<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 43-1350515
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
WEST 20TH STREET AND
STATE LINE ROAD
JOPLIN, MISSOURI 64804
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (417) 624-6166
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
None None
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
As of February 28, 1998, Registrant had outstanding 1,000 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
PAGE
<S> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . .11
Financial Information . . . . . . . . . . . . . . . . . . . . . . . Appendix F
</TABLE>
(i)
<PAGE> 3
ITEM 1- BUSINESS
THE COMPANY
On October 5, 1995, the Company was acquired (the
"Acquisition") through the merger of DPC Subsidiary Acquisition Corp. with and
into the Company's predecessor, Doane Products Company (the "Predecessor"),
which immediately merged with and into the Company (formerly known as DPC
Transition Corp.), with the Company being the surviving entity. Immediately
following such mergers, DPC Transition Corp. changed its name to Doane Products
Company. DPC Subsidiary Acquisition Corp. and DPC Transition Corp. were both
newly organized Delaware corporations formed for the sole purpose of effecting
the Acquisition.
The Company is a wholly-owned subsidiary of DPC Acquisition
Corp. ("DPCAC"). DPCAC was formed to acquire the Company by a group of
investors (the "Investors"), which included (a) certain members of the
Company's management, (b) Summit/DPC Partners, L.P. ("Summit"), an affiliate of
Summit Capital, Inc. ("SCI"), (c) DLJ Merchant Banking Partners, L.P. and
certain of its affiliates ("DLJMB"), all of which are affiliates of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJSC"), and (d) Chase Manhattan
Investment Holdings, Inc. ("CMIHI"), a wholly-owned subsidiary of The Chase
Manhattan Corporation.
The purchase price for the Acquisition was $249.1 million,
including existing indebtedness. The Acquisition was financed through (i) a
senior credit facility consisting of a syndicate of lenders led by Mercantile
Bank of St. Louis National Association ("Mercantile Bank"), which provides term
loan borrowings of $90 million and revolving loan borrowings of up to $25
million (the "Senior Credit Facility"), (ii) the sale of $120 million principal
amount of senior subordinated increasing rate notes of the Company (the "Bridge
Notes"), and (iii) a securities purchase agreement with the Investors providing
for (a) the sale of the Company's 14.25% Senior Exchangeable Preferred Stock
due 2007 (the "Preferred Stock") and warrants to purchase common stock of DPCAC
for $30 million, and (b) common stock of DPCAC for $27.5 million. The Bridge
Notes and $40 million of term loan borrowings were refinanced on March 4, 1996,
with the proceeds of $160 million principal amount of the Company's 10 5/8%
Notes due 2006 (the "Senior Notes"). As used herein, the term "Acquisition"
means the acquisition of the Company by DPCAC, the refinancing of existing
indebtedness and the payment of related fees and expenses.
GENERAL
The Company manufactures and distributes its pet food products
utilizing thirteen manufacturing and warehouse facilities and three additional
distribution warehouse facilities, all of which are located in proximity to
customers, raw materials and transportation networks. This network of
manufacturing and warehouse facilities reduces freight costs for raw materials
and finished goods and facilitates direct store shipment programs. Since 1987,
the Company has constructed seven new manufacturing facilities and renovated or
expanded most of its other manufacturing facilities. In constructing and
renovating such facilities, the Company utilizes in-house capabilities for the
design, manufacture, installation and repair of its pet food manufacturing
equipment, thereby reducing capital costs and start up times for plant
construction and renovation.
1
<PAGE> 4
The Company has been the primary supplier of private label dry
pet food products to Wal-Mart Stores, Inc. ("Wal-Mart") since 1970 and to the
Sam's Club division of Wal-Mart ("Sam's Club") since 1990. The Company
utilizes a computerized order and distribution system to ship product directly
from the Company's manufacturing and warehouse facilities to virtually all
domestic Wal-Mart stores, a majority of which are located within 250 miles of
the Company's facilities. The Company's direct ship program, which reduces
customer inventory, handling and warehouse expenses, is enhanced by the
location and number of the Company's facilities. The Company also offers
direct shipment programs to, and utilizes electronic data interchange systems
with, other customers, and believes that its experience with such programs and
systems is an important competitive factor that has allowed it to attract new
customers and increase sales to existing customers.
PRODUCTS AND SERVICES
The Company's primary product is dry pet food, which generated
approximately 93%, 94%, and 93% of the Company's total net sales in 1995, 1996
and 1997, respectively. Non-manufactured products generated approximately 6%,
5% and 6% of the Company's total net sales in 1995, 1996 and 1997,
respectively. The Company's engineering services group generated 1% to 2% of
the Company's net sales in each of such years.
Dry Pet Food Products. The Company produces, markets and
distributes a wide selection of high quality dry pet food products,
predominantly for dogs and cats. The Company manufactures dry pet food under
approximately 130 different private labels, and also manufactures various
branded products for national pet food companies. The dog food product lines
have accounted for the largest portion of the Company's dry pet food shipments.
Such shipments, excluding biscuits, represented approximately 85%, 84% and 84%
of the Company's dry pet food shipments (tonnage) in 1995, 1996 and 1997,
respectively. The Company's cat food product lines accounted for approximately
12% of the Company's dry pet food shipments (tonnage) in each of 1995, 1996 and
1997.
Non-Manufactured Products. Non-manufactured products include
cat litter, canned pet products and pet treats produced by third parties. The
Company receives these items at its facilities and aggregates them with the
Company's manufactured products for combined shipment to certain customers.
The Company provides this service as a part of its direct shipment program.
Engineering Services Group. The Company generally utilizes
its in-house engineering services group to design and supervise plant
construction with the objective of reducing construction costs and ensuring
quality control. The Company also designs and builds extruders, conveyors,
dryers and other parts and equipment, including replacement parts, for pet food
manufacturing facilities of the Company and third parties. The engineering
services group includes a repair staff to provide machinery and equipment
service and repair at the Company's production facilities and reduce production
downtime.
2
<PAGE> 5
SEASONALITY OF PET FOOD
The Company's sales are somewhat seasonal. The Company
typically experiences an increase in net sales during the first and fourth
quarters of each year, as is typical in the pet food industry. The seasonality
of the pet food business is generally attributable to cooler weather, which
results in increased dog food consumption.
SALES AND DISTRIBUTION
The Company's direct sales force seeks new accounts and
negotiates with mass merchandisers, membership clubs, feed stores and specialty
pet stores. The Company generally uses independent food brokers in obtaining
business from grocery stores. The Company also seeks to generate new business
through the expansion of its product lines and the development of new marketing
programs to existing customers.
The Company does not own or operate any transportation
equipment. Most of the Company's products are distributed utilizing its
customers' transportation networks. Several of the Company's largest customers
utilize the Company as a "just-in-time" supplier and maintain trailers at the
Company's manufacturing and distribution facilities. The trailers are loaded
and shipped either directly to individual stores or to customers' distribution
centers. Customers not utilizing their own fleets either arrange their own
transportation or have the Company arrange transportation on a contract basis
through common carriers.
CUSTOMERS
The Company produces, markets and distributes a wide selection
of dry pet food products under private labels for approximately 300 customers,
including mass merchandisers, membership clubs, national and regional grocery
chains, specialty pet store chains, farm and feed store chains, and grocery and
feed mill wholesalers and cooperatives. The Company also manufactures branded
pet food products for national pet food companies in accordance with customer
specifications and standards. In addition, the Company remarkets
non-manufactured pet products, manufactures and sells pet food production
equipment and parts, and fabricates other steel products to customer
specifications.
In 1997, Wal-Mart and Sam's Club accounted for 61.1% of the
Company's net sales. The Company has been the primary supplier of private
label dry pet food products to Wal-Mart since 1970 and to Sam's Club since
1990. A portion of the Company's sales to Wal-Mart is attributable to branded
pet food products manufactured and distributed by the Company for national pet
food companies. The Company utilizes a computerized order and distribution
system to ship product directly to virtually all domestic Wal-Mart stores, a
majority of which are located within 250 miles of the Company's facilities.
The Company generally does not have written contracts with its
customers. The loss of any significant customer, or customers, which in the
aggregate represent a significant portion of the Company's sales, would have an
adverse impact on the Company's operating results and cash flows.
3
<PAGE> 6
COMPETITION
The pet food business is highly competitive. The companies
that produce and market the major national branded pet foods are national or
international conglomerates that are substantially larger than the Company and
possess significantly greater financial and marketing resources than the
Company. The private label pet food products sold by the Company's customers
compete for access to shelf space with national branded products on the basis
of quality and price. National branded products compete principally through
advertising to create brand awareness and loyalty, and, increasingly, through
pricing. The Company expects that price competition from national branded
manufacturers may occur from time to time in the future. To the extent that
there is significant price competition from the national branded manufacturers
or such manufacturers significantly increase their presence in the private
label market, the Company's operating results and cash flow could be adversely
affected. The Company also competes with regional branded manufacturers and
other private label manufacturers and competes to manufacture certain products
for national branded pet food companies.
RAW MATERIALS AND PACKAGING
The principal raw materials required for the Company's
manufacturing operations are bulk commodity grains and foodstocks, including
corn, soybean meal, wheat middlings, meat and bone meal, and corn gluten meal.
The Company generally purchases raw materials one to three months in advance.
The Company generally purchases the raw material requirements of each of its
manufacturing facilities locally due to the high freight cost of transporting
bulk commodity products. As a result, raw material costs may vary
substantially among manufacturing facilities due to local supply and demand and
varying freight costs. Raw materials are generally purchased from large
national commodity companies and local grain cooperatives. The Company does
not maintain long-term contracts with any of its suppliers.
Packaging is a material component of the Company's raw
material costs. The Company has four main suppliers of packaging. The Company
has no long term contracts with any of its packaging suppliers.
The Company's raw material costs fluctuate, sometimes rapidly
and significantly. Generally, the Company prices its pet food products based
on the costs of raw materials and certain other costs plus a conversion charge
(which includes a profit factor). The Company periodically adjusts its product
prices based upon fluctuations in raw material costs. However, the Company's
customers generally discourage frequent changes in prices and there is often a
lag between raw material cost fluctuations and adjustments in sales prices. In
the short-term and particularly in the event of rapid or significant short-term
cost fluctuations, the prices at which the Company sells its products may not
fully reflect cost fluctuations. There can be no assurance as to the timing or
extent of the Company's ability to implement future price adjustments in the
event of significantly increased raw material costs. The Company's recent
experience has been that it has not been able entirely or immediately to pass
through such cost increases to its customers.
