<PAGE> 1
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UNITED STATES
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 July 3, 1999
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 PET CARE COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 43-1350515
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
HIGHWOODS PLAZA II
103 POWELL COURT, SUITE 200
BRENTWOOD, TN 37027
(Address of Principal Executive Office, Including Zip Code)
(615) 373-7774
(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
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date. As of August 12,
1999, Registrant had outstanding 1,000 shares of common stock, $0.01 par value,
were outstanding.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 3, 1999 (unaudited) and December
31, 1998...................................................................... 1
Unaudited Condensed Consolidated Statements of Income - three months and six
months ended July 3, 1999 and June 30, 1998................................... 2
Unaudited Condensed Consolidated Statements of Cash Flows - six months ended
July 3, 1999 and June 30, 1998................................................ 3
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income - July 3, 1999........................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements................ 5
Independent Auditors' Review Report........................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 11
Item 3. Qualitative and Quantitative Disclosures about Market Risk.................... 17
OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K............................................... 18
Signatures.................................................................... 18
</TABLE>
<PAGE> 3
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
July 3, December 31,
1999 1998
--------- ---------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,369 $ 3,349
Trade accounts receivable, net of allowances 85,254 95,726
Inventories, net 48,607 49,873
Deferred tax asset 4,664 3,749
Prepaid expenses and other current assets 4,584 17,131
--------- ---------
Total current assets 145,478 169,828
--------- ---------
Property, plant and equipment, net 204,764 206,287
Goodwill and other intangibles, net 302,194 298,882
Other assets, net 30,979 31,943
--------- ---------
Total assets $ 683,415 $ 706,940
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt $ 13,842 $ 12,889
Accounts payable 54,355 79,013
Accrued liabilities 47,462 47,750
--------- ---------
Total current liabilities 115,659 139,652
Long-term debt, excluding current liabilities 428,898 446,281
Other long-term liabilities 9,169 9,160
Deferred tax liability 12,153 4,761
--------- ---------
Total liabilities 565,879 599,854
--------- ---------
Senior exchangeable preferred stock, 3,000,000
shares authorized, 1,200,000 shares issued 41,754 37,792
--------- ---------
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares
authorized and issued -- --
Additional paid-in capital 106,268 105,670
Accumulated other comprehensive income (loss) (1,817) 489
Accumulated deficit (28,669) (36,865)
--------- ---------
Total stockholder's equity 75,782 69,294
--------- ---------
Total liabilities and stockholder's equity $ 683,415 $ 706,940
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements and accompanying auditors' review report.
1
<PAGE> 4
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 3, JUNE 30, JULY 3, JUNE 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 180,412 $ 140,843 $ 384,084 $ 285,150
Cost of goods sold 134,519 116,075 286,364 236,042
--------- --------- --------- ---------
Gross profit 45,893 24,768 97,720 49,108
Operating expenses:
Promotion and distribution 14,969 8,412 30,800 16,656
Selling, general and administrative 9,656 5,829 19,205 10,572
Amortization of intangibles 2,619 1,011 5,133 1,918
Nonrecurring expense 169 -- 2,115 --
--------- --------- --------- ---------
Income from operations 18,480 9,516 40,467 19,962
Interest expense, net 9,959 5,725 20,294 11,147
Other (income) expense, net (212) (92) (367) (123)
--------- --------- --------- ---------
Income before taxes 8,733 3,883 20,540 8,938
Income tax expense 3,590 1,409 8,382 3,185
--------- --------- --------- ---------
Net income $ 5,143 $ 2,474 $ 12,158 $ 5,753
========= ========= ========= =========
Basic net income per common share:
Net income $ 5,143 $ 2,474 $ 12,158 $ 5,753
Preferred stock dividends and accretion
of preferred stock (2,011) (1,783) (3,962) (3,515)
--------- --------- --------- ---------
Basic net income per common share $ 3,132 $ 691 $ 8,196 $ 2,238
========= ========= ========= =========
Weighted average shares outstanding 1,000 1,000 1,000 1,000
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements and accompanying auditors' review report.
