<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 0-27818
DOANE PRODUCTS COMPANY
State of Incorporation--Delaware IRS Employer Identification No. 43-1350515
West 20th Street and Stateline Road
Joplin, Missouri 64801
(417) 624-6166
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO ___________
Common Stock outstanding September 30, 1996 - 1,000 shares
<PAGE> 2
DOANE PRODUCTS COMPANY
INDEX
<TABLE>
<CAPTION>
Page
------
<S> <C>
PART I - Financial Information
Item 1:
Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 2
Consolidated Statements of Operations-three and nine months ended September 30, 1996 and
September 30, 1995 3
Consolidated Statements of Cash Flows - nine months ended September 30, 1996 and
September 30, 1995 4
Notes to Consolidated Financial Statements 5-8
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11
PART II - Other Information
Item 1:
Legal Proceedings 12
Item 5:
Other Information
Item 6:
Exhibits and Reports on Form 8-K
Signature 13
</TABLE>
<PAGE> 3
DOANE PRODUCTS COMPANY
BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 1,550
Accounts receivable, net 48,929 46,558
Inventories 28,571 27,595
Prepaid expenses and other 509 2,298
--------- ---------
Total current assets 78,009 78,001
Investments - cash value of life insurance 1,495 1,470
Property, net of accumulated depreciation $6,394
as of September 30, 1996, and $1,557 as of
December 31, 1995 91,882 91,832
Goodwill, net of amortization 126,997 129,105
Other assets 11,461 9,176
--------- ---------
$ 309,844 $ 309,584
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank overdraft $ 2,584 $ -
Current maturities of long-term debt 10,431 5,505
Accounts payable 22,655 18,883
Accrued expenses
Salaries and commissions 3,904 2,944
Other 522 11,775
--------- ---------
Total current liabilities 40,096 39,107
Deferred compensation 3,738 4,846
Long-term debt 203,719 204,233
Deferred income taxes 6,261 1,103
Deferred credit - 1,770
Senior exchangeable preferred stock 22,624 18,414
Stockholder's equity:
Common stock, par value $.01;
authorized and issued 1,000 shares - -
Additional paid in capital 40,425 40,425
Retained earnings (7,019) (314)
--------- --------
33,406 40,111
--------- --------
$ 309,844 $309,584
========= ========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE> 4
DOANE PRODUCTS COMPANY
STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 | 1995 1996 | 1995
(SUCCESSOR) | (PREDECESSOR) (SUCCESSOR) | (PREDECESSOR)
(unaudited) | (unaudited) (unaudited) | (audited)
| |
<S> <C> | <C> <C> | <C>
Net sales $ 124,672 | $ 91,932 $ 355,957 | $ 294,718
Cost of goods sold 111,965 | 75,838 314,897 | 245,163
--------- | -------- --------- | ---------
Gross profit 12,707 | 16,094 41,060 | 49,555
| |
Operating expenses: | |
Selling 3,739 | 2,518 10,530 | 8,773
General and administrative 4,243 | 5,024 12,416 | 10,776
Nonrecurring expenses - | 9,440 - | 9,440
--------- | -------- --------- | ---------
Total operating expenses 7,982 | 16,982 22,946 | 28,989
--------- | -------- --------- | ---------
Income (loss) from operations 4,725 | (888) 18,114 | 20,566
| |
Other income (expense): | |
Interest income 61 | 28 206 | 95
Interest expense (5,601) | (941) (17,173) | (3,707)
Non-recurring financing fees - | - (4,815) | -
Miscellaneous 3 | 30 10 | 9
--------- | -------- --------- | ---------
Total other income (expense) (5,537) | (883) (21,772) | (3,603)
| |
Income (loss) before income taxes (812) | (1,771) (3,658) | 16,963
Provision (benefit) for income taxes (203) | 22 (1,163) | 217
--------- | -------- --------- | ---------
Net income (loss) $ (609) | $ (1,793) $ (2,495) | $ 16,746
========= | ======== ========= | =========
| |
Net income (loss) $ (609) | $ (1,793) $ (2,495) | $ 16,746
Accretion of preferred stock 270 | - 808 | -
Preferred stock dividend 1,187 | - 3,402 | -
--------- | -------- --------- | ---------
Net loss applicable to common stock $ (2,066) | - $ (6,705) | -
--------- | -------- --------- | ---------
Net loss per common share available | |
to common stockholder (2,066) | - (6,705) | -
--------- | -------- --------- | ---------
Weighted average shares outstanding 1,000 | - 1,000 | -
