Redeemable, Convertible Series A Preferred Stock

6 Months Ended

Jun. 30, 2020

Schedule of Investments [Abstract]

Redeemable, Convertible Series A Preferred Stock

Redeemable Series A Convertible Preferred Stock

On May 19, 2020, we issued 250,000 shares of our 7.5% Series A Convertible Preferred Stock (the “Series A Preferred Stock”), with a par value of $0.01 per share, for an aggregate purchase price of $250 million, or $1,000 per share, pursuant to an Investment Agreement (the “Investment Agreement”) with CD&R VFC Holdings, L.P. (the “Purchaser”), an affiliate of Clayton, Dubilier & Rice, LLC, dated April 30, 2020. We received net proceeds of $244 million after issuance costs, a portion of which was used to pay down our revolver borrowings and the remainder of which will be used to provide additional short-term liquidity and support general corporate purposes.

Our Series A Preferred Stock is a participating security for our calculation of earnings per share (see Note 15 - Earnings (Loss) Per Share). Below is a summary of our Series A Preferred Stock characteristics, which are set forth in the Certificate of Designations:

Voting and Other

The holders of our Series A Preferred Stock vote together with the holders of common stock as a single class on an as-converted basis. In addition, the holders are entitled to vote as a separate class on certain matters and as required by law.

On an as-converted basis, together with the Purchaser's existing common shares of Covetrus, the Purchaser owns approximately 25% of pro forma common shares outstanding. However, unless certain stockholder approval is obtained, the terms of the Series A Preferred Stock limit the Purchaser's voting interest to 19.99% of our then-outstanding voting interests.

Under the terms of the Investment Agreement, the Purchaser has the right to appoint two designees to our board of directors.

Dividends

The holders participate in dividends on an as-converted basis when paid on common stock. Additionally, the holders are entitled to cumulative dividends, payable quarterly in arrears, at an annual rate of 7.5% of the stated value of $1,000 per share. Dividends may be paid in cash or accrue in accordance with the terms of the Certificate of Designations. For the three months ended June 30, 2020, our board of directors declared a pro rata quarterly dividend of $8.65 per share, or $2 million, that was paid on June 30, 2020. Accordingly, there were no cumulative dividends included in the accompanying condensed consolidated financial statements in connection with the outstanding shares of Series A Preferred Stock.

Conversion Rights

At the option of the holder, each share of the Series A Preferred Stock is convertible into common stock at any time as is determined by dividing the applicable conversion value by the applicable conversion price in effect at the time of conversion.

At the option of the Company, we may require the conversion of all of the outstanding shares of Series A Preferred Stock into the relevant number of shares of our common stock if either (i) our consolidated EBITDA (as defined in the Certificate of Designations) exceeds $300 million for two consecutive 12-month periods and our consolidated net total leverage ratio (as defined in the Certificate of Designations) as of the last day of such two consecutive 12-month periods does not exceed 4:00:1:00, or (ii) the volume-weighted average price of our common stock exceeds the product of the mandatory conversion threshold, 200%, if within two years of the issuance date multiplied by the conversion price on each of at least twenty trading days (whether or not consecutive) in a period of thirty consecutive trading days. Currently, our conversion price as described under (ii) above is $22.20.

However, unless certain stockholder approval is obtained, no share of Series A Preferred Stock is convertible into common stock if the conversion would result in the holder beneficially owning more than 19.99% of our then outstanding voting power.

In determining the appropriate classification for the conversion features of the Series A Preferred Stock, we determined that the conversion features do not meet the definition of a derivative and that bifurcation was not required as the features are considered clearly and closely related to the host instruments.

Redemption Provision

At the option of the holder, upon certain change in control events, each share of the Series A Preferred Stock is redeemable in an amount in cash equal to 101% of the liquidation preference thereof plus all accrued and unpaid dividends. Should the holders not redeem, we have the option to redeem the shares, upon certain change of control events, in an amount in cash equal to the liquidation preference as of the date of redemption, plus all accrued but unpaid dividends as of the date of redemption, plus certain additional amounts if the applicable redemption date is prior to the fifth anniversary of the date of issuance of such Series A Preferred Stock. As of June 30, 2020, a change in control was not probable.

We determined that bifurcation of the redemption features was not required as they do not require net settlement and therefore do not meet the definition of a derivative.

Liquidation Rights

In the event of any voluntary or involuntary liquidation, dissolution, or winding up of Covetrus, the holders of outstanding shares of Series A Preferred Stock are entitled to be paid out of the assets of Covetrus available for distribution to our shareholders before any payment to the holders of our common stock.