<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 JULY 1, 2000
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.)
210 WESTWOOD PLACE SOUTH, SUITE 400
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 [ ]
As of August 4, 2000, registrant had outstanding 1,000 shares of common
stock.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
<S> <C>
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of July 1, 2000
and January 1, 2000....................................................................... 1
Unaudited Condensed Consolidated Statements of Income for the three
months and six months ended July 1, 2000 and July 3, 1999................................. 2
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income for the six months ended July 1, 2000................................ 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
six months ended July 1, 2000 and July 3, 1999............................................ 4
Notes to Unaudited Condensed Consolidated Financial Statements............................ 5
Independent Auditors' Review Report....................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................................... 13
Item 6. Exhibits and Reports on Form 8-K.......................................................... 14
Signatures......................................................................................... 15
</TABLE>
<PAGE> 3
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
July 1, January 1,
2000 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,002 $ 7,194
Accounts receivable, net 104,439 69,156
Inventories, net 72,880 52,938
Deferred tax asset 18,709 14,720
Prepaid expenses and other current assets 3,925 3,799
------------ ------------
Total current assets 203,955 147,807
Property, plant and equipment, net 289,408 216,067
Goodwill and other intangible assets, net 368,842 298,545
Other assets 43,330 30,877
------------ ------------
Total assets $ 905,535 $ 693,296
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 25,024 $ 17,131
Accounts payable 79,871 64,512
Accrued liabilities 48,770 33,332
------------ ------------
Total current liabilities 153,665 114,975
Long-term debt, excluding current maturities 560,643 410,791
Other long-term liabilities 7,901 8,169
Deferred tax liability 46,988 30,450
------------ ------------
Total liabilities 769,197 564,385
------------ ------------
Senior Preferred Stock, 3,000,000 shares authorized,
1,200,000 shares issued and outstanding 50,442 45,965
------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding - -
Additional paid-in-capital 107,119 106,708
Accumulated other comprehensive income (loss) 3,865 (170)
Accumulated deficit (25,088) (23,592)
------------ ------------
Total stockholder's equity 85,896 82,946
------------ ------------
Total liabilities and stockholder's equity $ 905,535 $ 693,296
============ ============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
1
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DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
-------------------------- ---------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 210,688 $ 180,412 $ 415,155 $ 384,085
Cost of goods sold 166,971 133,869 314,238 285,142
------------ ----------- ------------ ------------
Gross profit 43,717 46,543 100,917 98,943
Operating expenses:
Promotion and distribution 17,208 14,969 33,913 30,800
Selling, general and administrative 11,574 9,656 22,475 19,205
Amortization of intangibles 3,159 2,619 5,849 5,133
Non-recurring expenses 8,665 169 9,028 2,115
------------ ----------- ------------ ------------
Income from operations 3,111 19,130 29,652 41,690
Interest expense, net 12,311 9,959 22,437 20,294
Other income, net (321) (212) (821) (367)
------------ ----------- ------------ ------------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle (8,879) 9,383 8,036 21,763
Income tax expense (benefit) (1,826) 3,843 5,055 8,858
------------ ----------- ------------ ------------
Income (loss) before cumulative effect of a
change in accounting principle (7,053) 5,540 2,981 12,905
Cumulative effect at adoption on January 1, 1999
of a change in accounting for derivative
instruments, net of income tax benefit of $1,440 - - - (2,263)
------------ ----------- ------------ ------------
Net income (loss) (7,053) 5,540 2,981 10,642
Preferred stock dividends and accretion (2,273) (2,011) (4,477) (3,962)
------------ ----------- ------------ ------------
Net income (loss) allocated to common shares $ (9,326) $ 3,529 $ (1,496) $ 6,680
============ =========== ============ ============
Basic and diluted net income (loss) per common share:
Income (loss) from continuing operations (9,326) 3,529 (1,496) 8,943
Cumulative effect of accounting change - - - (2,263)
------------ ----------- ------------ ------------
Net income (loss) per common share $ (9,326) $ 3,529 $ (1,496) $ 6,680
