounting, appraisal, financial
advisory, or investment banking firm of national standing if such Fair Market
Value is estimated to exceed $25.0 million. Not later than the date of making
any Restricted Payment (other than Restricted Payments under clauses (a) through
(h) of the preceding paragraph), the Company shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by the covenant
"Limitation on restricted payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
LIMITATION ON LIENS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, Incur or suffer to exist any
Lien (other than Permitted Liens) upon any of its property or assets (including
Capital Stock), whether owned on the Issue Date or acquired after that date,
securing any Indebtedness, unless contemporaneously with the Incurrence of the
Liens, effective provision is made to secure the Indebtedness due under the
Indenture and the Notes or, in respect of Liens on any Restricted Subsidiary's
property or assets, any Subsidiary Guarantee of such Subsidiary, equally and
ratably with (or prior to in the case of Liens with respect to Subordinated
Obligations or Guarantor Subordinated Obligations, as the case may be) the
Indebtedness secured by such Lien for so long as such Indebtedness is so
secured.
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LIMITATION ON SALE/LEASEBACK TRANSACTIONS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into any Sale/ Leaseback Transaction unless:
(1) the Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale/Leaseback Transaction at least
equal to the Fair Market Value (as evidenced by a resolution of the
Board of Directors of the Company) of the property subject to such
transaction;
(2) the Company or such Restricted Subsidiary could have Incurred
Indebtedness in an amount equal to the Attributable Indebtedness in
respect of such Sale/Leaseback Transaction pursuant to either the first
or second paragraph of the covenant described under "-- Limitation on
indebtedness";
(3) the Company or such Restricted Subsidiary would be permitted to create
a Lien on the property subject to such Sale/Leaseback Transaction
without securing the Notes by the covenant described under
"-- Limitation on liens"; and
(4) the Sale/Leaseback Transaction is treated as an Asset Disposition and
all of the conditions of the Indenture described under "-- Limitation
on sales of assets" (including the provisions concerning the
application of Net Available Cash) are satisfied with respect to such
Sale/Leaseback Transaction, treating all of the cash proceeds net of
fees and expenses received in such Sale/Leaseback Transaction as Net
Available Cash for purposes of such covenant.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM SUBSIDIARIES
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends, make any other distributions on its Capital Stock or pay
any Indebtedness or other obligation owed to the Company or any of its
Restricted Subsidiaries;
(2) make any loans or advances to the Company or any of its Restricted
Subsidiaries; or
(3) transfer any of its property or assets to the Company or any of its
Restricted Subsidiaries except:
(a) any encumbrance or restriction pursuant to an agreement in effect
on the Issue Date, including those arising under or in connection
with the Senior Credit Agreement; (b) any encumbrance or
restriction with respect to a Restricted Subsidiary pursuant to an
agreement relating to any Indebtedness Incurred by a Restricted
Subsidiary prior to the date on which that Restricted 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 that Restricted
Subsidiary was acquired by the Company;
(c) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement effecting a refinancing of
Indebtedness Incurred pursuant to an agreement referred to in
clauses (a) or (b) or this clause (c) or contained in any
amendment, supplement or modification, including an amendment and
restatement, to an agreement referred to in clauses (a) or (b) or
this clause (c); 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 Notes in any material respect than encumbrances and
restrictions contained in the agreements;
(d) in the case of clause (3), any encumbrance or restriction:
(i) 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,
(ii) 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 of its Restricted Subsidiaries not
otherwise prohibited by the Indenture, or
76
(iii) contained in security agreements securing Indebtedness of a
Restricted Subsidiary to the extent such encumbrance or
restrictions restrict the transfer of the property subject to
those security agreements;
(e) any restriction imposed by applicable law;
(f) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition
of all or substantially all the Capital Stock or assets of that
Restricted Subsidiary pending the closing of the sale or
disposition; and
(g) purchase obligations for property acquired in the ordinary course
of business that impose certain restrictions of the nature
described in clause (3) above on the property so acquired.
LIMITATION ON SALES OF ASSETS
(1) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, make any Asset Disposition unless:
(a) the Company or such Restricted Subsidiary, as the case may be,
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 the Asset Disposition at
least equal to the Fair Market Value of the shares and assets
subject to the Asset Disposition;
(b) at least 75% of the consideration thereof received by the Company
or Restricted Subsidiary is in the form of cash; and
(c) an amount equal to 100% of the Net Available Cash from the Asset
Disposition is applied by the Company, or the Restricted
Subsidiary, as the case may be:
(i) first, to the extent the Company or any Restricted Subsidiary,
as the case may be, elects, or is required by the terms of any
Indebtedness, to prepay, repay or purchase Secured
Indebtedness of the Company (other than Disqualified Stock or
Subordinated Obligations) or Secured Indebtedness of a Wholly
Owned Restricted Subsidiary and effect a permanent
corresponding commitment reduction thereunder (other than
Preferred Stock or Guaranteed Subordinated Obligations), in
each case other than Indebtedness owed to the Company or an
Affiliate of the Company, or the Senior Credit Agreement
(whether the Senior Credit Agreement is secured or unsecured)
within one year after the later of the date of the Asset
Disposition or the receipt of the Net Available Cash and
effect a permanent corresponding commitment reduction
thereunder;
(ii) second, to the extent of the balance of Net Available Cash
after application in accordance with clause (i), to the
extent the Company or the Restricted Subsidiary elects, to
reinvest in Additional Assets, including by means of an
Investment in Additional Assets by a Restricted Subsidiary
with Net Available Cash received by the Company or another
Restricted Subsidiary, within one year after the later of the
date of the Asset Disposition or the receipt of the Net
Available Cash;
(iii) third, to the extent of the balance of the Net Available Cash
after application in accordance with clauses (i) and (ii), to
make an offer to purchase pro rata (A) Notes, pursuant and
subject to the conditions of the Indenture, and (B) Pari
Passu Indebtedness (with similar asset sale provisions);
(iv) fourth, to the extent of the balance of the Net Available
Cash after application in accordance with clauses (i), (ii)
and (iii), to the extent consistent with any other applicable
provision of the Indenture or the 1998 Indenture, 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 Restricted Subsidiary (other than Indebtedness owed to
the Company or an Affiliate of the Company or Preferred
Stock), in each case described in this clause (iv) within one
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year from the receipt of the Net Available Cash or, if the
Company has made an offer pursuant to clause (iii), six months
from the date the offer is completed; and
(v) fifth, any excess remaining after application of the
foregoing, to any other lawful purpose not prohibited by the
terms of the Indenture.
In connection with any prepayment, repayment or purchase of
Indebtedness pursuant to clause (i), (iii) or (iv) above,
the Company or such Restricted 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 Restricted 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 that are not applied in accordance with this
covenant at any time exceeds $1.0 million. The Company
shall not be required to make an offer for the Notes
pursuant to this covenant if the Net Available Cash
available therefor, after application of the proceeds as
provided in clauses (i) and (ii) (the "Excess Proceeds"),
is less than $10.0 million, which lesser amounts shall be
carried forward for purposes of determining whether an
offer is required with respect to the Net Available Cash
following any subsequent Asset Disposition.
In the event the Company makes an Offer pursuant to this
covenant to purchase the Notes and an offer to purchase or
otherwise repurchase or redeem Pari Passu Indebtedness (a
"Pari Passu Offer"), upon completion of such Offer and Pari
Passu Offer, the amount of Excess Proceeds for purposes of
this Indenture shall be reset to zero.
For purposes of clause (b) of the first paragraph of this
covenant, the following will be deemed to be cash:
(A) the assumption of Indebtedness, other than Subordinated
Obligations, Guarantor Subordinated Obligations or
Disqualified Stock of the Company or any of its Restricted
Subsidiaries, and the release of the Company or such
Restricted Subsidiary from all liability on such
Indebtedness in connection with the Asset Disposition; and
(B) securities received by the Company or any of its Restricted
Subsidiaries of the Company from the transferee that are
converted by the Company or such Restricted Subsidiary into
cash within 90 days following the receipt thereof.
(2) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (1)(c)(iii) above, the Company will be
required to apply the Excess Proceeds to the repayment of the Notes and
any other Pari Passu Indebtedness outstanding with similar provisions
requiring the Company to make an offer to purchase such Indebtedness
with the proceeds from any Asset Disposition as follows: (A) the
Company will make an offer to purchase (an "Offer") within ten days of
such time from all holders of the Notes in accordance with the
procedures set forth in the Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out
of an amount (the "Note Amount") equal to the product of such Excess
Proceeds multiplied by a fraction, the numerator of which is the
outstanding principal amount of the Notes and the denominator of which
is the sum of the outstanding principal amount of the Notes and such
Pari Passu Indebtedness and (B) to the extent required by such Pari
Passu Indebtedness, the Company will make a Pari Passu Offer in an
amount equal to the excess of the Excess Proceeds over the Note Amount
at a purchase price of the principal amount required by the terms
thereof plus accrued and unpaid interest to the purchase date in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture with respect to the Offer
and in the documentation governing such Pari Passu Indebtedness with
respect to the Pari Passu Offer. If the aggregate purchase price of the
Notes tendered pursuant to the Offer and Pari Passu Indebtedness
tendered pursuant to the Pari Passu Offer is less than the Excess
Proceeds, the
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remaining Excess Proceeds will be available to the Company for use in
accordance with clause (1)(c)(iv) above.
(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 the
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 of its Restricted
Subsidiaries 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:
(a) the terms of the Affiliate Transaction are no less favorable to
the Company or the Restricted Subsidiary, as the case may be, than
those that could be obtained by the Company or such Restricted
Subsidiary in a comparable transaction at the time of the
transaction in arm's-length dealings with a Person who is not an
Affiliate;
(b) in the event such Affiliate Transaction involves aggregate
consideration in excess of $1.0 million, the terms of the
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 the board of directors of the Company, if
any (and such majority or majorities, as the case may be,
determines that such Affiliate Transaction satisfies the criteria
in clause (a) above); and
(c) in the event the Affiliate Transaction involves aggregate
consideration in excess of $5.0 million, the Company has received
a written opinion from an independent accounting, appraisal,
financial advisory or investment banking firm of national standing
that such Affiliate Transaction is fair to the Company or the
Restricted Subsidiary, as the case may be, from a financial point
of view.
(2) The provisions of the foregoing paragraph (1) will not prohibit:
(a) any Restricted Payment permitted to be paid pursuant to the
covenant described under "-- Limitation on restricted payments"
(and in the case of Permitted Investments, only those described in
clauses (5), (6), (9) and (10) of the definition of Permitted
Investments);
(b) the performance of the Company's or its Restricted 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;
(c) payment of compensation to, and indemnity provided on behalf of,
employees, officers, directors or consultants in the ordinary
course of business;
(d) 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;
(e) any transaction between the Company and a Wholly Owned Restricted
Subsidiary or between Wholly Owned Restricted Subsidiaries; or
(f) the provision by Persons (including J.P. Morgan Partners (BHCA),
L.P. and DLJ Merchant Banking Partners, L.P. and Persons directly
or indirectly controlled by such entities) who may be deemed
Affiliates or stockholders of the Company of investment banking,
commercial banking, trust, lending or financing, investment,
underwriting, placement agent, financial advisory or similar
services, to the Company or its Restricted Subsidiaries on
customary terms.
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LIMITATION ON SALE OF RESTRICTED SUBSIDIARY CAPITAL STOCK
The Company will not, and will not permit any of its Restricted
Subsidiaries to, (i) transfer, convey, sell, lease or otherwise dispose of any
Capital Stock of any Restricted Subsidiary to any Person, other than to the
Company or a Wholly Owned Restricted Subsidiary, or (ii) permit any Restricted
Subsidiary to issue any of its Capital Stock (other than, if necessary shares of
its Capital Stock constituting directors' qualifying shares) to any Person other
than to the Company or a Wholly Owned Restricted Subsidiary; provided, however,
that the foregoing shall not prohibit the conveyance, sale, lease or other
disposition of all the Capital Stock of a Restricted Subsidiary if the Net
Available Cash from that 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 SEC, and within 15 days after the reports are filed, provide
the Trustee and the registered holders of the Notes, at their addresses as set
forth in the register of 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, except that the Company shall not be required to
make such a filing if the Staff of the SEC will not accept such a filing (in
which case, the Company shall make available such reports to the Trustee and the
holders of the Notes within 15 days after the date such reports would have been
required to be filed). In addition, following the registration of the common
stock of the Company or Holdings pursuant to Section 12(b) or 12(g) of the
Exchange Act, the Company shall make available to the Trustee and the holders of
the Notes, promptly upon their becoming available, copies of the Company's (or
Holdings', as the case may be) annual report to stockholders and any other
information provided by the Company or Holdings to its public stockholders
generally. In addition, the Company and the Subsidiary Guarantors have agreed
that, for so long as any Notes remain outstanding, they will furnish to the
holders of the Notes and to securities analysts and prospective investors, upon
their request, the information required to be delivered pursuant to Rule
144A(d)(4) (which requirement may be satisfied by a Form 10-K or Form 10-Q, as
applicable, for so long as such periodic reports satisfy the information
requirements of Rule 144A(d)(4)) under the Securities Act to permit holders of
the Notes to resell the Notes pursuant to Rule 144A thereunder.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include consolidating financial information for
such Unrestricted Subsidiary to the extent not inconsistent with the Securities
Act, the Exchange Act or the rules and regulations thereunder or GAAP.
FUTURE SUBSIDIARY GUARANTORS
If the Company or any of its Subsidiaries acquires or creates another
Domestic Subsidiary after the date of the Indenture, then that newly acquired or
created Domestic Subsidiary will become a Guarantor and execute a supplemental
indenture and deliver an opinion of counsel satisfactory to the trustee within
10 Business Days of the date on which it was acquired or created; provided, that
this covenant does not apply to any Subsidiary that has properly been designated
as an Unrestricted Subsidiary in accordance with the Indenture for so long as it
continues to constitute an Unrestricted Subsidiary.
MERGER AND CONSOLIDATION
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all of its assets to, any Person, unless:
(1) 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 Notes and the Indenture;
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(2) immediately after giving effect to the transaction, and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Restricted Subsidiary of the Successor Company as a result of the
transaction as having been Incurred by the Successor Company or that
Restricted Subsidiary at the time of the transaction, no Default or
Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to the 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"; and
(4) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that the
consolidation, merger or transfer and the 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 of
its assets, will not be released from the obligation to pay the principal of and
interest on the Notes.
Notwithstanding the foregoing clauses, any Restricted 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 Restricted
Subsidiary of the Company, and the Company may merge with an Affiliate of the
Company incorporated solely for the purpose of reincorporating the Company in
another jurisdiction to realize tax benefits.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties and
assets of one or more Restricted Subsidiaries of the Company, which properties
and assets, if held by the Company instead of such Restricted Subsidiaries,
would constitute all or substantially all of the properties and assets of the
Company on a consolidated basis, shall be deemed to be the transfer of all or
substantially all of the properties and assets of the Company.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by the Company and its
Restricted Subsidiaries in the Subsidiary properly designated will be deemed to
be an Investment made as of the time of the designation and will reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under the caption "-- Restricted payments" or Permitted
Investments, as determined by the Company. That designation will only be
permitted if the Investment would be permitted at that time and if the
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
EFFECTIVENESS OF COVENANTS
The covenants described under "-- Limitation on indebtedness,"
"-- Limitation on restricted payments," "-- Limitation on restrictions on
distributions from subsidiaries," "-- Limitation on sales of assets,"
"-- Limitation on affiliate transactions," "-- Limitation on sale of subsidiary
capital stock," and clause (3) of the first paragraph of "-- Merger and
consolidation" (collectively, the "Suspended Covenants") will no longer be in
effect upon the Company attaining Investment Grade Status. If at any time the
Company's credit rating is downgraded from Investment Grade Status, then the
Suspended Covenants will thereafter be reinstated as if such covenants had never
been suspended and be applicable pursuant to the terms of the Indenture
(including in connection with performing any calculation or assessment to
determine compliance with the terms of the
81
Indenture), unless and until the Company subsequently attains Investment Grade
Status (in which event the Suspended Covenants shall again no longer be in
effect for such time that the Company maintains Investment Grade Status);
provided, however, that no Default, Event of Default or breach of any kind shall
be deemed to exist under the Indenture with respect to the Suspended Covenants
based on, and none of the Company or any of its Subsidiaries shall bear any
liability for, any actions taken or events occurring after the Company attains
Investment Grade Status and before any reinstatement of such Suspended Covenants
as provided above, or any actions taken at any time pursuant to any contractual
obligation arising prior to such reinstatement, regardless of whether such
actions or events would have been permitted if the applicable Suspended
Covenants remained in effect during such period. There can be no assurance that
the Notes will ever achieve Investment Grade Status or that any such rating will
be maintained.
EVENTS OF DEFAULT
An "Event of Default" is defined in the Indenture as:
(1) a default in any payment of interest or additional interest (as
required by the Registration Rights Agreement) on any Note when due,
continued for 30 days;
(2) a default in the payment of principal of or premium, if any, on any
Note when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise;
(3) the failure by the Company or any Subsidiary Guarantor to comply with
its obligations under the covenant "-- 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 the covenants described under "Certain
covenants" above (in each case, other than a failure to purchase Notes,
which will constitute an Event of Default under clause (2) above and
other than a failure to comply with "Certain Covenants -- Merger and
consolidation" which is covered by clause (3) above);
(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 Restricted 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
for so long as the 1998 Notes remain outstanding, and thereafter
exceeds $10.0 million, and the default shall not have been cured or the
acceleration rescinded within a 10-day period, except with respect to
Disqualified Stock pursuant to which the exclusive remedy of the
holders thereof is additional seats on the board of directors of the
Company or a Subsidiary (the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company or a Significant Subsidiary of the Company (the "bankruptcy
provisions");
(8) any judgment or decree for the payment of money in excess of $5.0
million for so long as the 1998 Notes remain outstanding, and
thereafter exceeds $10.0 million, to the extent not covered by
insurance, is rendered against the Company or a Significant Subsidiary
and the judgment or decree shall remain undischarged or unstayed for a
period of 60 days after it becomes final and non-appealable (the
"judgment default provision"); or
(9) the failure of any Subsidiary Guarantee to be in full force and effect,
except as contemplated by the terms thereof, or the denial or
disaffirmation by any Subsidiary Guarantor of its obligations under the
Indenture or any Subsidiary 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 Notes notify the Company of the Default and the Company does
not cure the Default within the time specified in clauses (4) and (5) hereof
after receipt of the 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 Notes by notice to the
Company may declare the principal of and accrued and
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unpaid interest on all the Notes to be due and payable. Upon such a declaration,
the principal, premium and accrued and unpaid interest shall be due and payable
immediately. If an Event of Default under the bankruptcy provisions occurs and
is continuing, the principal of and accrued and unpaid interest on all the Notes
will become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may waive any or all past Defaults or Event of Default (except with
respect to nonpayment of principal, premium or interest or a Default in respect
of a provision that cannot be waived without the consent of each holder) and
rescind any such acceleration with respect to the Notes and its consequences if
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction.
