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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 October 2, 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)
<TABLE>
<S> <C>
DELAWARE 43-1350515
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
</TABLE>
210 WESTWOOD PLACE SOUTH, SUITE 300
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 November 12,
1999, Registrant had outstanding 1,000 shares of common stock, $.01 par value,
were outstanding.
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<PAGE> 2
TABLE OF CONTENTS
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - October 2, 1999 (unaudited) and
December 31, 1998...................................................................... 1
Unaudited Condensed Consolidated Statements of Income - three months and nine
months ended October 2, 1999 and September 30, 1998.................................... 2
Unaudited Condensed Consolidated Statements of Cash Flows - nine months ended
October 2, 1999 and September 30, 1998................................................. 3
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income - October 2, 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>
October 2, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,699 $ 3,349
Trade accounts receivable, net of allowances 88,282 95,726
Inventories, net 48,830 49,873
Deferred tax asset 5,098 3,749
Prepaid expenses and other current assets 4,771 17,131
-------- --------
Total current assets 149,680 169,828
Property, plant and equipment, net 210,070 206,287
Goodwill and other intangibles, net 300,676 298,882
Other assets, net 30,080 31,943
-------- --------
Total assets $690,506 $706,940
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt $ 13,942 $ 12,889
Accounts payable 60,417 79,013
Accrued liabilities 44,956 47,750
-------- --------
Total current liabilities 119,315 139,652
Long-term debt, excluding current liabilities 425,797 446,281
Other long-term liabilities 10,285 9,160
Deferred tax liability 15,228 4,761
-------- --------
Total liabilities 570,625 599,854
-------- --------
Senior exchangeable preferred stock, 3,000,000 shares
authorized, 1,200,000 shares issued 43,827 37,792
-------- --------
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares
authorized and issued -- --
Additional paid-in capital 106,708 105,670
Accumulated other comprehensive income (loss) (4,227) 489
Accumulated deficit (26,427) (36,865)
-------- --------
Total stockholder's equity 76,054 69,294
-------- --------
Total liabilities and stockholder's equity $690,506 $706,940
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements and accompanying auditors' review report.
1
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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 NINE MONTHS ENDED
----------------------------- ---------------------------
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $181,436 $176,511 $565,520 $ 461,661
Cost of goods sold 136,550 142,541 422,914 378,582
-------- -------- -------- ---------
Gross profit 44,886 33,970 142,606 83,079
Operating expenses:
Promotion and distribution 14,264 12,395 45,064 29,051
Selling, general and administrative 10,400 6,808 29,605 17,380
Amortization of intangibles 2,619 2,205 7,752 4,124
Nonrecurring expense 304 4,311 2,419 4,311
-------- -------- -------- ---------
Income from operations 17,299 8,251 57,766 28,213
Interest expense, net 10,040 8,340 30,334 19,444
Other (income) expense, net (168) (146) (535) (229)
-------- -------- -------- ---------
Income before taxes 7,427 57 27,967 8,998
Income tax expense (benefit) 3,112 (165) 11,494 3,020
-------- -------- -------- ---------
Net income $ 4,315 $ 222 $ 16,473 $ 5,978
======== ======== ======== =========
Basic net income per common share:
Net income $ 4,315 $ 222 $ 16,473 $ 5,978
Preferred stock dividends and accretion
of preferred stock (2,073) (1,838) (6,035) (5,353)
-------- -------- -------- ---------
Basic net income per common share $ 2,242 $ (1,616) $ 10,438 $ 625
======== ======== ======== =========
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>
NINE MONTHS ENDING
----------------------------
OCTOBER 2, SEPTEMBER 30,
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,473 $ 5,978
Items not requiring (providing) cash:
Depreciation and amortization 19,680 11,867
Noncash interest expense 1,427 942
Deferred tax expense 11,364 2,665
Other (527) (593)
Changes in current assets and liabilities
(excluding amounts acquired) (18,025) (5,217)
-------- -------
Net cash provided by operating activities 30,392 15,642
-------- -------
Cash flows from investing activities:
Capital expenditures, including interest capitalized (20,558) (13,988)
Payment for acquisition of business, net of cash acquired (801) (26,190)
Other (1,351) (4,014)
-------- -------
Net cash used in investing activities (22,710) (44,192)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 12,851 42,021
Net borrowings (repayments) under revolving credit agreement (11,200) 3,310
Principal payments on long-term debt (10,600) (16,114)
Contributed capital 598 1,862
-------- -------
Net cash provided by (used in) financing activities (8,351) 31,079
-------- -------
Cash effect of changes in exchange rates 19 225
-------- -------
Increase (decrease) in cash and cash equivalents (650) 2,754
Cash and cash equivalents, beginning of period 3,349 1,078
-------- -------
Cash and cash equivalents, end of period $ 2,699 $ 3,832
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements and accompanying auditors' review report.