--------- | -------- --------- | ---------
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 5
DOANE PRODUCTS COMPANY
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTH | NINE MONTH
PERIOD ENDED | PERIOD ENDED
SEPTEMBER 30, 1996 | SEPTEMBER 30, 1995
SUCCESSOR | PREDECESSOR
--------- | -----------
(unaudited) | (audited)
<S> | <C>
|
Cash flows from operating activities: |
Net income (loss) $ (2,495) | $ 16,746
|
Items not requiring (providing) cash: |
Depreciation and amortization 7,388 | 3,694
Non-recurring financing fees expensed 4,815 | -
Amortization of deferred debt issuance costs 736 | -
Accrued deferred compensation (9) | (93)
(Gain) loss on sale property and equipment 11 | 10
Deferred income taxes 5,158 | -
Change in deferred credit (1,770) |
Changes in working capital components (8,079) | (7,403)
-------- | ---------
|
Net cash provided by operating activities $ 5,755 | $ 12,954
-------- | ---------
|
Cash flows from investing activities: |
Proceeds from sale of property and equipment 19 | 571
Purchase of property and equipment (4,956) | (4,224)
Increase in debt issuance costs (5,403) | -
(Increase) decrease in other assets (3,961) | (24)
-------- | ---------
|
Net cash used in investing activities (14,301) | (3,677)
-------- | ---------
|
Cash flows from financing activities: |
Bank overdraft 2,584 | -
Proceeds from issuance of long-term debt 177,000 | (7,225)
Principal payments on long-term debt (172,588) | (191)
Cash dividends - | (13,152)
-------- | ---------
|
Net cash provided (used) in financing activities 6,996 | (20,568)
-------- | ---------
|
Decrease in cash and cash equivalents (1,550) | (11,291)
Cash and cash equivalents, beginning of period 1,550 | 14,841
-------- | ---------
|
Cash and cash equivalents, end of period $ -0- | $ 3,550
======== | =========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 6
DOANE PRODUCTS COMPANY
Notes To Consolidated Financial Statements
for the nine months ended September 30, 1996
(dollars in thousands, except per share amounts)
(Unaudited)
1. Accounting policies
The unaudited interim financial information included herein reflects the
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the results of
operations, financial position, and cash flows for the periods presented.
Such interim information should be read in conjunction with the financial
statements and notes thereto contained in the Company's Registration Statement
on Form S-1 (File No. 33-98110) relating to the issuance of $160,000 principal
amount Senior Notes due 2006 (the "Senior Notes"). The accounting policies
used in preparing these financial statements are the same as those summarized
in the Company's 1995 financial statements included in the Form S-1
Registration Statement.
The results of operations for the nine months ended September 30, 1996 and
September 30, 1995 are not necessarily indicative of the results to be expected
for other interim periods or the full year.
2. Acquisition
On October 5, 1995 the Company was acquired (the "Acquisition") through the
merger (the "Merger") of DPC Subsidiary Acquisition Corp. with and into the
Company's predecessor (the "Predecessor") with the Company being the surviving
entity ("Successor"). DPC Subsidiary Acquisition Corp. was a newly organized
Delaware corporation formed for the sole purpose of effecting the Acquisition.
The Company is a wholly-owned subsidiary of DPC Acquisition Corp. ("DPCAC").
The purchase price was $249,100 including existing indebtedness. The
Acquisition was financed with a senior credit facility which provides term loan
borrowings of $90,000 and revolving loan borrowings of up to $25,000, $120,000
of senior subordinated increasing rate notes (the"Bridge Notes"), and $30,000
of 14.25% Senior Exchangeable Preferred Stock. The Bridge Notes and $40,000 of
term loan borrowings were refinanced on March 4, 1996 with the proceeds of
$160,000 principal amount of the Company's 10 5/8% Senior Notes due 2006 (the
"Senior Notes"). The cost of the Acquisition has been allocated on the basis
of the estimated fair value of the assets acquired and liabilities assumed.