============ =========== ============ ============
Basic and diluted weighted-average common
shares outstanding 1,000 1,000 1,000 1,000
============ =========== ============ ============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
2
<PAGE> 5
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Accumulated
Additional other
Common stock paid-in comprehensive Accumulated
Shares Amount capital income deficit Total
------ ------ ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 2000 1,000 $ - $ 106,708 $ (170) $ (23,592) $ 82,946
Comprehensive income:
Net income - - - - 2,981 2,981
Unrealized gain on foreign
currency translation, net - - - 3,203 - 3,203
Unrealized gain on cash flow
hedges, net of deferred tax of $400 - - - 832 - 832
----------
Total comprehensive income 7,016
----------
Preferred stock dividends - - - - (538) (538)
Accretion of preferred stock - - - - (3,939) (3,939)
Capital contribution - - 411 - - 411
------ -------- ------------ ------------ ----------- ----------
Balances at July 1, 2000 1,000 $ - $ 107,119 $ 3,865 $ (25,088) $ 85,896
====== ======== ============ ============ =========== ==========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
3
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DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended
--------------------------
July 1, July 3,
2000 1999
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,981 $ 10,642
Items not requiring (providing) cash:
Depreciation 10,258 7,647
Amortization of intangibles 5,849 5,133
Deferred income tax expense 3,150 7,567
Changes in fair value of derivative instruments (422) (1,223)
Non-cash interest expense 1,015 938
Other non-cash (credits) charges, net 741 815
Equity in joint ventures (615) (198)
Cumulative effect of accounting change - 2,263
Changes in current assets and liabilities (11,213) (15,682)
------------- -----------
Net cash provided by operating activities 11,744 17,902
------------- -----------
Cash flows from investing activities:
Capital expenditures, including interest capitalized (13,024) (13,387)
Acquisition related payments, net of cash acquired (143,689) -
Other, net (1,603) (1,082)
------------- -----------
Net cash used in investing activities (158,316) (14,469)
------------- -----------
Cash flows from financing activities:
Capital contribution 411 598
Net borrowings under revolving credit agreement (1,700) (10,200)
Principal payments on long-term debt (9,439) (7,310)
Proceeds on issuance of long-term debt 156,357 12,837
Payments for debt issuance costs (2,475) --
------------- -----------
Net cash provided by (used in) financing activities 143,154 (4,075)
Effect of exchange rate changes on cash and
cash equivalents 226 (338)
------------- -----------
Increase (decrease) in cash and cash equivalents (3,192) (980)
Cash and cash equivalents, beginning of period 7,194 3,349
------------- -----------
Cash and cash equivalents, end of period $ 4,002 $ 2,369
============= ===========
</TABLE>
See accompanying notes to the 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
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Doane Pet Care Company and Subsidiaries (the "Company") do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The year end condensed
consolidated balance sheet data was derived from audited financial statements.
In the opinion of management, all material adjustments, consisting of normal and
recurring adjustments, have been made which were considered necessary to present
fairly the financial position and the results of operations and cash flows at
the dates and for the periods presented. Certain reclassifications have been
made to previously reported consolidated financial statements to conform with
the fiscal 2000 presentation.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes contained in the Company's 1999 annual report on Form 10-K for the fiscal
year ended January 1, 2000 (the "1999 10-K"), including related exhibits. The
accounting policies used in preparing these financial statements are the same as
those summarized in the 1999 10-K.
Effective January 1, 1999, the Company 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 quarters of 1999 and 2000 ending on July 3,
1999 and July 1, 2000, respectively.
(2) CHANGE IN ACCOUNTING PRINCIPLE AND RESTATEMENT OF 1999 QUARTERLY
FINANCIAL DATA
Effective January 1, 1999, the Company adopted Statement on Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, ("SFAS 133") which establishes new accounting and reporting
guidelines for derivatives and hedging transactions. SFAS 133 requires
derivatives in place at the date of adoption to be re-evaluated and documented
as to the specific planned or expected future purchase being hedged to defer
unrealized gains and losses on the derivative instruments. The Company's
policies and procedures do not meet the requirements of SFAS 133 for this
accounting treatment.