2
<PAGE> 5
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ending
----------------------
July 3, June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,158 $ 5,753
Items not requiring (providing) cash:
Depreciation and amortization 12,780 6,453
Noncash interest expense 938 586
Deferred tax expense 7,091 2,874
Other 617 (7)
Changes in current assets and liabilities
(excluding amounts acquired) (15,682) (6,329)
-------- --------
Net cash provided by operating activities 17,902 9,330
-------- --------
Cash flows from investing activities:
Capital expenditures, including interest capitalized (13,387) (8,000)
Payment for acquisition of business, net of cash acquired -- (26,190)
Other (1,082) (182)
-------- --------
Net cash used in investing activities (14,469) (34,372)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 12,837 31,321
Net repayments under revolving credit agreement (10,200) --
Principal payments on long-term debt (7,310) (5,424)
Contributed capital 598 1,580
-------- --------
Net cash provided by (used in) financing activities (4,075) 27,477
-------- --------
Cash effect of changes in exchange rates (338) (5)
-------- --------
Increase (decrease) in cash and cash equivalents (980) 2,430
Cash and cash equivalents, beginning of period 3,349 --
-------- --------
Cash and cash equivalents, end of period $ 2,369 $ 2,430
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements and accompanying auditors' review report.
3
<PAGE> 6
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY AND
COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Common Accumulated
Stock Other
---------------- Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income (loss) Total
------ ------ -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 1,000 $ -- $105,670 $(36,865) $ 489 $ 69,294
Comprehensive income:
Net income -- -- -- 12,158 -- 12,158
Unrealized loss on foreign
currency translation -- -- -- -- (1,264) (1,264)
Unrealized loss on cash flow
derivative hedges, net of
reclassification adjustment -- -- -- -- (1,042) (1,042)
--------
Total comprehensive income 9,852
--------
Preferred stock dividends -- -- -- (3,424) -- (3,424)
Accretion of preferred stock -- -- -- (538) -- (538)
Capital contribution -- -- 598 -- -- 598
----- ------ -------- -------- -------- --------
Balance, July 3, 1999 1,000 $ -- $106,268 $(28,669) $ (1,817) $ 75,782
===== ====== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements statements and accompanying auditors' review report.
4
<PAGE> 7
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 3, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Doane
Pet Care Company and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all determinable adjustments
have been made which are considered necessary to present fairly the financial
position and the results of operations and cash flows at the dates and for the
periods presented.
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 are likely to differ from those estimates and assumptions, but
management does not believe such differences will materially affect the
Company's financial position, results of operations or cash flows.
The accounting policies used in preparing these financial statements are the
same as those summarized in the Company's Annual Report as amended on Form
10-K/A for the fiscal year ended December 31, 1998 (the "1998 10-K/A"), except
as discussed in Note 7.
The Company's interim consolidated financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
1998 10-K/A (including related exhibits).
Certain reclassifications have been made to previously reported consolidated
financial statements to conform with the fiscal 1998 presentation.
2. 52-WEEK FISCAL YEAR
For the year ended December 31, 1998, the Company's fiscal year end was a
calendar year end. Effective January 1, 1999, the Company has implemented a
fiscal year that ends on the Saturday nearest to the end of December. Each month
and quarter also end on a Saturday with the second quarter ending on July 3,
1999.
3. 1998 ACQUISITIONS
On April 17, 1998 the Company acquired Ipes Iberica, S.A. ("Ipes") for $26.2
million, net of cash acquired and the assumption of $1.9 million of
indebtedness. Ipes is a private label pet food manufacturer located in Spain.
This transaction has been accounted for as a purchase with the purchase price
and direct acquisition costs allocated based on the fair value of assets
acquired and liabilities assumed.
On August 3, 1998, the Company's parent acquired Windy Hill Pet Food Holdings
Inc. ("Holdings") for approximately 6.4 million shares of its common stock
valued at $63.6 million and
5
<PAGE> 8
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the assumption of $183.5 million of indebtedness. Windy Hill Pet Food Company,
Inc. ("Windy Hill"), a wholly-owned subsidiary of Holdings, was merged into the
Company in November 1998 in connection with the Refinancing Transactions
discussed in Note 4. Windy Hill was a leading manufacturer of pet food products
for both dogs and cats, including dry, canned, semi-moist, soft dry and soft
treats and dog biscuits. With Windy Hill, the Company became the largest
manufacturer of dog biscuits in the United States. This acquisition has been
accounted for as a purchase with the purchase price and direct acquisition costs
allocated based on the fair value of assets acquired and liabilities assumed.