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 of any Note may
pursue any remedy with respect to the Indenture or the Notes unless:
(1) the holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with their request within 60 days after
receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction that, in the opinion of the
Trustee, is inconsistent with the request within that 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding 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 Indenture
provides that in the event an Event of Default has occurred and is continuing,
the Trustee will be required in the exercise of its powers to use the degree of
care that a prudent person would use in the conduct of its own affairs. 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
security or 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 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
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 that would constitute certain
Defaults, their status and what action the Company is taking or proposes to take
in respect thereof.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture or was required to repurchase
the Notes, an equivalent premium shall also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the Notes. If an
Event of Default occurs prior to March 1, 2007 by reason of any willful action
83
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding the prohibition on redemption of the Notes prior to March
1, 2007, the premium specified in the Indenture shall also become immediately
due and payable to the extent permitted by law upon the acceleration of the
Notes.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture and the Notes may be amended
or supplemented with the consent of the holders of a majority in principal
amount of the Notes then outstanding (including without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Notes) and, subject to certain exceptions, any past Default or Event of
Default or compliance with any provisions may be waived with the consent of the
holders of a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes). However, without the consent
of each holder, no amendment may, among other things:
(1) reduce the principal amount of Notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on any
Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) reduce the premium payable upon the redemption or repurchase of any
Note or change the time at which any Note may be redeemed as described
above under "Optional redemption";
(5) make any Note payable in currency other than that stated in the Note;
(6) impair the right of any holder to receive payment of, premium, if any,
principal of and interest on such holder's Notes on or after the due
dates therefor (other than a repurchase required by "Certain
covenants -- Limitation on sales of assets" or "Change of control") or
to institute suit for the enforcement of any payment on or with respect
to such holder's Notes; or
(7) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Notwithstanding the foregoing, without the consent of any holder, the
Company, the Subsidiary Guarantors and the Trustee may amend the Indenture and
the Notes to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a Successor Company of the obligations of
the Company under the Indenture and the Notes or the obligations of a
Subsidiary Guarantor under its Subsidiary Guarantee;
(3) provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code);
(4) add Guarantees with respect to the Notes;
(5) secure the Notes;
(6) add to the covenants of the Company for the benefit of the holders or
surrender any right or power conferred upon the Company;
(7) make any change that does not adversely affect the rights of any
holder;
(8) comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act;
(9) to provide for the issuance of exchange securities which shall have
terms substantially identical in all respects to the Notes (except for
the transfer restrictions contained in the Notes shall be modified or
eliminated as appropriate), and which shall be treated, together with
any outstanding Notes, as a single class of securities; or
84
(10) to conform the text of the Indenture, the Subsidiary Guarantees or the
Notes to any provision of this Description of Notes to the extent that
such provision in this Description of Notes was intended to be a
verbatim recitation of a provision of the Indenture, the Subsidiary
Guarantees or the Notes.
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. A consent to any amendment or
waiver under the Indenture by any holder of Notes given in connection with a
tender of such holder's Notes will not be rendered invalid by such tender. 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 in the notice,
will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the 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 Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a Registrar and Paying Agent in respect of the
Notes. If the Company exercises its legal defeasance option, the Subsidiary
Guarantees in effect at such time will terminate.
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 Significant Subsidiaries, the judgment default provision and the
Subsidiary Guarantee provision described under "Events of default" above and the
limitations contained in clause (3) under "Certain covenants -- Merger and
consolidation" above ("covenant defeasance"). If the Company exercises its
covenant defeasance option, the Subsidiary Guarantees in effect at such time
will terminate.
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 Notes may not be accelerated because of
an Event of Default with respect to the Notes. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated because
of an Event of Default specified in clause (4), (5), (6), (7) (with respect only
to Significant Subsidiaries) (8) or (9) under "Events of default" above or
because of the failure of the Company to comply with clause (3) 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 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 (subject to customary exceptions and exclusions) to the
effect that holders of the 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. 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 or regulation.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
any Subsidiary or Holdings, as such, shall have any liability for any
obligations of the Company under the Notes, the Indenture or the Subsidiary
Guarantees or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder by accepting a Note waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
SEC that such a waiver is against public policy.
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CONCERNING THE TRUSTEE
Wilmington Trust Company is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all of the following terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"1998 Indenture" means the Indenture, dated as of November 12, 1998,
between the Company and Wilmington Trust Company, as trustee.
"1998 Notes" means the Company's $150.0 million aggregate principal amount
9 3/4% Senior Subordinated Notes due 2007.
"Additional Assets" means:
(1) any property or assets, other than Indebtedness and Capital Stock, to
be used by the Company or a Subsidiary of the Company in the pet food
business, distribution activities on behalf of pet food business
customers and other business activities that are incidental or related
thereto;
(2) the Capital Stock of a Person that becomes a Subsidiary of the Company
as a result of the acquisition of that Capital Stock by the Company or
another Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
the time is a Subsidiary; provided, however, that, in the case of
clauses (2) and (3), the Subsidiary of the Company is primarily engaged
in the pet food business, distribution activities on behalf of pet food
business customers and other business activities that are incidental or
related thereto.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with the specified Person, any Person who is a director or officer of
that Person or any Subsidiary of that 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 that 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," "-- Limitation on restricted
payments," "-- Limitation on sale of restricted subsidiary capital stock" 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 the 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
Restricted Subsidiary of the Company (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 Restricted Subsidiaries,
including any disposition by means of a merger, consolidation or similar
transaction, other than:
(1) 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;
(2) a disposition of inventory or Cash Equivalents in the ordinary course
of business;
(3) 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; and
86
(4) 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
March 1, 2010.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at a rate
equal to the rate of interest implicit in such transaction, determined in
accordance with GAAP), compounded annually, of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
the Sale/Leaseback Transaction, including any period for which the 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 (1) 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 (2) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Senior Credit Agreement 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 Senior Credit Agreement
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 or any Subsidiary Guarantors whether or
not a claim for post filing 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).
"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 the lease may be terminated without penalty.
"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.
"Cash Equivalents" means (1) U.S. Government Obligations 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; (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; (6) interests in any investment company which invests
solely in instruments of the type specified in clauses (1) through (5) above;
and (7) in the case of Foreign Subsidiaries, substantially similar investments
to those set forth in clauses (1) through (6) above, denominated in foreign
currencies; provided that references to the United States Government shall be
deemed to mean foreign countries having a sovereign rating of "A" or better from
either Standard & Poor's Ratings Group or Moody's Investors Service, Inc.
87
"Change of Control" means the occurrence of any of the following events:
(1) prior to the first public offering of Voting Stock of the Company or
Holdings, as the case may be, the Permitted Holders become the
"beneficial owner," as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, directly or indirectly, of less than 35% of the voting
power of the Voting Stock of the Company or Holdings, whether as a
result of issuance of securities of the Company or Holdings, as the
case may be, any merger, consolidation, liquidation or dissolution of
the Company or Holdings, as the case may be, any direct or indirect
transfer of securities by any Permitted Holder or otherwise and the
Permitted Holders beneficially own, directly or indirectly, in the
aggregate a lesser percentage of Voting Stock of the Company or
Holdings, as the case may be, than any other "person" or "group" of
related persons (as such terms are used in Section 13(d) and 14(d) of
the Exchange Act). For purposes of this paragraph (1) and paragraph (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; or
(2) following the first public offering of Voting Stock of the Company or
Holdings, as the case may be, (A) 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
paragraph (1) above (except that a person shall be deemed to have
"beneficial ownership" of all shares that any 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 Holdings, as
the case may be and (B) that the Permitted Holders beneficially own, as
defined in paragraph (1) above, directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting
Stock of the Company or Holdings, 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 Holdings, as the case may be. For
purposes of this paragraph (2), the other person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if the other person "beneficially owns," as defined
in this paragraph (2), directly or indirectly, more than 35% of the
voting power of the Voting Stock of the parent corporation and the
Permitted Holders "beneficially own," as defined in paragraph (1)
above, directly or indirectly, in the aggregate a lesser percentage of
the voting power of the Voting Stock of the 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
the parent corporation; or
(3) during any period of two consecutive years, individuals who at the
beginning of that period constituted the board of directors, together
with any new directors whose election by the 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 that
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;
provided that notwithstanding the foregoing, in the event a "change of control"
occurs under the 1998 Indenture, a Change of Control shall be automatically
deemed to occur under the Indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for that period, plus, to the extent deducted in calculating the Consolidated
Net Income:
(1) income tax expense;
(2) Consolidated Interest Expense;
(3) depreciation expense;
(4) amortization expense, in each case for that period; and
88
(5) other non-cash charges reducing Consolidated Net Income, excluding any
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 the period in connection with acquisitions previously made
by the Company and non-cash items increasing Consolidated Net Income for the
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 the
determination to Consolidated Interest Expense for those four fiscal quarters;
provided, however, that:
(1) if the Company or any of its Restricted Subsidiaries has Incurred any
Indebtedness since the beginning of that 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 the
period shall be calculated after giving effect on a pro forma basis to
the Indebtedness as if the Indebtedness had been Incurred on the first
day of that period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of the
new Indebtedness as if the discharge had occurred on the first day of
the period;
(2) if since the beginning of the period the Company or any of its
Restricted Subsidiaries shall have made any Asset Disposition,
Consolidated Cash Flow for the period shall be reduced by an amount
equal to the Consolidated Cash Flow, if positive, attributable to the
assets that are the subject of the Asset Disposition for the period or
increased by an amount equal to the Consolidated Cash Flow, if
negative, attributable thereto for the period, and Consolidated
Interest Expense for the period shall be reduced by an amount equal to
the Consolidated Interest Expense attributable to any Indebtedness of
the Company or any of its Restricted Subsidiaries repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its
continuing Restricted Subsidiaries in connection with the Asset
Disposition for that period, or, if the Capital Stock of any Restricted
Subsidiary of the Company is sold, the Consolidated Interest Expense
for the period directly attributable to the Indebtedness of that
Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for that Indebtedness
after the sale;
(3) if since the beginning of the period the Company or any of its
Restricted Subsidiaries, by merger or otherwise, shall have made an
Investment in any Restricted Subsidiary of the Company, or any Person
that becomes a Restricted Subsidiary of the Company, or an acquisition
of assets, including any Investment in a Restricted 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
the 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 the period; and
(4) if since the beginning of the period any Person, that subsequently
became a Restricted Subsidiary of the Company or was merged with or
into the Company or any Restricted Subsidiary of the Company since the
beginning of the 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 Restricted Subsidiary of the Company during that period,
Consolidated Cash Flow and Consolidated Interest Expense for that
period shall be calculated after giving pro forma effect thereto as if
the Asset Disposition, Investment or acquisition occurred on the first
day of the period.
89
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 that 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 Hedging Obligation applicable to
that Indebtedness if the Hedging Obligation has a remaining term in excess of 12
months.
"Consolidated Current Liabilities" means, as of any date of determination,
the aggregate amount of liabilities of the Company and its consolidated
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), after eliminating:
(1) all intercompany items between the Company and any Restricted
Subsidiary or between Restricted Subsidiaries, and
(2) all current maturities of long-term indebtedness.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries, plus, to the extent not
included in that interest expense:
(1) interest expense attributable to Capitalized Lease Obligations and
imputed interest with respect to Attributable Indebtedness;
(2) amortization of debt discount and debt issuance cost, other than those
debt discounts and debt issuance costs Incurred on the Issue Date;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(6) interest actually paid by the Company or any Restricted Subsidiary
under any Guarantee of Indebtedness or other obligation of any other
Person;
(7) net costs associated with any Hedging Obligations, including
amortization of fees;
(8) the product of all Preferred Stock dividends in respect of all
Preferred Stock of Restricted Subsidiaries of the Company and
Disqualified Stock of the Company held by Persons other than the
Company or a Wholly Owned Restricted 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
(9) the cash contributions to any employee stock ownership plan or similar
trust to the extent those contributions are used by the plan or trust
to pay interest or fees to any Person, other than the Company, in
connection with Indebtedness Incurred by the plan or trust.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Restricted Subsidiaries; provided, however,that
there shall not be included in Consolidated Net Income:
(1) any net income (loss) of any Person if the Person is not a Restricted
Subsidiary, except that subject to the limitations contained in clause
(3) below, the Company's equity in the net income of any Person for the
period shall be included in Consolidated Net Income up to the aggregate
amount of cash actually distributed by the Person during that period to
the Company or a Restricted Subsidiary as a dividend or other
distribution, subject, in the case of a dividend or other distribution
to a Restricted Subsidiary, to the limitations contained in clause (2)
below, and the Company's equity in a net loss of any such Person for
that period shall be included in determining Consolidated Net Income;
90
(2) any net income (loss) of any Restricted Subsidiary if the Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by that Restricted
Subsidiary, directly or indirectly, to the Company, except that subject
to the limitations contained in (3) below, the Company's equity in the
net income of any such Restricted Subsidiary for such period shall be
included in Consolidated Net Income up to the aggregate amount of cash
that could have been distributed by the Restricted Subsidiary during
the period to the Company or another Restricted Subsidiary as a
dividend, subject, in the case of a dividend that could have been made
to another Restricted Subsidiary, to the limitation contained in this
clause, and the Company's equity in a net loss of any such Restricted
Subsidiary for the period shall be included in determining Consolidated
Net Income;
(3) any gain, but not loss, realized upon the sale or other disposition of
any assets of the Company or its consolidated Restricted Subsidiaries,
including pursuant to any Sale/Leaseback Transaction, that 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;
(4) any extraordinary gain or loss;
(5) the cumulative effect of a change in accounting principles; and
(6) the noncash effect of charges recorded as a consequence of Financial
Accounting Standard No. 142 to the extent the amount of any such
charges exceeds the amount of amortization that would occur in the
absence of the adoption of Financial Accounting Standard No. 142
(assuming a 40-year amortizable life of the asset that is the subject
of such charge).
"Consolidated Net Tangible Assets" means, as of any date of determination,
the sum of the amounts that would appear on a consolidated balance sheet of the
Company and its consolidated Restricted Subsidiaries as the total assets (less
accumulated depreciation, amortization, allowances for doubtful receivables,
other applicable reserves and other properly deductible items) of the Company
and its Restricted Subsidiaries, after giving effect to purchase accounting and
after deducting therefrom Consolidated Current Liabilities and, to the extent
otherwise included, the amounts of (without duplication):
(1) the excess of cost over Fair Market Value of assets or businesses
acquired;
(2) any revaluation or other write-up in book value of assets subsequent to
the last day of the fiscal quarter of the Company immediately preceding
the Issue Date as a result of a change in the method of valuation in
accordance with GAAP;
(3) unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items;
(4) minority interests in consolidated Restricted Subsidiaries held by
Persons other than the Company or any Restricted Subsidiary;
(5) treasury stock; and
(6) cash or securities set aside and held in a sinking or other analogous
fund established for the purpose of redemption or other retirement of
Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Restricted 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 (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
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"Disqualified Stock" means, with respect to any Person, any Capital Stock
of that Person that 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:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is redeemable at the option of the holder thereof, in whole or in part,
in each case on or prior to 91 days after the Stated Maturity of the Notes.
"Domestic Consolidated Net Tangible Assets" means Consolidated Net Tangible
Assets less Foreign Consolidated Net Tangible Assets.
"Domestic Subsidiary" means any Subsidiary that is organized under the laws
of any jurisdiction within the United States of America or that guarantees or
otherwise provides direct credit support for any Indebtedness of the Company.
"Equity Investors" means J.P. Morgan Partners (BHCA), L.P., Bruckman,
Rosser, Sherrill & Co., L.P., DLJ Merchant Banking Partners, L.P. and Summit
Capital, Inc.
"Equity Offering" means any public or private offering for cash by the
Company or Holdings of its common stock, or options, warrants or rights with
respect to its common stock whether made pursuant to a registration statement
that has been declared effective by the SEC (other than on Form S-4 or S-8), or
otherwise.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means the price that could be negotiated in an
arm's-length free market transaction, for cash, between a willing seller and a
willing buyer, neither of whom is under undue pressure or compulsion to complete
the transaction.
"Foreign Consolidated Current Liabilities" means, as of the date of
determination, the aggregate amount of liabilities of the Foreign Subsidiaries
of the Company which may properly be classified as current liabilities
(including taxes accrued as estimated), after eliminating:
(1) all intercompany items between the Foreign Subsidiaries of the Company,
and
(2) all current maturities of long-term Indebtedness.
"Foreign Consolidated Net Tangible Assets" means, as of any date of
determination, the sum of the amounts that would appear on a consolidated
balance sheet of the Foreign Subsidiaries of the Company as the total assets
(less accumulated depreciation, amortization, allowances for doubtful
receivables, other applicable reserves and other properly deductible items) of
the Foreign Subsidiaries of the Company, after giving effect to purchase
accounting and after deducting therefrom Foreign Consolidated Current
Liabilities and, to the extent otherwise included, the amounts of (without
duplication):
(1) the excess of cost over Fair Market Value of assets or businesses
acquired;
(2) any revaluation or other write-up in book value of assets subsequent to
the last day of the fiscal quarter of the Company immediately preceding
the Issue Date as a result of a change in the method of valuation in
accordance with GAAP;
(3) unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items;
(4) minority interests in consolidated Foreign Subsidiaries held by Persons
other than the Company or any Subsidiary;
(5) treasury stock; and
(6) cash or securities set aside and held in a sinking or other analogous
fund established for the purpose of redemption or other retirement of
Capital Stock to the extent such obligation is not reflected in Foreign
Consolidated Current Liabilities.
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"Foreign Credit Agreements" shall mean those certain credit agreements
existing on the Issue Date to which any of the Company's foreign Subsidiaries is
a party or by which any of them is bound.
"Foreign Subsidiary" means any Subsidiary other than a Domestic Subsidiary.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, 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 will be
computed in conformity with GAAP.
"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:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of 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
(2) 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" will not include endorsements for
collection or deposit in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness (other than Disqualified Stock) of such Subsidiary
Guarantor (whether outstanding on the Issue Date or thereafter Incurred) which
is subordinate or junior in right of payment to the obligations of such
Subsidiary Guarantor under its Subsidiary Guarantee pursuant to a written
agreement.
"Hedging Obligations" means, with respect of any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements or similar arrangements providing for
protections against fluctuations in interest rates or the exchange of
nominal interest obligations, either generally or under specific
contingencies and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in commodity prices, currency exchange rates or
interest rates,
in each case, entered into for bona fide hedging purposes of the Company or its
Restricted Subsidiaries, as determined in good faith by the Board of Directors
or senior management of the Company, on customary terms entered into in the
ordinary course of business.
"Holdings" means Doane Pet Care Enterprises, Inc., a Delaware corporation.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable,
directly or indirectly, contingently or otherwise, 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.