The Company disclosed in its 1999 10-K a restatement of its financial
results for the first three quarters of 1999 relating to the adoption of SFAS
133. The adjustments are the result of a change from the previous methodology
for offsetting or reversing commodity derivative instrument contract fair value
gains and losses recognized in cost of goods sold in future periods when actual
cash settlement occurs or contract dates have passed. This change was
implemented based on a year end review of the Company's policies and procedures
relating to SFAS 133. The restated balances and results from operations as of
and for the second quarter and six months ended July 3, 1999, as disclosed in
this quarterly report on Form 10-Q, reflect the fair value gains and losses of
the Company's commodity derivative instruments in cost of goods sold immediately
as required by SFAS 133. As a result, the Company recorded the cumulative effect
of a change in accounting principle related to commodity derivative instruments
of $2.3 million at adoption on January 1, 1999. In addition, adjustments were
made for the second quarter and six months ended July 3, 1999 to decrease cost
of goods sold by $0.6 million and $1.2 million, respectively. The comparable
amounts for the second quarter and six months ended July 1, 2000 include
adjustments to increase cost of goods sold by $4.5 million and to decrease cost
of goods sold by $1.2 million, respectively.
(3) ACQUISITIONS
Arovit Acquisition
On May 10, 2000, the Company acquired A/S Arovit Petfood ("Arovit"),
headquartered in Esbjerg, Denmark, for approximately DKK 1.2 billion and assumed
indebtedness, net of cash, of approximately DKK 97.0 million. The decline in the
value of the DKK compared to the U.S. dollar since
5
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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
signing the share purchase agreement in March 2000 reduced the U.S. dollar
purchase price (approximately DKK 1.2 billion) to approximately $144.4 million
from $156.0 million. The Company did not realize the full benefit of the DKK
currency fluctuation because it hedged a portion of the DKK purchase price
against the U.S. dollar to limit exposure to foreign currency fluctuations in
accordance with its risk management policy. The Company recorded a non-recurring
charge of approximately $4.2 million and $4.6 million for the second quarter and
six months ended July 1, 2000, respectively, to reflect the hedged portion of
the foreign currency fluctuation.
Arovit manufactures and sells a full range of pet food products,
throughout Europe, for dogs and cats, including wet, dry and treats, primarily
through private label programs. This acquisition was 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. In connection with the
purchase of Arovit, the Company recorded $70.7 million of goodwill and
trademarks which are being amortized over 40 years and $11.7 million of other
identifiable assets which are being amortized over 5 to 30 years. Additionally,
the Company is depreciating acquired property, plant and equipment of $69.2
million over the remaining useful lives ranging from 5 to 30 years. The Company
financed this acquisition through an amendment to its existing credit facilities
which included $80.0 million of incremental Tranche B loans and Euro 82.0
million (approximately $73 million at May 10, 2000) of new Euro Tranche A loans.
The Euro denominated debt has been designated as a hedge of the foreign currency
(Euro) exposure inherent in Doane's net investment in Arovit. Changes in the
fair value of this Euro denominated debt due to fluctuations in the Euro to U.S.
dollar exchange rate have been recognized in accumulated other comprehensive
income.
Set forth below is certain unaudited pro forma consolidated financial
information of the Company for the year ended January 1, 2000 and the six months
ended July 1, 2000 that has been adjusted to reflect the Company's acquisition
of Arovit in the second quarter of 2000 as if such transaction occurred at
January 1, 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Six months
ended Year ended
July 1, January 1,
2000 2000
------------- -------------
<S> <C> <C>
Net sales $ 465,574 $ 954,700
Net income 2,164 22,183
Basic and diluted net income (loss) per common share (2,313) 14,010
</TABLE>
The pro forma financial data above 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 acquisition of Arovit been completed
as of such dates or indicative of future results of operations and financial
position.