The allocation resulted in goodwill of approximately $129,000. The goodwill is
being amortized over 40 years on a straight-line basis.
For financial statement purposes, the Acquisition and Merger were accounted for
as a purchase acquisition effective October 1, 1995. The effects of the
Acquisition have been reflected in the Company's assets and liabilities at that
date. As a result, the Company's financial statements for the periods
subsequent to September 30, 1995 are presented on the Successor's new basis of
accounting, while financial statements for September 30, 1995 and prior periods
are presented on the Predecessor's historical cost basis of accounting.
3. Long-term debt
Long-term Debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
<S> <C> <C>
Senior Credit Facility
Term Loan 44,075 86,158
Revolving Credit Facility 7,000 -
Industrial Revenue Bonds 3,075 3,580
Senior Notes 160,000 -
Bridge Note - 120,000
--------- -------
Total Long-term debt $ 214,150 $ 209,738
--------- ---------
Less Current Maturities 10,431 5,505
$ 203,719 $ 204,233
========= =========
</TABLE>
-5-
<PAGE> 7
Senior Credit Facility
In connection with the Acquisition, the Company entered into a senior credit
facility effective October 5, 1995 (the "Senior Credit Facility") with several
lending institutions. The Senior Credit Facility provided for an aggregate
principal amount of loans of up to $115,000 consisting of $90,000 in aggregate
principal amount of term loans (the "Term Loan Facility"), of which $40,000 has
been prepaid, and a $25,000 revolving credit facility (the "Revolving Credit
Facility").
The Term Loan Facility matures on September 30, 2000 and is due in quarterly
installments in increasing amounts, ranging from $2,083 to $4,792, commencing
September 30, 1996. The Revolving Credit Facility matures on September 30,
2000. The Company is required to reduce borrowings under the Revolving Credit
Facility to $10,000 or less for 30 consecutive days during the fiscal years
ended September 30, 1996 and 1997, and to $7,500 or less for 30 consecutive
days during each fiscal year ended September 30 thereafter.
Indebtedness under the Senior Credit Facility bears interest at a rate based,
at the Company's option, upon (i) the Base Rate plus 1.50% with respect to Base
Rate Loans and (ii) the LIBOR Rate for one, two, three or six months plus 2.75%
with respect to LIBOR Rate Loans; provided, however, the interest rates are
subject to reductions in the event the Company meets certain performance
targets. The Term Loan Facility bore interest at an average rate of 8.00% for
the period from July 1, 1996 to September 30, 1996.
The Senior Credit Facility is secured by substantially all of the assets of the
Company and a pledge of all of the Company's common stock held by DPCAC.
The Senior Credit Facility requires the Company to meet certain financial
tests, including minimum cash flow, minimum cash flow coverage ratio and
maximum leverage ratios. The Senior Credit Facility also contains covenants
which, among other things, limit the incurrence of additional indebtedness, the
nature of the business of the Company and its subsidiaries, investments, leases
of assets, ownership of subsidiaries, dividends, transaction with affiliates,
asset sales, acquisitions, mergers and consolidations, liens and encumbrances
and other matters customarily restricted in such agreements.