"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
that Person for borrowed money,
(2) the principal of and premium, if any, in respect of obligations of that
Person evidenced by bonds, debentures, Notes or other similar
instruments,
(3) all obligations of that 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
93
drawn upon or, if and to the extent drawn upon, the drawing is
reimbursed no later than the third business day following receipt by
the Person of a demand for reimbursement following payment on the
letter of credit,
(4) all obligations of that 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
that Person,
(6) all Indebtedness of other Persons secured by a Lien on any asset of
that Person, whether or not such Indebtedness is assumed by that
Person, provided, however, that the amount of Indebtedness of such
Person shall be the lesser of the Fair Market Value of the asset at the
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 Restricted 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 Hedging Obligations.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at that 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 that date.
"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.
"Investment Grade Status" shall occur when the Notes receive a rating of
"BBB-" or higher (with a stable outlook) from Standard & Poor's Ratings Group
and a rating of "Baa3" or higher from Moody's Investors Service, Inc. (with a
stable outlook) (or, if either such entity ceases to rate the Notes for reasons
outside of the control of the Company, the equivalent investment grade credit
rating from any other "nationally recognized statistical rating organization"
within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act selected
by the Company as a replacement agency).
"Issue Date" means the February 28, 2003.
"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 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:
(1) 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;
94
(2) all payments made on any Indebtedness that 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;
(3) 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;
(4) 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 Restricted Subsidiary of the Company after such
Asset Disposition; and
(5) 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 Restricted 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.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted Subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the holders
of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or
both any holder of any other Indebtedness (other than the Notes) of the
Company or any of its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment of the Indebtedness to be
accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Financial Officer, any Vice President, the Treasurer or the
Secretary of the Company. Officer of any Subsidiary Guarantor has a correlative
meaning.
"Officers' Certificate" means a certificate signed by two Officers in
accordance and compliance with the terms of the Indenture and that is delivered
to the Trustee.
"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.
"Pari Passu Indebtedness" means Indebtedness that ranks equally in right of
payment to the Notes.
"Permitted Holders" means the Equity Investors and their respective
Affiliates.
"Permitted Investment" means:
(1) any Investment in a Restricted Subsidiary of the Company or a Person
that will, upon making the Investment, become a Restricted Subsidiary;
provided, however, that the primary business of the Restricted
Subsidiary is a Related Business;
(2) 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
95
a Restricted Subsidiary of the Company; provided, however, that the
Person's primary business is a Related Business;
(3) any Investment in Cash Equivalents;
(4) receivables owing to the Company or any of its Restricted Subsidiaries,
if created or acquired in the ordinary course of business and payable
or dischargeable in accordance with customary trade terms;
(5) 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;
(6) loans or advances to employees made in the ordinary course of business
of the Company or such Restricted Subsidiary;
(7) 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 Restricted Subsidiaries or in satisfaction of judgments or
claims;
(8) Investments the payment for which consists exclusively of Capital
Stock, exclusive of Disqualified Stock, of the Company;
(9) any Investment that existed on the Issue Date;
(10) loans or advances to employees and directors to purchase Capital Stock
of the Company or Holdings; provided that the aggregate amount of
loans and advances shall not exceed $2.0 million at any time
outstanding;
(11) any Investment in another Person to the extent such Investment is
received by the Company or any Restricted Subsidiary as consideration
for Asset Disposition effected in compliance with the covenant under
"-- Limitations on sales of assets";
(12) prepayment and other credits to suppliers made in the ordinary course
of business consistent with the past practices of the Company and its
Restricted Subsidiaries;
(13) 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
(14) any Investment in another Person provided that the aggregate
Investments made pursuant to this clause shall not exceed in the
aggregate $25.0 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.
"Permitted Liens" means, with respect to any Person:
(1) (x) Liens securing Indebtedness and other obligations of the Company
and its Restricted Subsidiaries under the Senior Credit Agreement and
Liens on assets of Subsidiaries securing Guarantees of Indebtedness and
other obligations under the Senior Credit Agreement permitted to be
Incurred under the Indenture in an aggregate principal amount at any
one time outstanding not to exceed $280.0 million less the aggregate
amount of permanent reductions of commitments to extend credit
thereunder and repayment of principal thereof after the Issue Date and
(y) Liens securing Hedging Obligations granted in favor of lenders or
affiliates of lenders under the Senior Credit Agreement which Liens
shall be limited to the collateral securing the obligations under the
Senior Credit Agreement; provided that in the event the Consolidated
Coverage Ratio is 2.50:1.00 or greater at the time of the Incurrence of
any such Lien described in this clause (1), the foregoing limit shall
be inapplicable; provided further that Liens permitted under this
clause (1) shall not be used to secure Indebtedness that is issued in
exchange for, or the net proceeds of which are used to extend,
refinance, renew, replace or refund, the 1998 Notes;
(2) pledges or deposits by such Person under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other
96
than for the payment of Indebtedness) or leases to which such Person is
a party, or deposits to secure public or statutory obligations of such
Person or deposits or cash or United States government bonds to secure
surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import or customs duties or for the
payment of rent, in each case Incurred in the ordinary course of
business;
(3) Liens imposed by law, including carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested
in good faith by appropriate proceedings if a reserve or other
appropriate provisions, if any, as shall be required by GAAP shall have
been made in respect thereof;
(4) Liens for taxes, assessments or other governmental charges not yet
subject to penalties for non-payment or which are being contested in
good faith by appropriate proceedings provided appropriate reserves
required pursuant to GAAP have been made in respect thereof;
(5) Liens in favor of issuers of surety or performance bonds or letters of
credit or bankers' acceptances issued pursuant to the request of and
for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit do not constitute
Indebtedness;
(6) encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real properties or Liens incidental to
the conduct of the business of such Person or to the ownership of its
properties which do not materially adversely affect the value of said
properties or materially impair their use in the operation of the
business of such Person;
(7) Liens securing Hedging Obligations so long as the related Indebtedness
is, and is permitted to be under the Indenture, secured by a Lien on
the same property securing such Hedging Obligation;
(8) leases and subleases of real property which do not materially interfere
with the ordinary conduct of the business of the Company or any of its
Subsidiaries;
(9) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment have not
been finally terminated or the period within which such proceedings may
be initiated has not expired;
(10) Liens for the purpose of securing the payment of all or a part of the
purchase price of, or Capitalized Lease Obligations with respect to,
assets or property acquired or constructed in the ordinary course of
business, provided that:
(a) the aggregate principal amount of Indebtedness secured by such Liens
is otherwise permitted to be Incurred under the Indenture and does
not exceed the cost of the assets or property so acquired or
constructed; and
(b) such Liens are created within 180 days of construction or
acquisition of such assets or property and do not encumber any other
assets or property of the Company or any Restricted Subsidiary other
than such assets or property and assets affixed or appurtenant
thereto;
(11) Liens arising by virtue of any statutory or common law provisions
relating to banker's Liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a
depositary institution; provided that:
(a) such deposit account is not a dedicated cash collateral account and
is not subject to restrictions against access by the Company in
excess of those set forth by regulations promulgated by the Federal
Reserve Board; and
(b) such deposit account is not intended by the Company or any
Subsidiary to provide collateral to the depository institution;
(12) Liens arising from Uniform Commercial Code financing statement filings
regarding operating leases entered into by the Company and its
Subsidiaries in the ordinary course of business;
(13) Liens existing on the Issue Date (other than Permitted Liens under
clauses (1) and (21));
97
(14) Liens on property or shares of Capital Stock of a Person at the time
such Person becomes a Subsidiary; provided, however, that such Liens
are not Incurred in connection with, or in contemplation of, such
other Person becoming a Subsidiary; provided further, however, that
any such Lien may not extend to any other property owned by the
Company or any Subsidiary;
(15) Liens on property at the time the Company or a Subsidiary acquired the
property, including any acquisition by means of a merger or
consolidation with or into the Company or any Subsidiary; provided,
however, that such Liens are not Incurred in connection with, or in
contemplation of, such acquisition; provided further, however, that
such Liens may not extend to any other property owned by the Company
or any Subsidiary;
(16) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Company or a Wholly-Owned Subsidiary;
(17) Liens securing the Notes and Subsidiary Guarantees;
(18) Liens securing Indebtedness of Foreign Subsidiaries in an aggregate
principal amount at any one time outstanding not to exceed the amounts
permitted by the covenant described under "-- Certain
covenants -- Limitation on indebtedness;"
(19) Liens securing Refinancing Indebtedness Incurred to refinance
Indebtedness that was previously so secured, provided that any such
Lien is limited to all or part of the same property or assets (plus
improvements, accessions, proceeds or dividends or distributions in
respect thereof) that secured (or, under the written arrangements
under which the original Lien arose, could secure) the Indebtedness
being refinanced or is in respect of property that is the security for
a Permitted Lien hereunder;
(20) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries; and
(21) Liens not otherwise permitted by clauses (1) through (20) above
encumbering assets having a book value not in excess of 5% of Domestic
Consolidated Net Tangible Assets, as determined based on the
consolidated balance sheet of the Company as of the end of the most
recent fiscal quarter for which financial statements are available to
Holders ending prior to the date the Lien shall be Incurred.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision hereof or
any other entity.
"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 a security means the principal of the security plus the
premium, if any, payable on the security 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, exchange, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinance," "refinances," and
"refinanced" shall have a correlative meaning) any Indebtedness existing on the
date of the Indenture or Incurred in compliance with the Indenture (including
Indebtedness of the Company that refinances Indebtedness of any Restricted
Subsidiary and Indebtedness of any Restricted Subsidiary that refinances
Indebtedness of another Restricted Subsidiary) including Indebtedness that
refinances Refinancing Indebtedness, provided, however, that:
(1) (a) if the Stated Maturity of the Indebtedness being refinanced is
earlier than the Stated Maturity of the Notes, the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity
of the Indebtedness being refinanced or (b) if the Stated Maturity of
the Indebtedness being refinanced is later than the Stated Maturity of
the Notes, the Refinancing Indebtedness has a Stated Maturity at least
91 days later than the Stated Maturity of the Notes;
98
(2) 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;
(3) 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 (x) the aggregate
principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding of Indebtedness being
refinanced plus (y) without duplication, any additional Indebtedness
Incurred to pay interest or premiums required by the instruments
governing such existing Indebtedness and fees, underwriting discounts,
commissions and other expenses incurred in connection with the issuance
of the Refinancing Indebtedness and the repayment of the Indebtedness
being refinanced); and
(4) if the Indebtedness being refinanced is subordinated in right of
payment to the Notes or a Subsidiary Guarantee, such Refinancing
Indebtedness is subordinated in right of payment to the Notes or a
Subsidiary Guarantee on terms at least as favorable to the holders of
Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Registration Rights Agreement" means that certain registration rights
agreement dated as of the Issue Date by and between the Company, the Subsidiary
Guarantors and the initial purchasers set forth therein and future agreements of
a similar nature with respect to issuance of Additional Notes.
"Related Business" means the pet food business, distribution activities on
behalf of pet food business customers and such other business activities which
are incidental or related thereto.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers that property to a Person and the Company or a Subsidiary leases it
from that Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company and/or any
Subsidiary secured by a Lien.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Credit Agreement" means, with respect to the Company, one or more
debt facilities (including, without limitation, the Amended and Restated Credit
Agreement dated as of May 8, 2000, as amended as of March 21, 2001 and March 22,
2002 and as further amended as of February 10, 2003, and February 26, 2003,
entered into among Holdings, the Company, as borrower, JPMorgan Chase Bank, as
administrative agent, DLJ Capital Funding, Inc., as syndication agent, and
Firstar Bank, N.A., as documentation agent, and the lenders parties thereto from
time to time) together with the related documents thereto (including, without
limitation, any Guarantee agreements and security documents), in each case as
such agreement may be amended (including any amendment and restatement thereof),
supplemented or otherwise modified from time to time, including any agreements
extending the maturity of, refinancing, replacing (whether or not
contemporaneously) or otherwise restructuring (including increasing the amount
of available borrowings thereunder (provided that such increase in borrowings is
permitted by the covenant "Limitation on indebtedness") or adding Subsidiaries
of the Company as additional borrowers, collateral or guarantors thereunder) all
or any portion of the Indebtedness under such agreement or any successor or
replacement agreements and whether by the same or any other agent, lender or
group of lenders or investors and whether such refinancing or replacement is
under one or more debt facilities or commercial paper facilities, indentures or
other agreements, in each case with banks or other institutional lenders or
trustees or investors providing for revolving credit loans, term loans, notes or
letters or credit, together with related documents thereto (including, without
limitation, any Guarantee agreements and security documents).
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"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 Issue
Date.
"Stated Maturity" means, with respect to any Indebtedness or Preferred
Stock, the date specified in such security as the fixed date on which the
payment of principal of such Indebtedness or Preferred Stock is due and payable,
including pursuant to any mandatory redemption provision.
"Subordinated Obligation" means any Indebtedness (other than Disqualified
Stock) of the Company (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of payment to the 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 (1) such Person, (2) such Person and one
or more Subsidiaries of such Person or (3) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary will
refer to a Subsidiary of the Company.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Notes by a Subsidiary Guarantor pursuant to the terms of the Indenture and any
supplemental indenture thereto, and, collectively, all such Guarantees. Each
such Subsidiary Guarantee will be in the form prescribed by the Indenture.
"Subsidiary Guarantor" means any Subsidiary that is required to issue a
Subsidiary Guarantee.
"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.
"Unrestricted Subsidiary" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with the Company or any Restricted Subsidiary of the Company unless the
terms of any such agreement, contract, arrangement or understanding are
no less favorable to the Company or such Restricted Subsidiary than
those that might be obtained at the time from Persons who are not
Affiliates of the Company;
(3) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or
preserve such Person's financial condition or to cause such Person to
achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of the Company as an Unrestricted
Subsidiary will be evidenced to the trustee by filing with the trustee a
certified copy of the Board Resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "-- Certain covenants -- Limitation on restricted payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the preceding requirements
as an Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
will be deemed to be Incurred by a Restricted Subsidiary of the Company as of
such date and, if such Indebtedness is not permitted to be Incurred as of such
date under the covenant described under the caption "-- Certain
covenants -- Limitation on indebtedness," the Company will be in default of such
covenant. The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation will be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of
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any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation will only be permitted if (1) such Indebtedness is permitted under
the covenant described under the caption "-- Certain covenants -- Limitation on
indebtedness," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period; and (2) no
Default or Event of Default would be in existence following such designation.
Notwithstanding the restrictions set forth above, Doane International Pet
Products LLC, a Delaware limited liability company (or any successor thereto),
shall, to the extent a Subsidiary, be deemed an Unrestricted Subsidiary so long
as it (or its successor) is not a Wholly-Owned Subsidiary, at which time it
shall be an Unrestricted Subsidiary only as provided above.
"U.S. Government Obligations" means direct obligations, or certificates
representing an ownership interest in 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
that 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.
"Wholly-Owned Subsidiary" means a Restricted 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 Restricted Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
THE GLOBAL NOTES
The new notes will be issued in the form of one or more registered notes in
global form, without interest coupons. Upon issuance, each of the global notes
will be deposited with the trustee as custodian for DTC and registered in the
name of Cede & Co., as nominee of DTC. Ownership of beneficial interests in each
global note will be limited to persons who have accounts with DTC, or DTC
participants, or persons who hold interests through DTC participants. We expect
that under procedures established by DTC:
- upon deposit of each global note with DTC's custodian, DTC will credit
portions of the principal amount of the global note to the accounts of
the DTC participants exchanging outstanding notes; and
- ownership of beneficial interests in each global note will be shown on,
and transfer of ownership of those interests will be effected only
through, records maintained by DTC (with respect to interests of DTC
participants) and the records of DTC participants (with respect to other
owners of beneficial interests in the global note).
Beneficial interests in the global notes may not be exchanged for notes in
physical, certificated form except in the limited circumstances described below.
BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
All interests in the global notes will be subject to the operations and
procedures of DTC. We provide the following summaries of those operations and
procedures solely for the convenience of investors. The operations and
procedures of DTC are controlled by DTC and may be changed at any time. We are
not responsible for those operations or procedures.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York;
- a "banking organization" within the meaning of the New York State Banking
Law;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
- a "clearing agency" registered under Section 17A of the Exchange Act.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between its participants
through electronic book-entry changes to the accounts of its participants. DTC's
participants include securities brokers and dealers; banks and trust companies;
clearing
101
corporations and other organizations. Indirect access to DTC's system is also
available to others such as banks, brokers, dealers and trust companies; these
indirect participants clear through or maintain a custodial relationship with a
DTC participant, either directly or indirectly. Investors who are not DTC
participants may beneficially own securities held by or on behalf of DTC only
through DTC participants or indirect participants in DTC.
So long as DTC's nominee is the registered owner of a global note, that
nominee will be considered the sole owner or holder of the notes represented by
that global note for all purposes under the indenture. Except as provided below,
owners of beneficial interests in a global note:
- will not be entitled to have notes represented by the global note
registered in their names;
- will not receive or be entitled to receive physical, certificated notes;
and
- will not be considered the owners or holders of the notes under the
indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the trustee under the indenture.
As a result, each investor who owns a beneficial interest in a global note
must rely on the procedures of DTC to exercise any rights of a holder of notes
under the indenture (and, if the investor is not a participant or an indirect
participant in DTC, on the procedures of the DTC participant through which the
investor owns its interest).
Payments of principal, premium (if any) and interest with respect to the
notes represented by a global note will be made by the trustee to DTC's nominee
as the registered holder of the global note. Neither we nor the trustee will
have any responsibility or liability for the payment of amounts to owners of
beneficial interests in a global note, for any aspect of the records relating to
or payments made on account of those interests by DTC, or for maintaining,
supervising or reviewing any records of DTC relating to those interests.
Payments by participants and indirect participants in DTC to the owners of
beneficial interests in a global note will be governed by standing instructions
and customary industry practice and will be the responsibility of those
participants or indirect participants and DTC.
Transfers between participants in DTC will be effected under DTC's
procedures and will be settled in same-day funds.
DTC has agreed to the above procedures to facilitate transfers of interests
in the global notes among participants in those settlement systems. However, DTC
is not obligated to perform these procedures and may discontinue or change these
procedures at any time. Neither we nor the trustee will have any responsibility
for the performance by DTC or its participants or indirect participants of its
obligations under the rules and procedures governing its operations.
CERTIFICATED NOTES
Notes in physical, certificated form will be issued and delivered to each
person that DTC identifies as a beneficial owner of the related notes only if:
- DTC notifies us at any time that it is unwilling or unable to continue as
depositary for the global notes and a successor depositary is not
appointed within 120 days;
- DTC ceases to be registered as a clearing agency under the Securities
Exchange Act of 1934 and a successor depositary is not appointed within
120 days;
- we, at our option, notify the trustee that we elect to cause the issuance
of certificated notes; or
- certain other events provided in the indenture should occur.
102
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of outstanding notes for new notes, but
does not purport to be a complete analysis of all potential tax effects. The
discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations, Internal Revenue Service rulings and
pronouncements and judicial decisions now in effect, all of which may be subject
to change at any time by legislative, judicial or administrative action. These
changes may be applied retroactively in a manner that could adversely affect a
holder of new notes. The description does not consider the effect of any
applicable foreign, state, local or other tax laws or estate or gift tax
considerations.