4. EXCHANGE OFFER AND REFINANCING TRANSACTIONS
In November 1998, the Company refinanced its capital structure pursuant to the
following series of transactions collectively referred to herein as the
"Refinancing Transactions."
o Windy Hill was merged into the Company;
o the Company completed a cash tender offer for approximately $97 million
principal amount of its 10 5/8% senior notes due 2006;
o Windy Hill completed a cash tender offer for $46 million principal amount
of its 9 3/4% senior subordinated notes due 2007, which tender offer was
required by a change of control provision in the indenture governing such
notes;
o the Company completed an exchange offer of $150 million principal amount of
its 9 3/4% senior subordinated notes due 2007 for the remaining
approximately $63 million principal amount of its senior notes and the
remaining approximately $74 million principal amount of Windy Hill's senior
subordinated notes; and
o the Company entered into a new senior credit facility with a syndicate of
financial institutions providing for total commitments of $345 million. The
Company borrowed $292 million under the senior credit facility to fund the
cash requirements of the Refinancing Transactions, repay borrowings under
and retire its previous credit facilities, repay other debt and repay a
bridge financing incurred in connection with the tender offer for the Windy
Hill's senior subordinated notes.
5. PRO FORMA 1998 RESULTS OF OPERATIONS
Set forth below is certain unaudited pro forma consolidated financial
information of the Company for the three months and six months ended June 30,
1998 based on historical information that has been adjusted to reflect the
Company's acquisition of IPES and Windy Hill, discussed in Note 3, and the
Refinancing Transactions, discussed in Note 4, as if all such transactions
occurred at January 1, 1998. The pro forma information related to Windy Hill
also gives effect to three acquisitions, which occurred during 1998, prior to
the merger with the Company, as if such transactions occurred at January 1,
1998.
6
<PAGE> 9
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited summary pro forma consolidated financial data is based on certain
assumptions and estimates, and therefore does not purport to be indicative of
the results that would actually have been obtained had the transactions been
completed as of such date or indicative of future results of operations and
financial position.
Unaudited Pro Forma Condensed Consolidated Statements of Income
(in thousands)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1998 1998
------------- -------------
<S> <C> <C>
Net Sales $ 211,067 $ 440,545
Cost of goods sold 168,365 353,598
--------- ---------
Gross profit 42,702 86,947
Operating expenses:
Promotion and distribution 15,907 32,088
Selling, general and administrative 9,983 18,687
Amoritization of intangibles 2,501 4,939
Transition expenses 353 513
--------- ---------
Income from operations 13,958 30,720
Interest expense, net 10,015 20,289
Other (income) expense, net (292) (597)
--------- ---------
Income before taxes 4,235 11,028
Income tax expense 1,632 4,375
--------- ---------
Net income before extraordinary item $ 2,603 $ 6,653
========= =========
</TABLE>
6. INVENTORIES
Inventories at July 3, 1999 consist of the following (in thousands):
<TABLE>
<S> <C>
Raw materials $ 10,999
Packaging Materials 21,315
Finished goods 16,293
--------
Total $ 48,607
========
</TABLE>
7
<PAGE> 10
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. ACCOUNTING CHANGE
Effective January 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standard, the Company is required to carry all derivative instruments in the
statement of financial position at fair value. The accounting for changes in the
fair value (i.e., gains or losses) of a derivative instrument depends on whether
it has been designated and qualifies as part of a hedging relationship and, if
so, on the reason for holding it. If certain conditions are met, entities may
elect to designate a derivative instrument as a hedge of exposures to changes in
fair values, cash flows, or foreign currencies. If the hedged exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness, as well as the ineffective portion
of the gain or loss is reported in earnings immediately. Accounting for foreign
currency hedges is similar to the accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change. As of July 3, 1999, all
of the Company's derivative instruments were designated as cash flow hedges.
Comprehensive income includes a loss of $2.3 million, net of tax, as a fair
market value adjustment related to the instruments.
