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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 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
(formerly Doane Products Company)
(Exact Name of Registrant as Specified in Its Charter)
Delaware 43-1350515
- ------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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 such
filing requirements for the past 90 days. Yes [X] 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 May 6, 1999, 1000
shares of common stock, $0.01 par value, were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
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Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 3, 1999 (unaudited) and December
31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Unaudited Condensed Consolidated Statements of Income - three months ended
April 3, 1999 and March 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Condensed Consolidated Statements of Cash Flows - three months ended
April 3, 1999 and March 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income - April 3, 1999 . . . . . . . . . . . . . . . . . . . . . 5
Notes to Unaudited Condensed Consolidated Financial Statements . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Qualitative and Quantitative Disclosures about Market Risk . . . . . . . . . . 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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DOANE PET CARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
April 3, December 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,814 $ 3,349
Trade accounts receivable, net of allowances 90,196 95,775
Inventories, net 55,012 51,499
Deferred tax asset 3,802 3,749
Prepaid expenses and other current assets 12,954 17,131
-------- --------
Total current assets 165,778 171,503
Property, plant and equipment, net 203,007 206,353
Goodwill, and other intangibles net 305,695 299,631
Other assets, net 30,558 31,581
-------- --------
Total assets $705,038 $709,068
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt $ 13,942 $ 12,889
Accounts payable 59,814 79,013
Accrued liabilities 52,553 49,878
-------- --------
Total current liabilities 126,309 141,780
Long-term debt, excluding current liabilities 450,025 446,281
Other long-term liabilities 10,064 9,160
Deferred tax liability 8,746 4,761
-------- --------
Total liabilities 595,144 601,982
-------- --------
Senior exchangeable preferred stock, 3,000 shares
authorized, 1,200 shares issued 39,743 37,792
-------- --------
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares
authorized and issued 1 1
Additional paid-in capital 105,672 105,669
Other comprehensive income (3,721) 489
Accumulated deficit (31,801) (36,865)
-------- --------
Total stockholder's equity 70,151 69,294
-------- --------
Total liabilities and stockholder's equity $705,038 $709,068
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
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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
----------------------
April 3, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Net sales $203,673 $144,307
Cost of goods sold 151,846 119,967
-------- --------
Gross Profit 51,827 24,340
Operating expenses:
Promotion and distribution 15,831 8,244
Selling, general and administrative 9,549 4,743
Amortization of intangibles 2,514 907
Nonrecurring expense 1,946 -
-------- --------
Income from operations 21,987 10,446
Interest expense, net 10,335 5,422
Other (income) expense, net (155) (31)
-------- --------
Income before taxes 11,807 5,055
Income tax expense 4,792 1,776
-------- --------
Net income $ 7,015 $ 3,279
======== ========
Basic net income per common share:
Net income $ 7,015 $ 3,279
Preferred stock dividends and accretion of
preferred stock (1,951) (1,732)
-------- --------
Basic net income per common share $ 5,064 $ 1,547
======== ========
Weighted average shares outstanding 1,000 1,000
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended
----------------------
April 3, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,015 $ 3,279
Items not requiring (providing) cash:
Depreciation and amortization 6,430 2,918
Noncash interest expense 452 297
Deferred tax expense 3,988 1,776
Other 111 (76)
Changes in current assets and liabilities (16,555) (11,557)
---------- ----------
Net cash provided by operating activities 1,441 (3,363)
---------- ----------
Cash flows from investing activities:
Capital expenditures, including interest capitalized (6,925) (3,355)
Other (309) (75)
---------- ----------
Net cash used in investing activities (7,234) (3,430)
---------- ----------
Cash flows from financing activities:
Net borrowings under revolving credit agreement 9,400 9,465
Principal payments on long-term debt (2,925) (2,922)
Contributed capital 3 250
---------- ----------
Net cash provided by financing activities 6,478 6,793
---------- ----------
Effects of exchange rates changes on cash (220) -
---------- ----------
Increase in cash and cash equivalents 465 -
Cash and cash equivalents, beginning of period 3,349 -
---------- ----------
Cash and cash equivalents, end of period $ 3,814 $ -
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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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 Total
-------- -------------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 1,000 $ 1 $ 105,669 $ (36,865) $ 489 $ 69,294
Comprehensive income:
Net income - - - 7,015 - 7,015
Comprehensive income, unrealized
loss on foreign currency translation - - - - (742) (742)
Comprehensive income, unrealized
loss on cash flow derivative hedges - - - - (3,468) (3,468)
---------
Total comprehensive income 2,805
Preferred stock dividends - - - (1,682) - (1,682)
Accretion of preferred stock - - - (269) - (269)
Capital contribution - - 3 - - 3
======== ====== ============ ============ ========== =========
Balance, April 3, 1999 1,000 $ 1 $ 105,672 $ (31,801) $ (3,721) $ 70,151
======== ====== ============ ============ ========== =========
</TABLE>
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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 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").