We believe that the exchange of outstanding notes for new notes will not be
an exchange or otherwise a taxable event to a holder for United States federal
income tax purposes. Accordingly, a holder will have the same adjusted issue
price, adjusted basis and holding period in the new notes as it had in the
outstanding notes immediately before the exchange.
103
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that you may
transfer new notes issued under the exchange offer in exchange for the
outstanding notes if:
- you acquire the new 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 new notes.
You may not participate in the exchange offer if you are:
- our "affiliate" within the meaning of Rule 405 under the Securities Act
of 1933; or
- a broker-dealer that acquired outstanding notes directly from us.
Each broker-dealer that receives new notes for its own account in exchange
for outstanding notes that were acquired 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 such new notes. In other transactions involving
an exchange offer, the staff of the Securities and Exchange Commission has taken
the position that broker-dealers may fulfill their prospectus delivery
requirements, other than in connection with a resale of an unsold allotment from
an original sale of outstanding securities, with a prospectus prepared in
connection with the exchange offer. We believe this prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for outstanding notes
where such outstanding notes were acquired as a result of market-making
activities or other trading activities. We have agreed that, for a period of up
to 180 days after the expiration of the exchange offer, we will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
If you wish to exchange new notes for your outstanding notes in the
exchange offer, you will be required to make representations to us as described
in "Exchange offer -- Purpose and effect of the exchange offer" and
"-- Procedures for tendering -- Your representations to us" in this prospectus
and in the letter of transmittal.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold 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 new notes or a combination of such
methods of resale;
- at market prices prevailing at the time of resale; and
- at prices related to such prevailing market prices or negotiated prices.
Any such 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 such broker-dealer or the purchasers of any such new notes.
Any broker-dealer that resells new notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933 and any profit on
any such resale of new notes and any commission or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act of 1933. 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 of
1933.
For a period of up to 180 days after the expiration of the exchange offer,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to our
performance of or compliance with the registration rights agreement, and will
indemnify holders of the outstanding notes, including any broker-dealers,
against certain liabilities, including liabilities under the Securities Act of
1933.
104
LEGAL MATTERS
Certain legal matters relating to this offering will be passed upon for us
by Vinson & Elkins L.L.P., New York, New York.
EXPERTS
The consolidated financial statements of Doane Pet Care Company as of
December 29, 2001 and December 28, 2002, and for each of the years in the
three-year period ended December 28, 2002, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The audit report covering the fiscal 2002
consolidated financial statements refers to a change in accounting for goodwill
and other intangible assets.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. Our Securities and
Exchange Commission filings are available to the public over the Internet at the
Securities and Exchange Commission's web site at http://www.sec.gov. You may
also read and copy any document we file at the Securities and Exchange
Commission's public reference room at Judiciary Plaza, 450 Fifth Street,
Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference room and its copy
charges.
We have agreed that, for so long as any notes remain outstanding, if we are
not subject to the informational requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, we will furnish to holders and beneficial
owners of our notes and to prospective purchasers designated by such holders the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act of 1933 to permit compliance with Rule 144A in connection with
resales of the notes.
You may request a copy of any of the documents summarized in this
prospectus, at no cost, by writing or telephoning us at the following address
and phone number:
Mr. Philip K. Woodlief
Vice President, Finance and Chief Financial Officer
Doane Pet Care Company
210 Westwood Place South
Suite 400
Brentwood, Tennessee 37027
(615) 373-7774
105
DOANE PET CARE COMPANY AND SUBSIDIARIES
FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 29, 2001 and
December 28, 2002......................................... F-3
Consolidated Statements of Income for the years ended
December 30, 2000, December 29, 2001 and December 28,
2002...................................................... F-4
Consolidated Statements of Stockholder's Equity and
Comprehensive Income for the years ended December 30,
2000, December 29, 2001 and December 28, 2002............. F-5
Consolidated Statements of Cash Flows for the years ended
December 30, 2000, December 29, 2001 and December 28,
2002...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Doane Pet Care Company
We have audited the accompanying consolidated balance sheets of Doane Pet
Care Company and subsidiaries as of December 29, 2001 and December 28, 2002 and
the related consolidated statements of income, stockholder's equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 28, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Doane Pet
Care Company and subsidiaries at December 29, 2001 and December 28, 2002 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 28, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective
December 30, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
/S/ KPMG LLP
Nashville, Tennessee
February 14, 2003, except as to Note 26, which is as of February 28, 2003
F-2
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,032 $ 7,596
Accounts receivable, net.................................. 120,760 129,347
Inventories, net.......................................... 54,841 63,631
Deferred tax asset........................................ 10,115 5,859
Prepaid expenses and other current assets................. 5,469 8,143
-------- --------
Total current assets.............................. 197,217 214,576
Property, plant and equipment, net.......................... 249,379 260,092
Goodwill and trademarks, net................................ 347,081 363,080
Other assets................................................ 42,868 32,919
-------- --------
Total assets...................................... $836,545 $870,667
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 28,488 $ 5,720
Accounts payable.......................................... 64,013 93,528
Accrued liabilities....................................... 57,721 56,113
-------- --------
Total current liabilities......................... 150,222 155,361
Long-term debt, excluding current maturities................ 559,335 548,300
Other long-term liabilities................................. 10,805 23,692
Deferred tax liability...................................... 12,585 7,261
-------- --------
Total liabilities................................. 732,947 734,614
-------- --------
Senior Preferred Stock (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding....... 65,672 77,550
-------- --------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding................................. -- --
Additional paid-in-capital................................ 115,655 115,674
Accumulated other comprehensive income (loss)............. (7,607) 9,558
Accumulated deficit....................................... (70,122) (66,729)
-------- --------
Total stockholder's equity........................ 37,926 58,503
-------- --------
Total liabilities and stockholder's equity........ $836,545 $870,667
======== ========
</Table>
See accompanying notes to consolidated financial statements.
F-3
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Net sales............................................... $875,761 $895,830 $887,333
Cost of goods sold...................................... 687,799 749,092 701,418
-------- -------- --------
Gross profit.................................. 187,962 146,738 185,915
Operating expenses:
Promotion and distribution............................ 52,285 58,993 53,525
Selling, general and administrative................... 50,507 47,193 48,663
Amortization.......................................... 12,779 13,743 3,552
Other operating expenses.............................. 28,639 8,655 1,447
-------- -------- --------
Income from operations............................. 43,752 18,154 78,728
Interest expense, net................................... 51,223 57,020 62,395
Other income, net....................................... (1,732) (757) (724)
-------- -------- --------
Income (loss) before income taxes.................. (5,739) (38,109) 17,057
Income tax expense (benefit)............................ (854) (16,171) 1,786
-------- -------- --------
Net income (loss).................................. (4,885) (21,938) 15,271
Preferred stock dividends and accretion................. (9,240) (10,467) (11,878)
-------- -------- --------
Net income (loss) available to common shares....... $(14,125) $(32,405) $ 3,393
======== ======== ========
Basic and diluted net income (loss) per common share.... $(14,125) $(32,405) $ 3,393
======== ======== ========
Basic and diluted weighted-average common shares
outstanding........................................... 1,000 1,000 1,000
======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
F-4
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
--------------- PAID-IN INCOME ACCUMULATED
SHARES AMOUNT CAPITAL (LOSS) DEFICIT TOTAL
------ ------ ---------- ------------- ----------- --------
Balances at January 1, 2000..... 1,000 $ -- $106,708 $ (170) $(23,592) $ 82,946
Comprehensive loss:
Net loss...................... -- -- -- -- (4,885) (4,885)
Foreign currency translation,
net........................ -- -- -- 2,260 -- 2,260
Unrealized loss, net of
deferred tax benefit of
$600....................... -- -- -- (772) -- (772)
--------
Total comprehensive
loss................ (3,397)
--------
Preferred stock dividends....... -- -- -- -- (8,163) (8,163)
Accretion of preferred stock.... -- -- -- -- (1,077) (1,077)
Parent capital contribution..... -- -- 572 -- -- 572
----- ------ -------- ------- -------- --------
Balances at December 30, 2000... 1,000 $ -- $107,280 $ 1,318 $(37,717) $ 70,881
Comprehensive loss:
Net loss...................... -- -- -- -- (21,938) (21,938)
Foreign currency translation,
net........................ -- -- -- (7,352) -- (7,352)
Unrealized loss, net of
deferred tax benefit of
$1,196..................... -- -- -- (1,573) -- (1,573)
--------
Total comprehensive
loss................ (30,863)
--------
Preferred stock dividends....... -- -- -- -- (9,390) (9,390)
Accretion of preferred stock.... -- -- -- -- (1,077) (1,077)
Parent capital contribution..... -- -- 8,375 -- -- 8,375
----- ------ -------- ------- -------- --------
Balances at December 29, 2001... 1,000 $ -- $115,655 $(7,607) $(70,122) $ 37,926
----- ------ -------- ------- -------- --------
Comprehensive income:
Net income.................... -- -- -- -- 15,271 15,271
Foreign currency translation,
net........................ -- -- -- 22,792 -- 22,792
Unrealized loss, net of
deferred tax benefit of
$313....................... -- -- -- (43) -- (43)
Minimum pension liability, net
of deferred tax benefit of
$3,556..................... (5,584) (5,584)
--------
Total comprehensive
income.............. 32,436
--------
Preferred stock dividends....... -- -- -- -- (10,801) (10,801)
Accretion of preferred stock.... -- -- -- -- (1,077) (1,077)
Parent capital contribution..... -- -- 19 -- -- 19
----- ------ -------- ------- -------- --------
Balances at December 28, 2002... 1,000 $ -- $115,674 $ 9,558 $(66,729) $ 58,503
===== ====== ======== ======= ======== ========
</Table>
See accompanying notes to consolidated financial statements.
F-5
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)..................................... $ (4,885) $(21,938) $ 15,271
Items not requiring (providing) cash:
Depreciation....................................... 23,555 27,687 28,612
Amortization....................................... 12,779 13,743 3,552
Deferred tax expense (benefit)..................... (1,780) (18,082) 1,258
Non-cash interest expense.......................... 2,368 5,844 15,058
Equity in joint ventures........................... (895) (788) (705)
Plant closures and Project Focus................... 15,337 8,866 --
Net loss on divestitures........................... -- 4,660 --
Other non-cash charges (credits), net.............. (998) 500 2,352
Changes in current assets and liabilities
(excluding amounts acquired):
Accounts receivable.............................. (31,300) (661) (2,669)
Inventories...................................... (4,103) 5,112 (5,587)
Prepaid expenses and other current assets........ (960) 154 (1,632)
Accounts payable................................. 27,626 (44,479) 25,541
Accrued liabilities.............................. 8,644 (4,554) (2,278)
--------- -------- --------
Net cash provided by (used in) operating
activities.................................. 45,388 (23,936) 78,773
--------- -------- --------
Cash flows from investing activities:
Capital expenditures.................................. (35,347) (17,316) (24,348)
Proceeds from sale of assets.......................... -- 20,884 1,766
Acquisition related payments, net of cash received.... (145,764) -- --
Other, net............................................ (205) (2,102) (3,320)
--------- -------- --------
Net cash provided by (used in) investing
activities.................................. (181,316) 1,466 (25,902)
--------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
agreements......................................... (2,400) 30,400 (23,000)
Proceeds from issuance of long-term debt.............. 159,007 17,511 9,738
Principal payments on long-term debt.................. (22,706) (27,925) (36,172)
Payments for debt issuance costs...................... (2,501) (2,928) (2,316)
Parent capital contribution........................... 572 8,375 19
--------- -------- --------
Net cash provided by (used in) financing
activities.................................. 131,972 25,433 (51,731)
Effect of exchange rate changes on cash and cash
equivalents........................................... (80) (89) 424
--------- -------- --------
Increase (decrease) in cash and cash
equivalents................................. (4,036) 2,874 1,564
Cash and cash equivalents, beginning of year............ 7,194 3,158 6,032
--------- -------- --------
Cash and cash equivalents, end of year.................. $ 3,158 $ 6,032 $ 7,596
========= ======== ========
</Table>
See accompanying notes to consolidated financial statements.
F-6
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Doane Pet Care Company ("Company") is a wholly-owned subsidiary of Doane
Pet Care Enterprises, Inc. ("Parent"). The Company is a leading global provider
of pet food, primarily private label, with 32 combined manufacturing and
distribution facilities in the United States and Europe. The Company
manufactures pet food products primarily for dogs and cats, including dry, wet,
semi-moist, soft dry, soft treats and biscuits, to retailers of all types. The
Company also operates a machine shop and a structural steel fabrication plant
that sells to third parties and supports the Company's facilities.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated. The
Company's 50% joint venture investments are accounted for under the equity
method. Equity from the joint venture investments is recorded in other income,
net, in the accompanying consolidated statements of income.
52-53 WEEK FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to the end of
December; and therefore, fiscal 2000, 2001 and 2002 ended on December 30, 2000,
December 29, 2001 and December 28, 2002, respectively. Fiscal 2000 through 2002
were each 52-week years.
RECLASSIFICATIONS
Certain fiscal 2000 and 2001 amounts have been reclassified to conform with
fiscal 2002 presentation.
USE OF ESTIMATES
In conformity with accounting principles generally accepted in the United
States of America, preparation of the Company's financial statements requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the consolidated financial statements; and therefore, actual
results could ultimately differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid investments with original
maturities of three months or less.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at net realizable value through recording a
valuation allowance for outstanding deductions with customers, doubtful accounts
and cash discounts. The Company's policy is to estimate its allowance by
applying a recovery percentage based on historical collection experience and
performing a specific identification review of customer account balances. The
Company had allowances against accounts receivable of $8.6 million and $5.3
million at December 29, 2001 and December 28, 2002, respectively.
The Company extends unsecured credit in the form of accounts receivable,
principally to retailers and national branded companies throughout the United
States and Europe, with credit extended to one customer representing 45% and 49%
of accounts receivable, net, at December 29, 2001 and December 28, 2002,
respectively.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories are stated net of a valuation
allowance for obsolescence, primarily related to packaging inventories. The
Company's policy is to estimate its allowance based on specific identification
of obsolete
F-7
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SKUs or probable SKUs to be rationalized. The Company had allowances against
inventories of $7.6 million and $4.7 million at December 29, 2001 and December
28, 2002, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of 20 to 40 years for buildings and
improvements and 3 to 12 years for machinery and equipment.
GOODWILL AND TRADEMARKS
Goodwill has been recorded under the purchase accounting method to
represent the excess of the purchase price over the fair value of the assets
acquired and liabilities assumed. The Company's only intangible asset with an
indefinite useful life other than goodwill is its trademarks. See Note
2 -- "Changes in Accounting Principles" for a discussion of the Company's
adoption of Financial Accounting Standards Board's ("FASB's") Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS 142"), which became effective for the Company as of the beginning of
fiscal 2002.
Prior to the adoption of SFAS 142, the Company amortized goodwill over 20
and 40 years and trademarks over 30 years using the straight-line method. The
recovery of the carrying value of goodwill and trademarks was periodically
evaluated for impairment in relation to the operating performance and expected
future operating cash flows of the Company on an undiscounted basis. If the
carrying value of such assets exceeded the expected undiscounted future
operating cash flows, an impairment loss was recognized to the extent the
carrying amount of the acquired net assets exceeded the fair value and was
calculated using expected discounted future operating cash flows.
OTHER ASSETS
Other assets on the accompanying consolidated balance sheets of the Company
consists of (1) debt issuance costs; (2) other intangible assets with estimable
useful lives; (3) investments in joint ventures; and (4) other miscellaneous
long-term assets. The Company's policy is to amortize into interest expense its
debt issuance costs over the life of the related indebtedness. Other intangible
assets with estimable useful lives, primarily consisting of plate costs and
software, are being amortized generally over three to five years.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with FASB's Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), long-lived assets, including property, plant and equipment and intangible
assets with estimable useful lives are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Goodwill and other intangible assets with indefinite lives
not subject to amortization are tested annually for impairment, and are tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. Prior to adoption of SFAS 144,
the Company accounted for long-lived assets in accordance with FASB's Statement
of Financial Accounting Standards No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." See Note
2 -- "Changes in Accounting Principles" for a discussion of the Company's
adoption of SFAS 144 effective December 30, 2001.
FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates book value. The fair value of
long-term debt is based upon market value, if traded, or discounted at the
estimated rate the Company would currently incur on similar debt. See Note
10 -- "Fair Value of Financial Instruments."
F-8
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are determined based upon differences
between the financial reporting and tax basis of assets and liabilities. The
differences are measured by applying enacted tax rates and laws to taxable years
in which such differences are expected to reverse.
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped and the customer
takes ownership and assumes risk of loss, collection of the relevant receivable
is probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable.
PROMOTION AND DISTRIBUTION
Promotion and distribution expenses are primarily promotions, freight,
brokerage fees, and warehousing expenses. Distribution expenses were $31.2
million, $34.7 million and $33.7 million in fiscal 2000, 2001 and 2002,
respectively.
COMMODITY DERIVATIVE INSTRUMENTS
The Company seeks to manage its commodity price risk associated with market
fluctuations by using derivative instruments for portions of its corn, soybean
meal, alternative proteins and natural gas purchases, principally through
exchange traded futures and options contracts. The terms of these contracts are
generally less than one year. During the term of the contract, the Company
balances positions daily with cash payments to or from the exchanges. At the
termination of a contract, the Company has the ability to settle financially or
by exchange for the physical commodity, in which case, the Company would deliver
the contract against the acquisition of the physical commodity. The Company's
policy does not permit speculative commodity trading. All changes in the fair
value of the Company's commodity derivative instruments are included in cost of
goods sold in the accompanying consolidated statements of income.
INTEREST RATES SWAP AND CAP CONTRACTS
The Company periodically uses interest rate swap and cap contracts to limit
its exposure to the interest rate risk associated with its domestic floating
rate debt. The Company's policy does not permit speculative trading related to
its debt. Changes in market values of these financial instruments are highly
correlated with changes in market values of the hedged item both at inception
and over the life of the contracts. In accordance with FASB's Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), the Company's interest rate swap contracts
have been designated as cash flow hedges with changes in fair value recognized
in accumulated other comprehensive income (loss), net of deferred taxes, in the
accompanying consolidated balance sheets until they are realized at which point,
they are recognized in interest expense, net, in the accompanying consolidated
statements of income. Amounts received or paid under interest rate swap
contracts and on interest rate cap contracts are recorded as interest income
(expense) in the accompanying consolidated statements of income.
FOREIGN CURRENCY DERIVATIVE INSTRUMENTS
The Company seeks to manage its exposure to exchange rate fluctuations on
foreign currency transactions by using foreign currency forward contracts.
