<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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)
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)
(417) 624-6166
(Registrant's telephone number, including area code)
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 [ ]
As of May 1, 1998, the Registrant had outstanding 1,000 shares of Common
Stock.
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TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Item 1. Financial Statements.......................................................................1
Consolidated Balance Sheets- March 31, 1998 and December 31, 1997..........................1
Consolidated Statements of Income- three months ended
March 31, 1998 and March 31, 1997..........................................................2
Consolidated Statements of Cash Flow- three months ended
March 31, 1998 and March 31, 1997..........................................................3
Notes to Consolidated Financial Statements.................................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................6
PART II
OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K............................................................9
Signatures..................................................................................................10
</TABLE>
(i)
<PAGE> 3
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance for doubtful
accounts; $93 and $58 at March 31, 1998 and
December 31, 1997, respectively $ 59,703 $ 66,369
Inventories 33,048 32,426
Prepaid expenses and other 4,863 3,550
--------- ---------
Total current assets 97,614 102,345
Property and equipment, net of accumulated depreciation
of $17,455 as of March 31, 1998, and $15,448 as of
December 31, 1997 101,337 99,994
Goodwill, net of amortization 122,068 122,882
Other assets 12,709 12,963
--------- ---------
Total assets $ 333,728 $ 338,184
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 11,667 $ 11,667
Accounts payable 32,886 42,422
Accrued expenses
Salaries and commissions 4,105 4,714
Accrued interest 1,780 6,223
Rebates and other promotional accruals 7,452 9,064
Other 2,522 2,610
--------- ---------
Total current liabilities 60,412 76,700
Deferred compensation 4,065 4,081
Long-term debt 195,286 188,743
Deferred income taxes 5,945 4,169
--------- ---------
265,708 273,693
--------- ---------
Senior exchangeable preferred stock, 3,000 shares authorized,
1,200 shares issued 32,277 30,545
--------- ---------
Stockholders' equity:
Common stock, par value $.01
Authorized and issued 1,000 shares -- --
Additional paid in capital 41,925 41,675
Retained earnings (deficit) (6,182) (7,729)
--------- ---------
35,743 33,946
--------- ---------
Total liabilities and stockholders' equity $ 333,728 $ 338,184
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------------ ------------------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 140,191 $ 137,747
Cost of goods sold 119,145 122,063
--------------- ---------------
Gross profit 21,046 15,684
Operating expenses:
Selling 4,861 4,549
General and administrative 5,739 3,966
--------------- ---------------
10,600 8,515
--------------- ---------------
Income from operations 10,446 7,169
Other income (expense):
Interest expense (5,449) (5,678)
Miscellaneous 58 68
--------------- ---------------
(5,391) (5,610)
--------------- ---------------
Income before income taxes 5,055 1,559
Provision for income taxes 1,776 564
--------------- ---------------
Net income $ 3,279 $ 995
=============== ===============
Net income (loss) applicable $ 1,547 $ (547)
to common stock
Basic net income (loss)
per common share $ 1,547 $ (547)
Weighted average shares outstanding 1,000 1,000
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
DOANE PRODUCTS COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTH THREE MONTH
PERIOD ENDED PERIOD ENDED
MARCH 31, 1998 MARCH 31, 1997
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,279 $ 995
Items not requiring cash:
Depreciation and amortization 2,918 2,601
Amortization of deferred debt issuance costs 297 281
Deferred tax expense 1,776 583
Deferred commodity credit -- 521
Other (76) 72
Changes in working capital components (11,557) (11,890)
--------------- ---------------
Net cash used in operating activities (3,363) (6,837)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of property and equipment -- 1
Capital expenditures, including interest capitalized (3,355) (5,711)
Increase in debt issuance costs -- (91)
Other (75) (151)
--------------- ---------------
Net cash used in investing activities (3,430) (5,952)
--------------- ---------------
Cash flows from financing activities:
Net borrowings under revolving credit agreement 9,465 13,725
Proceeds from issuance of long-term debt -- 1,668
Principal payments on long-term debt (2,922) (2,604)
Contributed Capital 250 --
--------------- ---------------
Net cash provided by financing activities 6,793 12,789
--------------- ---------------
Increase in cash and cash equivalents -- --
Cash and cash equivalents, beginning of period -- --
--------------- ---------------
Cash and cash equivalents, end of period $ -- $ --
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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DOANE PRODUCTS COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
1. Basis of Presentation
The interim consolidated financial statements of Doane Products Company (the
"Company"), included herein, have not been audited by the Company's independent
accountants. The statements include all adjustments, such as normal recurring
accruals, which management considers necessary for a fair presentation of the
financial position and operating results of the Company for the periods
presented. Operating results for the prior year periods include certain
reclassifications to conform with the current year presentation. The statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
conformity with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The operating results for
interim periods are not necessarily indicative of results to be expected for an
entire year. The accounting policies used in preparing these financial
statements are the same as those summarized in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
The Company's interim consolidated financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997
(including related exhibits), and the Company's Amendment No. 1 on Form S-3 to
Form S-1 Registration Statement (File No. 33-98110) relating to the issuance of
$160,000 principal amount of the Company's 10 5/8% Senior Notes due 2006 (the
"Senior Notes").