8. NONRECURRING EXPENSE
Nonrecurring expenses for the six months ended July 3, 1999 include $1.4 million
related to a proposed initial public stock offering by the Company's parent,
which was withdrawn prior to completion. These expenses include fees paid for
legal, accounting and printing services, and other miscellaneous expenses.
In addition, nonrecurring expense for the three months and six months ended July
3, 1999 includes $0.2 million and $0.7 million, respectively, of
transition-related costs incurred in connection with the merger and integration
of Windy Hill with the Company.
9. COMMITMENTS AND CONTINGENCIES
On October 30, 1998 the Company initiated a voluntary product recall for certain
dry dog food manufactured at our Temple, Texas plant between July 1 and August
31, 1998. The cost of the product recall was not covered by insurance. The
Company recorded a $3.0 million product recall charge in the fourth quarter of
fiscal 1998.
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.
8
<PAGE> 11
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. SUBSEQUENT EVENT
On July 30, 1999, the Company acquired a 50% interest in the business of North
American Pet Products, Inc, a privately held international pet food distribution
and brokerage company with approximately $9 million in annual revenues.
9
<PAGE> 12
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Doane Pet Care Company
We have reviewed the condensed consolidated balance sheet of Doane Pet Care
Company and Subsidiaries as of July 3, 1999, the related condensed consolidated
statements of income for the three-month and six-month periods ended July 3,
1999 and June 30, 1998 and condensed consolidated statements of cash flows for
the six-month periods ended July 3, 1999 and June 30, 1998 and the condensed
consolidated statement of stockholder's equity and comprehensive income for the
six-month period ended July 3, 1999. These condensed consolidated financial
statements are the responsibility of the Company's management.
We have conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Doane Pet Care Company and
Subsidiaries as of December 31, 1998, and the related consolidated statements of
income, stockholder's equity and comprehensive income and cash flows for the
year then ended (not presented herein); and in our report dated February 25,
1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Houston, Texas
August 6, 1999 KPMG, LLP
10
<PAGE> 13
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain of the statements in this Form 10-Q are "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21B of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements
other than statements of historical facts included in this Form 10-Q, including
without limitation statements regarding budgeted capital expenditures, the
Company's financial position, the year 2000 and unaudited pro forma financial
information, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations are disclosed in the Company's 1998 Form 10-K/A. Should
one or more of these risks or uncertainties occur, or should underlying
assumptions prove incorrect, the Company's actual results and plans for the
remainder of 1999 and beyond could differ materially from those expressed in
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by such factors.
RESULTS OF OPERATIONS
Readers are urged to consider carefully the financial statements and related
notes contained elsewhere in this report and in our Form 10-K/A for the fiscal
year ended December 31, 1998 as they read the discussion below.
During 1998, we completed several material transactions affecting our ongoing
operations and debt structure. Those transactions are summarized in "Note 3 -
1998 Acquisitions" and "Note 4 - Exchange Offer and Refinancing Transactions" to
the Unaudited Condensed Consolidated Financial Statements. The discussion that
follows of the financial condition and results of operations includes the effect
of the Ipes acquisition in the 1998 amounts after April 17, 1998 and includes
the effect of all the transactions discussed above in the 1999 period. As a
result, the comparability of the results is significantly impacted. Pro forma
1998 results of operations assumes that all these transactions occurred at
January 1, 1998, and are presented in Note 5 to the Unaudited Condensed
Consolidated Financial Statements.