The availability and price of agricultural commodities are
subject to price fluctuations that create price risk. The Company manages the
price risk created by market fluctuations by
4
<PAGE> 7
hedging portions of its primary commodity products purchases, principally
through exchange traded futures and options contracts that are designated as
hedges. The terms of such contracts are generally less than one year.
Settlement of positions are either through financial settlement with the
exchanges or via exchange for the physical commodity in which case the Company
delivers the contract against the acquisition of the physical commodity.
The Company's policy does not permit speculative commodity
trading. Futures and options contracts are accounted for as hedges, and gains
and losses are recognized in the period realized as part of the cost of
products sold and in the cash flows. The deferred net futures and options
position is reported on the balance sheet as a current asset for net loss
positions and as a deferred credit for net gain positions. In addition to
futures and options, the Company also contracts for future physical
procurement, in which case unrealized gains and losses are deferred to the
applicable accounting period. Typically, maturities vary and do not exceed
twelve months.
There can be no assurance that advance purchasing strategies
and hedging activities will have the desired effect of counter-balancing raw
material cost increases. Conversely, should raw material costs decrease below
the costs reflected in the Company's advance purchases and hedges, such
activities could adversely affect the Company's results of operations compared
to what they otherwise would have been. See ITEM 7- "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
RESEARCH AND DEVELOPMENT
The Company's research and development department consists of
a staff of chemists and nutritionists, a central laboratory used for research
and development, and laboratories at each of the Company's production
facilities used for quality control. The research and development department
formulates the mix of raw materials and vitamins and minerals and tests the
nutritional content of new products. Independent commercial kennels and
catteries are used for comparison taste tests to nationally branded products to
assure digestibility and palatability as well as to substantiate the
nutritional content of new products.
GOVERNMENTAL REGULATION
The Company is subject to federal, state and local laws and
regulations intended to protect the public health and the environment,
including air and water quality, fuel storage tanks and waste handling and
disposal. The Company considers itself to be in material compliance with
applicable environmental laws and regulations currently applicable to its
business and operations. Compliance with environmental laws and regulations
historically has not had a material effect on the Company's capital
expenditures, earnings or competitive position, and the Company does not
anticipate that such compliance will have a material effect on the Company in
the future. Environmental laws and regulations have changed substantially in
recent years and the Company believes that the trend of more expansive and more
strict environmental legislation and regulations will continue. While the
Company believes it is in substantial compliance with applicable environmental
and worker safety laws, there can be no assurance that additional costs for
compliance will not be incurred in the future or that such costs will not be
material.
5
<PAGE> 8
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), also known as the "Superfund" law, imposes 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. While there can be no assurance of the
position that may be taken by any environmental agency with respect to the
Company's past operations in connection with any CERCLA site, the Company has
not received, nor does it expect to receive, any notice that it is or will be
designated a potentially responsible party to any CERCLA site. Some of the
Company's manufacturing facilities are located within industrial areas. In the
past, nearby industries have suffered releases of hazardous substances to the
environment that are the subject of CERCLA investigations. It is possible that
these neighboring environmental activities may have impacted some of the
Company's properties. The Company has not been advised, nor does it expect to be
advised, by any environmental agency that it is considered a potentially
responsible party for the neighboring environmental conditions, and the Company
has no reason to believe that such conditions would have a material adverse
effect on the Company.
The manufacturing and marketing of the Company's products are subject
to regulation by federal regulatory agencies, including the Occupational Safety
and Health Administration ("OSHA"), the Food and Drug Administration ("FDA") and
the United States Department of Agriculture ("DOA"), and by various state and
local authorities. The FDA also regulates the labeling of the Company's
products. The Company procures and maintains the necessary permits and licenses
in order to operate its facilities and considers itself to be in material
compliance with applicable OSHA, DOA, and FDA requirements.
TRADEMARKS
Certain of the Company's brands are protected by trademark
registrations in the United States. The Company believes that its registered
trademarks are adequate to protect such brand names.
EMPLOYEES
As of December 31, 1997, the Company had approximately 1,243 employees,
of which approximately 132 were management and administrative personnel and
approximately 1,111 were manufacturing personnel. Of this number, 324 employees
in three of the Company's plants were represented by labor unions at each of the
plants. The collective bargaining agreement with respect to the Birmingham,
Alabama plant covers 86 employees as of December 31, 1997, and expires in
January 2001. The collective bargaining agreement with the Joplin, Missouri
plant covers 193 employees as of December 31, 1997, and expires in January 1999.
The collective bargaining agreement with the Muscatine, Iowa plant covers 45
employees as of December 31, 1997, and expires in December 1999. The Company
considers its relations with its employees to be satisfactory.
6
<PAGE> 9
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain of the statements set forth under ITEM 1- "BUSINESS" and ITEM
7- "MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and elsewhere in this Form 10-K, such as the statements regarding
planned capital expenditures and the availability of capital resources to fund
capital expenditures, are forward-looking and are based upon the Company's
current belief as to the outcome and timing of such future events. There are
numerous risks and uncertainties that can affect the outcome and timing of such
events, including many factors beyond the control of the Company. These factors
include, but are not limited to, the cost of raw materials and packaging,
competition, the Company's continued business relationship with certain
customers, the uncertainty of environmental matters, the highly leveraged
condition of the Company and the various restrictive covenants to which the
Company is subject.
Should one or more of these risks or uncertainties occur, or should
underlying assumptions prove incorrect, the Company's actual results and plans
for 1998 and beyond could differ materially from those expressed in the
forward-looking statements.
7
<PAGE> 10
ITEM 6 - SELECTED FINANCIAL DATA
The following tables present (i) selected historical financial data of
the Company prior to the Acquisition ("Predecessor") as of and for each of the
years ended December 31, 1993 and 1994 and the nine month period ended September
30, 1995, and (ii) selected historical financial data of the Company after the
Acquisition ("Successor") as of and for the three month period ended December
31, 1995, and for each of the years ended December 31, 1996 and 1997. The
selected historical financial data as of and for each of the years ended
December 31, 1993 and 1994 and the nine month period ended September 30, 1995
have been derived from the audited financial statements of Predecessor. The
selected historical financial data as of and for the three month period ended
December 31, 1995 and for each of the years ended December 31, 1996 and 1997
have been derived from the audited financial statements of Successor. The
results of operations for the three month period ended December 31, 1995 are not
necessarily indicative of the results of operations of Successor for the full
year. The financial data set forth below should be read in conjunction with ITEM
7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Company's financial statements and notes thereto included in
ITEM 8 - "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA".
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
8
<PAGE> 11
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------- --------------------------------------
Nine Three
Month Month
Period Period
Ended Ended
September 30, December 31,
1993 1994 1995 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:(10)
Net sales .............................. $ 345,804 $ 377,018 $ 303,633 $ 114,958 $ 513,217 $ 564,741
Gross profit ........................... 65,306 68,396 56,239 17,774 66,441 81,845
Promotion and distribution.............. 23,566 23,007 17,675 6,484 26,480 31,876
Selling, general and administrative .... 11,296 11,550 8,558 3,677 15,050 17,985
Unusual item (1) ....................... -- -- 9,440 -- -- --
Income from operations ................. 30,444 33,839 20,566 7,613 24,911 31,984
Net income (loss)(2) .................. 28,528 31,000 16,746 1,024 (1,518) 6,234
Non-cash preferred stock dividends(3) .. -- -- -- 1,069 4,670 5,308
Accretion of preferred stock(4) ........ -- -- -- 269 1,076 1,077
OTHER DATA:
EBITDA(5) .............................. $ 35,103 $ 38,613 $ 33,804 $ 10,063 $ 35,264 $ 43,216
Interest expense, net .................. 1,706 2,494 3,611 5,806 22,471 22,463
Non recurring finance charge(6) ........ -- -- -- -- 4,815 --
Depreciation and amortization .......... 4,526 4,660 3,694 2,359 11,157 12,141
Ratio of EBITDA to interest expense .... -- -- -- 1.7x 1.6x 1.9x
Ratio of earnings to fixed charges(7) .. 17.2x 13.1x 5.6x 1.3x .9x 1.4x
Additions to property and equipment:
Maintenance .......................... 1,888 1,891 1,290 567 2,353 2,012
Expansion(8) ......................... 2,231 10,268 2,934 730 5,548 12,425
Pet food sold (thousands of tons) ...... 897 942 774 288 1,189 1,237
Net cash provided by
operating activities ................. 25,820 39,250 12,954 2,711 18,583 20,972
Net cash used in investing activities .. 4,070 12,368 3,677 209,346 11,489 15,161
Net cash provided by (used in)
financing activities ................. (17,768) (16,808) (20,568) 204,635 (8,644) (5,811)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-----------------------------------------------------
AT DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
-----------------------------------------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ........................... $ 31,194 $ 35,410 $ 38,894 $ 26,123 $ 25,645
Total assets ............................. 117,962 142,710 309,584 338,293 338,184
Long-term debt (including current
portion)................................ 32,776 68,436 209,738 206,603 200,410
Preferred stock(9)........................ -- -- 18,414 24,160 30,545
Stockholders' equity ..................... 50,148 31,759 40,111 33,247 33,946
</TABLE>
(1) Represents nonrecurring bonus payments to senior management in connection
with the Acquisition.
(2) Net income of Predecessor does not include any provision for federal income
taxes. Prior to the Acquisition, Predecessor was organized as a subchapter
S corporation. Consequently, Predecessor did not pay federal, state or
local income taxes except in those states that did not recognize subchapter
S status or that required the payment of franchise taxes based on income.
9
<PAGE> 12
(3) Dividends on the Preferred Stock are payable quarterly at a rate of 14.25%
per annum, accrete to the Liquidation Value and may be paid through the
issuance of additional shares of Preferred Stock on each dividend payment
date through September 30, 2000.
(4) Represents accretion of the excess of the Liquidation Value over the
carrying value of the Preferred Stock (see footnote 9 below).
(5) EBITDA (earnings before interest, taxes, depreciation, amortization and
unusual item (see footnote 1 above)) is presented here not as a measure of
operating results, but rather as a measure of the Company's operating
performance and ability to service debt.
(6) Amount represents fees relating to the $120 million of Bridge Notes
associated with the Acquisition. These fees were expensed in March 1996 in
connection with the refinancing of the Bridge Notes with proceeds from the
sale of the Senior Notes.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes and extraordinary items plus fixed
charges (excluding capitalized interest). Fixed charges consist of interest
(including capitalized interest) on all indebtedness, amortization of
deferred financing costs and that portion of rental expense that management
believes to be representative of interest.