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).
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 first quarter in 1999 ending
on April 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 the assumption of $183.5 million of indebtedness.
Windy Hill Pet Food Company, Inc. ("Windy Hill"), a wholly-owned
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subsidiary of Holdings, was merged into the Company in November 1998 in
connection with the Refinancing Transactions as 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. The allocation of the
purchase price is preliminary because estimates were made regarding the fair
value of certain assets and liabilities for which the Company is obtaining
valuation information either from sale transactions, or internal studies. The
final determination of the fair values is expected to be completed no later
than the second quarter of 1999, and any resulting changes to the estimate,
which are not expected to be material, will be recorded as an adjustment to
Goodwill.
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 ended March 31, 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 the
beginning of the period. The pro forma information related to Windy Hill also
gives effect to three acquisitions, which occurred during 1998 as if such
transactions occurred at the beginning of the period.
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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 Statement of Income
Three months ended March 31, 1998
(in thousands)
Net sales $ 229,478
Cost of goods sold 185,233
-----------
Gross Profit 44,245
Operating expenses:
Promotion and distribution 16,181
Selling, general and administrative 8,704
Amortization of intangibles 2,438
Transition expense 160
-----------
Income from operations 16,762
Interest expense, net 10,274
Other (income) expense, net (305)
-----------
Income before taxes 6,793
Income tax expense 2,743
-----------
Net income before extraordinary item $ 4,050
===========
6. INVENTORIES
Inventories at April 3, 1999 consist of the following (in thousands):
April 3,
1999
-----------
Raw materials $ 12,700
Packaging Materials 23,342
Finished goods 18,970
-----------
Total $ 55,012
===========
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
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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 April 3, 1999, all of the Company's derivative instruments were designated
as cash flow hedges. Comprehensive income includes a loss of $3.5 million as a
fair market value adjustment related to the instruments.
8. NONRECURRING EXPENSE
Nonrecurring expenses 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 includes $0.5 million 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.
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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 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 the
beginning of the 1998 period, and are presented in Note 5 to the Unaudited
Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
Three months Three months
ended ended
April 3, March 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Net sales $203,673 100.0% $144,307 100.0%
Cost of goods sold 151,846 74.6 119,967 83.1
-------- ----- -------- -----
Gross Profit 51,827 25.4 24,340 16.9
Operating expenses:
Promotion and distribution 15,831 7.8 8,244 5.8
Selling, general and administrative 9,549 4.7 4,743 3.3
Amortization of intangibles 2,514 1.2 907 0.6
Nonrecurring expense 1,946 0.9 - -
-------- ----- -------- ----
Income from operations 21,987 10.8 10,446 7.2
Interest expense, net 10,335 5.1 5,422 3.7
Other income (expense), net (155) (0.1) (31) -
-------- ----- -------- ----
Income before taxes 11,807 5.8 5,055 3.5
Income tax expense 4,792 2.4 1,776 1.2
-------- ----- -------- ----
Net income $ 7,015 3.4% $ 3,279 2.3%
======== ===== ======== ====
</TABLE>
THREE MONTHS ENDED APRIL 3, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Sales. Net sales for the three months ended April 3, 1999 increased 41.1%
to $203.7 million from $144.3 million in the three months ended March 31, 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 4.4%, and a $4.1
million reduction in nonmanufactured 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 April 3, 1999 increased
113.2% to $51.8 million from $24.3 million in the three months ended March 31,
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. 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 April 3, 1999 increased 92.0% to $15.8 million from $8.2
million in the three months ended March 31, 1998. The primary reason for the
increase is due to the Windy Hill and IPES acquisitions. The increase is
partially offset by the volume decrease discussed above because promotion
expense varies based upon tons sold and the realization of acquisition
synergies.