Changes in market values of these financial instruments are highly correlated
with changes in market values of the hedged item both at inception and over the
life of the contracts. In accordance with SFAS 133, changes in fair value of
gains and losses on foreign currency forward contracts that qualify for hedge
accounting are recorded in accumulated other comprehensive income (loss), net of
deferred taxes, in the accompanying consolidated balance sheets until they are
realized, at which point, they are recognized in other income, net, in the
accompanying consolidated statements of income. All other
F-9
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
gains and losses on foreign currency forward contracts are recorded as an
increase or reduction in net sales in the accompanying consolidated statements
of income as they occur.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of (1) net income (loss); (2) foreign
currency translation, including changes in the fair value of the Company's
Euro-denominated debt designated as a hedge of the Company's net investment in
Europe; (3) changes in the fair value of interest rate swap contracts and
foreign currency derivative instruments designated as hedges; and (4) changes in
the minimum pension liability. Comprehensive income (loss) is presented in the
accompanying consolidated statements of stockholder's equity and comprehensive
income.
FOREIGN CURRENCY GAINS AND LOSSES
The Company's foreign-owned assets and liabilities have been translated to
U.S. dollars using the exchange rates in effect at the period end dates in the
accompanying consolidated balance sheets. Results of foreign operations have
been translated using the average exchange rates during the periods presented in
the accompanying consolidated statements of income. The cumulative translation
adjustment for the Company's net investment in foreign operations has been
recognized in accumulated other comprehensive income (loss) in the accompanying
consolidated financial statements. Foreign currency transaction gains and losses
are recognized in the accompanying consolidated statements of income as they
occur.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is calculated using the
weighted-average number of shares of common stock outstanding during the period
after adjusting net income (loss) for unpaid preferred stock dividends and the
accretion of the preferred stock. Diluted net income (loss) per common share is
the same as basic net income (loss) per common share as no common stock
equivalents exist.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"), which
requires the Company to record the fair value of an asset retirement obligation
as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development and/or normal use of the assets. SFAS 143
also requires the Company to record a corresponding asset that is depreciated
over the life of the asset. Subsequent to the initial measurement of an asset
retirement obligation, SFAS 143 requires the obligation be adjusted at the end
of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. SFAS 143 became effective for the
Company as of the beginning of fiscal 2003. The Company is evaluating the
impact, if any, that adoption of SFAS 143 will have on its consolidated
financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS 145"), which amends existing
authoritative pronouncements to make various technical corrections, clarify
meanings and describe their applicability under changed conditions. SFAS 145
requires gains and losses from the extinguishment of debt to be classified as
extraordinary items only if they meet the criteria of unusual or infrequent or
they meet the criteria for classification as an extraordinary item. SFAS 145
became effective for the Company as of the beginning of fiscal 2003. In
accordance with SFAS 145, the Company will recognize a charge to net income in
the first quarter of fiscal 2003 associated with the issuance of its 10 3/4%
senior notes in February 2003 that does not meet the criteria for classification
as an extraordinary item. See Note 26 -- "Subsequent Events."
F-10
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"), which addresses significant issues regarding the recognition, measurement
and reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for pursuant to
the guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires companies to recognize costs associated with
exit or disposal activities when these costs are incurred rather than at the
date of a commitment to an exit or disposal plan. The scope of SFAS 146 also
includes costs related to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS 146 became
effective for the Company as of the beginning of fiscal 2003. The Company is
evaluating the impact, if any, that adoption of SFAS 146 will have on its
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), which elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company is evaluating
the impact, if any, that adoption of the recognition and measurement provisions
of FIN 45 will have on its consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation -- Transition and
Disclosure, an Amendment of FASB Statement No. 123 ("SFAS 148"), which amends
Statement on Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal 2002
and are included in Note 13 -- "Stock Option Plan of Parent."
(2) CHANGES IN ACCOUNTING PRINCIPLES
Effective December 30, 2001, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. SFAS 142
requires that goodwill and other intangible assets with indefinite lives no
longer be amortized. SFAS 142 further requires that the fair value of goodwill
and other intangible assets with indefinite lives be tested for impairment upon
adoption of this statement, annually and upon the occurrence of certain events,
and be written down to fair value if considered impaired. In the first quarter
of fiscal 2002, the Company reassessed the useful lives and residual values of
all intangible assets acquired in purchase business combinations, including
those intangible assets having estimable useful lives that are classified as
other assets in the Company's balance sheets which resulted in no impact on its
consolidated financial statements. During the second quarter of fiscal 2002, the
Company completed the required transitional impairment tests of goodwill and
other intangible assets with indefinite lives and, based on the results of the
tests, determined no impairment to the carrying values of these assets existed
as of December 29, 2001. In the fourth quarter of fiscal 2002, the Company
performed its required annual assessment of impairment and determined no such
impairment was evident.
F-11
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results of operations of the Company, as adjusted to give effect to SFAS
142 as if it were adopted on January 2, 2000, follows (in thousands):
<Table>
<Caption>
YEARS ENDED
---------------------------
DECEMBER 30, DECEMBER 29,
2000 2001
------------ ------------
Net loss, as reported....................................... $(4,885) $(21,938)
Add back: Amortization, net of income tax benefit........... 7,221 7,591
------- --------
Net income (loss), as adjusted............................ $ 2,336 $(14,347)
======= ========
Basic and diluted net loss per common share, as adjusted.... $(6,904) $(24,814)
======= ========
</Table>
Effective December 30, 2001, the Company adopted FASB's Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which requires that long-lived assets to be
disposed of by sale be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in discontinued
operations. SFAS 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS 144 had
no material impact on the Company's financial position or results of operations.
(3) ACQUISITION
On May 10, 2000, the Company acquired A/S Arovit Petfood ("Arovit"),
headquartered in Esbjerg, Denmark, for approximately $144.4 million and assumed
indebtedness, net of cash, of approximately $11.8 million. Arovit manufactures
and sells throughout Europe a full range of pet food products for dogs and cats,
including wet, dry and treats, primarily through private label programs. This
acquisition was accounted for as a purchase with the purchase price and direct
acquisition costs allocated based on the fair value of assets acquired and
liabilities assumed. In connection with the purchase of Arovit, the Company
recorded $72.7 million of goodwill and trademarks that were amortized over 40
years through December 29, 2001 and $9.4 million of other intangible assets with
estimable useful lives that were amortized over 5 to 30 years. Additionally, the
Company is depreciating acquired property, plant and equipment of $69.2 million
over the remaining useful lives ranging from 5 to 30 years. The Company financed
this acquisition through an amendment to its existing senior credit facility,
which included Euro 82.0 million ($73.7 million) of new Euro Tranche A loans
with the remainder being additional borrowings under Tranche B of the USD term
facility. The Euro-denominated debt has been designated as a hedge of the
foreign currency exposure inherent in the Company's net investment in Europe.
Changes in the fair value of this Euro-denominated debt due to fluctuations in
the Euro to U.S. dollar exchange rate have been recognized in accumulated other
comprehensive income (loss) in the accompanying consolidated financial
statements.
Set forth below is certain unaudited pro forma consolidated financial
information of the Company for the year ended December 30, 2000 that has been
adjusted to reflect the Company's acquisition of Arovit as if such transaction
occurred at January 2, 2000 (in thousands, except per share amount):
<Table>
<Caption>
YEAR ENDED
DECEMBER 30,
2000
------------
Net sales................................................... $926,184
Net loss.................................................... (6,893)
Basic and diluted net loss per common share................. (16,133)
</Table>
The pro forma financial data above is based on certain assumptions and
estimates; and therefore, does not purport to be indicative of the results that
would actually have been obtained had the acquisition of Arovit been completed
as of such date or indicative of future financial position and results of
operations.
F-12
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DIVESTITURES
On April 27, 2001, the Company sold its Perham, Minnesota dry dog and cat
food facility and related assets, including the Tuffy's brand, for $7.0 million.
On May 3, 2001, the Company sold its Deep Run domestic wet pet food business and
related assets, other than real estate, for $13.9 million (collectively, the
"Divestitures"). The Company recognized a $4.7 million net loss on the sale of
these businesses. In addition, the Company recognized $2.0 million of severance
costs for the elimination of certain corporate positions following the
Divestitures. These charges were recognized in fiscal 2001 other operating
expenses in the accompanying consolidated statements of income. See Note
16 -- "Other Operating and Project Focus Implementation Expenses."
(5) INVENTORIES
A summary of inventories, net of valuation allowance, follows (in
thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Raw materials............................................... $12,312 $14,957
Packaging materials......................................... 16,139 19,002
Finished goods.............................................. 26,390 29,672
------- -------
Total..................................................... $54,841 $63,631
======= =======
</Table>
(6) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Land........................................................ $ 10,788 $ 11,136
Buildings and improvements.................................. 84,991 90,444
Machinery and equipment..................................... 219,367 243,738
Construction in progress.................................... 6,710 14,465
-------- --------
321,856 359,783
Less: Accumulated depreciation.............................. (72,477) (99,691)
-------- --------
Total..................................................... $249,379 $260,092
======== ========
</Table>
(7) GOODWILL AND TRADEMARKS
A summary of goodwill and trademarks follows (in thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Goodwill.................................................... $323,216 $339,941
Trademarks.................................................. 66,000 67,181
-------- --------
389,216 407,122
Less: Accumulated amortization.............................. (42,135) (44,042)
-------- --------
Total..................................................... $347,081 $363,080
======== ========
</Table>
F-13
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) ACCRUED LIABILITIES
A summary of accrued liabilities follows (in thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Rebates and promotions...................................... $14,326 $15,356
Compensation................................................ 5,501 11,977
Derivative instruments...................................... 13,322 8,433
Restructuring costs......................................... 4,784 2,752
Divestitures................................................ 950 706
Interest.................................................... 6,367 5,620
Healthcare costs and workers' compensation.................. 4,232 3,650
Real estate, franchise and income taxes..................... 3,003 2,561
Other....................................................... 5,236 5,058
------- -------
Total..................................................... $57,721 $56,113
======= =======
</Table>
(9) LONG-TERM DEBT AND LIQUIDITY
A summary of long-term debt follows (in thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Revolving credit facility................................... $ 38,000 $ 15,000
Term loan facilities........................................ 352,804 340,924
Sponsor facility............................................ 16,777 17,245
Senior subordinated notes................................... 148,071 148,430
Industrial development revenue bonds........................ 14,461 14,471
Debt of foreign subsidiaries................................ 17,710 17,950
-------- --------
587,823 554,020
Less: Current maturities.................................... (28,488) (5,720)
-------- --------
Total..................................................... $559,335 $548,300
======== ========
</Table>
Current maturities of long-term debt as of December 28, 2002 have been
reclassified to reflect the refinancing in February 2003. See Note
26 -- "Subsequent Events."
BANK LOANS
The information disclosed below relates to the Company's Amended Credit
Facility, as amended and in effect at December 28, 2002. The Company entered
into additional amendments to its Amended Credit Facility on February 28, 2003
concurrently with the issuance of new senior notes. For a discussion of the
Company's Amended Credit Facility, as amended in February 2003, see Note
26 -- "Subsequent Events."
In May 2000, the Company entered into a new senior credit facility with a
syndicate of banks and other institutional investors, as lenders, and JPMorgan
Chase Bank, as administrative agent, as amended in March 2001 and 2002 (the
"Amended Credit Facility"). As of December 28, 2002, the Amended Credit Facility
provided for total commitments of a Euro 66.7 million term loan facility (the
"Euro Term Loan Facility") and $346.0 million, consisting of a $271.0 million
term loan facility (the "USD Term Loan Facility") and a $75.0 million revolving
credit facility (the "Revolving Credit Facility") with a $20.0 million sub-limit
for issuance of letters of credit of which $2.6 million and $2.5 million was
outstanding December 29, 2001 and December 28, 2002, respectively. In March
2001, the commitments under the Revolving Credit Facility were reduced to $60.0
million until certain financial performance tests are achieved. Such tests were
not met in
F-14
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fiscal 2001 or 2002. All loans under the Amended Credit Facility bear interest
at the higher of the Euro dollar rate plus 4.75%, or the prime rate of the
administrative agent plus 3.75%, until maturity in 2006. The Company also pays
certain fees with respect to the Amended Credit Facility. The Euro Term Loan
Facility bore interest at 6.72% and 7.84%, the USD Term Loan Facility bore
interest at 7.81% and 7.12% and the Revolving Credit Facility bore interest at
7.00% and 8.00% at December 29, 2001 and December 28, 2002, respectively. The
Euro Term Loan Facility has a final maturity of December 30, 2005. As of
December 28, 2002, the principal amounts due under the Euro Term Loan Facility
were as follows: (i) approximately Euro 8.7 million in 2003; (ii) approximately
Euro 11.0 million in 2004; and (iii) approximately Euro 47.0 million in 2005.
The USD Term Loan Facility consists of three tranches with final maturities of
March 31, 2005, December 31, 2005 and December 31, 2006, respectively, unless
terminated sooner upon an event of default. As of December 28, 2002, the
principal amounts due under the USD Term Loan Facility were as follows: (i)
approximately $15.0 million in 2003 and 2004; (ii) approximately $162.0 million
in 2005; and (iii) approximately $79.0 million in 2006. The Revolving Credit
Facility has a final maturity of March 31, 2005. At December 28, 2002, the
Company had $15.0 million of outstanding borrowings under its Revolving Credit
Facility and $2.5 million letters of credit outstanding, resulting in $42.5
million of availability under its Revolving Credit Facility. The Amended Credit
Facility provides for mandatory prepayments of the Company's borrowings upon
certain specified events and in certain specified percentages, and the Company
may also prepay borrowings under the Amended Credit Facility.
The Company and certain restricted subsidiaries are required to guarantee
amounts outstanding under the Amended Credit Facility. The indebtedness incurred
pursuant to the Amended Credit Facility is secured by a first priority lien on
substantially all of the material assets of the Company and its restricted
domestic subsidiaries. The Amended Credit Facility contains certain financial
and other covenants usual and customary for a secured credit agreement.
In March 2002, the Company amended its Amended Credit Facility to provide
for, among other things: (1) an increase in interest rates to the Eurodollar
rate plus 4.75% for all loans and an increase in the commitment fee rate on the
Revolving Credit Facility to 1.00%; (2) a grant to the Company's lenders of a
lien on its material operating accounts, (3) a limit on the amount of future
capital expenditures up to a total of $25.0 million for fiscal 2002 and $7.0
million for the first quarter of 2003; (4) a limit on certain permitted
investments; (5) an amendment to its existing financial covenants through March
31, 2003; (6) a new minimum EBITDA covenant; and (7) the issuance of new senior
subordinated notes if the net proceeds of such new subordinated notes are used
to repay the loans under the senior credit facility. In addition, an Excess
Leverage Fee, as defined in the Amended Credit Facility, will accrue if the
"senior leverage" ratio exceeds 3.25 to 1.00 as of March 31, 2003, at a rate
equal to 2.5% of the sum of the daily average of the aggregate unpaid principal
amount of the loans from March 31, 2002 to March 31, 2003. If the Excess
Leverage fee is earned, it will generally be payable only from any future asset
sales and debt and equity offerings, but in any event not later than March 31,
2005. As of December 28, 2002, the Company had accrued $6.7 million related to
the Excess Leverage Fee as it appeared probable at that date that such amounts
would be payable.
The Amended Credit Facility, as amended in March 2001 and 2002, also waived
certain financial covenant requirements for the fiscal years ended December 30,
2000 and December 29, 2001 and reduced the financial covenant requirements
through March 31, 2003. Without such waivers, the Company would not have been in
compliance with the covenants at December 30, 2000 or December 29, 2001. Any
such event of default could permit a majority of the lenders to accelerate
outstanding debt under the Amended Credit Facility and permit a majority of the
lenders under the Revolving Credit Facility to terminate the Revolving Credit
Commitment (without acceleration of such debt). Such acceleration would result
in a cross-default under the Company's existing 9 3/4% senior subordinated
notes.
The Company is required to keep a certain percentage of its outstanding
debt at a fixed interest rate. In connection with this requirement, the Company
may enter into interest rate swap and cap agreements from time to time to seek
to manage its interest rate risk exposure under the Amended Credit Facility. At
F-15
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 28, 2002, the Company had interest rate swap contracts with a total
notional amount of $60.0 million for which the Company pays fixed rates and
receives floating rate LIBOR and had an interest rate cap contract with a
notional amount of $50.0 million for which the Company would receive payments if
floating rate LIBOR exceeds the cap rate.
SPONSOR FACILITY
The sponsor facility ("Sponsor Facility") is a senior unsecured loan
bearing interest at 15.0%. Principal and accrued interest under the loan is due
on March 31, 2007. The Amended Credit Facility restricts the payment of any
interest or principal on the Sponsor Facility until the ratio of the Company's
Average Senior Debt to EBITDA, as defined in the Amended Credit Facility,
calculated on a pro forma basis giving effect to any such principal or interest
payments, is no greater than 2.75 to 1.00 and the Company maintains at least
$35.0 million of credit availability (the "Payment Test"). The Sponsor Facility
requires that all unpaid interest and principal be paid at the end of each
quarter in which the Payment Test is achieved, to the extent allowed by the
Amended Credit Facility. The Company did not make any payments in 2001 or 2002.
The Company's Parent issued warrants in connection with the Sponsor Facility
that gave the warrantholders the right to purchase 30.0% of the outstanding
stock of the Company's Parent for a nominal amount. The cash proceeds of $25.0
million were allocated between the warrants and the Sponsor Facility, based on
their relative fair values. As a result, $8.4 million was allocated to the
warrants and recognized as a capital contribution from the Company's Parent in
the accompanying consolidated statement of stockholder's equity and
comprehensive income. The Sponsor Facility is being accreted to its $25.0
million face value as a charge to interest expense in the accompanying
consolidated statements of income to reflect an effective interest rate over the
life of the Sponsor Facility. See Note 26 -- "Subsequent Events" for a
discussion of the repayment of the Company's Sponsor Facility in conjunction
with the issuance of new senior notes.
SENIOR SUBORDINATED NOTES
On November 12, 1998, the Company issued $150.0 million in aggregate
principal amount of its 9 3/4% Senior Subordinated Notes due May 15, 2007 with
interest payable semi-annually. The senior subordinated notes were issued at a
discount that is being amortized as interest expense on a straight-line basis
over the term of the notes. The senior subordinated notes are general unsecured
obligations and are subordinated in right of payment to all senior indebtedness
and senior in right of payment to any current or future indebtedness of the
Company that, by its terms, is subordinated to the senior subordinated notes.
The payment of obligations of each subsidiary guarantor are subordinated to the
payment of senior indebtedness of such subsidiary guarantor.
The Company may redeem the senior subordinated notes at any time on or
after May 15, 2002, in whole or in part, at the option of the Company, at the
redemption prices set forth below, plus accrued and unpaid interest, if any, to
the redemption date:
<Table>
<Caption>
YEARS PERCENTAGE
- ----- ----------
2003........................................................ 103.250%
2004........................................................ 101.625%
2005 and thereafter......................................... 100.000%
</Table>
At any time prior to May 15, 2002, the senior subordinated notes may also
be redeemed in whole, but not in part, at the option of the Company upon the
occurrence of a Change in Control (as defined in the Note Indenture) at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium (as defined in the Note Indenture) and the unpaid accrued
interest, if any, to the date of redemption. Upon a Change in Control, holders
of the senior subordinated notes may require the Company to purchase all or a
portion of the senior subordinated notes at a purchase price equal to 101% of
their principal amount plus accrued interest, if any. The senior subordinated
notes have certain covenants that have restrictions on dividends, distributions,
indebtedness, affiliate transactions and lines of business.