3
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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 -- -- -- 16,473 -- 16,473
Unrealized loss on foreign
currency translation -- -- -- -- (684) (684)
Unrealized loss on cash flow
derivative hedges, net of
reclassification adjustment -- -- -- -- (4,032) (4,032)
--------
Total comprehensive income 11,757
--------
Preferred stock dividends -- -- -- (5,228) -- (5,228)
Accretion of preferred stock -- -- -- (807) -- (807)
Capital contribution, other -- -- 1,038 -- -- 1,038
----- ------ -------- -------- -------- --------
Balance, October 2, 1999 1,000 $ -- $106,708 $(26,427) $ (4,227) $ 76,054
===== ====== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements and accompanying auditors' review report.
4
<PAGE> 7
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 2, 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 1999 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 third quarter ending on October 2,
1999.
3. ACQUISITIONS
1998
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.
5
<PAGE> 8
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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. 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.
1999
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. The purchase price was $0.8 million in cash and $0.4 million in stock.
This acquisition will be accounted for under the equity method.
On September 1, 1999, the Company terminated its 50/50 joint venture associated
with the manufacturing operations of a pet food plant in Caldwell, Idaho. Upon
termination, the Company assumed control of 100% of the pet food operations at
the facility. In connection therewith, the Company entered into a long-term
lease for the facility. This acquisition has been accounted for as a purchase.
On October 14, 1999, the Company acquired a pet food plant in the United Kingdom
for approximately $5.0 million. Although the plant does not have a current
customer base (the plant's exclusive customer terminated its contract prior to
the acquisition), it has the capability to manufacture a complete range of dry
pet foods, with an emphasis on super premium pet foods. This acquisition has
been accounted for as a purchase.
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
6
<PAGE> 9
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended September
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.
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.
7
<PAGE> 10
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Consolidated Statements of Income
(in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1998
------------------ -----------------
<S> <C> <C>
Net sales $199,799 $640,344
Cost of goods sold 160,328 513,926
-------- --------
Gross profit 39,471 126,418
Operating expenses:
Promotion and distribution 14,731 46,819
Selling, general and administrative 8,331 27,018
Amortization of intangibles 2,718 7,657
Nonrecurring expenses 12,254 12,767
-------- --------
Income from operations 1,437 32,157
Interest expense, net 9,572 29,861
Other (income) expense, net (287) (884)
-------- --------
Income (loss) before taxes (7,848) 3,180
Income tax expense (benefit) (1,110) 3,265
-------- --------
Net income (loss) before extraordinary item $ (6,738) $ (85)
======== ========
</TABLE>
6. INVENTORIES
Inventories at October 2, 1999 consist of the following (in thousands):
<TABLE>
<S> <C>
Raw materials $10,112
Packaging Materials 18,924
Finished goods 19,794
-------
Total $48,830
=======
</TABLE>
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
balance sheet 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
8
<PAGE> 11
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
relationship and, if so, on the reason for holding it. As of October 2, 1999,
all of the Company's derivative instruments were designated as cash flow hedges,
whereby 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. Comprehensive income includes a loss of $4.0
million, net of tax, as a fair market value adjustment related to the
instruments.
8. NONRECURRING EXPENSE
Nonrecurring expenses for the nine months ended October 2, 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 nine months ended
October 2, 1999 includes $0.3 million and $1.0 million, respectively, of
transition-related costs incurred in connection with the merger and integration
of Windy Hill with the Company.
9. 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.