Senior Notes
The Senior Notes bear interest at the rate of 10 5/8% per annum, payable
semiannually on March 1 and September 1 of each year, commencing on September
1, 1996. The Senior Notes are redeemable, at the Company's option, in whole or
in part, from time to time, on or after March 1, 2001, initially at 105.313% of
their principal amount and thereafter at prices declined to 100% at March 1,
2004 until maturity, in each case together with accrued and unpaid interest to
the redemption date. In addition, at any time on or prior to March 1, 1999,
the Company may redeem up to 35% of the aggregate principal amount of the
Senior Notes originally issued with the net cash proceeds of one or more public
equity offerings, at 109.625% of their principal amount, together with accrued
and unpaid interest, if any, to the redemption date; provided that at least
$104,000 in principal amount of Senior Notes remain outstanding immediately
after any such redemption. The Senior Notes are general senior unsecured
obligations of the Company, ranking senior to all subordinated indebtedness of
the Company and ranking pari passu in right of payment to all other senior
indebtedness of the Company. Lenders under the Senior Credit Facility have
claims with respect to the assets constituting collateral for such indebtedness
that are effectively senior and right of payment to the claims of holders of
the Senior Notes. The Senior Notes were issued pursuant to an indenture which
contains covenants restricting or limiting the ability of the Company and its
subsidiaries to pay dividends or make other restricted payments, incur
additional indebtedness and issue preferred stock, create liens, incur
dividends and other payment restrictions affecting subsidiaries, enter into
mergers or consolidations, make asset sales, enter into transactions with
affiliates, and engage in other lines of business. Under certain
circumstances, the Company is required to offer to purchase all outstanding
Senior Notes at a purchase price in cash equal to 100% of their principal
amount, plus accrued and unpaid interest to the date of repurchase, with the
proceeds of certain asset sales. Upon a Change of Control (as defined in the
indenture relating to the Senior Notes) each holder of Senior Notes will have
the right to require the Company to repurchase all or any part of such holder's
Senior Notes at a purchase price equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest to the date of purchase.
-6-
<PAGE> 8
The Senior Credit Facility prohibits the Company from repurchasing any Senior
Notes upon a Change of Control.
Industrial Development Revenue Bonds
The Industrial Development Bonds with The County of Pueblo, Colorado (the
"Pueblo IDRBs") were issued on October 1, 1991 in the aggregate principal
amount of $4,500. The Pueblo IDRBs bear interest at a rate of 6.3% to 7.15%
per annum. Principal repayments are due annually through October, 2001. The
Pueblo IDRBs are secured by real estate and other property and equipment at the
Pueblo, Colorado manufacturing facility.
4. Senior Exchangeable Preferred Stock
The Company has authorized 3,000,000 shares of Senior Exchangeable Preferred
Stock of which the Company issued 1,200,000 shares in connection with the
financing of the Acquisition.
The Senior Exchangeable Preferred Stock has an initial liquidation preference
of $25.00 per share (aggregate initial liquidation preference is $30,000). The
Senior Exchangeable Preferred Stock was recorded at the net proceeds of $17,075
after deducting $12,925 paid to DPCAC for warrants of DPCAC which were issued
in conjunction with the Senior Exchangeable Preferred Stock. The excess of the
liquidation preference over the carrying value is being accreted quarterly over
a twelve year period ended September 30, 2007 by a direct reduction to retained
earnings.
Dividends on the Senior Exchangeable Preferred Stock are payable quarterly at
the rate of 14.25% per annum per share. Dividends on the Senior Exchangeable
Preferred Stock accrete to the liquidation value of the Senior Exchangeable
Preferred Stock and, at the option of the holders of a majority of the shares
of Senior Exchangeable Preferred Stock, may be paid through the issuance of
additional shares of Senior Exchangeable Preferred Stock on each dividend
payment date through September 30, 2000. The Company does not expect to pay
dividends on the Senior Exchangeable Preferred Stock in cash for any period
prior to September 30, 2000. Cumulative dividends on Senior Exchangeable
Preferred Stock that have not been paid at September 30, 1996 and December 31,
1995 are included in the carrying amount of the Senior Exchangeable Preferred
Stock.
The Senior Exchangeable Preferred Stock will be exchangeable, in whole or in
part, at the option of the Company on any dividend payment date for 14.25%
Junior Subordinated Exchange Debentures.
The terms of the Senior Exchangeable Preferred Stock prohibit (i) the payment
of dividends on securities ranking on a parity with or junior to the Senior
Exchangeable Preferred Stock and (ii) redemption, repurchase or acquisition of
any Junior Securities with certain exception, in each case, unless full
cumulative dividends have been paid on the Senior Exchangeable Preferred Stock.
5. Income (Loss) Per Common Share
Income (loss) per common share is computed based upon the weighted average
number of common shares outstanding during each period. The income (loss)
is decreased (increased) by preferred stock dividends and the accretion of
preferred stock in calculating net income (loss) attributable to the
common shareholder.