Larkshall Acquisition
On October 14, 1999, the Company acquired all of the assets of the
Larkshall Extrusions ("Larkshall") division of Buxted Chicken Limited for $5.0
million in cash. Larkshall is a manufacturer of a complete range of dry pet
foods, with an emphasis on super premium pet foods, located in England. 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.
DIPP Acquisition
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. The jointly owned business has operated
under the name of Doane International Pet Products LLC ("DIPP") since the
acquisition and is the Company's exclusive distributor of Doane manufactured
products, as well as DIPP's existing product lines, in the Asian and Latin
American markets. The Company's investment in DIPP is
6
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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
being accounted for under the equity method. The purchase price was $0.8 million
in cash and 40,000 shares in common stock of Doane Pet Care Enterprises, Inc.,
the Company's parent, valued at $0.4 million.
(4) INVENTORIES
A summary of inventories, net of valuation allowances, follows (in
thousands):
<TABLE>
<CAPTION>
July 1, January 1,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
Raw materials $ 24,716 $ 15,321
Packaging materials 26,412 20,199
Finished goods 21,752 17,418
----------- -----------
Total $ 72,880 $ 52,938
=========== ===========
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
The Company is party, in the ordinary course of business, to claims and
litigation. In management's opinion, the resolution of such matters is not
expected to have a material impact on the future financial condition, results of
operations or cash flows of the Company.
(6) NON-RECURRING EXPENSES
Non-recurring expenses include (1) a realized loss of $4.2 million and
$4.6 million for the second quarter and six months ended July 1, 2000,
respectively, on a forward currency purchase contract to hedge our currency risk
associated with the Arovit purchase; (2) a $3.0 million charge in the second
quarter of 2000 for closure of certain inefficient manufacturing facilities; and
(3) a $1.4 million charge in the second quarter of 2000 for the write-off of
costs for a potential acquisition that was not consummated.
At July 1, 2000, the Company had $2.2 million accrued for plant closure
costs, primarily related to lease termination costs and severance. The Company
expects to pay these costs within the next year.
7
<PAGE> 10
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 1, 2000, the related condensed consolidated
statements of income for the three-month and six-month periods ended July 1,
2000 and July 3, 1999, the condensed consolidated statement of stockholder's
equity and comprehensive income for the six-month period ended July 1, 2000 and
the condensed consolidated statements of cash flows for the six-month periods
ended July 1, 2000 and 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 January 1, 2000, 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,
2000, 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 January 1, 2000 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
As discussed in Note 2 to the condensed consolidated financial statements,
effective January 1, 1999, the Company adopted Statement on Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
/s/ KPMG LLP
Houston, Texas
July 27, 2000
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking
statements which are based on management's current views and assumptions
regarding future events and financial performance. These statements are
qualified by reference to the sections "Forward-Looking Statements" and "Risk
Factors" in Item 1 of our 1999 annual report on Form 10-K, which lists important
factors that could cause actual results to differ materially from those
discussed in this report.