2. Inventories
The composition of inventories at the balance sheet dates was as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials ..................................................... $ 7,888 $ 8,449
Packaging materials ............................................... 11,225 10,735
Finished goods .................................................... 13,935 13,242
---------- ----------
$ 33,048 $ 32,426
========== ==========
</TABLE>
3. 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.
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<PAGE> 7
4. Subsequent Events
Senior Credit Facility
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 "Senior Credit Facility"). Under the Senior Credit Facility
funding was increased under the "Term Loan Facility" from the outstanding
balance of $31,795 to $41,794 and a new $7,000 purchase money facility was
created, which may be drawn upon at a later time. The "Revolving Credit
Facility" remains at $25,000. The term of the 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 or 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.
Ipes Iberica, S.A. Acquisition
On April 17, 1998 the Company purchased 100% of the outstanding stock of Ipes
Iberica, S.A. ("Ipes") for $28.7 million. Ipes is a private label pet food
manufacturer located in Spain with 1997 net sales of $20 million. The
transaction was financed through a $21.1 million non recourse facility provided
by the HSBC Investment Bank, Plc. in Spain, and $7.6 million from the Company's
Senior Credit Facility.
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<PAGE> 8
DOANE PRODUCTS COMPANY AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
presented in the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
The following table sets forth, for the periods indicated, the percentage which
the items in the Consolidated Statement of Operations bear to net sales and the
percentage change of such items compared to the indicated prior period.
<TABLE>
<CAPTION>
Three months ended March 31, %
1998 1997 Change
------ ------ --------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Net sales:
Pet food ....................... $ 131.7 94.0% $ 127.9 92.8% 3.0%
Non-manufactured products ...... 6.5 4.6 8.2 6.0 (20.7)
Engineering products ........... 2.0 1.4 1.7 1.2 17.6
--------------------------- ---------------------------
Total net sales ............ 140.2 100.0 137.8 100.0 1.7
Cost of sales ..................... 119.2 85.0 122.1 88.6 (2.4)
--------------------------- ---------------------------
Gross profit ...................... 21.0 15.0 15.7 11.4 33.8
Operating expenses:
Selling ........................ 4.9 3.5 4.5 3.3 8.9
General and administrative ..... 5.7 4.1 4.0 2.9 42.5
--------------------------- ---------------------------
Total operating expenses ... 10.6 7.6 8.5 6.2 24.7
--------------------------- ---------------------------
Income from operations ............ 10.4 7.4 7.2 5.2 44.4
Interest expense ............... 5.4 3.9 5.7 4.1 (5.3)
Other expense (income) ......... (0.1) (0.1) (0.1) (0.1) 0.0
--------------------------- ---------------------------
Income before taxes ............... 5.1 3.6 1.6 1.2 218.8
Provision for income taxes ........ 1.8 1.3 0.6 0.4 200.0
--------------------------- ---------------------------
Net income ........................ $ 3.3 2.3% $ 1.0 0.8% 230.0%
=========================== ===========================
</TABLE>
RESULTS OF OPERATIONS
Three months ended March 31, 1998 compared to three months ended March 31, 1997.
Net Sales. Net sales for the three months ended March 31, 1998 increased 1.7% to
$140.2 million from $137.8 million in the same period in 1997. Pet food net
sales increased 3.0% to $131.7 million for the three months ended March 31, 1998
from $127.9 million in the same period in 1997. Volume increases resulted in a
5.0% revenue increase, which was reduced by price declines of 2.0% primarily for
cost plus contracts. Net sales of non-manufactured products decreased to $6.5
million for the three months ended March 31, 1998 from $8.2 million for the same
period in 1997 as a result of discontinuing distribution of certain products.
Engineering products net sales increased to $2.0 million for the three months
ended March 31, 1998 from $1.7 million in the same period in 1997 because of the
Company's internal focus on projects at Everson, Pennsylvania, Washington
Courthouse, Ohio and Miami, Oklahoma in 1997 ("1997 Expansion Projects").
Gross Profit. Gross profit for the three month period ended March 31, 1998
increased 33.8% to $21.0 million from $15.7 million in the same period in 1997.