6. Inventories
The composition of inventories at the balance sheet dates was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
<S> <C> <C>
Raw materials $ 6,482 $ 8,401
Packaging materials 9,322 9,480
Finished goods $ 12,767 9,714
-------- -----
$ 28,571 $ 27,595
======== ========
</TABLE>
-7-
<PAGE> 9
7. Commitments and Contingencies
Except as described below, the Company is not a party to any material pending
legal proceedings other than ordinary routine litigation incidental to its
business, that management believes would have a material adverse affect on its
financial condition or results of operations.
The Company was named as a defendant in a case styled Harvey v. Doane Products
Company, which was filed in the US District Court for the Northern District of
Alabama on September 7, 1995. The plaintiff alleged that the Company
negligently loaded a common carrier which resulted in the death of the driver
of the truck and his wife. The Company has been awarded a summary judgement
for this claim on April 15, 1996 and the case was dismissed.
The Company has also been named as a defendant in a wrongful death action on
behalf of the wife of the driver of the truck. The plaintiff is claiming
$1,250 plus costs. The Company believes it is adequately insured for any
damages that may result from such actions, and therefore no provision for loss
has been made in the accompanying financial statements. The Company has filed
a motion for summary judgement to dismiss this claim.
-8-
<PAGE> 10
DOANE PRODUCTS COMPANY
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Acquisition. On October 5, 1995 the Company was acquired by DPC
Acquisition Corp. (the "Acquisition"). In connection with the Acquisition,
the Company entered into a credit facility (the "Senior Credit Facility") with
a syndicate of lenders providing for bank term loan borrowings of $90 million
and revolving loan borrowings of up to $25 million. Additional financing for
the Acquisition was provided by a bridge loan (the "Bridge Loan") in the amount
of $120 million. On March 4, 1996 the Company issued $160 million 10 5/8%
Senior Notes due 2006 (the "Senior Notes") and used the proceeds to repay the
$120 million Bridge Loan and prepay $40 million of term loan borrowings.
The Acquisition has been accounted for using the purchase method of accounting.
The total purchase price of $249.1 million, including existing indebtedness
(exclusive of fees and expenses of approximately $13.0 million), has been
allocated to the assets and liabilities acquired based upon their respective
fair values. As a result, beginning October 1, 1995, the Company recorded
expenses for depreciation and amortization that are significantly in excess of
historical levels. In addition, the results of operations of the Company have
been significantly affected by the impact of the financing of the Acquisition,
including interest expense on the indebtedness incurred under the Senior Credit
Facility, the Senior Notes, and the Bridge Loan. The financial statements for
periods after October 1, 1995 are presented on the Company's new basis of
accounting, while the financial statements for September 30, 1995 are presented
on the Company's predecessor's historical cost basis of accounting.
Prior to the Acquisition, the Company was organized as a subchapter S
corporation. Consequently, the Company did not pay federal, state or local
income taxes except in those states that did not recognize subchapter S status
or that required payment of franchise taxes.
Results of Operations
Net Sales. Doane Products Company derives substantially all of its revenue
from the sale of private label pet food products. Net sales in the three month
period ended September 30, 1996 increased 35.7% to $124.7 million from $91.9
million for the same period ended in 1995. Pet food net sales increased 34.6%
to $115.9 million in the three month period ended September 30, 1996 from $86.1
million in the same period of 1995. This increase was primarily due to a 17.7%
increase in pet food tons sold and price increases implemented in response to
higher raw material costs. Net sales of non-manufactured products increased
55.7% in the three month period ended September 30, 1996 to $6.3 million due to
distribution of additional items. Engineering net sales increased 38.4%
in the three month period ended September 30, 1996 to $2.4 million. Net
sales in the nine month period ended September 30, 1996 increased
20.8% to $356.0 million from $294.7 million during the same period ended in
1995 primarily due to volume growth and price increases.
Gross Profit. Gross profit for the three month period ended September 30,
1996 decreased 21.1% to $12.7 million from $16.1 million for the same period in
1995. Gross profit for the three month period ended September 30, 1996 was
negatively impacted by increases in the costs of most raw materials. The cost
increases were partially offset by an increase in tons of pet food sold and
price increases implemented throughout the quarter. Gross profit for the three
month period ended September 30, 1996 was also negatively impacted by $.3
million due to increased depreciation resulting from the write up of assets in
connection with the Acquisition. Gross profit as a percent of net sales for
the three month period declined to 10.2% from 17.5% for the same period in 1995.