(8) Includes the construction of new manufacturing or distribution facilities
and expenditures to increase production capacity or capability.
(9) The Preferred Stock had an initial liquidation preference of $30 million
and was sold as a unit with warrants to purchase shares of common stock of
DPCAC for aggregate consideration of $30 million. Approximately $12.9
million of such consideration was allocated to the value of the warrants
and is recorded as stockholders' equity.
(10) Certain prior year re-classifications have been made to conform to the
current year presentation.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company derives substantially all of its revenue from the sale of
dry pet food products. Historically, approximately 85% to 90% of pet food cost
of goods sold has been comprised of raw material and packaging costs with labor,
insurance, utilities and depreciation comprising the remainder. As a result,
volatility in marketplaces for certain commodity grains and food stocks used in
the Company's production process can have a significant impact on the
profitability of the Company. The Company periodically adjusts prices based on
cost fluctuations. There can be no assurance as to the timing or extent of the
Company's ability to implement future price adjustments in the event of
significantly increased raw material costs. The Company's recent experience has
been that it has not been able entirely or immediately to pass through such cost
increases to its customers.
10
<PAGE> 13
The Company manages the price risk created by market fluctuations by
hedging portions of its primary commodity products purchases, principally
through exchange traded futures and options contracts that are designated as
hedges. The terms of such contracts are generally less than one year. Settlement
of positions are either through financial settlement with the exchanges or via
exchange for the physical commodity in which case the Company delivers the
contract against the acquisition of the physical commodity.
The Company's policy does not permit speculative commodity trading.
Futures and options contracts are accounted for as hedges, and gains and losses
are recognized in the period realized as part of the cost of products sold and
in the cash flows. The deferred net futures and options position is reported on
the balance sheet as a current asset for net loss positions and as a deferred
credit for net gain positions. In addition to futures and options, the Company
also contracts for future physical procurement, in which case unrealized gains
and losses are deferred to the applicable accounting period. Typically,
maturities vary and do not exceed twelve months. Unrealized losses of $.9
million were deferred on outstanding contracts at December 31, 1997.
Operating expenses are comprised of promotion and distribution, and
selling, general and administrative expenses. Promotion and distribution
expenses are primarily (a) brokerage fees, (b) promotions, volume incentive
discounts and rebates paid to customers, and (c) freight and distribution
expenses. The Company's selling, general and administrative expenses represent
salaries and related expenses, amortization expense, and other corporate
overhead costs.
Sales of non-manufactured products include sales of cat litter, canned
pet products and pet treats produced by third parties. The Company receives
these items at its manufacturing facilities and warehouses and aggregates them
with the Company's products for combined shipment to certain customers. The
Company provides this service as part of its direct shipment program.
The Company's sales are somewhat seasonal. The Company typically
experiences an increase in net sales during the first and fourth quarters of
each year, as is typical in the pet food industry. The seasonality of the pet
food business is generally attributable to cooler weather, which results in
increased dog food consumption.
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.
The financial statements for the three months ended December 31, 1995,
and the years ended December 31, 1996 and December 31, 1997 are presented on
Successor's new basis of accounting, while the financial statements for the nine
months ended September 30, 1995 are presented on the Predecessor's historical
cost basis of accounting. The principal differences between the financial
statements for Predecessor and for Successor are Successor's financial
statements have increased debt expense, new depreciable basis, goodwill and
corporate level taxes.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, capital
expenditures and working capital requirements from cash flow from operations,
bank borrowings and industrial development bonds. The Company had working
capital of $25.6 million at December 31, 1997. Net cash provided by operating
activities was $15.7 million, $18.6 million and $21.0 million for the twelve
month period ended December 31, 1995, and for the years ended December 31, 1996
and 1997, respectively. Net cash provided by (used for) borrowings was
approximately $139.7 million, ($9.0) million and ($6.7) million, respectively,
for such periods.
Historically, principal uses of cash have been for debt service,
capital expenditures and working capital. During the three year period ended
December 31, 1997, the Company spent $27.9 million on capital expenditures, of
which $21.6 million was used to acquire and construct additional manufacturing
capacity, including a new manufacturing facility, a renovated manufacturing
facility and five new production lines in existing facilities, and $6.3 million
was used to maintain existing manufacturing facilities. During the year ended
December 31, 1997, the Company spent $14.4 million on capital expenditures, of
which $12.4 million was used for expansion, including (a) the acquisition (in
February 1997), renovation and equipping of the Everson, Pennsylvania
manufacturing and warehouse facility, (b) the construction of a new
manufacturing and warehouse facility for the production of treats in Miami,
Oklahoma, which commenced operations on August 12, 1997 and (c) the addition of
a biscuit line to the Washington Court House facility. The Company financed the
Miami, Oklahoma facility through the issuance on March 12, 1997 of $6.0 million
of industrial development revenue bonds ("Industrial Development Bonds"), which
are secured by a mortgage lien and security interest on certain real and
personal property. The Industrial Development Bonds were recorded at $5.7
million at December 31, 1997, which was net of the reserve fund.
On April 17, 1998 the Company purchased 100% of the outstanding stock
of IPES IBERICA, S.A. ("IPES") for approximately $28.3 million. IPES is a
private label pet food manufacturer located in Spain, with $21.1 million in net
sales in 1997. The Company has financed the acquisition through non-recourse
borrowings in Spain for 75% of the purchase price, with the balance of the
purchase price being provided by the existing Senior Credit Facility.
On June 10, 1998, the Company and its parent, DPC Acquisition Corp.,
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Windy Hill Pet Food Holdings, Inc. and its subsidiary, Windy Hill Pet Food
Company, Inc. and certain stockholders of Windy Hill Pet Food Holdings, Inc.
Under the terms of the Merger Agreement, Windy Hill Pet Food Holdings, Inc.
will become a wholly-owned subsidiary of DPC Acquisition Corp.
It is expected that existing manufacturing facilities, notwithstanding
the recent capital expenditures on new and existing facilities, will not be
sufficient to meet the Company's anticipated volume growth for the next several
years. Accordingly, the Company anticipates that additional facilities will be
necessary in order to support continued growth of the Company's business. The
Company has continued to examine alternatives for expanding its business either
through construction of additional manufacturing capacity or acquisition of
manufacturing assets. Such potential acquisitions could include acquisitions of
operating companies. The Company intends to finance such expansions or
acquisitions with borrowings under existing or expanded credit facilities, or
the issuance of additional equity, depending on the size of the proposed
expansions or acquisitions.
As a result of the Acquisition and the sale of the Senior Notes, the
Company is highly
12
<PAGE> 15
leveraged and has significantly increased cash requirements for debt service
relating to the Senior Credit Facility, the Senior Notes and the Industrial
Development Bonds. The Company's ability to borrow is limited by the Senior
Credit Facility and the limitations on the incurrence of indebtedness under the
Trust Indenture under the Senior Notes. The Company anticipates that its
operating cash flow, together with amounts available to it under the Senior
Credit Facility and new industrial development bonds, will be sufficient to
finance working capital requirements, debt service requirements and anticipated
capital expenditures during the 1998 calendar year.
In connection with the Acquisition, the Company entered into the Senior
Credit Facility with a syndicate of lenders led by Mercantile Bank providing for
term loan borrowings of $90.0 million (the "Term Loan Facility") and a revolving
credit facility of $25.0 million (the "Revolving Credit Facility") that the
Company uses for working capital and capital expenditures. Approximately $84.3
million of the Term Loan Facility was advanced to the Company at the time of the
Acquisition, $1.8 million was advanced on December 29, 1995 to repay certain
industrial development bonds and an additional $3.1 million was advanced in 1996
to redeem additional industrial development bonds. The Senior Credit Facility
was amended on February 28, 1996 to modify, among other things, certain
covenants, the maturity date and the repayment schedule. In conjunction with
such amendment, the Company repaid $40 million in principal amount of term loan
borrowings with a portion of the proceeds of the sale of the Senior Notes. The
Senior Credit Facility was also amended on June 28, 1996 and March 31, 1997 to
modify certain financial covenants.
On April 13, 1998 the company amended and restated the Senior Credit
Facility, which increased the Term Loan Facility borrowings by $10.0 million to
$41.8 million, and provided a new Purchase Money Facility of $7.0 million to be
drawn at a future date. Additional changes include: (i) reduction of interest
rate margins, (ii) extension of final maturity, (iii) reduction of quarterly
installment amounts, and (iv) revised schedule of financial covenants.
Mandatory repayments under the Term Loan Facility, as amended, include
the $2.5 million payment made June 30, 1998, and a $.5 million payment on March
31, 1999. Quarter-end payments increase to $2.5 million for June through
December 1999, and increase to $3.4 million for March 2000 through June 2001.
The $10.9 million balance is due September 30, 2001. Availability under the
Purchase Money Facility decreases by $2.5 million September 30, 1998 and
December 31, 1998; any remaining balance must be repaid by March 31, 1999.
Substantially all of the Company's assets are pledged under the Senior Credit
Facility.
At December 31, 1997, the Company had borrowing capacity in the amount
of $24.2 million under the Revolving Credit Facility, which was net of $.8
million for outstanding letters of credit. Long term debt outstanding at
December 31, 1997 consisted of $160.0 million Senior Notes, the Term Loan
Facility in the amount of $34.7 million, and Industrial Development Bonds in the
net amount of $5.7 million.
RESULTS OF OPERATIONS
The following discussion is based on the historical financial
statements included in ITEM 8 - "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA".
The results for the three month period ended December 31, 1995, and for each of
the years ended December 31, 1996 and 1997, reflect the Acquisition, which has
been accounted for using the purchase method
13
<PAGE> 16
of accounting. The total purchase price of $249.1 million, including existing
indebtedness (exclusive of fees and expenses of approximately $13.0 million),
was allocated to the assets and liabilities acquired based upon their respective
fair values. As a result, beginning October 1, 1995, the Company recorded
expenses for depreciation and amortization significantly in excess of historical
levels recorded by the Predecessor. In addition, the results of operations of
the Company have been significantly affected by the impact of the financing of
the Acquisition, including interest expense on the indebtedness incurred in
connection with the Senior Credit Facility, the Bridge Notes, and the Senior
Notes.
The historical combined results of operations of the Company for the
twelve month period ended December 31, 1995, and the years ended December 31,
1996 and December 31, 1997 are not directly comparable to the results of
operations of Predecessor due to the effects of the Acquisition.