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 October 2, 1999, the related condensed
consolidated statements of income for the three-month and nine-month periods
ended October 2, 1999 and September 30, 1998 and condensed consolidated
statements of cash flows for the nine-month periods ended October 2, 1999 and
September 30, 1998 and the condensed consolidated statement of stockholder's
equity and comprehensive income for the nine-month period ended October 2, 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
November 8, 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 and Windy Hill acquisitions in the 1998 amounts after April 17, 1998
and August 3, 1998, respectively. 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 NINE MONTHS ENDED
------------------------------------------ ------------------------------------------
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 181,436 100.0% $ 176,511 100.0% $ 565,520 100.0% $ 461,661 100.0%
Cost of goods sold 136,550 75.3 142,541 80.8 422,914 74.8 378,582 82.0
--------- ----- --------- ----- --------- ----- --------- -----
Gross profit 44,886 24.7 33,970 19.2 142,606 25.2 83,079 18.0
Operating expenses:
Promotion and distribution 14,264 7.9 12,395 7.0 45,064 8.0 29,051 6.3
Selling, general and administrative 10,400 5.7 6,808 3.9 29,605 5.2 17,380 3.8
Amortization of intangibles 2,619 1.4 2,205 1.2 7,752 1.4 4,124 0.9
Nonrecurring expense 304 0.2 4,311 2.4 2,419 0.4 4,311 0.9
--------- ----- --------- ----- --------- ----- --------- -----
Income from operations 17,299 9.5 8,251 4.7 57,766 10.2 28,213 6.1
Interest expense, net 10,040 5.5 8,340 4.7 30,334 5.4 19,444 4.2
Other (income) expense, net (168) (0.1) (146) -- (535) (0.1) (229) --
--------- ----- --------- ----- --------- ----- --------- -----
Income before taxes 7,427 4.1 57 0.0 27,967 4.9 8,998 1.9
Income tax expense 3,112 1.7 (165) (0.1) 11,494 2.0 3,020 0.6
--------- ----- --------- ----- --------- ----- --------- -----
Net income $ 4,315 2.4% $ 222 0.1 $ 16,473 2.9% $ 5,978 1.3%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
THREE MONTHS ENDED OCTOBER 2, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,
1998
Net Sales. Net sales for the three months ended October 2, 1999 increased 2.8%
to $181.4 million from $176.5 million in the three months ended September 30,
1998. The reason for the increase is due to the Windy Hill acquisition, which
was acquired on August 3, 1998 and therefore included in the 1999 third quarter
results for three months and in the comparative 1998 period for two months. The
impact of the acquisition was mitigated by 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 6.6%, and a
$4.3 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 October 2, 1999 increased
32.1% to $44.9 million from $34.0 million in the three months ended September
30, 1998. The primary reason for the increase is due to benefits from
realization of several margin improvement initiatives put in place during 1998
and 1999. The margin improvement initiatives included new product development,
realization of acquisition synergies, automation improvements, and management of
low margin business. In addition, the increase is partially due to the increase
in sales resulting from the Windy Hill acquisition. 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 October 2, 1999 increased 15.3% to $14.3 million from $12.4
million in the three months ended September 30, 1998. The primary reason for the
increase is due to the Windy Hill acquisition.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $10.4 million for the three months ended
October 2, 1999 from $6.8 million in the three months ended September 30, 1998.
The increase is partially due to the Windy Hill
12
<PAGE> 15
acquisition. In addition, expenses have increased due to expenses related to the
Year 2000 compliance, salaries and related fringe benefits associated with
annual wage increases, and higher one time professional fees in the 1999 third
quarter period.
Amortization of intangibles. Amortization of intangibles increased to $2.6
million for the three months ended October 2, 1999 from $2.2 million in the
three months ended September 30, 1998 due to the Windy Hill acquisition.
Nonrecurring expense. Nonrecurring expense for the three months ended October 2,
1999 was $0.3 million as compared to $4.3 million for the same period in 1998.
These expenses were incurred in connection with the merger and integration of
Windy Hill with the Company.
Interest expense, net. Net interest expense for the three months ended October
2, 1999 increased to $10.0 million from $8.3 million in the three months ended
September 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 acquisition.
Income tax expense. The Company's effective income tax rate of 41.9% for the
three months ended October 2, 1999 is higher than the statutory rate due to the
amortization of goodwill which is not deductible for federal or state tax
purposes. The Company's tax benefit for the three months ended September 30,
1998 includes a year-to-date cumulative effect adjustment necessary to reflect
the annual effective tax rate.