11
<PAGE> 14
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------------------- ------------------------------------------
July 3, 1999 June 30, 1998 July 3, 199 June 30, 1998
-------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 180,412 100.0% $ 140,843 100.0% $ 384,084 100.0% $285,150 100.0%
Cost of goods sold 134,519 74.6 116,075 82.4 286,364 74.6 236,042 82.8
--------- ------- --------- ----- --------- ----- --------- -----
Gross profit 45,893 25.4 24,768 17.6 97,720 25.4 49,108 17.2
Operating expenses:
Promotion and distribution 14,969 8.3 8,412 6.0 30,800 8.0 16,656 5.8
Selling, general and administrative 9,656 5.4 5,829 4.1 19,205 5.0 10,572 3.7
Amortization of intangibles 2,619 1.5 1,011 0.7 5,133 1.3 1,918 0.7
Nonrecurring expense 169 -- -- -- 2,115 0.6 -- 0.0
--------- ------- --------- ----- --------- ----- --------- -----
Income from operations 18,480 10.2 9,516 6.8 40,467 10.5 19,962 7.0
Interest expense, net 9,959 5.5 5,725 4.1 20,294 5.3 11,147 3.9
Other (income) expense, net (212) (0.1) (92) (0.1) (367) (0.1) (123) 0.0
--------- ------- --------- ----- --------- ----- --------- -----
Income before taxes 8,733 4.8 3,883 2.8 20,540 5.3 8,938 3.1
Income tax expense 3,590 1.9 1,409 1.0 8,382 2.1 3,185 1.1
--------- ------- --------- ----- --------- ----- --------- -----
Net income $ 5,143 2.9% $ 2,474 1.8% $ 12,158 3.2% $ 5,753 2.0%
========= ======= ========= ===== ========= ===== ========= =====
</TABLE>
THREE MONTHS ENDED JULY 3, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales for the three months ended July 3, 1999 increased 28.1% to
$180.4 million from $140.8 million in the three months ended June 30, 1998. The
reason for the increase is due to the Windy Hill acquisition. Partially
offsetting this increase is certain low margin sales that the Company ceded to
provide additional capacity for future growth of more profitable business,
resulting in a net pro forma volume decline of 8.5%, and a $4.5 million
reduction in non-manufactured product sales. In addition the 1999 sales reflect
price declines attributable to the pass-through of certain raw material cost
decreases to customers.
Gross profit. Gross profit for the three months ended July 3, 1999 increased
85.1% to $45.9 million from $24.8 million in the three months ended June 30,
1998. The primary reason for the increase is the sales increase resulting from
the Windy Hill acquisition. In addition, the increase reflects the benefits from
realization of several margin improvement initiatives put in place during the
last year and reduction in the cost of commodities. The margin improvement
initiatives included new product development, realization of acquisition
synergies, automation improvements, and management of low margin business. On a
pro forma basis, the increase in gross profit was partially offset by the volume
decrease discussed above.
Promotion and distribution expenses. Promotion and distribution expenses for the
three months ended July 3, 1999 increased 78.6% to $15.0 million from $8.4
million in the three months ended June 30, 1998. The primary reason for the
increase is due to the Windy Hill acquisition. On a pro forma basis, the
increase is partially offset by the realization of acquisition synergies and the
volume decrease discussed above.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $9.7 million for the three months ended
July 3, 1999 from $5.8 million in the three months ended June 30, 1998. The
primary reason for the increase is due to the Windy Hill acquisition.
12
<PAGE> 15
Amortization of intangibles. Amortization of intangibles increased to $2.6
million for the three months ended July 3, 1999 from $1.0 million in the three
months ended June 30, 1998 due to the Windy Hill acquisition.
Interest expense, net. Net interest expense for the three months ended July 3,
1999 increased to $10.0 million from $5.7 million in the three months ended June
30, 1998 primarily due to $183.5 million of debt incurred in connection with the
Windy Hill acquisition, offset by payments made on the debt since the date of
the acquisitions.
Income tax expense. The Company's effective income tax rate of 41.1% for the
three months ended July 3, 1999 increased from 36.3% in the three months ended
June 30, 1998 primarily because of the Windy Hill acquisition and the related
amortization of goodwill which is not deductible for federal or state tax
purposes.
SIX MONTHS ENDED JULY 3, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales for the six months ended July 3, 1999 increased 34.7% to
$384.1 million from $285.2 million in the six months ended June 30, 1998. The
reason for the increase is due to the Windy Hill and IPES acquisitions.
Partially offsetting this increase is certain low margin sales that the Company
ceded to provide additional capacity for future growth of more profitable
business, resulting in a net pro forma volume decline of 7.5%, and a $9.2
million reduction in non-manufactured product sales. In addition the 1999 sales
reflect price declines attributable to the pass-through of certain raw material
cost decreases to customers.