Gross profit for the nine month period ended September 30, 1996
decreased 17.1% to $41.1 million from $49.6 million during the same
period in 1995 for the same reasons.
Operating Expenses. Operating expenses decreased to $8.0 million in the
three month period ended September 30, 1996 from $17.0 million for the same
period of 1995, primarily due to nonrecurring expenses of $9.4 million
related to bonuses paid by the former stockholders. Selling expenses
increased to $3.7 million from $2.5
-9-
<PAGE> 11
million in 1995. This increase was primarily attributable to increases in
promotions, volume incentive discounts and brokerage resulting from increased
pet food tons sold. General and administrative expenses decreased to $4.2
million in the three month period ended September 30, 1996 from $5.0 million in
1995 primarily due to non-recurring expenses incurred prior to the Acquisition,
partially offset by an increase in depreciation and amortization expenses of
$.9 million in the three month period ended September 30, 1996 as a result of
the Acquisition . Operating expenses as a percent of net sales decreased to
6.4% from 18.5% for the same period in 1995 due to nonrecurring expenses of $9.4
million related to bonuses paid by the former stockholders. Operating expenses
decreased to $22.9 million in the nine month period ended September 30, 1996
from $29.0 million for the same period in 1995 for the same reasons.
Income From Operations. Income from operations increased $5.6 million to $4.7
million in the three month period ended September 30, 1996 from a loss of $.9
million in the third quarter of 1995. This increase was primarily due to
nonrecurring expenses of $9.4 million related to bonuses paid by the former
stockholders in connection with the Acquisition in the third quarter of 1995.
This was offset by increases in depreciation and amortization expenses of $1.2
million as a result of the Acquisition in October 1995 and increased costs for
most raw materials for the three months ended September 30, 1996. Income from
operations decreased 12.1%, or $2.5 million, to $18.1 million in the nine month
period ended September 30, 1996 from $20.6 million in the same period in 1995
primarily due to increased costs for most raw materials in 1996 offset by
nonrecurring expenses in 1995.
Interest Expense. Interest expense increased to $5.6 million in the three
month period ended September 30, 1996 from $.9 million in 1995 due to interest
expense on debt incurred to finance the Acquisition, and amortization costs of
$.2 million related to deferred costs associated with the new debt. Interest
expense increased to $17.2 million in the nine month period ended September 30,
1996 from $3.7 million for the same period in 1995 for the same reasons.
Income Taxes. Income taxes decreased to $(.2) million for the three month
period ended September 30, 1996 from $.02 million for the third quarter of
1995. The tax benefit for the nine months ended September 30, 1996 was $1.2
million as compared to a tax provision of $.2 million for the same period in
1995. Prior to the Acquisition, the Company was organized as a sub-chapter S
corporation and consequently the Company did not pay federal, state or local
income taxes except in those states that did not recognize sub-chapter S status
or that required payment of franchise taxes.
Liquidity and Capital Resources
The Company had working capital of $37.9 million at September 30, 1996. Net
cash provided by operating activities was $3.9 million, down from $13.0 million
for the same period during 1995, primarily due to lower gross profit for the
three quarters of 1996, additional interest expense and non-recurring financing
fees resulting from the Acquisition.
As part of the Senior Credit Facility the Company maintains a $25.0 million
revolving credit facility with banks which provides adequate liquidity to meet
the Company's operational needs. At September 30, 1996, the Company had
borrowing capacity in the amount of $16.8 million under the Senior Credit
Facility, which is net of $1.2 million for outstanding letters of credit.
Long term debt outstanding at September 30, 1996 consisted primarily of $160.0
million Senior Notes, bank term notes in the amount of $44.1 million, and bank
revolving credit notes in the amount of $7.0 million.
The Company is highly leveraged and has significantly increased cash
requirements for debt service relating to the Senior Notes. The Company's
ability to borrow is limited by the Senior Credit Facility and the limitations
on the incurrence of the indebtedness under the indenture entered into by the
Company in connection with the Senior Notes. The Company anticipates that its
operating cash flow, together with amounts available to it under the Senior
Credit Facility, will be sufficient to finance working capital requirements,
debt service requirements and anticipated capital expenditures.