RESULTS OF OPERATIONS
Readers are encouraged to consider carefully the accompanying unaudited
condensed consolidated financial statements and related notes contained
elsewhere in this quarterly report on Form 10-Q and our consolidated financial
statements and related notes contained in our 1999 annual report on Form 10-K as
they read the discussion below (table in thousands, except percentages):
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------------------- --------------------------------------
July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
------------------ ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 210,688 100.0 % $180,412 100.0 % $ 415,155 100.0 % $384,085 100.0%
Cost of goods sold 166,971 79.3 133,869 74.2 314,238 75.7 285,142 74.2
---------- ----- ------- ----- --------- ----- -------- -----
Gross profit 43,717 20.7 46,543 25.8 100,917 24.3 98,943 25.8
Operating expenses:
Promotion and distribution 17,208 8.2 14,969 8.3 33,913 8.2 30,800 8.0
Selling, general and administrative 11,574 5.4 9,656 5.4 22,475 5.4 19,205 5.0
Amortization of intangibles 3,159 1.5 2,619 1.4 5,849 1.4 5,133 1.3
Non-recurring expenses 8,665 4.1 169 0.1 9,028 2.2 2,115 0.6
---------- ----- ------- ----- --------- ----- -------- -----
Income from operations 3,111 1.5 19,130 10.6 29,652 7.1 41,690 10.9
Interest expense, net 12,311 5.8 9,959 5.5 22,437 5.4 20,294 5.3
Other income, net (321) (0.1) (212) (0.1) (821) (0.2) (367) (0.1)
---------- ----- ------- ----- --------- ----- -------- -----
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle (8,879) (4.2) 9,383 5.2 8,036 1.9 21,763 5.7
Income tax expense (benefit) (1,826) (0.9) 3,843 2.1 5,055 1.2 8,858 2.3
---------- ----- ------- ----- --------- ----- -------- -----
Income (loss) before cumulative effect of
a change in accounting principle (7,053) (3.3) 5,540 3.1 2,981 0.7 12,905 3.4
Cumulative effect at adoption on
January 1, 1999 of a change in accounting
for derivative instruments, net of income
tax benefit of $1,440 - - - - - - (2,263) (0.6)
---------- ----- ------- ----- --------- ----- -------- -----
Net income (loss) (7,053) (3.3)% 5,540 3.1 % 2,981 0.7 % 10,642 2.8%
========== ===== ======= ===== ========= ===== ======== =====
</TABLE>
THREE MONTHS ENDED JULY 1, 2000 COMPARED TO THREE MONTHS ENDED JULY 3, 1999
Net sales. Our net sales in the second quarter of 2000 increased 16.8%
to $210.7 million from $180.4 million in the same 1999 period. This net sales
growth is primarily due to the acquisition of Arovit in May 2000. Excluding the
impact of this acquisition, we experienced an increase of approximately 3.1%
over the comparable 1999 period.
Gross profit. Our gross profit in the second quarter of 2000 decreased
6.1% to $43.7 million from $46.5 million in the same 1999 period primarily due
to the change in the fair value of our commodity derivative instruments. As
required by SFAS 133, we recognized in cost of goods sold an unfavorable fair
market value adjustment associated with our commodity derivative instruments of
$4.5 million in the second quarter of 2000 compared to a favorable fair market
value adjustment of $0.6 million in the comparable 1999 period. In addition, our
gross margin for the second quarter of 2000 was impacted by product improvements
to meet competition, new business development expenses and an increase in the
price of natural gas.
9
<PAGE> 12
These factors were partially offset by a favorable impact on our gross margin
resulting from the acquisition of Arovit.
Promotion and distribution expenses. Our promotion and distribution
expenses in the second quarter of 2000 increased to $17.2 million from $15.0
million in the same 1999 period primarily due to the acquisition of Arovit. As a
percentage of net sales, promotion and distribution expenses remained consistent
between the periods.
Selling, general and administrative. Our selling, general and
administrative expenses in the second quarter of 2000 increased to $11.6 million
from $9.7 million in the same 1999 period primarily due to the acquisition of
Arovit. As a percentage of net sales, selling, general and administrative
expenses remained consistent between the periods.
Amortization of intangibles. Our amortization expense for intangibles
in the second quarter of 2000 increased to $3.2 million from $2.6 million in the
same 1999 period primarily due to the acquisition of Arovit.
Non-recurring expenses. Non-recurring expenses in the second quarter of
2000 include (1) a $4.2 million realized loss on a forward currency purchase
contract which was put in place to hedge our currency risk associated with the
Arovit purchase; (2) a $3.0 million charge for closure of certain inefficient
manufacturing facilities; and (3) a $1.4 million charge for the write-off of
costs for a potential acquisition that was not consummated.
Interest expense, net. Interest expense, net, for the second quarter of
2000 increased to $12.3 million from $10.0 million in the same 1999 period
primarily due to an increase in interest rates and the financing obtained for
the purchase of Arovit in May 2000.