<TABLE>
<CAPTION>
1995
PREDECESSOR SUCCESSOR COMBINED SUCCESSOR
------------- ------------ -------------------- -------------------------------------------
NINE MONTH THREE MONTH TWELVE MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995 1996 1997
------------- ------------ -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .................... 303,633 114,958 $418,591 100.0% $513,217 100.0% $564,741 100.0%
Cost of goods sold ........... 247,394 97,184 344,578 82.3 446,776 87.1 482,896 85.5
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ................. 56,239 17,774 74,013 17.7 66,441 12.9 81,845 14.5
Operating expenses:
Promotion and distribution ... 17,675 6,484 24,159 5.8 26,480 5.2 31,876 5.6
Selling, general and
administrative ............. 8,558 3,677 12,235 2.9 15,050 2.9 17,985 3.2
Unusual item ................. 9,440 -- 9,440 2.3 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations ....... 20,566 7,613 28,179 6.7 24,911 4.8 31,984 5.7
Interest expense, net ........ 3,611 5,806 9,417 2.2 22,471 4.4 22,463 4.0
Non-recurring finance charge.. -- -- -- -- 4,815 0.9 -- --
Equity in earnings of joint
venture .................... -- -- -- -- -- -- (186) (0.0)
Other expense, net ........... (8) 29 21 0.0 (2) 0.0 84 0.0
-------- -------- -------- -------- -------- -------- -------- --------
Income before taxes .......... 16,963 1,778 18,741 4.5 (2,373) (0.5) 9,623 1.7
Income tax expense (benefit).. 217 754 971 0.2 (855) (0.2) 3,389 0.6
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) (1) ........ $ 16,746 $ 1,024 $ 17,770 4.3% $ (1,518) (0.3)% $ 6,234 1.1%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) For Predecessor, net income does not include any provision for federal
income taxes.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The following table sets forth the Company's net sales for each sales
component and gross profit for the years ended December 31, 1997 and December
31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, %
1996 1997 CHANGE
--------------------------------------------
Net sales: (DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Pet food ...................... $ 480.8 $ 524.7 9.1%
Non-manufactured products ..... 24.3 32.7 34.6
Engineering products .......... 8.1 7.3 (9.9)
------------ ------------ ------------
Total ........... $ 513.2 $ 564.7 10.0%
============ ============ ============
Gross profit ...................... $ 66.4 $ 81.8 23.2%
</TABLE>
14
<PAGE> 17
Net Sales. Net sales for 1997 increased 10.0% to $564.7 million from
$513.2 million in 1996. Pet food net sales increased 9.1% to $524.7 million for
1997 from $480.8 million in 1996. Of this amount, approximately 4.3% was due to
increases in tons sold, and the balance was principally the result of price
increases implemented in late 1996 to mitigate increases in raw material costs
that occurred throughout 1996. Net sales of non-manufactured products increased
34.6% to $32.7 million for 1997 from $24.3 million in 1996 due to distribution
of additional products. Engineering products net sales decreased 9.9% to $7.3
million for 1997 from $8.1 million in 1996 due to the focusing of the Company's
efforts on its projects at Everson, Pennsylvania, Washington Court House, Ohio
and Miami, Oklahoma.
Gross profit. Gross profit for 1997 increased 23.2% to $81.8 million
from $66.4 million in 1996. Of this amount, 16.8% represents improvements in pet
food margins due to the aforementioned price increases and some reduction in the
cost of certain raw materials in the latter part of 1997. The balance of the
gross profit improvement is largely due to the additional non-manufactured
products. Gross profit increased as a percentage of net sales to 14.5% for 1997
from 12.9% in 1996.
Operating expenses. Operating expenses for 1997 increased to $49.9
million (8.8% of net sales) from $41.5 million (8.1% of net sales) in 1996.
Promotion and distribution expenses increased to $31.9 million for 1997 from
$26.5 million in 1996 due to increases in sales promotions, volume incentive
discounts and brokerage costs resulting from increased pet food tons sold.
Selling, general and administrative expenses increased to $18.0 million for 1997
from $15.1 million in 1996 due to (i) increases in salaries and related fringe
benefits associated with annual wage increases, additional personnel, and
increased bonuses due to improved performance; (ii) increases in property taxes
on new and expanded facilities; and (iii) increases in expenses associated with
the installation of new information systems.
Income from operations. Income from operations for 1997 increased 29.1%
to $32.0 million from $24.9 million in 1996. Income from operations as a
percentage of net sales increased to 5.7% for 1997 from 4.8% in 1996, due to
improved pet food margins and additional non-manufactured products sales.
Interest expense. Interest expense, net remained unchanged at $22.5
million for 1997 and 1996. Interest expense reductions resulting from payments
on the Term Loan Facility were largely offset by additional interest expense on
proceeds from the Industrial Development Bonds that were used to finance the
construction of the new Miami, Oklahoma facility. Interest expense as a
percentage of net sales decreased to 4.0% from 4.4% in 1996.
Net income. Net income for 1997 increased to $6.2 million from a net
loss of $1.5 million in 1996, primarily as a result of increased pet food
margins and additional non-manufactured products sales.
15
<PAGE> 18
Year Ended December 31, 1996 Compared to Combined Twelve Month Period Ended
December 31, 1995
The following table sets forth the Company's net sales for each sales
component and gross profit for the year ended December 31, 1996 and the combined
twelve month period ended December 31, 1995:
<TABLE>
<CAPTION>
COMBINED TWELVE
MONTH PERIOD ENDED YEAR ENDED %
DECEMBER 31, 1995 DECEMBER 31, 1996 CHANGE
-------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Pet food ................... $ 387.6 $ 480.8 24.0%
Non-manufactured products .. 23.2 24.3 4.7
Engineering products ....... 7.7 8.1 5.2
-------------------- -------------------- --------------------
Total ............. $ 418.5 $ 513.2 22.6%
==================== ==================== ====================
Gross Profit ........................ $ 74.0 $ 66.4 (10.3)%
</TABLE>
Net sales. Net sales for 1996 increased 22.6% to $513.2 million from
$418.5 million in the twelve month period ended December 31, 1995. Pet food net
sales increased 24.0% to $480.8 million for 1996 from $387.6 million in the
twelve month period ended December 31, 1995. This increase was primarily due to
a 12.0% increase in tons sold, of which 2.2% represented new business, and price
increases implemented throughout the year in response to higher raw material
costs. Net sales of non-manufactured products increased 4.7% for 1996 to $24.3
million due to distribution of additional items. Engineering net sales increased
5.2% for 1996 to $8.1 million.
Gross profit. Gross profit for 1996 was negatively impacted by
increases in the costs of most raw materials. The cost increases were partially
offset by an increase in tons of pet food sold and price increases implemented
throughout the year. Gross profit for 1996 was also negatively impacted by $1.9
million due to increased depreciation resulting from the write-up of assets in
connection with the Acquisition. Gross profit as a percentage of net sales for
the periods declined from 17.7% in 1995 to 12.9% for 1996, primarily due to
decreased margins on pet food sales.
Operating expenses. Operating expenses decreased 9.4% to $41.5 million
for 1996 from $45.8 million in the twelve month period ended December 31, 1995.
This was due primarily to the nonrecurrence in 1996 of $9.4 million of unusual
expenses recorded as of September 30, 1995 in connection with the Acquisition.
Promotion and distribution expenses increased to $26.5 million for 1996 from
$24.2 million in the twelve month period ended December 31, 1995. This increase
was primarily attributable increases in promotions, volume incentive discounts,
rebates and brokerage fees resulting from increased pet food tons sold. Selling,
general and administrative expenses increased to $15.1 million for 1996 from
$12.2 million in the twelve month period ended December 31, 1995, primarily due
to additional depreciation and amortization expenses in the amount of $2.6
million incurred in connection with the Acquisition. Operating expenses as a
percentage of net sales decreased to 8.1% from 11.0% in the twelve month period
ended December 31, 1995.
16
<PAGE> 19
Income from operations. Income from operations decreased 11.7%, or $3.3
million, to $24.9 million for 1996 from $28.2 million in the twelve month period
ended December 31, 1995. Income from operations as a percentage of net sales
decreased to 4.8% for 1996 from 6.7% in the twelve month period ended December
31, 1995, primarily as a result of lower pet food margins and increased
depreciation and amortization expense.
Nonrecurring charge. In the year ended December 31, 1996, $4.8 million
in nonrecurring interim debt financing costs were written off concurrent with
the issuance of the Shares.
Interest expense. Interest expense net increased to $22.5 million for
1996 from $9.4 million in the twelve month period ended December 31, 1995 due
to the debt incurred to finance the Acquisition.
Net income. Net income (loss) decreased to $(1.5) million for 1996 from
$17.8 million in the twelve month period ended December 31, 1995, as a result of
lower pet food margins, increased interest, depreciation and amortization
expenses and nonrecurring financing fees.
INFLATION AND CHANGES IN PRICES
The Company's financial results depend to a large extent on the cost of
raw materials and packaging and the ability of the Company to pass along to its
customers increases in these costs. Historically, market prices for commodity
grains and food stocks have fluctuated in response to a number of factors,
including changes in United States government farm support programs, changes in
international agricultural and trading policies and weather conditions during
the growing and harvesting seasons. Fluctuations in paper prices have resulted
from changes in supply and demand, general economic conditions and other
factors. In the event of any increases in raw materials costs, the Company may
be required to increase sales prices for its products in order to avoid margin
deterioration. There can be no assurance as to the timing or extent of the
Company's ability to implement future price adjustments in the event of
increased raw material costs or as to whether any price increases implemented by
the Company may affect the volumes of future shipments. Although the Company
manages the price risk created by market fluctuations by hedging portions of its
primary commodity product purchases, there can be no assurance that the
Company's results of operations will not be exposed to volatility in the
commodity markets. See "-- Overview" and "Business -- Raw Materials and
Packaging."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), which
establishes standards for reporting and display of comprehensive income and
its components. The components of comprehensive income refer to revenues,
expenses, gains and losses that are excluded from net income under current
accounting standards, including foreign currency translation items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. SFAS 130 requires that all items
that are recognized under accounting standards as components of comprehensive
income be reported in a financial statement displayed in equal prominence with
other financial statements; the total or other comprehensive income for a
period is required to be transferred to a component of equity that is separately
displayed in a statement of financial position at the end of an accounting
period. SFAS 130 is effective for both interim and annual periods beginning
after December 15, 1997. The Company will adopt SFAS 130 in the fiscal year
ending December 31, 1998.