Gross profit. Gross profit for the six months ended July 3, 1999 increased 99.0%
to $97.7 million from $49.1 million in the six months ended June 30, 1998. The
primary reason for the increase is the sales increase resulting from the Windy
Hill and IPES acquisitions. In addition, the increase reflects the benefits from
realization of several margin improvement initiatives put in place during the
last year and reduction in the cost of commodities. The margin improvement
initiatives included new product development, realization of acquisition
synergies, automation improvements, and management of low margin business. On a
pro forma basis, the increase in gross profit was partially offset by the volume
decrease discussed above.
Promotion and distribution expenses. Promotion and distribution expenses for the
six months ended July 3, 1999 increased 84.4% to $30.8 million from $16.7
million in the six months ended June 30, 1998. The primary reason for the
increase is due to the Windy Hill and IPES acquisitions. On a pro forma basis,
the increase is partially offset by the realization of acquisition synergies and
the volume decrease discussed above.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $19.2 million for the six months ended July
3, 1999 from $10.6 million in the six months ended June 30, 1998. The primary
reason for the increase is due to the Windy Hill and IPES acquisitions. In
addition, expenses have increased due to expenses related to the Year 2000
compliance and salaries and related fringe benefits associated with annual wage
increases.
Amortization of intangibles. Amortization of intangibles increased to $5.1
million for the six months ended July 3, 1999 from $1.9 million in the six
months ended June 30, 1998 due to the Windy Hill and IPES acquisitions.
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<PAGE> 16
Nonrecurring expense. Nonrecurring expense includes: a) $1.4 million expenses
related to a proposed initial public stock offering by the Company's parent,
which was withdrawn prior to completion and b) $0.7 million of expenses incurred
in connection with the merger and integration of Windy Hill with the Company.
The stock offering expenses include fees paid for legal, accounting and printing
services, and other miscellaneous expenses.
Interest expense, net. Net interest expense for the six months ended July 3,
1999 increased to $20.3 million from $11.1 million in the six months ended June
30, 1998 primarily due to $206.0 million of debt incurred in connection with the
Windy Hill and IPES acquisitions, offset by payments made on the debt since the
date of the acquisitions.
Income tax expense. The Company's effective income tax rate of 40.8% for the six
months ended July 3, 1999 increased from 35.6% in the six months ended June 30,
1998 primarily because of the Windy Hill acquisition and the related
amortization of goodwill which is not deductible for federal or state tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and working
capital requirements from cash flow from operations, bank borrowings and
industrial development bonds. We had working capital of $29.8 million at July 3,
1999. As of July 3, 1999, we had borrowing capacity of $75.8 million under our
revolver, which was net of $2.4 million for outstanding letters of credit.
Net cash provided by operating activities was $17.9 million in the six months
ended July 3, 1999 and $9.3 million in the corresponding 1998 period. This
increase in the 1999 period compared to 1998 was due to higher net income before
deferred tax and an increase in amortization expense resulting from the
acquisitions, partially offset by working capital requirements.
Net cash used in investing activities was $14.5 million and $34.4 million for
the six-month periods ended July 3, 1999 and June 30, 1998, respectively. In the
six months ended July 3, 1999, we spent $13.4 million on capital expenditures.
In the 1998 comparable period, we acquired Ipes for approximately $26.2 million
and spent $8.0 million on capital expenditures.
Net cash used in financing activities was approximately $4.1 million in the six
months ended July 3, 1999. Net cash provided by financing activities was $27.5
million for the six months ended June 30, 1998. For the six months ended July 3,
1999, we paid down $10.2 million and $7.3 million on our revolver and long-term
debt, respectively. This was partially offset by long-term borrowings of $12.8
million. For the 1998 comparable period, we borrowed $31.3 million which was
primarily used for the Ipes acquisition. This was partially offset by long term
debt payments of $5.4 million.
We expect that existing manufacturing facilities will not be sufficient to meet
our anticipated volume growth. We have continued to examine alternatives for
expanding our business either through construction of additional manufacturing
capacity or acquisition of manufacturing assets. Potential acquisitions could
include acquisitions of operating companies. We intend to finance these
expansions or acquisitions with borrowings under existing or expanded credit
facilities, or the issuance of additional equity.