F-16
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INDUSTRIAL DEVELOPMENT REVENUE BONDS
On March 12, 1997, the Company issued $6.0 million of 7.25% Ottawa County
Finance Authority Industrial Development Revenue Bonds (the "Miami Bonds"). The
Miami Bonds are subject to mandatory redemption, under certain circumstances,
prior to maturity at a redemption price of 110% 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 Miami Bonds are senior secured
obligations of the Company and effectively rank senior to the Company's
unsecured debt to the extent of the value of the assets that serve as collateral
and otherwise rank on a parity in right of payment with all other senior
indebtedness of the Company.
On July 24, 1998, the Company issued $9.0 million of 6.25% Oklahoma
Development Finance Authority Industrial Development Revenue Bonds, Series 1998
(the "Clinton Bonds") through the Oklahoma Development Finance Authority. The
Clinton Bonds are subject to mandatory redemption prior to maturity, under
certain circumstances, at a redemption price of 105% 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 Clinton Bonds are
senior secured obligations of the Company and effectively rank senior to the
Company's unsecured debt to the extent of the value of the assets that serve as
collateral and otherwise rank on a parity in right of payment with all other
senior indebtedness of the Company. On July 24, 1998, the Clinton Bonds were
purchased by the Company's wholly-owned subsidiary, Doane/Windy Hill Joint
Venture, L.L.C, which sold the bonds on May 6, 1999 at a net price of $8.7
million.
DEBT OF FOREIGN SUBSIDIARIES
Debt of foreign subsidiaries at December 29, 2001 consisted of peseta
denominated borrowings for which the HSBC Branch in Spain was the facility
agent. At December 29, 2001, the borrowings were comprised of Tranche A of $5.7
million (PTA 1,069 million) outstanding and amortizing semi-annually until
maturity in April 2005 and Tranche B of $3.0 million (PTA 554 million)
outstanding and payable in full in April 2006. The interest rates were 5.78% on
Tranche A and 6.78% on Tranche B at December 29, 2001, and adjust with changes
in MIBOR (Madrid Inter-Bank Offer Rate).
In February 2002, the peseta denominated loan was refinanced. The new loan
is with FIH (Finansierings Instituttet for Industri og Handvaerk A/S), a Danish
lender, and denominated in Euro. As of December 28, 2002, the outstanding
balance was $10.1 million (Euro 9.7 million). The loan amortizes evenly on a
quarterly basis until the final maturity in 2008. The interest rate on the loan
was 5.37% at December 28, 2002 and is fixed at this rate until the end of the
third year, at which point it resets to the then current three year rate plus
interest margin. At December 29, 2001, the loan was classified between long term
debt and current maturities of long term debt based on the terms of the new
loan.
Debt of foreign subsidiaries also consists of Danish Krona ("DKK")
denominated borrowings from various financial institutions totaling $5.9 million
(DKK 49.5 million) and $5.4 million (DKK 37.5 million) at December 29, 2001 and
December 28, 2002, respectively. These borrowings are comprised of both fixed
and variable rate loans with interest rates ranging from 4.14% to 7.80% and
maturity dates ranging from 2003 to 2014.
F-17
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the estimated fair value of financial instruments, other than
current assets and liabilities, follows (in thousands):
<Table>
<Caption>
DECEMBER 29, 2001 DECEMBER 28, 2002
--------------------------------- ---------------------------------
BOOK VALUE ESTIMATED FAIR VALUE BOOK VALUE ESTIMATED FAIR VALUE
---------- -------------------- ---------- --------------------
Debt -- liability:
Revolving credit facility... $ 38,000 $ 38,000 $ 15,000 $ 15,000
Term loan facilities........ 352,804 335,164 340,924 328,138
Sponsor facility............ 16,777 15,938 17,245 16,598
Senior subordinated notes... 148,071 121,418 148,430 118,744
Other....................... 32,171 32,171 32,421 32,421
-------- -------- -------- --------
$587,823 $542,691 $554,020 $510,901
======== ======== ======== ========
Derivative instruments and
hedges -- asset (liability):
Commodities................. $ (7,513) $ (7,513) $ (5,730) $ (5,730)
Interest rate............... (4,492) (4,492) (2,181) (2,181)
Foreign currency............ (705) (705) (178) (178)
</Table>
The fair value of debt is, where available, based on the traded market
price on the date closest to the Company's year end. The Company considers the
Revolving Credit Facility and other long-term debt, as recorded in the
accompanying consolidated balance sheets, to approximate fair value. At December
28, 2002, the Company had open commodity contracts with a fair value loss of
$5.7 million.
The Company periodically uses interest rate swap and cap contracts to limit
its exposure to the interest rate risk associated with its domestic floating
rate debt, which totaled $390.8 million and $355.9 million at December 29, 2001
and December 28, 2002, respectively. At December 29, 2001 and December 28, 2002,
$165.0 million and $110.0 million, respectively, of the Company's domestic
floating rate debt was hedged by interest rate swap and cap contracts. The
Company had a cumulative unrealized loss of $4.5 million and $2.2 million, or
$2.8 million and $1.3 million net of deferred tax benefit, at December 29, 2001
and December 28, 2002, respectively. The maturity dates of the Company's open
interest rate swap and cap contracts extend through November 2003.
At December 29, 2001, the Company had a cumulative unrealized gain on
foreign currency forward contracts of $0.7 million, or $0.5 million net of
deferred tax expense. At December 28, 2002, the Company had an open foreign
currency forward contract that matures within the next 12 months with a notional
value of $3.1 million and a fair value loss of $0.2 million that has been
recognized in the accompanying consolidated statements of income.
(11) SENIOR PREFERRED STOCK (REDEEMABLE)
The Senior Preferred Stock has an initial liquidation preference of $25 per
share (aggregate initial liquidation preference is $30.0 million). The Senior
Preferred Stock was recorded at the net proceeds of $17.1 million at October 5,
1995 after deducting $12.9 million paid to the Company for 1,354,478 warrants of
Parent, which were issued in conjunction with the Senior Preferred Stock. The
excess of the liquidation preference over the carrying value is being accreted
quarterly by a direct reduction to retained earnings over a 12 year period that
ends December 30, 2007.
Dividends on the Senior Preferred Stock are payable quarterly at the rate
of 14.25% per annum on the most recent quarterly liquidation value of each
share. Dividends on the Senior Preferred Stock accrete to the liquidation value
of the Senior Preferred Stock. The Company has not paid dividends in cash or
additional shares of Senior Preferred Stock since the initial issuance of the
Senior Preferred Stock. Cumulative dividends
F-18
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on Senior Preferred Stock that have not been paid at December 29, 2001 and
December 28, 2002 are $41.9 million and $52.6 million, respectively, and are
included in the carrying amount of the Senior Preferred Stock in the
accompanying consolidated balance sheets. As of December 29, 2001 and December
28, 2002, the cumulative accretion to redemption value on the Senior Preferred
Stock was $6.7 million and $7.8 million, respectively.
The Company may, at its option, redeem the Senior Preferred Stock, in whole
or in part, at redemption prices per share, together with accrued and unpaid
dividends as follows:
<Table>
<Caption>
YEARS BEGINNING PERCENTAGE OF
SEPTEMBER 30, LIQUIDATION VALUE
- --------------- -----------------
2003.................................................. 102.850%
2004.................................................. 101.425%
2005.................................................. 100.000%
2006.................................................. 100.000%
</Table>
The Company is required to redeem all outstanding shares of Senior
Preferred Stock on September 30, 2007 at 100% of the liquidation value at this
date, together with accrued and unpaid dividends.
In the event of a Change of Control, as defined, the holders of Senior
Preferred Stock have the right to require the Company to redeem such Senior
Preferred Stock, in whole or in part, at a price equal to 101% of liquidation
value at the Change of Control date together with any unpaid dividends.
The terms of the Senior Preferred Stock prohibit (1) the payment of
dividends on securities ranking on a parity with or junior to the Senior
Preferred Stock; and (2) redemption, repurchase or acquisition of any Junior
Securities with certain exceptions, in each case, unless full cumulative
dividends have been paid on the Senior Preferred Stock.
Holders of the Senior Preferred Stock have limited voting rights customary
for preferred stock and the right to elect two additional directors to the
Company's board of directors upon certain events such as the Company failing to
declare and pay dividends on any six consecutive dividend payment dates.
(12) COMMON STOCK OF PARENT
The Parent's common stock consists of two classes, Class A Common Stock and
Class B Common Stock. The Class A and Class B Common Stock are identical except
the Class B Common Stock has no voting rights. The Class B Common Stock is
convertible into shares of Class A Common Stock at any time at the option of the
holder thereof. Each holder of Class A Common Stock is entitled to one vote for
each share of Class A Common Stock held of record on all matters submitted to a
vote of stockholders. The holders of Class A Common Stock do not have cumulative
voting rights in the election of directors to the Parent's board of directors.
The holders of Common Stock have no preemptive, subscription, redemptive or
conversion rights, except that holders of Class B Common Stock may at their
option, convert their shares into Class A Common Stock.
(13) STOCK OPTION PLAN OF PARENT
Effective November 1, 1996, Parent adopted its 1996 Stock Option Plan, as
amended. Certain employees of the Company are covered under this plan. Each
stock option granted under this plan allows for the purchase of one share of
Parent's Class A common stock. Under the 1996 Stock Option Plan, options
covering 640,327 and 594,200 shares were outstanding as of December 29, 2001 and
December 28, 2002, respectively.
On July 14, 1999, Parent adopted the 1999 Stock Incentive Plan. In
connection with the adoption of the 1999 Stock Incentive Plan, no new grants
could be made under the 1996 Stock Option Plan.
Effective October 31, 2001, Parent approved the "repricing" of all vested
and unvested stock options under the 1996 Stock Option Plan and the 1999 Stock
Incentive Plan that had an exercise price exceeding $2.50 per share. All such
eligible stock options were given a new exercise price of $2.50 per share and
the
F-19
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vesting period was re-started. The repricing involved a surrender of the
eligible stock options in exchange for a grant of new stock options covering an
equivalent number of shares at the new exercise price. Stock options covering a
total of 1,516,300 shares were granted at the $2.50 per share exercise price,
and all such grants were made under the 1999 Stock Incentive Plan and are
accounted for as variable plan awards. Since the fair value of Parent's Class A
common stock was less than $2.50 per share at December 29, 2001, no compensation
expense was recorded in fiscal 2001 on the variable plan awards. While the
estimated fair value of the Parent's Class A common stock exceeded $2.50 per
share at December 28, 2002, the compensation expense in fiscal 2002 was minimal.
All of the grants have a time-vesting schedule pursuant to which 50% of an
individual's stock options will vest two years after the grant date, 25% will
vest after the third year, and the remaining 25% will vest after the fourth
year. Under the 1999 Stock Incentive Plan, 4,200,000 shares are authorized for
issuance, and as of December 29, 2001 and December 28, 2002, options covering
3,230,300 and 3,209,800 shares, respectively, had been granted and remained
outstanding.
The Company and its Parent have elected to continue to follow APB Opinion
No. 25, Accounting for Stock Issued to Employees, ("APB Opinion No. 25") to
account for fixed stock awards granted to employees; however, if the Company
adopted Statement on Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation, ("SFAS 123") to account for fixed stock awards granted
to employees, the Company's net income (loss) and basic and diluted net income
(loss) per common share for fiscal 2000, 2001 and 2002 would have been reduced
as follows (in thousands, except per share amounts):
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Net income (loss) available to common shares, as
reported...................................... $(14,125) $(32,405) $3,393
Less: Total stock-based employee compensation
expense determined based on the fair value
method for all awards, net of income tax
expense (benefit).......................... (759) 896 (128)
-------- -------- ------
Pro forma net income (loss) available to common
shares........................................ $(14,884) $(31,509) $3,265
======== ======== ======
Earnings per share:
Basic and diluted net income (loss) per common
share, as reported......................... $(14,125) $(32,405) $3,393
======== ======== ======
Basic and diluted net income (loss) per common
share, pro forma........................... $(14,884) $(31,509) $3,265
======== ======== ======
</Table>
In fiscal 2001, the pro forma net loss per common share is lower than the
net loss per common share primarily due to the reversal of compensation expense
associated with unvested stock options cancelled during fiscal 2001. Pro forma
information regarding net income (loss) and basic and diluted net income (loss)
per common share has been determined as if the Company had accounted for its
employee stock options under the minimum value method of SFAS 123 under the
assumptions of a risk free rate of return of 6.03%, 5.02% and 3.60% for fiscal
2000, 2001 and 2002, respectively, and an expected life of options ranging from
5 to 10 years. The Company has no present plans to pay dividends on its common
stock. The effect of applying SFAS 123, as calculated above, may not be
representative of the effect on reported net income (loss) for future years.
F-20
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
A summary of the components of accumulated other comprehensive income
(loss) follows (in thousands):
<Table>
<Caption>
ACCUMULATED
FOREIGN UNREALIZED OTHER
CURRENCY MINIMUM GAIN COMPREHENSIVE
TRANSLATION PENSION LIABILITY (LOSS), NET INCOME (LOSS)
----------- ----------------- ----------- -------------
Balances at January 1, 2000.......... $(1,225) $ -- $ 1,055 $ (170)
Comprehensive income (loss)........ 2,260 -- (772) 1,488
------- ------- ------- -------
Balances at December 30, 2000........ 1,035 -- 283 1,318
Comprehensive loss................. (7,352) -- (1,573) (8,925)
------- ------- ------- -------
Balances at December 29, 2001........ (6,317) -- (1,290) (7,607)
Comprehensive income (loss)........ 22,792 (5,584) (43) 17,165
------- ------- ------- -------
Balances at December 28, 2002........ $16,475 $(5,584) $(1,333) $ 9,558
======= ======= ======= =======
</Table>
(15) OPERATING LEASES
The Company leases certain facilities, machinery and equipment under
operating lease agreements with varying terms and conditions. A summary of the
future annual minimum lease payments under these leases follows (in thousands):
<Table>
<Caption>
MINIMUM
YEARS ENDING ANNUAL PAYMENTS
- ------------ ---------------
2003.................................................. $4,072
2004.................................................. 3,955
2005.................................................. 3,911
2006.................................................. 2,966
2007.................................................. 1,586
2008 and thereafter................................... 2,550
</Table>
Rent expense was $4.9 million, $5.8 million and $6.0 million for fiscal
2000, 2001 and 2002, respectively.
(16) OTHER OPERATING AND PROJECT FOCUS IMPLEMENTATION EXPENSES
In October 2001, the Company initiated a new market and operational
strategy ("Project Focus") designed to provide more focused service to its
customers by simplifying and distinguishing its product offerings and associated
pricing, improving its planning and marketing support services, and reducing the
complexity of its operations. The Company has permanently reduced its cost
structure by streamlining its available product offerings, optimizing its
production facilities and reducing its workforce. In connection with Project
Focus, the Company closed one manufacturing facility and had a corporate
workforce reduction, which resulted in the termination of 45 employees in the
fourth quarter of fiscal 2001. The Company recognized Project Focus related
costs of $10.2 million, consisting of $2.0 million of restructuring charges and
$8.2 million of implementation expenses. The major components of these charges
are included in the table below.
F-21
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of other operating and Project Focus implementation expenses
follows (in thousands):
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Other operating expenses:
Transaction costs............................. $ 6,275 $ -- $ 1,447
Divestitures.................................. -- 4,660 --
------- ------- -------
Restructuring costs:
Severance.................................. 3,541 2,836 --
Asset impairments.......................... 15,337 618 --
Plant closure costs........................ 3,486 541 --
------- ------- -------
Total restructuring costs................ 22,364 3,995 --
------- ------- -------
Total other operating expenses........... 28,639 8,655 1,447
------- ------- -------
Project Focus implementation expenses:
Allowances for inventories.................... -- 6,609 --
Allowances for accounts receivable............ -- 1,639 --
------- ------- -------
Total Project Focus implementation
expenses................................. -- 8,248 --
------- ------- -------
Total other operating and Project Focus
implementation expenses.................. $28,639 $16,903 $ 1,447
======= ======= =======
</Table>
TRANSACTION COSTS
Fiscal 2000 transaction costs of $6.3 million included: (1) a loss of $4.6
million on a foreign currency purchase contract associated with the Arovit
acquisition; (2) $1.5 million of costs for unconsummated acquisitions; and (3)
$0.2 million of miscellaneous transaction costs.
Fiscal 2002 transaction costs of $1.4 million included a $0.8 million
charge related to the write-off of costs for the Company's postponed bond
offering and a $0.6 million charge related to the Company's abandoned sale of
its European business.
DIVESTITURES
In fiscal 2001, the Company recorded a $4.7 million net loss related to the
Divestitures. See Note 4 -- "Divestitures."
RESTRUCTURING COSTS
Fiscal 2000 restructuring costs included: (1) severance costs of $1.5
million for the elimination of positions associated with the closure of certain
inefficient manufacturing facilities, $1.6 million for the elimination of
corporate positions and $0.4 million for restructuring associated with the
Arovit acquisition; (2) asset impairment costs, primarily related to property,
plant and equipment, associated with these facility closures; and (3) related
plant shutdown expenses. Fiscal 2001 restructuring costs included: (1) severance
costs of $2.0 million for the elimination of corporate positions following the
Divestitures, $0.8 million for additional corporate headcount reductions in
connection with Project Focus and $0.2 million for restructuring at the
Company's foreign operations; (2) asset impairment costs, primarily related to
property, plant and equipment, associated with the closure of a manufacturing
and distribution facility in connection with Project Focus; and (3) related
plant shutdown expenses of $0.4 million for this facility closure. These 2001
restructuring costs were offset by adjustments to previously accrued
restructuring charges as described below. The Company terminated 330 employees
in fiscal 2001 as a result of plant closings and corporate headcount reductions.
F-22
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A roll-forward of the Company's accrued restructuring costs for fiscal
2000, 2001 and 2002 follows (in thousands):
<Table>
Balance at January 1, 2000.................................. $ --
-------
Fiscal 2000 restructuring costs:
Severance.............................................. 3,541
Plant closure costs.................................... 3,486
-------
Total restructuring costs............................ 7,027
Fiscal 2000 cash payments................................. (2,422)
-------
Balance at December 30, 2000................................ 4,605
-------
Fiscal 2001 restructuring costs:
Severance.............................................. 2,836
Plant closure costs.................................... 541
-------
Total restructuring costs............................ 3,377
Fiscal 2001 cash payments................................. (3,198)
-------
Balance at December 29, 2001................................ 4,784
Fiscal 2002 cash payments................................. (2,032)
-------
Balance at December 28, 2002................................ $ 2,752
=======
</Table>
The future expected payout of the Company's accrued restructuring costs as
of December 28, 2002 follows (in thousands):
<Table>
<Caption>
MINIMUM
FISCAL YEARS ENDING ANNUAL PAYMENTS
- ------------------- ---------------
2003.......................................... $ 2,496
2004.......................................... 256
-------
Total....................................... $ 2,752
=======
</Table>
PROJECT FOCUS IMPLEMENTATION EXPENSES
Project Focus implementation expenses in fiscal 2001 consist of valuation
allowances against packaging inventories and accounts receivable associated with
SKU reduction and customer mix shift. These expenses totaling $8.2 million are
in addition to the $2.0 million of other operating expenses discussed above and
were classified in the accompanying consolidated statements of income as
follows: (1) $0.3 million as a reduction in net sales; (2) $6.6 million as cost
of goods sold; (3) $0.9 million as promotion and distribution expenses; and (4)
$0.4 million as selling, general and administrative expenses.