YEAR 2000
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "year 2000" issue
and is developing an implementation plan to resolve the issue. The year 2000
issue results from computer programs being written using two digits (rather
than four) to define the applicable year. Any of the Company's programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, the year 2000 issue will not
pose significant internal operational problems for the Company's computer
systems, as so modified and converted, and that modifications and conversions
will not be significant to the Company's financial results; however, there can
be no assurance that the Company will identify all such year 2000 problems in
its other computer systems or those of its customers, vendors and resellers in
advance of their occurrence or that the Company will be able to successfully
remedy any problems that are discovered.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DOANE PRODUCTS COMPANY
By /s/ Douglas J. Cahill
--------------------------------------
Douglas J. Cahill
President and
Chief Executive Officer
Date August 4, 1998
------------------------------------
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By /s/ Douglas J. Cahill
-----------------------------------------------
Douglas J. Cahill
President and
Chief Executive Officer
Date August 4, 1998
---------------------------------------------
By /s/ Thomas R. Heidenthal
-----------------------------------------------
Thomas R. Heidenthal
Senior Vice President, Chief Financial Officer
and Principal Accounting Officer
Date August 4, 1998
---------------------------------------------
By /s/ George B. Kelly
-----------------------------------------------
George B. Kelly
Chairman of the Board
Date August 4, 1998
---------------------------------------------
By /s/ Bob L. Robinson
-----------------------------------------------
Bob L. Robinson
Director
Date August 4, 1998
---------------------------------------------
18
<PAGE> 21
By /s/ Peter T. Grauer
-----------------------------------------------
Peter T. Grauer
Director
Date August 4, 1998
---------------------------------------------
By /s/ Andrew H. Rush
-----------------------------------------------
Andrew H. Rush
Director
Date August 4, 1998
---------------------------------------------
By /s/ Jeffrey C. Walker
-----------------------------------------------
Jeffrey C. Walker
Director
Date August 4, 1998
---------------------------------------------
By /s/ M. Walid Mansur
-----------------------------------------------
M. Walid Mansur
Director
Date August 4, 1998
---------------------------------------------
By /s/ Ray Chung
-----------------------------------------------
Ray Chung
Director
Date August 4, 1998
---------------------------------------------
By /s/ Stephen C. Sherrill
-----------------------------------------------
Stephen C. Sherrill
Director
Date August 4, 1998
---------------------------------------------
19
<PAGE> 22
DOANE PRODUCTS COMPANY
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(WITH INDEPENDENT AUDITORS'
REPORT THEREON)
F-1
(Amended)
<PAGE> 23
Independent Auditors' Report
Board of Directors
Doane Products Company:
When the transaction referred to in Note _ of the Notes to Financial Statements
has been consummated, we will be in a position to render the following report.
We have audited the accompanying consolidated balance sheets of Doane Products
Company - Successor as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows of Doane
Products Company - Successor for the years ended December 31, 1997 and 1996 and
for the three month period ended December 31, 1995, and the consolidated
statements of income, stockholders' equity and cash flows of Doane Products
Company - Predecessor for the nine months ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Doane Products Company
Successor at December 31, 1997 and 1996, and the results of operations and cash
flows of Doane Products Company - Successor for the years ended December 31,
1997 and 1996 and for the three month period ended December 31, 1995 and of
Doane Products Company - Predecessor for the nine month period ended September
30, 1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
February 13, 1998, except as to
Note _, which is as of ______________.
F-2
<PAGE> 24
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Successor
-------------------------------------------
December 31, March 31
1996 1997 1998
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ - $ -
Trade accounts receivable, net of allowances 68,279 66,369 59,703
Inventories 30,737 32,426 33,048
Prepaid expenses and other assets 7,368 3,550 4,863
--------- --------- ---------
Total Current Assets 106,384 102,345 97,614
Property, plant, and equipment, net 93,083 99,994 101,337
Goodwill, net of amortization 126,068 122,882 122,068
Other assets, net 12,758 12,963 12,709
--------- --------- ---------
Total Assets $ 338,293 $ 338,184 $ 333,728
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 10,417 $ 11,667 $ 11,667
Accounts payable 51,303 42,422 32,886
Accrued liabilities 18,541 22,611 15,859
--------- --------- ---------
Total current liabilities 80,261 76,700 60,412
Long-term debt, excluding current installments 196,186 188,743 195,286
Post-retirement benefit liability 4,030 4,081 4,065
Deferred income tax liability 409 4,169 5,945
--------- --------- ---------
Total liabilities 280,886 273,693 265,708
Senior exchangeable preferred stock, 3,000 shares
authorized, 1,200 shares issued 24,160 30,545 32,277
Stockholder's equity:
Common stock, par value $.01, Authorized and
issued 1000 shares - - -
Additional paid-in capital 40,825 41,675 41,925
Accumulated deficit (7,578) (7,729) (6,182)
--------- --------- ---------
Total stockholders' equity 33,247 33,946 35,743
--------- --------- ---------
Total liabilities and stockholders' equity $ 338,293 $ 338,184 $ 333,728
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 25
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the years ending December 31, 1995, 1996 and 1997
and the three month periods ended March 31, 1998 and 1997 (unaudited)
<TABLE>
<CAPTION>
Predecessor Successor
-------------- ----------------------------------------------------------
Nine month Three month
period ended period ended Year ended Year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 303,633 $ 114,958 $ 513,217 $ 564,741
Cost of goods sold 247,394 97,184 446,776 482,896
-------------- -------------- -------------- --------------
Gross profit 56,239 17,774 66,441 81,845
Operating expenses:
Promotion and distribution 17,675 6,484 26,480 31,876
Selling, general and administrative 8,558 3,677 15,050 17,985
Unusual item 9,440 -- -- --
-------------- -------------- -------------- --------------
Income from operations 20,566 7,613 24,911 31,984
Interest expense, net 3,611 5,806 22,471 22,463
Non-recurring finance charge -- -- 4,815 --
Equity in earnings of joint venture -- -- -- (186)
Other expense, net (8) 29 (2) 84
-------------- -------------- -------------- --------------
Income before taxes 16,963 1,778 (2,373) 9,623
Income tax expense (benefit) 217 754 (855) 3,389
-------------- -------------- -------------- --------------
Net income (loss) $ 16,746 $ 1,024 $ (1,518) $ 6,234
============== ============== ============== ==============
Net income (loss) applicable to
common stock -- $ (314) $ (7,264) $ (151)
Basic net income (loss) per common share -- $ (314) $ (7,264) $ (151)
Pro forma earnings data (unaudited)
Net income as reported $ 16,746
Pro forma adjustment for federal
and state income tax expense 5,861
--------------
Pro forma net income $ 10,885
==============
Pro forma basic net income per
common share $ 189
============== ============== ============== ==============
Weighted average shares outstanding 57,500 1,000 1,000 1,000
============== ============== ============== ==============
<CAPTION>
THREE MONTHS
PERIOD ENDED
MARCH 31,
------------------------------
1997 1998
---------- -----------
(unaudited)
<S> <C> <C>
Net sales $ 141,741 $ 144,497
Cost of goods sold 122,725 119,967
---------- ----------
Gross profit 19,016 24,530
Operating expenses:
Promotion and distribution 7,881 8,434
Selling, general and administrative 3,966 5,650
Unusual item -- --
---------- ----------
Income from operations 7,169 10,446
Interest expense, net 5,672 5,422
Non-recurring finance charge -- --
Equity in earnings of joint venture -- (27)
Other expense, net (62) (4)
---------- ----------
Income before taxes 1,559 5,055
Income tax expense (benefit) 564 1,776
---------- ----------
Net income (loss) $ 995 $ 3,279
========== ==========
Net income (loss) applicable to
common stock $ (547) $ 1,547
Basic net income (loss) per common share $ (547) $ 1,547
Pro forma earnings data (unaudited)
Net income as reported
Pro forma adjustment for federal
and state income tax expense
Pro forma net income
Pro forma basic net income per
common share
Weighted average shares outstanding
1,000 1,000
========== ==========
</TABLE>
-4-
<PAGE> 26
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the years ending December 31, 1995, 1996 and 1997
And three months ended March 31, 1997 and 1998 (Unaudited)
<TABLE>
<CAPTION>
Predecessor Successor
----------- ------------------------------------------------------------
Three month
Nine month Three month period ended
period ended period ended Year ended Year ended March 31,
September 30, December 31, December 31, December 31, ----------------
1995 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 16,746 $ 1,024 $ (1,518) $ 6,234 $ 995 $ 3,279
Items not requiring (providing) cash:
Depreciation and amortization 3,694 2,359 15,972 12,141 2,882 3,215
Accrued deferred compensation (93) 23 282 51 35 (16)
Loss on sale of property and equipment 10 -- 26 115 37 3
Deferred income tax expense (benefit) -- 1,102 (855) 3,389 583 1,776
Equity in foreign joint venture -- -- -- (186) (90) (27)
Changes in:
Accounts receivable 1,800 (7,620) (21,176) 1,910 6,986 6,666
Inventories (2,424) (2,954) (3,141) (1,689) 2,975 (622)
Prepaid expenses and other (498) (571) (5,479) 3,818 4,744 (1,313)
Accounts payable (11,526) 4,084 32,155 (8,881) (19,126) (9,536)
Accrued expenses 5,245 7,034 2,317 4,070 (7,469) (6,752)
Other -- (1,770) -- -- 611 36
----------- ----------- ----------- ----------- -------- -------
Net cash provided by operating
activities 12,954 2,711 18,583 20,972 (6,837) 3,363
----------- ----------- ----------- ----------- -------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment 571 -- 26 39 1 --
Capital expenditures, including interest
capitalized (4,224) (1,297) (7,901) (14,437) (5,712) (3,355)
Acquisition related payments -- (207,961) (1,087) -- -- --
Increase in cash value of life insurance (24) (88) (112) (324) (9) (7)
Investment in foreign joint venture -- -- (1,979) -- -- --
Other -- -- (436) (439) (232) (68)
----------- ----------- ----------- ----------- -------- ------
Net cash used in investing activities (3,677) (209,346) (11,489) (15,161) (5,952) 3,430
----------- ----------- ----------- ----------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt (7,225) 204,348 163,136 5,698 1,668 --
Increase in debt issuance costs -- -- (5,909) (468) -- --
Retirement of prior indebtedness -- (46,013) -- -- -- --
Net borrowings under short-term credit agreements 595 (6,800) -- -- -- --
Net borrowings under revolving credit agreement -- -- 1,475 (1,475) 13,725 9,465
Principal payments on long-term debt (786) (4,400) (167,746) (10,416) (2,604) (2,922)
Dividends paid (13,152) -- -- -- -- --
Issuance of preferred stock -- 17,075 -- -- -- --
Capital contribution -- 40,425 400 850 -- 250
----------- ----------- ----------- ----------- ------- -------
Net cash provided by (used in)
financing activities (20,568) 204,635 (8,644) (5,811) 12,789 6,793
----------- ----------- ----------- ----------- ------- -------
Decrease in cash and
cash equivalents (11,291) (2,000) (1,550) -- -- --
Cash and cash equivalents, beginning of period 14,841 3,550 1,550 -- -- --
----------- ----------- ----------- ----------- ------- -------
Cash and cash equivalents, end of period $ 3,550 $ 1,550 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 27
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
For the years ending December 31, 1997, 1996 and 1995
and three months ended March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------------------------------------------