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Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $9.5 million for the three months ended
April 3, 1999 from $4.7 million in the three months ended March 31, 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 intangible expenses increased to
$2.5 million for the three months ended April 3, 1999 from $0.9 million in the
three months ended March 31, 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) $0.5 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 three months ended April 3,
1999 increased to $10.3 million from $5.4 million in the three months ended
March 31, 1998 primarily due to $206.0 million of debt incurred in connection
with the Windy Hill and IPES acquisitions.
Income tax expense. The Company's effective income tax rate of 40.6% for the
three months ended April 3, 1999 increased from 35.1% in the three months ended
March 31, 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 $39.5 million at April
3, 1998.
Net cash provided by (used for) operating activities was $1.4 million and
$(3.4) million for the three months ended April 3, 1999, and March 31, 1998,
respectively. The first quarter of our fiscal year is typically our seasonally
lowest quarter for cash flow from operations due to several annual payments in
the first quarter. Net cash used in investing activities for the three-month
period ended April 3, 1999 increased $3.8 million due to additional capital
expenditures for the new facility in Clinton, OK and capital expenditures for
acquired businesses which are not reflected in the prior year amount. Net cash
provided by financing activities was approximately $6.5 million and $6.8
million for the three months ended April 3, 1999 and March 31, 1998,
respectively. The decrease in the 1999 period compared to 1998 was primarily
due to the 1998 capital contribution. Borrowings approximated $6.5 million in
each period.
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.
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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, 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 April 3, 1999, we had incurred costs of approximately $4.4 million in
connection with year 2000 compliance. We intend to test and verify our year
2000 compliance projects by July 1999, 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
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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 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.
14
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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
three-month ended April 3, 1999 net income by approximately $0.4 million and
our three-month ended April 3, 1999 pro forma cash flow from operations by
approximately $0.7 million. In addition, such a change would result in a
decrease in the fair value of the debt at April 3, 1999 by approximately $9.6
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 $307.1 million, at April 3, 1999. Amounts received under swap
agreements are recorded as a reduction (addition) to interest expense. The
deferred loss associated with such contracts was approximately $0.3 million at
April 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 $3.1 million at April 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 April 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 sales of $8.4 million for the three months ended April 3,
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
15
<PAGE> 17
associated with fluctuations in foreign currency rates. The translation
adjustment included in comprehensive income for the three months ended April 3,
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: May 14, 1999 By: /s/ THOMAS R. HEIDENTHAL
-------------------------------------
Thomas R. Heidenthal
Senior Vice President and Chief
Financial Officer
Dated: May 14, 1999 By: /s/ PHILIP K. WOODLIEF
-------------------------------------
Philip K. Woodlief
Vice President - Finance and
Principal Accounting Officer
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 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> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 3,814
<SECURITIES> 0
<RECEIVABLES> 91,994
<ALLOWANCES> (1,798)
<INVENTORY> 55,012
<CURRENT-ASSETS> 165,778
<PP&E> 237,691
<DEPRECIATION> (34,684)
<TOTAL-ASSETS> 705,038
<CURRENT-LIABILITIES> 126,309
<BONDS> 150,000
0
39,743
<COMMON> 1
<OTHER-SE> 70,150
<TOTAL-LIABILITY-AND-EQUITY> 705,038
<SALES> 203,673
<TOTAL-REVENUES> 203,673
<CGS> 151,846
<TOTAL-COSTS> 181,686
<OTHER-EXPENSES> (155)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,335
<INCOME-PRETAX> 11,807
<INCOME-TAX> 4,792
<INCOME-CONTINUING> 7,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,015
<EPS-PRIMARY> 5,064.00
<EPS-DILUTED> 5,064.00
</TABLE>