F-23
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) INCOME TAXES
A summary of income tax expense (benefit) follows (in thousands):
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Current:
Federal....................................... $ 177 $ -- $ (625)
State and local............................... 171 -- --
Foreign....................................... 578 1,911 1,153
------- -------- -------
Total current tax expense.................. 926 1,911 528
------- -------- -------
Deferred:
Federal....................................... 528 (11,130) 2,603
State and local............................... (42) (1,952) 363
Foreign....................................... (2,266) (5,000) (1,708)
------- -------- -------
Total deferred tax expense (benefit)....... (1,780) (18,082) 1,258
------- -------- -------
Total income tax expense (benefit)......... $ (854) $(16,171) $ 1,786
======= ======== =======
</Table>
A summary of income (loss) before income taxes and cumulative effect of a
change in accounting principle by domestic and foreign source follows (in
thousands):
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Domestic........................................ $ 1,303 $(20,852) $ 22,404
Foreign......................................... (7,042) (17,257) (5,347)
------- -------- --------
$(5,739) $(38,109) $ 17,057
======= ======== ========
</Table>
Income tax expense (benefit) differs from the amount computed by applying
the U.S. federal statutory rate of 35.0% to pre-tax income (loss) as follows (in
thousands):
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Computed "expected" federal tax expense
(benefit)..................................... $(2,009) $(13,338) $ 5,970
State and local tax expense..................... 84 (1,269) 236
Foreign tax benefit............................. (1,752) (2,776) (4,462)
Non-deductible loss on foreign currency forward
contract...................................... 1,599 -- --
Non-deductible amortization of goodwill......... 1,156 1,156 --
Meals and entertainment and other............... 68 56 42
------- -------- -------
$ (854) $(16,171) $ 1,786
======= ======== =======
</Table>
F-24
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the income tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and liabilities follows (in
thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Current deferred tax assets:
Accounts receivable....................................... $ 2,525 $ 772
Inventory................................................. 761 801
Accruals and provisions................................... 6,829 4,286
-------- --------
Net current deferred tax asset......................... $ 10,115 $ 5,859
======== ========
Noncurrent deferred tax assets (liabilities):
Net operating loss carryforwards.......................... $ 18,378 $ 30,392
Property and equipment.................................... (13,183) (19,239)
Goodwill and trademarks................................... (17,491) (21,616)
Accumulated other comprehensive income.................... 1,761 4,405
Foreign................................................... (3,080) (1,689)
Other..................................................... 1,030 486
-------- --------
Net noncurrent deferred tax liability.................. (12,585) (7,261)
-------- --------
Total net deferred tax liability....................... $ (2,470) $ (1,402)
======== ========
</Table>
In assessing the realizable value of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which these temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the historical taxable income of the Company and projections for future taxable
income over the periods that the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the future benefits
of these deductible differences and net operating loss carryforwards at December
28, 2002.
At December 28, 2002, the Company had federal net operating loss
carryforwards of $77.3 million, that are available to offset future taxable
income through 2022. The deferred tax assets resulting from the Company's
federal and state net operating loss carryforwards total $30.4 million. The
Company's foreign subsidiaries had net operating loss carryforwards of $5.8
million, which results in a deferred tax asset of $1.7 million. The Company has
a valuation allowance of $0.6 million against its foreign net operating loss
carryforwards.
(18) EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company had a defined benefit, non-contributory pension plan covering
hourly and salaried employees of the former Hubbard Milling Company, which was
frozen on May 28, 1998. As a result, future benefits no longer accumulate and
the Company's service cost ceased. The Company's funding policy for this plan
was to make the minimum annual contribution required by applicable regulations.
In addition, the Company terminated a defined benefit, non-contributory pension
plan on May 31, 1998 that previously covered all non-bargaining employees. The
Company's only active pension plan covers 46 union employees at one of its
facilities.
F-25
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of net periodic pension income for the Company's pension plans
follows (in thousands):
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Service cost.................................... $ 16 $ 19 $ 20
Interest cost................................... 1,145 1,115 1,104
Expected return on plan assets.................. (1,728) (1,670) (1,494)
Net amortization and deferral................... 7 8 9
Recognition of actuarial loss................... -- -- 291
------- ------- -------
Net periodic pension income................... $ (560) $ (528) $ (70)
======= ======= =======
</Table>
A summary of assumptions used by the Company in the determination of
pension plan information follows:
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Discount rate................................... 7.90% 7.60% 6.75%
Rate of increase in compensation levels......... N/A N/A N/A
Expected long-term rate of return on plan
assets........................................ 8.50% 8.50% 8.50%
</Table>
A summary of the funded status of the pension plans reconciled with amounts
recognized in other assets or other long-term liabilities in the accompanying
consolidated balance sheets follows (in thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Actuarial present value of benefit obligations:
Accumulated and projected benefits........................ $(15,189) $(16,485)
Plan assets at fair value................................. 18,301 15,406
-------- --------
Projected plan assets in excess of (less than) benefit
obligation........................................... 3,112 (1,079)
Items not yet recognized in earnings:
Unrecognized net loss..................................... 4,797 --
-------- --------
Pension asset (liability).............................. $ 7,909 $ (1,079)
======== ========
</Table>
A rollforward of the Company's pension benefit obligation for fiscal 2001
and 2002 follows (in thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Projected benefit obligation, beginning of year............. $ 15,043 $ 15,189
Service cost.............................................. 19 20
Interest cost............................................. 1,115 1,104
Benefits paid............................................. (1,164) (1,175)
Actuarial gain............................................ 176 1,347
-------- --------
Projected benefit obligation, end of year................... $ 15,189 $ 16,485
======== ========
</Table>
F-26
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A rollforward of the Company's plan assets at fair value for fiscal 2001
and 2002 follows (in thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Plan assets at fair value, beginning of year................ $ 20,337 $ 18,301
Employer contributions.................................... 48 48
Actual loss on plan assets................................ (819) (1,770)
Benefits paid............................................. (1,265) (1,173)
-------- --------
Plan assets at fair value, end of year...................... $ 18,301 $ 15,406
======== ========
</Table>
Under FASB's Statement on Financial Accounting Standards No. 87, Employers'
Accounting for Pensions ("SFAS 87"), the Company was required to record a
balance sheet adjustment during the 2002 fourth quarter for the minimum pension
liability. The non-cash adjustment was a reduction of $9.1 million, or $5.6
million net of deferred tax benefit, in accumulated other comprehensive income
(loss) in the accompanying consolidated financial statements. Under federal law,
the Company was not required to make any cash contributions to the inactive plan
in fiscal 2000, 2001 and 2002. The Company's contributions to its active plan in
fiscal 2000, 2001 and 2002 were less than $0.1 million each year.
POST-RETIREMENT PLANS
The Company maintained two post-retirement healthcare plans that provided
medical coverage for eligible retirees and their dependents that were merged on
February 1, 2000. The Company pays benefits under the merged plan when due and
does not fund its plan obligations as they accrue.
The net periodic post-retirement benefit cost included the following
components (in thousands):
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Service cost.................................... $ 14 $ 15 $ 15
Interest and amortization cost.................. 236 259 298
----- ----- -----
Net periodic post-retirement benefit cost..... $ 250 $ 274 $ 313
===== ===== =====
</Table>
A summary of the funded status of the post-retirement plans reconciled with
amounts recognized in other long-term liabilities in the accompanying
consolidated balance sheets follows (in thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Accumulated post-retirement benefit obligation:
Retirees and dependents................................... $ 3,353 $ 4,271
Fully eligible active plan participants................... 297 505
Other active plan participants............................ 344 262
Unrecognized prior service cost........................... 333 292
Unrecognized net loss..................................... (586) (1,515)
------- -------
Post-retirement benefit liability...................... $ 3,741 $ 3,815
======= =======
</Table>
F-27
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A rollforward of the accumulated post-retirement benefit obligation for
fiscal 2001 and 2002 follows (in thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Projected benefit obligation, beginning of year............. $ 3,776 $ 3,741
Service cost.............................................. 15 15
Interest and amortization cost............................ 259 298
Benefits paid............................................. (309) (239)
------- -------
Projected benefit obligation, end of year................... $ 3,741 $ 3,815
======= =======
</Table>
The weighted-average discount rate used in determining the net periodic
post-retirement benefit cost was 7.90%, 7.60%, and 6.75% for fiscal 2000, 2001
and 2002, respectively. The weighted-average discount rate used in determining
the accumulated post-retirement benefit obligation was 7.60% and 6.75% as of
December 29, 2001 and December 28, 2002, respectively. An increase in the cost
of covered healthcare benefits of 8.00% was assumed for 2003 and gradually
trended down to 5.50% for 2008 and thereafter. Increasing the assumed medical
cost trend rates by one percentage point in each year would increase the
accumulated post-retirement benefit obligation by $0.4 million and $0.4 million
as of December 29, 2001 and December 28, 2002, respectively, and the aggregate
of the service cost and interest cost components of net periodic post-retirement
benefit cost for fiscal 2000, 2001 and 2002 by $30,000, $32,000 and $34,000,
respectively.
DEFINED CONTRIBUTION PLANS
As of January 1, 2000, the Company adopted the Doane Pet Care Retirement
Savings Plan, which was formed through the merger of two predecessor plans. The
merged plan was amended and restated and is intended to be a qualified plan
under the Internal Revenue Code. The plan provides coverage for eligible
employees and permits employee contributions from 1% to 60% of pre-tax earnings,
subject to annual dollar limits set by the IRS. The Company matches 50% of the
first 6% of the employee contribution with a provision for other contributions
at the board of directors' discretion. Participant vesting for the employer's
matching contributions are 25% per year for each full year of service. For
fiscal 2000, 2001 and 2002, the Company contributed $1.3 million, $1.2 million
and $1.0 million, respectively, to the Doane Pet Care Retirement Savings Plan.
The Company also has a plan called the Doane Pet Care Savings and
Investment Plan -- Union Plan which was adopted on June 1, 1998 and covers
eligible union employees at the Joplin, Missouri plant. This plan is intended to
be a qualified retirement plan under the Internal Revenue Code. The plan permits
employee contributions between 1% and 60% of pre-tax earnings, subject to annual
dollar limits set by the IRS, and provides for a variety of investment options.
Effective April 1, 2000, the union employees of the Muscatine, Iowa plant became
eligible for coverage by the Doane Pet Care Savings and Investment Plan -- Union
Plan under the existing terms and conditions. The Company does not contribute to
this plan.
(19) DEFERRED COMPENSATION AGREEMENTS AND SALARY CONTINUATION PLAN
The Company has deferred compensation agreements with two individuals that
provide for annual payments upon retirement to be paid over 10 consecutive
years. The Company had a liability of $0.7 million and $0.6 million at December
29, 2001 and December 28, 2002, respectively.
The Company also has a salary continuation plan with 21 participants at
December 28, 2002. Participants in the plan who reach age 55 and have 10 years
of service with the Company begin vesting in their benefits, which are payable
in 10 equal annual installments after retirement. The Company had an expected
future liability equal to the present value of future payments under this plan
of $1.5 million and $2.2 million at December 29, 2001 and December 28, 2002,
respectively. The liabilities associated with the Company's
F-28
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred compensation agreements and salary continuation plan are recognized in
other long-term liabilities in the accompanying consolidated balance sheets.
(20) SEGMENT DATA
The Company has combined manufacturing and distribution facilities in two
distinct geographical markets, the United States ("Domestic") and Europe
("International"); however, its operations in both of these markets have similar
manufacturing processes, as well as products and services. Long-lived assets of
the Company are attributed to individual countries on the basis of where these
assets are domiciled. The Company's net sales are attributed to individual
countries on the basis of where its products are manufactured and distributed. A
summary of long-lived assets and net sales by geographical segment follows (in
thousands):
<Table>
<Caption>
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Long-lived assets:
Domestic.................................................. $ 429,700 $ 428,133
--------- ---------
International:
Denmark................................................ 137,166 159,902
Spain.................................................. 22,030 27,764
United Kingdom......................................... 7,564 7,373
--------- ---------
Total international.................................. 166,760 195,039
--------- ---------
Total long-lived assets.............................. $ 596,460 $ 623,172
========= =========
</Table>
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Net sales:
Domestic...................................... $ 739,216 $ 697,597 $ 692,237
--------- --------- ---------
International:
Denmark.................................... 101,246 155,071 151,354
Spain...................................... 29,545 28,905 33,676
United Kingdom............................. 5,754 14,257 10,066
--------- --------- ---------
Total international...................... 136,545 198,233 195,096
--------- --------- ---------
Total net sales.......................... $ 875,761 $ 895,830 $ 887,333
========= ========= =========
</Table>
(21) MAJOR CUSTOMER
For fiscal 2000, 2001 and 2002, the same customer accounted for
approximately 40%, 40% and 44%, respectively, of the Company's net sales. The
Company does not have a long-term contract with this customer. The loss of this
customer would have a material adverse impact on the Company's financial
position, results of operations and liquidity.
F-29
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(22) ADDITIONAL CASH FLOW INFORMATION
Additional cash flow information for fiscal 2000, 2001 and 2002 follows (in
thousands):
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest paid, net of amounts
capitalized.............................. $ 47,310 $ 50,591 $ 48,226
Income taxes paid.......................... 235 2,184 236
Schedule of non-cash investing and financing
activities:
Fair value adjustment for interest swap rate
agreements................................. (2,122) (4,097) 2,347
Fair value adjustment for foreign currency
derivatives................................ 749 1,327 625
Exchange rate effect on Euro-denominated
debt....................................... 3,452 (4,414) (11,553)
</Table>
(23) RELATED PARTY TRANSACTIONS
DLJ Merchant Banking Partners, L.P. and certain other affiliates of Credit
Suisse First Boston LLC own shares of common stock of the Company and warrants
to purchase common stock of Parent. Credit Suisse First Boston LLC and its
affiliates have received certain payments of fees, including fees for various
investment banking and commercial banking services provided to the Company and
Parent.
DLJ Merchant Banking Partners, L.P. and certain other affiliates of Credit
Suisse First Boston LLC are parties to the investors' agreement. In accordance
with the investors' agreement, DLJ Merchant Banking Partners, L.P. has
designated one individual to the boards of directors of the Company and Parent.
The Company previously had a management advisory agreement with Summit
Capital Inc. ("SCI") which is a stockholder of the Company and has a member who
is a director of the Company. The Company paid SCI an annual fee of $0.2 million
for these advisory services provided. The agreement expired on October 5, 2000.
J.P. Morgan Partners (BHCA), L.P. is an affiliate of JPMorgan Chase Bank
and J.P. Morgan Securities Inc. J.P. Morgan Partners (BHCA), L.P. and one of its
affiliates own senior preferred stock in the Company and common stock and
warrants to purchase common stock of Parent.
JPMorgan Chase Bank, J.P. Morgan Securities Inc. and their affiliates
perform various commercial banking and investment banking services from time to
time for the Company and its affiliates. Since the beginning of fiscal 2001
through February 1, 2003, JPMorgan Chase Bank, J.P. Morgan Securities Inc. and
their affiliates have received a total of $1.0 million for acting in the
foregoing capacities, excluding interest and other charges earned generally by
all lenders under the senior credit facility.
J.P. Morgan Partners (BHCA), L.P. is a party to the investors' agreement.
In accordance with the investors' agreement, it has designated two individuals
to the boards of directors of the Company and Parent.
See Note 26 -- "Subsequent Events" for a discussion of the Company's
related party transactions associated with its issuance of 10 3/4% senior notes
on February 28, 2003.
(24) COMMITMENTS AND CONTINGENCIES
The Company is party, in the ordinary course of business, to claims and
litigation. In management's opinion, the resolution of such matters is not
expected to have a material impact on the future financial condition, results of
operations or cash flows of the Company.
F-30
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(25) QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly results follows (in thousands, except per share
amounts):
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
FISCAL 2001 QUARTER QUARTER QUARTER QUARTER
- ----------- -------- -------- -------- --------
Net sales................................. $250,764 $217,262 $206,299 $221,505
Gross profit.............................. 31,747 40,552 40,200 34,239
Net income (loss)......................... (8,777) (6,162) 16 (7,015)
Basic and diluted net loss per common
share................................... (11,272) (8,736) (2,641) (9,756)
</Table>
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
FISCAL 2002 QUARTER QUARTER QUARTER QUARTER
- ----------- -------- -------- -------- --------
Net sales................................. $220,106 $204,298 $216,334 $246,595
Gross profit.............................. 50,914 48,766 44,469 41,766
Net income (loss)......................... 8,473 5,187 2,760 (1,149)
Basic and diluted net income (loss) per
common share............................ 5,643 2,267 (255) (4,262)
</Table>
In the fourth quarter of fiscal 2001 and 2002, the Company recognized $10.2
million of Project Focus related charges and $0.7 million of other operating
expenses, respectively. See Note 16 - "Other Operating and Project Focus
Implementation Expenses." In the fourth quarter of fiscal 2002, the Company
recognized a non-cash adjustment of $9.1 million, or $5.6 million net of
deferred tax benefit, in accumulated other comprehensive income (loss) in its
accompanying consolidated financial statements for minimum pension liability.
See Note 18 -- "Employee Benefit Plans."
(26) SUBSEQUENT EVENTS
In February 2003, the Company issued $213.0 million in aggregate principal
amount of 10 3/4% senior unsecured notes due March 1, 2010 at a price of 98.8%
of par with interest payable semi-annually on March 1 and September 1 of each
year, commencing on September 1, 2003. The senior unsecured notes are general
unsecured obligations and are effectively subordinated in right of payment to
all senior secured indebtedness to the extent of the value of the assets
securing that indebtedness and senior in right of payment to any current or
future indebtedness of the Company that, by its terms, is subordinated to the
senior unsecured notes. The payments of obligations of each subsidiary guarantor
are subordinated to the payment of senior indebtedness of such subsidiary
guarantor.
The proceeds from the 10 3/4% senior notes were used to repay $169.0 of the
Company's Amended Credit Facility and $33.7 million was deposited into a
defeasance fund to repay any Sponsor Facility notes tendered during the tender
period. The Company intends to use these funds to repay the Sponsor Facility in
full, although the Company has no right to require the holders of the Sponsor
Facility notes to tender their notes prior to maturity. Any notes not tendered
prior to the expiration of the tender period will remain outstanding under their
original terms, and excess funds in the defeasance fund will be used to make
additional repayments on the Amended Credit Facility.