Common stock Treasury Stock
------------------------ Paid-in ------------------------- Retained
Shares Amount capital Shares Amount earnings Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 100,000 $ 50 $ -- $ (42,500) $ (34,000) $ 65,709 $ 31,759
Net income -- -- -- -- -- 16,746 16,746
Dividends declared -- -- -- -- -- (13,152) (13,152)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances, September 30, 1995 100,000 $ 50 $ -- $ (42,500) $ (34,000) $ 69,303 $ 35,353
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Successor
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balances, October 1, 1995 -- $ -- $ -- -- $ -- $ -- $ --
Capital contribution 1,000 -- 40,425 -- -- -- 40,425
Net income -- -- -- -- -- 1,024 1,024
Preferred stock dividends -- -- -- -- -- (1,069) (1,069)
Accretion of preferred stock -- -- -- -- -- (269) (269)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1995 1,000 -- 40,425 -- -- (314) 40,111
Capital contribution -- -- 400 -- -- -- 400
Net loss -- -- -- -- -- (1,518) (1,518)
Preferred stock dividends -- -- -- -- -- (4,670) (4,670)
Accretion of preferred stock -- -- -- -- -- (1,076) (1,076)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1996 1,000 -- 40,825 -- -- (7,578) 33,247
Capital contribution -- -- 850 -- -- -- 850
Net income -- -- -- -- -- 6,234 6,234
Preferred stock dividends -- -- -- -- -- (5,308) (5,308)
Accretion of preferred stock -- -- -- -- -- (1,077) (1,077)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 1,000 -- 41,675 -- -- (7,729) 33,946
Capital contribution (unaudited) -- -- 250 -- -- -- 250
Net income (unaudited) -- -- -- -- -- 3,279 3,279
Preferred stock dividends
(unaudited) -- -- -- -- -- (1,463) (1,463)
Accretion of preferred stock
(unaudited) -- -- -- -- -- (269) (269)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, March 31, 1998
(unaudited) 1,000 $ -- $ 41,925 -- $ -- $ (6,182) $ 35,743
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 28
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, 1997, 1996 and 1995
(1) ACQUISITION
On October 5, 1995 Doane Products Company (Doane) was acquired (the
Acquisition) through the merger (the Merger) of DPC Subsidiary
Acquisition Corp. with and into Doane with Doane being the surviving
entity (Successor). DPC Subsidiary Acquisition Corp. was a newly
organized Delaware corporation formed for the sole purpose of effecting
the Acquisition. Doane is a wholly-owned subsidiary of DPC Acquisition
Corp. (DPCAC). The purchase price was $249.1 million, including existing
indebtedness. The acquisition was financed with a senior credit facility
which provides term loan borrowings of $90 million and revolving loan
borrowings of up to $25 million, $120 million of senior subordinated
increasing rate notes, and $30 million of 14.25% Senior Exchangeable
Preferred Stock. The cost of the acquisition has been allocated on the
basis of the estimated fair value of the assets acquired and liabilities
assumed. The allocation resulted in goodwill of approximately $129
million. The goodwill is being amortized over 40 years on a
straight-line basis.
For financial statement purposes, the Acquisition and Merger was
accounted for as a purchase acquisition effective October 1, 1995. The
effects of the acquisition have been reflected in the Company's assets
and liabilities at that date. As a result, the Company's financial
statements for the periods subsequent to September 30, 1995 are
presented on the Successor's new basis of accounting, while financial
statements for September 30, 1995 and prior periods are presented on the
Predecessor's historical cost basis of accounting.
In connection with the Acquisition and Merger, the Company recorded
certain merger related expenses of $9,440 consisting primarily of bonus
payments to certain members of management, which have been charged to
operations as of September 30, 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company manufactures dry pet foods and operates a machine shop and a
structural steel fabrication plant. The Company extends unsecured credit
in the form of current accounts receivable, principally to large
distributors and retailers throughout the United States, with credit
extended to one customer approximating 70%, 65% and 66% of accounts
receivable at December 31, 1996 and 1997, and March 31, 1998
(unaudited), respectively.
PRINCIPLES OF CONSOLIDATION
In November 1996, the Company formed a UK holding company, DPC
International, Ltd., a wholly-owned subsidiary of Doane Products
Company, to account for its 50% investment in a foreign joint venture.
The Company is accounting for its investment under the equity method of
accounting. The accompanying consolidated financial statements for
December 31, 1996 and 1997, and March 31, 1998 (unaudited), include the
accounts of Doane and its wholly-owned subsidiary. All inter-company
transactions and balances have been eliminated.
(Continued)
F-7
<PAGE> 29
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIS OF PRESENTATION
Certain reclassifications have been made to the fiscal 1996 consolidated
financial statements to conform with the fiscal 1997 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents consist
primarily of repurchase agreements and certificates of deposit.
INVENTORIES
All inventories are valued at the lower of cost or market. Cost is
determined using the FIFO method.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over the estimated useful life of
each asset ranging from three to forty years. Annual depreciation is
computed using the straight-line method.
In fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-lived Assets and for Long Lived Assets to be Disposed Of (SFAS
121). Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.
When such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. The adoption of SFAS 121 did
not have a material impact on the Company's consolidated financial
statements.
INCOME TAXES
Effective October 1, 1995, concurrent with the Acquisition and the
Company's change from an S Corporation for federal income tax purposes
to a C Corporation, the Successor Company began applying the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," (FAS 109). Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities. These deferred taxes
are measured by applying current tax laws. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in
the period that includes the enactment date.
(Continued)
F-8
<PAGE> 30
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired in the Acquisition and is being amortized by
the straight-line method over 40 years. The Company's policy is to
periodically evaluate such cost to determine whether there has been any
impairment in value. Accumulated amortization was $4,046, $7,300 and
$8,113 at December 31, 1996 and 1997, and March 31, 1998 (unaudited),
respectively.
RECOGNITION OF REVENUE
Revenue is recognized at the time the product is shipped.
COMMODITY HEDGES
The Company manages price risk created by market fluctuations by hedging
portions of its primary commodity products purchases, principally
through exchange traded futures and options contracts which are
designated as hedges. The terms of such contracts are generally less
than one year. Settlement of positions are either through financial
settlement with the exchanges or via exchange for the physical commodity
in which case the Company delivers the contract against the acquisition
of the physical commodity.
The Company's policy does not permit speculative commodity trading.
Futures and options contracts are accounted for as hedges, and gains and
losses are recognized in the period realized as part of the cost of
products sold and in the cash flows. The deferred net futures and
options position is reported on the balance sheet as a current asset for
net loss positions and as a deferred credit for net gain positions. In
addition to futures and options, the Company also contracts for future
physical procurement, in which case unrealized gains and losses are
deferred to the applicable accounting period. Typically, maturities vary
and do not exceed twelve months.
Deferred losses on these outstanding contracts were $5,398, $917 and
$1,400 at December 31, 1996 and 1997, and March 31, 1998 (unaudited),
respectively.
USE OF ESTIMATES IN PREPARATION
OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(Continued)
F-9
<PAGE> 31
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA FINANCIAL DATA
Pro forma net income per common share and pro forma income taxes are set
forth herein because the Predecessor Company previously operated as a
subchapter S Corporation.
Pro forma net income per share of common stock is calculated based on
net income reduced by pro forma income taxes, divided by the weighted
average number of shares of common stock outstanding.
Pro forma income taxes reflect federal income taxes that would have been
incurred had the Predecessor Company been subject to such taxes. Such
amounts have been deducted from net income in the accompanying
statements of income, pursuant to the rules and regulations of the
Securities and Exchange Commission.
FINANCIAL INSTRUMENTS
Fair value estimates are made at discrete points in time based on
relevant market information. These estimates may be subjective in nature
and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. The Company believes that
the carrying amounts of its current assets, current liabilities and
long-term debt approximate the fair value of such items.
NET INCOME (LOSS) PER COMMON SHARE
In fiscal 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128).
In accordance with SFAS 128, basic net income (loss) per common share is
computed based upon the weighted average number of common shares
outstanding during each period. The Company does not have any
potentially dilutive securities at December 31, 1995, 1996, and 1997.
Net income (loss) is decreased (increased) by unpaid cumulative
preferred stock dividends and the accretion of the preferred stock in
calculating net income (loss) attributable to the common shareholder.
(3) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1996 1997 1998
------- ------- ---------
(unaudited)
<S> <C> <C> <C>
Raw materials $ 7,268 $ 8,449 $ 7,888
Packaging materials 10,609 10,735 11,225
Finished goods 12,860 13,242 13,935
------- ------- --------
$30,737 $32,426 $33,048
======= ======= ========
</TABLE>
(Continued)
F-10
<PAGE> 32
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------- March 31,
1996 1997 1998
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Land $ 3,987 $ 4,037 $ 4,037
Buildings and improvements 25,395 29,439 29,463
Machinery and equipment 65,377 76,442 77,301
Furniture and fixtures 1,932 2,536 2,636
Automotive equipment 1,000 1,016 1,078
Construction in progress 3,504 1,972 4,277
--------- --------- ---------
101,195 115,442 118,792
Less accumulated depreciation 8,112 15,448 17,455
--------- --------- ---------
$ 93,083 $ 99,994 $ 101,337
========= ========= =========
</TABLE>
(5) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------- March 31,
1996 1997 1998
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Salaries and commissions $ 3,223 $ 4,714 $ 4,105
Accrued interest 6,379 6,223 1,780
Rebates and other promotions 7,510 9,064 7,452
Other 1,429 2,610 2,522
--------- --------- ---------
$ 18,541 $ 22,611 $ 15,859
========= ========= =========
</TABLE>
F-11
<PAGE> 33
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1996 1997 1998
-------- -------- ---------
(unaudited)
<S> <C> <C>
Senior Credit Facility $ 46,603 $ 34,712 $ 41,255
Senior Notes 160,000 160,000 160,000
Industrial Development Revenue Bonds
(net of reserve funds) -- 5,698 5,698
-------- -------- --------
206,603 200,410 206,953
Less current maturities 10,417 11,667 11,667
-------- -------- --------
$196,186 $188,743 $195,286
======== ======== ========
</TABLE>
SENIOR CREDIT FACILITY
In connection with the Acquisition, the Company entered into a senior
credit facility effective October 5, 1995 (the Senior Credit Facility)
with several lending institutions. The Senior Credit Facility, as
amended, provides for an aggregate principal amount of loans of up to
$85,000 consisting of $60,000 in aggregate principal amount of term
loans (the Term Loan Facility) and a $25,000 revolving credit facility
(the Revolving Credit Facility).