Income tax expense. Our second quarter pre-tax loss of $8.9 million
resulted in an income tax benefit of $1.8 million compared to $3.8 million of
income tax expense on pre-tax income of $9.4 million in the same 1999 period.
Our effective income tax rate decreased for the second quarter of 2000 primarily
as the result of the loss on the forward currency purchase contract discussed
above that is not deductible for income tax purposes.
SIX MONTHS ENDED JULY 1, 2000 COMPARED TO SIX MONTHS ENDED JULY 3, 1999
Net sales. Our net sales for the six months ended July 1, 2000
increased 8.1% to $415.2 million from $384.1 million in the same 1999 period.
This net sales growth is primarily due to the acquisition of Arovit in May 2000.
Excluding the impact of this acquisition, we experienced an increase in net
sales of approximately 1.6% over the comparable 1999 period. Our net sales and
tonnage volume growth was mitigated by two industry factors: (1) our customers
reduced purchases at the beginning of this year following a year-end build-up of
inventory due to year 2000 concerns and (2) our mass merchandise, grocery and
club customers reduced purchases to make room for a major national brand that
was launched into these channels in the first quarter of 2000 following
development of this brand in select specialty channels. In addition to the
industry factors, our sales growth was mitigated by certain low margin sales,
which we ceded towards the end of the first quarter of 1999.
Gross profit. Our gross profit for the six months ended July 1, 2000
increased by 2.0% to $100.9 million from $98.9 million in the same 1999 period.
While our gross margin was favorably impacted by the purchase of Arovit, this
impact was partially offset by additional costs for product improvements to meet
competition, new business development expenses and an increase in the price of
natural gas.
Promotion and distribution expenses. Our promotion and distribution
expenses for the six months ended July 1, 2000 increased to $33.9 million from
$30.8 million in the same 1999 period primarily due to the acquisition of
Arovit. As a percentage of net sales, promotion and distribution expenses
remained consistent between the periods.
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Selling, general and administrative. Our selling, general and
administrative expenses for the six months ended July 1, 2000 increased to $22.5
million from $19.2 million in the same 1999 period primarily due to the
acquisition of Arovit and partially due to expenses associated with our
Larkshall acquisition, depreciation on hardware and software put in place during
1999 and annual salary adjustments.
Amortization of intangibles. Our amortization expense on intangibles
for the six months ended July 1, 2000 increased to $5.8 million from $5.1
million in the same 1999 period primarily due to the acquisition of Arovit.
Non-recurring expenses. Non-recurring expenses for the six months ended
July 1, 2000 include (1) a $4.6 million realized loss on a forward currency
purchase contract which was put in place to hedge our currency risk associated
with the Arovit purchase; (2) a $3.0 million charge for closure of certain
inefficient manufacturing facilities; and (3) a $1.4 million charge for the
write-off of costs for a potential acquisition that was not consummated.
Interest expense, net. Interest expense, net, for the six months ended
July 1, 2000 increased to $22.4 million from $20.3 million in the same 1999
period primarily due to an increase in interest rates.
Income tax expense. Income tax expense for the six months ended July 1,
2000 decreased to $5.1 million from $8.9 million due to lower pre-tax income
compared to the same 1999 period. Our effective income tax rate increased to
62.9% from 40.7% due to the add-back of permanent differences, primarily
non-deductible amortization of goodwill, reflecting a larger percentage of
pre-tax income for the 2000 period and the loss on a forward currency purchase
contract discussed in non-recurring expenses above that is not deductible for
income tax purposes.
Cumulative effect of a change in accounting principle. The cumulative
effect of a change in accounting principle in the first quarter of 1999 relates
to our adoption of SFAS 133, which applies to derivative commodity purchase
transactions. The loss recorded of $3.7 million in the 1999 period is presented
net of income tax benefit of $1.4 million.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and
working capital requirements from cash flows from operations, bank borrowings
and industrial development revenue bonds. We had working capital of $50.3
million at July 1, 2000. As of July 1, 2000, we had unused borrowing capacity of
$89.7 million under our revolving credit agreement, which was net of $2.0
million for outstanding letters of credit.