We are highly leveraged and have significant cash requirements for debt service
relating to the senior credit facility, the senior subordinated notes, the IPES
debt and industrial development bonds. Our ability to borrow is limited by the
senior credit facility and the limitations on
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<PAGE> 17
the incurrence of indebtedness in the indenture governing our senior
subordinated notes. We anticipate that our operating cash flow, together with
amounts available to us under our senior credit facility and new industrial
development bonds, will be sufficient to finance working capital requirements,
debt service requirements and capital expenditures through the 1999 fiscal year.
YEAR 2000
We have conducted a comprehensive review of our computer software to identify
the systems that could be affected by the "year 2000" issue. The year 2000 issue
results from computer programs being written using two digits, rather than four,
to define the applicable year. As a result, certain of our programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This calculation could result in a major system failure or
miscalculations.
We have made an assessment of year 2000 compliance and reviewed our business
application software, which resulted in plans to either replace or upgrade all
essential business software at an estimated cost of $5.6 million. We are
currently reviewing our administrative hardware and software, which include
networks, communications and security systems, and the software related to
manufacturing equipment. We have implemented a program to confirm year 2000
compliance with all third parties with which we have material relationships.
As of July 3, 1999, we had incurred costs of approximately $5.3 million in
connection with year 2000 compliance. We have tested our year 2000 compliance
projects, including third party compliance. We believe that a failure to
complete our year 2000 compliance, or a failure by parties with whom we have
material relationships to complete their year 2000 compliance, by December 31,
1999 could have a material adverse effect on our financial condition and results
of operations. We believe that we can provide the resources necessary to ensure
year 2000 compliance prior to the year 2000. However, if we are delayed in our
year 2000 compliance, we may experience a decrease in efficiency that could have
a material adverse effect on our results of operations. We also believe that a
sufficient number of suppliers exist if our current suppliers are delayed in
their efforts to achieve year 2000 compliance thereby minimizing risk to us. We
have developed contingency plans that include moving production within our plant
network, securing additional ingredient storage facilities and transferring
procurement to year 2000 compliant suppliers.
EURO
Effective January 1, 1999, eleven of the fifteen countries comprising the
European Union began a transition to a single monetary unit, the "Euro," which
is scheduled to be completed by July 1, 2002. We are currently considering
options to ensure that our European subsidiaries can operate effectively in the
Euro. Our subsidiaries in Italy and Spain may incur significant costs in
conversion of their systems to the Euro. We are unable to predict whether these
costs can be passed on to customers. The customers of our subsidiaries may also
begin conducting operations using the Euro prior to the completion of the
conversion of the systems of our subsidiaries. Delays in conversion could have a
material adverse effect on the results of the operations of these subsidiaries.
In addition, the introduction of the Euro may increase competition, as
manufacturers in other European countries become able to compete more easily in
our markets. We do not believe that the implementation of the Euro will have a
material effect on our operations or financial condition taken as a whole.
15
<PAGE> 18
INFLATION AND CHANGES IN PRICES
Our financial results depend to a large extent on the cost of raw materials and
packaging and the ability of us to pass along to our 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 U.S.
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, we may be required to increase sales prices
for our products in order to avoid margin deterioration. We cannot assure you of
the timing or extent of our ability to implement future price adjustments in the
event of increased raw material costs or of whether any price increases
implemented by us may affect the volumes of future shipments.
We manage the price risk created by market fluctuations by hedging portions of
our primary commodity product purchases, principally through exchange traded
futures and options contracts that are designated as hedges. The terms of these
contracts are generally less than one year. Settlement of positions are either
through financial settlement with the exchanges or through exchange for the
physical commodity in which case we deliver the contract against the acquisition
of the physical commodity. Our policy does not permit speculative commodity
trading. Although we manage the price risk of market fluctuations by hedging
portions of our primary commodity product purchases, we cannot assure you that
our results of operations will not be exposed to volatility in the commodity
market.
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<PAGE> 19
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks. Market risk is the potential loss arising from
adverse changes in market prices and rates. We do not enter into derivative or
other financial instruments for trading or speculative purposes. Our market risk
could arise from changes in interest rates, commodity prices and foreign
currency exchange rates.