Of this increase, approximately 28.9% resulted from improvements in pet food
margins due to reductions in certain raw material costs, and approximately 4.0%
was due to the volume gains described above. The remaining .9% was a result of
non pet food products.
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<PAGE> 9
Operating Expenses. Operating expenses for the three months ended March 31, 1998
increased to $10.6 million (7.6% of net sales) from $8.5 million (6.2% of net
sales) in the same period in 1997. General and administrative expenses
represented 81.0% (or $1.7 million) of this increase which is due to increases
in (i) salaries and related fringe benefits, (ii) professional fees, and (iii)
amortization and depreciation. The balance of the increase is due to an increase
of 8.9% (or $.4 million) in selling expenses resulting from increases in
variable sales promotions, incentive discounts, and brokerage costs on volume
gains.
Income From Operations. Income from operations for the three months ended March
31, 1998 increased 44.4% to $10.4 million from $7.2 million in the same period
in 1997. Income from operations as a percent of net sales increased to 7.4% for
the three months ended March 31, 1998 from 5.2% in the same period in 1997 due
to improved pet food margins and volume gains.
Interest Expense. Interest expense decreased to $5.4 million for the three
months ended March 31, 1998 from $5.7 million in the same period in 1997
primarily due to an overall reduction in the Senior Credit Facility from year to
year.
Net Income. Net income for the three months ended March 31, 1998 increased to
$3.3 million from $1.0 million in the same period in 1997 due to increased pet
food margins and volume gains.
LIQUIDITY AND CAPITAL RESOURCES
For the three month period ended March 31, 1998, cash used in operating
activities was $3.4 million compared to $6.8 million in the same period in 1997,
which was primarily due to a $3.1 million increase in net income before non cash
charges. Working capital at both March 31, 1998 and March 31, 1997 was $37.2
million and the working capital increase for the three month period ended March
31, 1998 was $.3 million less than in the same period in 1997.
Net cash used in investing activities was $3.4 million for the three month
period ended March 31, 1998 which was $2.6 million lower than the same period in
1997. This reduction was due to expenditures for the 1997 Expansion Projects
that exceeded the capital expansion programs in the first quarter of 1998. The
1998 capital expansion programs included the purchase of a building in Clinton,
Oklahoma (in March 1998), which will be refurbished to manufacture dry pet food,
and warehouse expansion projects at two existing facilities.
Net cash provided by financing activities for the three month period ended March
31, 1998 decreased by $6.0 million from the same period ended in 1997 and was
the direct result of improvements in cash used in operating and investing
activities of $3.4 million and $2.6 million, respectively.
At March 31, 1998, the Company had borrowing capacity in the amount of $14.4
million under the Revolving Credit Facility, which was net of $1.1 million for
outstanding letters of credit. Long term debt outstanding at March 31, 1998
consisted of $160.0 million Senior Notes, the Term Loan Facility in the amount
of $31.8 million, and Industrial Revenue Bonds in the net amount of $5.7
million.
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 it's 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.
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<PAGE> 10
On April 13, 1998 the Company amended and restated the Senior Credit Facility,
which increased the Term Loan Facility borrowings by $10.0 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.
On April 17, 1998 the Company purchased 100% of the outstanding stock of Ipes
Iberica, S.A. ("Ipes") for $28.7 million. Ipes is a private label pet food
manufacturer located in Spain with 1997 net sales of $20 million. The
transaction was financed through a $21.1 million non recourse facility provided
by the HSBC Investment Bank, Plc. in Spain, and $7.6 million from the Company's
Senior Credit Facility.
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<PAGE> 11
DOANE PRODUCTS COMPANY AND SUBSIDIARY
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Index
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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DOANE PRODUCTS COMPANY AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOANE PRODUCTS COMPANY
May 1, 1998 By /s/ THOMAS R. HEIDENTHAL
------------------------------------
Thomas R. Heidenthal
Senior Vice President and
Chief Financial Officer
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<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DOANE
PRODUCTS COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 59,796
<ALLOWANCES> (93)
<INVENTORY> 33,048
<CURRENT-ASSETS> 97,614
<PP&E> 118,792
<DEPRECIATION> (17,455)
<TOTAL-ASSETS> 333,728
<CURRENT-LIABILITIES> 60,412
<BONDS> 160,000
0
32,277
<COMMON> 0
<OTHER-SE> 41,925
<TOTAL-LIABILITY-AND-EQUITY> 333,728
<SALES> 140,191
<TOTAL-REVENUES> 140,191
<CGS> 119,145
<TOTAL-COSTS> 129,745
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,449
<INCOME-PRETAX> 5,055
<INCOME-TAX> 1,776
<INCOME-CONTINUING> 3,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,279
<EPS-PRIMARY> 1,547
<EPS-DILUTED> 0
</TABLE>