NINE MONTHS ENDED OCTOBER 2, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net Sales. Net sales for the nine months ended October 2, 1999 increased 22.5%
to $565.5 million from $461.7 million in the nine months ended September 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 7.2%, and a
$13.5 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 nine months ended October 2, 1999 increased
71.6% to $142.6 million from $83.1 million in the nine months ended September
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 1998 and 1999. 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
nine months ended October 2, 1999 increased 55.0% to $45.1 million from $29.1
million in the nine months ended September 30, 1998. The primary reason for the
increase is due to the Windy Hill and IPES acquisitions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $29.6 million for the nine months ended
October 2, 1999 from $17.4 million in the
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<PAGE> 16
nine months ended September 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 $7.8
million for the nine months ended October 2, 1999 from $4.1 million in the nine
months ended September 30, 1998 due to the Windy Hill and IPES acquisitions.
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) $1.0 million of expenses incurred
in connection with the merger and integration of Windy Hill with the Company for
the nine months ended October 2, 1999. For the nine months ended September 30,
1998, the Company incurred $4.3 million in connection with the merger and
integration of Windy Hill with the Company.
Interest expense, net. Net interest expense for the nine months ended October 2,
1999 increased to $30.3 million from $19.4 million in the nine months ended
September 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 41.1% for the
nine months ended October 2, 1999 increased from 33.6% in the nine months ended
September 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 $30.4 million at October
2, 1999. As of October 2, 1999, we had borrowing capacity of $76.8 million under
our revolver, which was net of $2.4 million for outstanding letters of credit.
Net cash provided by operating activities was $30.4 million in the nine months
ended October 2, 1999 and $15.6 million in the corresponding 1998 period. This
increase in the 1999 period compared to 1998 was due to higher net income before
the non-cash charges of deferred tax and amortization expense, partially offset
by working capital requirements.
Net cash used in investing activities was $22.7 million and $44.2 million for
the nine-month periods ended October 2, 1999 and September 30, 1998,
respectively. In the nine months ended October 2, 1999, we spent $20.6 million
on capital expenditures. In the 1998 comparable period, we acquired Ipes for
approximately $26.2 million and spent $14.0 million on capital expenditures.
Net cash used in financing activities was approximately $8.4 million in the nine
months ended October 2, 1999. Net cash provided by financing activities was
$31.1 million for the nine months ended September 30, 1998. For the nine months
ended October 2, 1999, we paid down $11.2 million and $10.6 million on our
revolver and long-term debt, respectively. This was partially offset by
long-term borrowings of $12.9 million. For the 1998 comparable period, we
borrowed
14
<PAGE> 17
$42.0 million which was primarily used for the Ipes acquisition. This was
partially offset by long term debt payments of $16.1 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 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, time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
calculation could result in a system failure or miscalculations.
We have made an assessment of year 2000 readiness and reviewed our business
application software. We undertook a review of 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 readiness with all external entities with which we have
material relationships.
As of October 2, 1999, we had incurred costs of approximately $5.4 million in
connection with year 2000 readiness. We have tested our year 2000 readiness
projects, including third party compliance. We believe that a failure to
complete our year 2000 readiness, or a failure by parties with whom we have
material relationships to complete their year 2000 readiness, by December 31,
1999 could have a material adverse effect on our financial condition and results
of operations. We believe that our Year 2000 efforts have been conducted in an
efficient and responsible manner. However, if we are delayed in our year 2000
readiness, 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 readiness 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 ready 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
15
<PAGE> 18
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.
INFLATION AND CHANGES IN PRICES
Our financial results depend to a large extent on the cost of raw materials and
packaging and our ability 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.
16
<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 nine-month ended
October 2, 1999 net income by approximately $0.9 million and our nine-month
ended October 2, 1999 pro forma cash flow from operations by approximately $1.5
million. In addition, such a change would result in a decrease in the fair value
of the debt at October 2, 1999 by approximately $9.3 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 $278.9 million at October 2, 1999. Amounts received under swap
agreements are recorded as a reduction (addition) to interest expense. The
deferred gain associated with such contracts was approximately $0.8 million, net
of tax, at October 2, 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 $4.8 million, net of tax, at
October 2, 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
October 2, 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 $23.0
17
<PAGE> 20
million for the nine months ended October 2, 1999, we generally transact
business in U.S. dollars. We 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 nine months ended October 2,
1999 was a loss of $0.7 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: November 15, 1999 By: /s/ THOMAS R. HEIDENTHAL
-----------------------------------
Thomas R. Heidenthal
Senior Vice President and
Chief Financial Officer
Dated: November 15, 1999 By: /s/ PHILIP K. WOODLIEF
-----------------------------------
Philip K. Woodlief
Vice President - Finance and
Principal Accounting Officer
18
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