In conjunction with the issuance of the 10 3/4% senior notes, the Company
amended its Amended Credit Facility. The Amended Credit Facility entered into in
February 2003, provided for, among other things: (1) the issuance of the 10 3/4%
senior notes and repayment of the Sponsor Facility; (2) the repayment of a
portion of the term loans and Revolving Credit Facility under the Company's
senior credit facility in order of forward maturity; (3) less restrictive
covenants on capital expenditures, investments and other activities; (4) the
elimination of certain financial covenants and restructuring of other financial
covenants; (5) the elimination of the Excess Leverage Fee; (6) the elimination
of the fixed rate debt percentage requirement; and (7) the permanent reduction
of the Revolving Credit Facility from $75.0 million to $60.0 million.
F-31
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As adjusted for the application of the net proceeds of the senior notes,
the Company's Amended Credit Facility, as amended on February 28, 2003, provides
for total commitments of a Euro 34.8 million ($37.7 million assuming a USD to
Euro exchange rate of 1.0825) Euro Term Loan Facility and $201.6 million,
consisting of a $141.6 million USD Term Loan Facility and a $60.0 million
Revolving Credit Facility, with a $20.0 million sub-limit for issuance of
letters of credit. Availability of funds under the Amended Credit Facility is
subject to certain customary terms and conditions. After the application of the
net proceeds from the sale of the 10 3/4% senior notes, the principal amounts
due under the Euro Term Loan Facility are as follows: (i) approximately Euro
34.8 million in 2005; and the principal amounts due under the USD Term Loan
Facility are approximately (i) $10.7 million in 2004, (ii) $88.3 million in
2005, and (iii) $42.6 million in 2006.
In connection with the repayments made by the Company on its Amended Credit
Facility concurrent with the issuance of the 10 3/4% senior notes and deposits
into the Sponsor Facility defeasance fund as described above, the Company
estimates it will incur a pre-tax charge to earnings of $10.8 million. This
pre-tax charge includes: (1) a $4.0 million write-off of deferred financing
costs, primarily related to the Company's Amended Credit Facility; (2) a charge
of $7.6 million for the accretion of the Sponsor Facility to face value; (3) a
charge of $5.9 million realized foreign currency translation loss as a result of
retiring a portion of the Euro Term Loan Facility with a corresponding credit to
accumulated other comprehensive income (loss); and (4) a credit of $6.7 million
for the reversal of an Excess Leverage Fee accrual.
ANNUAL MATURITIES OF LONG-TERM DEBT
A summary of the annual maturities of long-term debt as of December 28,
2002, as adjusted to reflect the issuance of the 10 3/4% senior notes, the
expected repayment of the Sponsor Facility and the amendments to the Amended
Credit Facility that were effected contemporaneously with the issuance of senior
notes is as follows (in thousands):
<Table>
<Caption>
YEARS ENDING MATURITIES
- ------------ ----------
2003..................................................... $ 5,720
2004..................................................... 13,910
2005..................................................... 136,164
2006..................................................... 44,260
2007..................................................... 150,535
2008 and thereafter...................................... 226,405
--------
$576,994
========
</Table>
RELATED PARTY TRANSACTIONS
Credit Suisse First Boston LLC was one of the joint book-running managers
in the Company's offering of 10 3/4% senior notes. DLJ Capital Funding, Inc., an
affiliate of Credit Suisse First Boston LLC, is the syndication agent and a
lender under the senior credit facility and received a portion of the repayment
of loans under the senior credit facility from the net proceeds of the sale of
the 10 3/4% senior notes. In connection with the sale of the 10 3/4% senior
notes, Credit Suisse First Boston LLC and its affiliates received fees of
approximately $3.3 million. J.P. Morgan Securities Inc. was also a joint
book-running manager in the offering of the 10 3/4% senior notes. Affiliates of
J.P. Morgan Securities Inc. were holders of promissory notes under the Sponsor
Facility and received approximately $16.9 million of the net proceeds from the
sale of the 10 3/4% senior notes. JPMorgan Chase Bank serves as the
administrative agent and a lender under the senior credit facility and received
a portion of the repayment of loans under the senior credit facility from the
net proceeds of the sale of 10 3/4% senior notes. JPMorgan Chase Bank received a
$0.5 million fee in connection with the amendments to the senior credit facility
effected contemporaneously with the sale of the 10 3/4% senior notes.
F-32
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the sale of the 10 3/4% senior notes, J.P. Morgan Securities
Inc. and its affiliates received fees of approximately $1.6 million.
In addition to the affiliates of J.P. Morgan Securities Inc. that hold
promissory notes under the Sponsor Facility, as discussed above, affiliates of
other persons known to the Company to beneficially own more than 5% of the
common stock of Parent also hold promissory notes under the Sponsor Facility.
Assuming these persons tender all of their promissory notes by the applicable
expiration date and assuming a repayment date of February 28, 2003, Bruckmann,
Rosser, Sherrill & Co., L.P. would receive approximately $7.5 million, Summit
Capital Inc. would receive approximately $2.3 million and PNC Capital Corp.
would receive approximately $1.2 million of the net proceeds from the sale of
the 10 3/4% senior notes. Additionally, certain executive officers of the
Company each received $0.1 million from the repayment of their promissory notes
under the Sponsor Facility in connection with the sale of the 10 3/4% senior
notes.
(27) FINANCIAL INFORMATION RELATED TO GUARANTOR SUBSIDIARIES
Consolidated financial information related to the Company and its guarantor
subsidiaries and non-guarantor subsidiaries as of December 29, 2001 and December
28, 2002, and for each of the fiscal years ended December 30, 2000, December 29,
2001 and December 28, 2002 is disclosed to comply with the reporting
requirements of the guarantor subsidiaries. The guarantor subsidiaries are
wholly-owned domestic subsidiaries of the Company who have fully and
unconditionally guaranteed the Company's 9 3/4% Senior Subordinated Notes due
May 15, 2007. See Note 9 -- "Long-Term Debt and Liquidity." Condensed
consolidated financial information follows (in thousands, except share and par
value amounts):
F-33
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 29, 2001
-------------------------------------------------------
INTERCOMPANY
GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents............... $ 1,950 $ 4,082 $ -- $ 6,032
Accounts receivable, net................ 81,916 38,844 -- 120,760
Inventories, net........................ 38,566 16,275 -- 54,841
Deferred tax asset...................... 10,115 -- -- 10,115
Prepaid expenses and other current
assets................................ 4,226 1,243 -- 5,469
-------- -------- --------- --------
Total current assets............... 136,773 60,444 -- 197,217
Property, plant and equipment, net......... 162,324 87,055 -- 249,379
Goodwill and trademarks, net............... 267,376 79,705 -- 347,081
Other assets............................... 227,654 10,741 (195,527) 42,868
-------- -------- --------- --------
Total assets....................... $794,127 $237,945 $(195,527) $836,545
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt.... $ 22,708 $ 5,780 $ -- $ 28,488
Accounts payable........................ 33,088 30,925 -- 64,013
Accrued liabilities..................... 44,674 12,857 190 57,721
-------- -------- --------- --------
Total current liabilities.......... 100,470 49,562 190 150,222
Long-term debt, excluding current
maturities.............................. 547,405 174,906 (162,976) 559,335
Other long-term liabilities................ 10,744 61 -- 10,805
Deferred tax liability..................... 9,505 3,080 -- 12,585
-------- -------- --------- --------
Total liabilities.................. 668,124 227,609 (162,786) 732,947
-------- -------- --------- --------
Senior Preferred Stock (Redeemable),
3,000,000 shares authorized, 1,200,000
shares issued and outstanding........... 65,672 -- -- 65,672
-------- -------- --------- --------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 par value; 1,000
shares authorized, issued and
outstanding........................... -- -- -- --
Additional paid-in-capital.............. 115,655 31,181 (31,181) 115,655
Accumulated other comprehensive loss.... (1,805) (4,242) (1,560) (7,607)
Accumulated earnings (deficit).......... (53,519) (16,603) -- (70,122)
-------- -------- --------- --------
Total stockholder's equity......... 60,331 10,336 (32,741) 37,926
-------- -------- --------- --------
Total liabilities and stockholder's
equity........................... $794,127 $237,945 $(195,527) $836,545
======== ======== ========= ========
</Table>
F-34
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 28, 2002
-------------------------------------------------------
INTERCOMPANY
GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents............... $ 57 $ 7,539 $ -- $ 7,596
Accounts receivable, net................ 86,190 43,157 -- 129,347
Inventories, net........................ 43,068 20,563 -- 63,631
Deferred tax asset...................... 5,859 -- -- 5,859
Prepaid expenses and other current
assets................................ 6,853 1,290 -- 8,143
-------- -------- --------- --------
Total current assets............... 142,027 72,549 -- 214,576
Property, plant and equipment, net......... 160,757 99,335 -- 260,092
Goodwill and trademarks, net............... 267,376 95,704 -- 363,080
Other assets............................... 230,170 10,709 (207,960) 32,919
-------- -------- --------- --------
Total assets....................... $800,330 $278,297 $(207,960) $870,667
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt.... $ -- $ 5,720 $ -- $ 5,720
Accounts payable........................ 59,218 34,310 -- 93,528
Accrued liabilities..................... 44,758 11,355 -- 56,113
-------- -------- --------- --------
Total current liabilities.......... 103,976 51,385 -- 155,361
Long-term debt, excluding current
maturities.............................. 536,069 172,636 (160,405) 548,300
Other long-term liabilities................ 23,692 -- -- 23,692
Deferred tax liability..................... 5,571 1,690 -- 7,261
-------- -------- --------- --------
Total liabilities.................. 669,308 225,711 (160,405) 734,614
-------- -------- --------- --------
Senior Preferred Stock (Redeemable),
3,000,000 shares authorized, 1,200,000
shares issued and outstanding........... 77,550 -- -- 77,550
-------- -------- --------- --------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 per share; 1,000
shares authorized, issued and
outstanding........................... -- -- -- --
Additional paid-in-capital.............. 115,674 47,690 (47,690) 115,674
Accumulated other comprehensive income
(loss)................................ (16,868) 26,291 135 9,558
Accumulated deficit..................... (45,334) (21,395) -- (66,729)
-------- -------- --------- --------
Total stockholder's equity......... 53,472 52,586 (47,555) 58,503
-------- -------- --------- --------
Total liabilities and stockholder's
equity........................... $800,330 $278,297 $(207,960) $870,667
======== ======== ========= ========
</Table>
F-35
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 30, 2000
----------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales................................................ $739,216 $136,545 $875,761
Cost of goods sold....................................... 579,809 107,990 687,799
-------- -------- --------
Gross profit................................... 159,407 28,555 187,962
Operating expenses:
Promotion and distribution............................. 38,317 13,968 52,285
Selling, general and administrative.................... 40,827 9,680 50,507
Amortization........................................... 10,822 1,957 12,779
Other operating expenses............................... 28,097 542 28,639
-------- -------- --------
Income from operations......................... 41,344 2,408 43,752
Interest expense, net.................................... 41,138 10,085 51,223
Other income, net........................................ (1,097) (635) (1,732)
-------- -------- --------
Income (loss) before income taxes.............. 1,303 (7,042) (5,739)
Income tax expense (benefit)............................. 834 (1,688) (854)
-------- -------- --------
Net income (loss).............................. 469 (5,354) (4,885)
Preferred stock dividends and accretion.................. (9,240) -- (9,240)
-------- -------- --------
Net loss available to common shares............ $ (8,771) $ (5,354) $(14,125)
======== ======== ========
</Table>
F-36
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 29, 2001
----------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales................................................ $697,597 $198,233 $895,830
Cost of goods sold....................................... 592,525 156,567 749,092
-------- -------- --------
Gross profit................................... 105,072 41,666 146,738
Operating expenses:
Promotion and distribution............................. 37,642 21,351 58,993
Selling, general and administrative.................... 33,821 13,372 47,193
Amortization........................................... 11,038 2,705 13,743
Other operating expenses............................... 8,440 215 8,655
-------- -------- --------
Income from operations......................... 14,131 4,023 18,154
Interest expense, net.................................... 37,237 19,783 57,020
Other (income) expense, net.............................. (2,254) 1,497 (757)
-------- -------- --------
Loss before income taxes....................... (20,852) (17,257) (38,109)
Income tax benefit....................................... (13,082) (3,089) (16,171)
-------- -------- --------
Net loss....................................... (7,770) (14,168) (21,938)
Preferred stock dividends and accretion.................. (10,467) -- (10,467)
-------- -------- --------
Net loss available to common shares............ $(18,237) $(14,168) $(32,405)
======== ======== ========
</Table>
F-37
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 28, 2002
----------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales................................................ $692,237 $195,096 $887,333
Cost of goods sold....................................... 556,967 144,451 701,418
-------- -------- --------
Gross profit................................... 135,270 50,645 185,915
Operating expenses:
Promotion and distribution............................. 32,573 20,952 53,525
Selling, general and administrative.................... 34,560 14,103 48,663
Amortization........................................... 2,872 680 3,552
Other operating expenses............................... 1,447 -- 1,447
-------- -------- --------
Income from operations......................... 63,818 14,910 78,728
Interest expense, net.................................... 42,558 19,837 62,395
Other (income) expense, net.............................. (1,144) 420 (724)
-------- -------- --------
Income (loss) before income taxes.............. 22,404 (5,347) 17,057
Income tax expense (benefit)............................. 2,341 (555) 1,786
-------- -------- --------
Net income (loss).............................. 20,063 (4,792) 15,271
Preferred stock dividends and accretion.................. (11,878) -- (11,878)
-------- -------- --------
Net income (loss) available to common shares... $ 8,185 $ (4,792) $ 3,393
======== ======== ========
</Table>
F-38
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 30, 2000
----------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Cash flows from operating activities:
Net income (loss)..................................... $ 469 $ (5,354) $ (4,885)
Items not requiring (providing) cash:
Depreciation and amortization...................... 27,814 8,520 36,334
Deferred tax expense (benefit)..................... 486 (2,266) (1,780)
Other non-cash charges, net........................ 15,806 6 15,812
Changes in current assets and liabilities
(excluding amounts acquired)..................... (13,570) 13,477 (93)
--------- -------- ---------
Net cash provided by operating activities..... 31,005 14,383 45,388
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures.................................. (22,528) (12,819) (35,347)
Acquisition related payments, net of cash received.... (147,751) 1,987 (145,764)
Other, net............................................ (340) 135 (205)
--------- -------- ---------
Net cash used in investing activities......... (170,619) (10,697) (181,316)
--------- -------- ---------
Cash flows from financing activities:
Net repayments under revolving credit agreements...... (2,400) -- (2,400)
Proceeds from issuance of long-term debt.............. 153,730 5,277 159,007
Principal payments on long-term debt.................. (14,305) (8,401) (22,706)
Payments for debt issuance costs...................... (2,501) -- (2,501)
Parent capital contribution........................... 572 -- 572
--------- -------- ---------
Net cash provided by (used in) financing
activities.................................. 135,096 (3,124) 131,972
--------- -------- ---------
Effect of exchange rate changes on cash and cash
equivalents........................................... (459) 379 (80)
--------- -------- ---------
Increase (decrease) in cash and cash
equivalents................................. (4,977) 941 (4,036)
Cash and cash equivalents, beginning of year............ 5,019 2,175 7,194
--------- -------- ---------
Cash and cash equivalents, end of year.................. $ 42 $ 3,116 $ 3,158
========= ======== =========
</Table>
F-39
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 29, 2001
----------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Cash flows from operating activities:
Net loss............................................... $ (7,770) $(14,168) $(21,938)
Items not requiring (providing) cash:
Depreciation and amortization....................... 28,817 12,613 41,430
Deferred tax benefit................................ (12,842) (5,240) (18,082)
Other non-cash charges, net......................... 17,478 1,604 19,082
Changes in current assets and liabilities........... (62,846) 18,418 (44,428)
-------- -------- --------
Net cash provided by (used in) operating
activities................................... (37,163) 13,227 (23,936)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures................................... (10,383) (6,933) (17,316)
Proceeds from sale of assets, net of cash received..... 20,884 -- 20,884
Other, net............................................. (4,143) 2,041 (2,102)
-------- -------- --------
Net cash provided by (used in) investing
activities................................... 6,358 (4,892) 1,466
-------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving credit agreements....... 30,400 -- 30,400
Proceeds from issuance of long-term debt............... 16,666 845 17,511
Principal payments on long-term debt................... (18,910) (9,015) (27,925)
Payments for debt issuance costs....................... (2,928) -- (2,928)
Parent capital contribution............................ 8,375 -- 8,375
-------- -------- --------
Net cash provided by (used in) financing
activities................................... 33,603 (8,170) 25,433
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................ (890) 801 (89)
-------- -------- --------
Increase in cash and cash equivalents.......... 1,908 966 2,874
Cash and cash equivalents, beginning of year............. 42 3,116 3,158
-------- -------- --------
Cash and cash equivalents, end of year................... $ 1,950 $ 4,082 $ 6,032
======== ======== ========
</Table>
F-40
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 28, 2002
----------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Cash flows from operating activities:
Net income (loss)...................................... $ 20,063 $ (4,792) $ 15,271
Items not requiring (providing) cash:
Depreciation and amortization....................... 20,202 11,962 32,164
Deferred tax expense (benefit)...................... 2,966 (1,708) 1,258
Other non-cash charges, net......................... 16,740 (35) 16,705
Changes in current assets and liabilities........... (1,089) 14,464 13,375
-------- -------- --------
Net cash provided by operating activities......... 58,882 19,891 78,773
-------- -------- --------
Cash flows from investing activities:
Capital expenditures................................... (14,858) (9,490) (24,348)
Proceeds from sale of assets........................... 314 1,452 1,766
Other, net............................................. 2,502 (5,822) (3,320)
-------- -------- --------
Net cash used in investing activities............. (12,042) (13,860) (25,902)
-------- -------- --------
Cash flows from financing activities:
Net repayments under revolving credit agreements....... (23,000) -- (23,000)
Proceeds from issuance of long-term debt............... -- 9,738 9,738
Principal payments on long-term debt................... (23,436) (12,736) (36,172)
Payments for debt issuance costs....................... (2,316) -- (2,316)
Parent capital contribution............................ 19 -- 19
-------- -------- --------
Net cash used in financing activities............. (48,733) (2,998) (51,731)
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................ -- 424 424
-------- -------- --------
Increase (decrease) in cash and cash
equivalents.................................... (1,893) 3,457 1,564
Cash and cash equivalents, beginning of year............. 1,950 4,082 6,032
-------- -------- --------
Cash and cash equivalents, end of year................... $ 57 $ 7,539 $ 7,596
======== ======== ========
</Table>
F-41
DOANE PET CARE COMPANY
[DPC LOGO]
OFFER TO EXCHANGE
UP TO $213,000,000 OF
10 3/4% SENIOR NOTES DUE 2010
FOR
UP TO $213,000,000 OF
10 3/4% SENIOR NOTES DUE 2010
THAT HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
---------------------------------
PROSPECTUS
---------------------------------
MAY 7, 2003