The Term Loan Facility matures on September 30, 2000 and is due in
quarterly installments in increasing amounts, ranging from $2,100 to
$3,700, commencing September 30, 1996. The Senior Credit Facility
provides for mandatory prepayments of the Term Loan Facility based on
certain performance targets as well as proceeds of asset sales which are
subject to certain permitted exceptions. The Revolving Credit Facility
matures on September 30, 2000. Prior to the amendment of the Senior
Credit Facility as discussed below, the Company was required to reduce
borrowings under the Revolving Credit to $10,000 or less for 30
consecutive days during the fiscal years ended September 30, 1996 and
1997, and to $7,500 or less for 30 consecutive days during each fiscal
year ended September 30 thereafter.
(Continued)
F-12
<PAGE> 34
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Indebtedness under the Senior Credit Facility bears interest at a rate
based, at the Company's option, upon (i) the Base Rate plus 1.50% with
respect to Base Rate Loans and (ii) the LIBOR Rate for one, two, three
or six months plus 2.75% with respect to LIBOR Rate Loans; provided,
however, the interest rates are subject to reductions in the event the
Company meets certain performance targets. The Revolving Credit Facility
bore interest at 9.5% and 9.3% for the years ended December 31, 1996 and
1997, respectively. The Term Loan Facility bore interest at a weighted
average rate of 8.47% for the period from October 5, 1995 to December
31, 1995, and 7.95% and 8.44% for the years ended December 31, 1996 and
1997, respectively.
The Company is required to pay a commitment fee based on the committed
undrawn amount of the Revolving Credit Facility during the preceding
quarter equal to .375% per annum, payable in arrears on a quarterly
basis during 1996 and equal to .5% per annum, payable in arrears on a
quarterly basis, thereafter; provided, such fee may be reduced after
1996 to as low as .25% based on certain performance targets.
The Senior Credit Facility is secured by substantially all of the assets
of the Company and a pledge of all of the Company's common stock held by
DPCAC.
The Senior Credit Facility requires the Company to meet certain
financial tests, including minimum cash flow, minimum cash flow coverage
ratio and maximum leverage ratios. The Senior Credit Facility also
contains covenants which, among other things, will limit the incurrence
of additional indebtedness, the nature of the business of the Company
and its subsidiaries, investments, leases of assets, ownership of
subsidiaries, dividends, transaction with affiliates, asset sales,
acquisitions, mergers and consolidations, liens and encumbrances and
other matters customarily restricted in such agreements.
The Company had approximately $24,225 available under the revolving
credit agreement at December 31, 1997 which expires in 1999.
Effective April 13, 1998, the Company amended its senior credit facility
pursuant to the Second Amended and Restated Revolving Credit and Term
Loan Agreement (the "Amended Senior Credit Facility"). Under the Amended
Senior Credit Facility funding was increased under the "Term Loan
Facility" from the outstanding balance of $31,795 to $41,794 and a new
$7,000 purchase money facility was created, which may be drawn upon at a
later time. The "Revolving Credit Facility" remains at $25,000. The term
of the Amended Senior Credit Facility has been extended from September
30, 2000 to September 30, 2001. Concurrent with the extension of the
term of the facility, the amortization of the Term Loan Facility has
been extended and quarterly principal payments reduced, initially from
$2,917 to $2,500.
The Company has the option to draw funds at either a Base Rate of LIBOR
Rate plus an Applicable Margin, which margin is determined from a
pricing grid predicated upon the ratio of Consolidated Total Debt to
Consolidated EBITDA. In general the LIBOR margins have decreased by
.375% and the Base Rate margins have decreased by .5%.
The predecessor agreement required the Company to cause the aggregate
principal amount of all Revolving Credit and Swing Loans to be less than
$7,500 for a minimum period of 30 consecutive days each fiscal year,
which provision, together with the Excess Cash Flow Recapture provision,
has been eliminated. Additionally, certain financial covenants have been
amended consistent with the extended term of the facility.
BRIDGE NOTES
The bridge notes (the Bridge Notes) matured on October 5, 1996 and bore
interest at a floating rate equal to the sum of (i) the prime rate, (ii)
5.00%, and (iii) an additional percentage amount, equal to 1.00%
effective from March 30, 1996 and increasing by .50% effective from and
including each quarterly anniversary of such date until the Bridge Notes
are paid in full; provided that the interest rate shall not exceed 20%
per annum. On March 4, 1996, the Bridge Notes were repaid with the
proceeds from the issuance of the Senior Notes. The Bridge Notes bore
interest at a rate of 13.50% per annum at December 31, 1995 and for the
period January 1, 1996 to March 4, 1996. In connection with this debt
refinancing, the Company incurred a $4,815 non-recurring finance charge
to write-off debt issuance costs associated with the Bridge Notes.
(Continued)
F-13
<PAGE> 35
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SENIOR NOTES
The Senior Notes (the Senior Notes) bear interest at the rate of 10.625%
per annum, payable semiannually on March 1 and September 1 of each year,
commencing on September 1, 1996. The Senior Notes are redeemable, at the
Company's option, in whole or in part, from time to time, on or after
March 1, 2001, initially at 105.313% of their principal amount and
thereafter at prices declining to 100% at March 1, 2004 until maturity,
in each case together with accrued and unpaid interest to the redemption
date. In addition, at any time on or prior to March 1, 1999, the Company
may redeem up to 35% of the aggregate principal amount of the Notes
originally issued with the net cash proceeds of one or more public
equity offerings, at 109.625% of their principal amount, together with
accrued and unpaid interest, if any, to the redemption date; provided
that at least $104,000 in principal amount of the Senior Notes remain
outstanding immediately after any such redemption.
The Senior Notes are general senior unsecured obligations of the
Company, ranking senior to all subordinated indebtedness of the Company
and ranking pari passu in right of payment to all other senior
indebtedness of the Company. Lenders under the Senior Credit Facility
have claims with respect to the assets constituting collateral for such
indebtedness that are effectively senior and right of payment to the
claims of holders of the Senior Notes. The Senior Notes were issued
pursuant to the Note Indenture which contains covenants restricting or
limiting the ability of the Company and its subsidiaries to pay
dividends or make other restricted payments, incur additional
indebtedness and issue preferred stock, create liens, incur dividends
and other payment restrictions affecting subsidiaries, enter into
mergers or consolidations, make asset sales, enter into transactions
with affiliates, and engage in other lines of business. Under certain
circumstances, the Company is required to offer to purchase all
outstanding Senior Notes at a purchase price in cash equal to 100% of
their principal amount, plus accrued and unpaid interest to the date of
repurchase, with the proceeds of certain asset sales. Upon a Change of
Control (as defined in the Note Indenture) each holder of Senior Notes
will have the right to require the Company to repurchase all or any part
of such holder's Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest to
the date of purchase.
INDUSTRIAL REVENUE BONDS, OTTAWA COUNTY, OKLAHOMA
On March 12, 1997 the Company issued $6,000 of industrial development
revenue bonds (the "Bonds") through the Ottawa County Finance Authority
in Miami, Oklahoma. The Bonds bear interest at the rate of 7.25% payable
on each December 1 and June 1, commencing December 1, 1997. The Bonds
are subject to mandatory redemption prior to maturity, in part, at a
redemption price of 100% of the principal amount thereof, plus accrued
interest to the redemption date, in varying principal amounts on June 1
of each year from 2007 through 2017.
(Continued)
F-14
<PAGE> 36
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Bonds are general secured obligations of the Company, ranking senior
to all subordinated indebtedness of the Company and on a parity in right
of payment with all other senior indebtedness of the Company. The Bonds
are additionally secured by a Mortgage and Security Agreement.
Aggregate annual maturities of long-term debt at December 31, 1997 and
March 31, 1998 were:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
----------------- --------------
(unaudited)
<S> <C> <C>
1998 $ 11,667 $11,667
1999 11,667
2000 11,378
Thereafter 165,698
</TABLE>
(7) SENIOR EXCHANGEABLE PREFERRED STOCK
The Company has authorized 3,000 shares of Senior Exchangeable Preferred
Stock of which the Company issued 1,200 shares in connection with the
financing of the Acquisition.
The Senior Exchangeable Preferred Stock has an initial liquidation
preference of $25.00 per share (aggregate initial liquidation preference
is $30,000). The Senior Exchangeable Preferred Stock was recorded at the
net proceeds of $17,075 after deducting $12,925 paid to DPCAC for
warrants of DPCAC which were issued in conjunction with the Senior
Exchangeable Preferred Stock. The excess of the liquidation preference
over the carrying value is being accreted quarterly over a twelve year
period ended September 30, 2007 by a direct reduction to retained
earnings.
Dividends on the Senior Exchangeable Preferred Stock are payable
quarterly at the rate of 14.25% per annum per share. Dividends on the
Senior Exchangeable Preferred Stock accrete to the liquidation value of
the Senior Exchangeable Preferred Stock and, at the option of the
holders of a majority of the shares of Senior Exchangeable Preferred
Stock, may be paid through the issuance of additional shares of Senior
Exchangeable Preferred Stock on each dividend payment date through
September 30, 2000. The Company does not expect to pay dividends on the
Senior Exchangeable Preferred Stock in cash for any period prior to
September 30, 2000. Cumulative dividends on Senior Exchangeable
Preferred Stock that have not been paid at December 31, 1996 and 1997,
and March 31, 1998 (unaudited), are $5,739, $11,047 and $12,510,
respectively and are included in the carrying amount of the Senior
Exchangeable Preferred Stock. As of December 31, 1997, and March 31,
1998 (unaudited), the cumulative accretion to redemption value and
cumulative dividends on the Senior Exchangeable Preferred Stock are
$2,422 and $2,691, respectively and $11,047 and $12,510, respectively.
(Continued)
F-15
<PAGE> 37
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Prior to September 30, 1998, the Company may, at its option, redeem up
to one-third of the then outstanding Senior Exchangeable Preferred Stock
with the net proceeds of an initial public offering of its common stock
at a redemption price of 114% of the then liquidation value of the
Senior Exchangeable Preferred Stock, plus accrued and unpaid dividends.