-10-
<PAGE> 12
Market prices for certain commodity grains and food stocks used in the
Company's production process continued to increase significantly during the
third quarter of 1996. While the Company implemented price increases for it's
products throughout the nine month period ended September 30, 1996, such price
increases were not sufficient to offset fully the increases in raw material
costs. Accordingly, the Company's profit margins for the first three quarters
of 1996 were adversely affected.
In the event of further increases in raw material costs, the Company would be
required to further increase sales prices for its products in order to avoid
margin deterioration. There can be no assurance that any future sales price
increases could be successfully implemented by the Company or as to whether any
price increases implemented by the Company may affect the volume of future
shipments.
Capital expenditures for the nine months ended September 30, 1996 were $5.0
million compared to $4.2 million for the same period in 1995.
It is expected that existing manufacturing facilities will not be sufficient
to meet the Company's anticipated volume growth for the next several years.
Accordingly, it is anticipated that capital expenditures will be required to
construct or acquire additional manufacturing capacity. The Company's capital
expenditure budget for the remainder of 1996 is approximately $2.9 million,
which includes $2.6 million to increase manufacturing and warehouse capacity.
In addition, future increases in demand may require the Company to construct or
acquire new manufacturing facilities.
The Company expects to finance additional manufacturing facilities with cash
flow from operations and the revolving credit facility. No assurance can be
given that cash flow from operations will be sufficient to finance such
expansion.
-11-
<PAGE> 13
DOANE PRODUCTS COMPANY
PART II
Item 1. Legal Proceedings
Except as described below, the Company is not a party to any material pending
legal proceedings other than ordinary routine litigation incidental to its
business, that management believes would have a material adverse affect on its
financial condition or results of operations.
The Company was named as a defendant in a case styled Harvey v. Doane Products
Company, which was filed in the US District Court for the Northern District of
Alabama on September 7, 1995. The plaintiff alleged that the Company
negligently loaded a common carrier which resulted in the death of the driver
of the truck and his wife. The Company has been awarded a summary judgement
for this claim on April 15, 1996 and the case was dismissed.
The Company has also been named as a defendant in a wrongful death action on
behalf of the wife of the driver of the truck. The plaintiff is claiming
$1,250 plus costs. The Company believes it is adequately insured for any
damages that may result from such actions, and therefore no provision for loss
has been made in the accompanying financial statements. The Company has filed
a motion for summary judgement to dismiss this claim.
Item 5. Other Information
On November 12, 1996, a subsidiary of the Company, DPC International Limited,
acquired approximately 50% of the issued and outstanding capital stock of
Effeffe S.r.l., an Italian company that manufactures dry pet food. The total
purchase price of such capital stock was approximately $2.0 million. Pursuant
to the terms of such acquistion, DPC International Limited will appoint 50% of
the Board of Directors of Effeffe.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
-12
<PAGE> 14
DOANE PRODUCTS COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOANE PRODUCTS COMPANY
November 13, 1996 /s/ ROY E. HESS
------------------------------------
Roy E. Hess
Vice President - Finance
(Principal Financial Officer and
Duly Authorized Officer)
-13-
<PAGE> 15
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
-------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOANE
PRODUCTS COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 48,929
<ALLOWANCES> 0
<INVENTORY> 28,571
<CURRENT-ASSETS> 78,009
<PP&E> 98,276
<DEPRECIATION> (6,394)
<TOTAL-ASSETS> 309,844
<CURRENT-LIABILITIES> 40,096
<BONDS> 160,000
<COMMON> 0
0
22,624
<OTHER-SE> 40,425
<TOTAL-LIABILITY-AND-EQUITY> 309,844
<SALES> 355,957
<TOTAL-REVENUES> 355,957
<CGS> 314,897
<TOTAL-COSTS> 337,843
<OTHER-EXPENSES> 22,946
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,173
<INCOME-PRETAX> (3,658)
<INCOME-TAX> (1,163)
<INCOME-CONTINUING> (2,495)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,495)
<EPS-PRIMARY> (6,705)
<EPS-DILUTED> 0
</TABLE>