Interest rate risk. We are subject to market risk exposure related to changes in
interest rates. Accordingly, our net income is affected by changes in interest
rates. Assuming our current level of borrowings, a 100 basis point increase in
interest rates under these borrowings would decrease our six-month ended July 3,
1999 net income by approximately $0.8 million and our six-month ended July 3,
1999 pro forma cash flow from operations by approximately $1.4 million. In
addition, such a change would result in a decrease in the fair value of the debt
at July 3, 1999 by approximately $10.2 million. We could take action to mitigate
our exposure to adverse changes in interest rates. However, due to the
uncertainty of the actions that would be taken and the possible effects, this
analysis assumes no such actions. Furthermore, this analysis does not consider
the effects of the change in the level of overall economic activity that could
exist in such an environment.
We periodically use interest rate hedges, or swaps, to limit our exposure to the
interest rate risk associated with our floating rate long term debt, which was
approximately $281.9 million, at July 3, 1999. Amounts received under swap
agreements are recorded as a reduction (addition) to interest expense. The
deferred gain associated with such contracts was approximately $0.6 million, net
of tax, at July 3, 1999.
Commodity price risk. We manage price risk created by market fluctuations by
hedging portions of our primary commodity products purchases, which are corn and
soybean meal, principally through exchange traded futures and options contracts
that are designated as hedges. The terms of these contracts are generally less
than one year. Settlement of positions are either through financial settlement
with the exchanges or through exchange for the physical commodity in which case
we deliver the contract against the acquisition of the physical commodity.
Our policy does not permit speculative commodity trading. Effective January 1,
1999, futures and options contracts are accounted for as cash flow hedges in
accordance with Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." In accordance with the
standard, the cash flow hedges are recorded in the balance sheet at fair value.
The effective portion of the gain or loss on the derivative instrument is
reported initially as a component of other comprehensive income and subsequently
reclassified into earnings when the forecasted transaction affects earnings.
Typically, maturities vary and do not exceed twelve months.
Deferred losses on these outstanding contracts were $1.6 million, net of tax, at
July 3, 1999. Based upon an analysis utilizing the actual derivative contractual
volumes and assuming a 10% adverse movement in commodity prices, the potential
decrease in the fair value of the derivative commodity instruments at July 3,
1999 would not have a material adverse effect on our financial position, results
of operations or cash flows.
Foreign currency exchange risk. Our earnings and financial position are affected
by foreign exchange rate fluctuations. Except for our Spanish foreign
operations, which had net sales of $15.5 million for the six months ended July
3, 1999, we generally transact business in U.S. dollars. We
17
<PAGE> 20
generally finance our peseta-denominated assets with peseta currency borrowings,
thereby reducing our exposure to the risk associated with fluctuations in
foreign currency rates. The translation adjustment included in comprehensive
income for the six months ended July 3, 1999 was a loss of $1.3 million.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index
27.1 Financial Data Schedule
(b) Reports on Form 8-K
NONE
DOANE PET CARE COMPANY AND SUBSIDIARIES
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 PET CARE COMPANY
Dated: August 16, 1999 By: /s/ THOMAS R. HEIDENTHAL
-----------------------------------------
Thomas R. Heidenthal
Senior Vice President and Chief Financial
Officer
Dated: August 16, 1999 By: /s/ PHILIP K. WOODLIEF
-----------------------------------------
Philip K. Woodlief
Vice President - Finance and
Principal Accounting Officer
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<PAGE> 21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-03-1999
<CASH> 2,369
<SECURITIES> 0
<RECEIVABLES> 87,093
<ALLOWANCES> (1,839)
<INVENTORY> 48,607
<CURRENT-ASSETS> 145,478
<PP&E> 243,179
<DEPRECIATION> (38,415)
<TOTAL-ASSETS> 683,415
<CURRENT-LIABILITIES> 115,659
<BONDS> 160,786
0
41,754
<COMMON> 0
<OTHER-SE> 75,782
<TOTAL-LIABILITY-AND-EQUITY> 683,415
<SALES> 384,084
<TOTAL-REVENUES> 384,084
<CGS> 286,364
<TOTAL-COSTS> 343,617
<OTHER-EXPENSES> (367)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,294
<INCOME-PRETAX> 20,540
<INCOME-TAX> 8,382
<INCOME-CONTINUING> 12,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,158
<EPS-BASIC> 8,196
<EPS-DILUTED> 8,196
</TABLE>