On and after September 30, 2000, the Company may, at its option, redeem
the Senior Exchangeable Preferred Stock in whole or in part at
redemption prices per share set forth below, together with accrued and
unpaid dividends:
<TABLE>
<CAPTION>
Year Percent of
Beginning liquidation
September 30, Value
------------- -----------
<S> <C> <C>
2000 107.125%
2001 105.700
2002 104.275
2003 102.850
2004 101.425
2005 100.000
2006 100.000
</TABLE>
The Company will be required to redeem all outstanding shares of Senior
Exchangeable Preferred Stock on September 30, 2007 at 100% of the then
liquidation value, together with accrued and unpaid dividends.
The Senior Exchangeable Preferred Stock will be exchangeable, in whole
or in part, at the option of the Company on any dividend payment date
for 14.25% Junior Subordinated Exchange Debentures.
In the event of a change of control, as defined, the holders of Senior
Exchangeable Preferred Stock have the right to require the Company to
redeem such Senior Exchangeable Preferred Stock, in whole or in part, at
a price equal to 101% of the then liquidation value together with any
unpaid dividends.
The terms of the Senior Exchangeable Preferred Stock prohibit (i) the
payment of dividends on securities ranking on a parity with or junior to
the Senior Exchangeable Preferred Stock and (ii) redemption, repurchase
or acquisition of any Junior Securities with certain exceptions, in each
case, unless full cumulative dividends have been paid on the Senior
Exchangeable Preferred Stock.
Holders of the Senior Exchangeable Preferred Stock have limited voting
rights customary for preferred stock, and the right to elect two
additional directors upon certain events such as the Company failing to
declare and pay dividends on any six consecutive dividend payment dates.
Continued)
F-16
<PAGE> 38
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) MAJOR CUSTOMER
For the nine months ended September 30, 1995, one customer accounted for
approximately 65% of the Predecessor Company's total revenue. For the
three months ended December 31, 1995 and the years ended December 31,
1996 and 1997, and the three months ended March 31, 1998, the same
customer accounted for approximately 65%, 63%, 61% and ___%,
respectively, of the Successor Company's total revenue. The
Company does not have a long-term contract with this customer.
(9) INCOME TAXES
The Predecessor had elected under both Federal and certain state income
tax laws to be taxed as an S Corporation. Under this election, the
Company's taxable income was taxed to the stockholders on their
individual income tax returns. The provision for income taxes reflects
the accrual of corporation income taxes due in states which do not
recognize the S Corporation status.
Effective October 1, 1995, concurrent with the Acquisition, the Company
changed from an S Corporation for Federal income tax purposes to a C
Corporation and began applying the provisions of FAS 109.
The Company elected to step up the tax basis in the assets acquired.
Goodwill recorded in the acquisition is deductible for tax purposes over
15 years.
The components of income tax expense (benefit) are:
<TABLE>
<CAPTION>
Three month
period ended Year ended Year ended
December 31, December 31, December 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ (318) $ -- $ --
State (30) -- --
Deferred:
Federal 1,102 (855) 3,084
State -- -- 305
----------- ----------- -----------
Total income tax
provision (benefit) $ 754 $ (855) $ 3,389
=========== =========== ===========
</TABLE>
(Continued)
F-17
<PAGE> 39
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The difference between the statutory rate and the effective tax rate is
a result of nondeductible meals and entertainment expenses and other
miscellaneous expenses.
The tax effects of temporary differences that give rise to the
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1997 are presented below:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
CURRENT DEFERRED
Deferred tax assets:
Accounts receivable $ 19 $ 40
Inventory 286 291
Accruals and provisions 576 921
-------- --------
Current deferred tax asset $ 881 $ 1,252
======== ========
NONCURRENT DEFERRED
Deferred tax assets - net operating loss carryforwards 8,656 10,093
-------- --------
8,656 10,093
Deferred tax liabilities:
Tax over book amortization (4,088) (5,751)
Difference between book and tax basis of
property and equipment (4,977) (8,511)
-------- --------
(9,065) (13,896)
Net noncurrent deferred tax liability (409) (4,169)
-------- --------
Total net deferred tax asset (liability) $ 472 (2,917)
======== ========
</TABLE>
There is no valuation allowance as of fiscal year ended December 31,
1997. It is the opinion of management that future operations will more
likely than not generate taxable income to realize deferred tax assets.
At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $27,000 which are
available to offset future taxable income, if any, through 2011.
(10) EMPLOYEE BENEFIT PLANS
The Company has a defined benefit, noncontributory pension plan covering
substantially all non-bargaining employees. Benefits under the plan are
based on the employee's compensation during the five most highly
compensated consecutive years during the ten years preceding normal
retirement date. The Company's funding policy for the plan is to make
the minimum annual contribution required by applicable regulations.
(Continued)
F-18
<PAGE> 40
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net periodic pension cost for the Company's defined benefit pension
plans consisted of the following components for the years ended:
<TABLE>
<CAPTION>
Predecessor Successor
--------------------------- ---------------------------
Nine month Three month
period ended period ended Year ended Year ended
September 30, December 31, December 31, December 31,
1995 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service cost (benefits)
earned $ 714 $ 237 $ 1,059 $ 1,276
Interest cost on
projected benefit
obligation 515 197 781 903
Actual return on plan
assets (1,509) (377) (906) (1,914)
Net amortization and
deferral 997 180 71 983
----------- ----------- ----------- -----------
Net periodic pension cost $ 717 $ 237 $ 1,005 $ 1,248
=========== =========== =========== ===========
</TABLE>
Assumptions used by the Company in the determination of pension plan
information consisted of the following as of:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.0% 7.0% 7.0%
Rate of increase in compensation levels 5.5% 5.5% 5.5%
Expected long-term rate of return on plan assets 7.5% 7.5% 7.5%
</TABLE>
(Continued)
F-19
<PAGE> 41
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth the plan's funded status and amounts
recognized in the accompanying balance sheets as of:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ (7,940) $ (8,936)
======== ========
Accumulated benefits $ (8,172) $ (9,192)
======== ========
Projected benefits $(13,060) $(14,818)
Plan assets at fair value 12,428 14,557
-------- --------
Projected benefit obligation in
excess of plan assets (632) (261)
Items not yet recognized in earnings:
Unrecognized net loss (gain) (45) (1,144)
Unrecognized net asset at December 31, 1986,
being recognized over 14.49 to 17.95 years 333 313
-------- --------
Pension liability recognized in
the balance sheet $ (344) $ (1,092)
======== ========
</TABLE>
The Company sponsors a defined contribution postretirement plan which
provides medical coverage for eligible retirees and their dependents (as
defined in the plan). On October 1, 1995, the Company adopted SFAS 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
The following sets forth the plans' funded status reconciled with the
amount shown in the Company's consolidated balance sheets and
consolidated statements of income on an accrual basis rather than a
pay-as-you-go (cash) basis as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents $ 825 $ 824
Fully eligible active plan participants 356 382
Other active plan participants 316 363
--------- ---------
Accrued postretirement benefit cost $ 1,497 $ 1,569
========= =========
</TABLE>
(Continued)
F-20
<PAGE> 42
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three month
period ended Year ended Year ended
December 31, December 31, December 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net periodic postretirement benefit cost
included the following components:
Service cost - benefits attributed to
service during the period $ 17 $ 17 $ 18
Interest cost on accumulated
postretirement benefit obligation 100 104 102
---------- ---------- ----------
Net periodic postretirement
benefit cost $ 117 $ 121 $ 120
========== ========== ==========
</TABLE>
For measurement purposes, per capita claims costs for participants over
age 65 were assumed to increase at a 7.07% and 6.50% annual rate for
1996 and 1997, respectively; the rate was assumed to decrease gradually
to 4.0% for 2001 and remain at that level thereafter. The medical cost
trend rate assumption has a significant effect on the amounts reported.
To illustrate, increasing the assumed medical cost trend rates by 1
percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1997 by $214 and
the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended 1997 by $18.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% for December 31, 1996 and
1997.
(11) DEFERRED COMPENSATION AGREEMENTS AND
SALARY CONTINUATION PLAN
The Company has deferred compensation agreements with two individuals
which provide, upon retirement, annual payments to be paid over ten
consecutive years. The liability is approximately $1,190, $1,150, and
$______ at December 31, 1996 and 1997 and March 31, 1998 (unaudited),
respectively.
The Company also has a salary continuation plan in which there were
twenty-three and twenty-two participants at December 31, 1996 and 1997,
respectively. Participants in the plan, who reach age fifty-five and
have ten years of service with the Company, become vested as to benefits
which are payable in ten equal annual installments after retirement. The
Company has recorded an expected future liability equal to the present
value of future payments under this plan. The liability is approximately
$1,343, $1,362, and $_____ at December 31, 1996 and 1997 and March 31,
1998 (unaudited), respectively.
(Continued)
F-21
<PAGE> 43
DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) ADDITIONAL CASH FLOW INFORMATION
The following is additional cash flow information for the nine month
period ended September 30, 1995, for the three month period ended
December 31, 1995, and for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
Predecessor Successor
-------------------------- ------------------------------------------------------
Nine month Three month Three month
period ended period ended Year ended Year ended period ended
September 30, December 31, December 31, December 31, March 31,
1995 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Additional cash payment
information:
Interest paid (net of
amounts
capitalized) $ 5,114 $ 192 $ 21,028 $ 21,924 $ -- $ 9,572
Income taxes paid
(refunded) 302 (51) 351 -- -- --
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
The Company is party, in the ordinary course of business, to certain
claims and litigation. In management's opinion, the resolution of such
matters is not expected to have a material impact on the financial
condition or results of operations of the Company.
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 141,741 $ 137,215 $ 132,445 $ 153,340
Gross margins 19,016 18,885 20,623 23,321
Net income 995 481 1,905 2,853
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 122,000 $ 116,132 $ 127,256 $ 147,829
Gross margins 18,247 15,416 14,508 18,270
Net income (loss) (1,650) (236) (609) 977
</TABLE>
(15) SUBSEQUENT EVENTS
Ipes Iberica, S.A. Acquisition
On April 17, 1998 the Company purchased 100% of the outstanding stock
of Ipes Iberica, S.A. ("Ipes") for $28.3 million. Ipes is a private
label pet food manufacturer located in Spain with 1997 net sales of
$21.1 million. The transaction was financed through a $20.9 million
non recourse facility provided by the HSBC Investment Bank, Plc. in
Spain, and $7.4 million from the Company's Senior Credit Facility.
F-22