For the six months ended July 1, 2000, cash generated from operating
activities totaled $11.7 million, down from $17.9 million in the same 1999
period. This decrease resulted primarily from lower earnings offset by a
favorable change in working capital in the 2000 period compared to the 1999
period.
The net cash used in our investing activities of $158.3 million for the
six months ended July 1, 2000 was higher than the same 1999 period due to $143.7
of acquisition related payments, net of cash acquired, primarily for the Arovit
acquisition.
Net cash provided by our financing activities was approximately $143.2
million for the six months ended July 1, 2000 primarily resulting from the
financing obtained for the purchase of Arovit.
The acquisition of Arovit, in May 2000, was financed through borrowings
under an amendment to our senior credit agreement. The amended credit agreement
provides for $80.0 million of incremental Tranche B loans and Euro 82.0 million
(approximately $73.0 million at May 10, 2000) of new Euro Tranche A loans. The
final maturity of each is December 2005, and each amortizes over the five-year
term with balloon payments at maturity.
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We are continually reviewing our requirements to upgrade and/or add
new facilities to meet the market demands placed on us. In this process, the
Company may eliminate outdated and inefficient facilities, upgrade equipment and
warehouse facilities, or add new capacity either through the construction or
acquisition of operating companies. We intend to finance these upgrades or
acquisitions with borrowings under existing or expanded credit facilities, or
the issuance of additional equity or debt securities.
We are highly leveraged and have significant cash requirements for debt
service. Our ability to borrow is limited by our senior credit facility and the
limitations on the incurrence of indebtedness in the indenture governing our
senior subordinated notes. We anticipate our operating cash flows, together with
amounts available to us under our senior credit facility, will be sufficient to
finance working capital requirements, debt service requirements and capital
expenditures through fiscal 2000.
EURO
Effective January 1, 1999, 11 of the 15 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 our operations in Europe can operate effectively after
transitioning to the Euro. Our European operations may incur significant costs
in conversion of their systems to the Euro. We are unable to predict whether
these costs can be passed through to our European customers. These customers may
also begin conducting business using the Euro prior to the completion of the
conversion of our European systems. Delays in conversion could have a material
adverse effect on the results of our operations in Europe. 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 costs of raw
materials and packaging and our ability to pass along increases in these costs
to our customers. 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, which affect our costs for packaging
materials, have resulted from changes in supply and demand, general economic
conditions and other factors. In addition, we have exposure to changes in
pricing of natural gas, which affects our manufacturing costs. In the event of
any increases in raw materials, packaging and natural gas costs, we may be
required to increase sales prices for our products 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 materials,
packaging and natural gas costs or of whether any price increases implemented by
us may affect the volumes of future shipments to our customers.
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 risks could arise from changes in commodity prices, interest rates
and foreign currency exchange rates.
Commodity price risk. We manage price risk created by market
fluctuations by using derivative instruments for portions of our primary
commodity product purchases, which are corn and soybean meal, principally
through exchange traded futures and options contracts. 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.
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 commodity derivative instruments at July 1,
2000 would not have a material adverse effect on our financial position, results
of operations or cash flows.
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Our commodity derivative instruments currently do not meet the
requirements of SFAS 133 to be designated as hedges. Accordingly, all changes in
the fair value of our derivative instruments for commodities are included in
cost of goods sold in the statements of income for the second quarter and six
months ended July 1, 2000 and July 3, 1999 in the accompanying unaudited
condensed consolidated financial statements included herein. We expect to refine
the strategy, process and documentation of our commodity derivative instruments
and redesignate qualifying transactions as cash flow hedges in the fourth
quarter of fiscal year 2000.
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 net income
for the second quarter and six months ended July 1, 2000 by approximately $0.5
million and $1.0 million, respectively. In addition, such a change would result
in a decrease of approximately $8.9 million in the fair value of our fixed rate
debt at July 1, 2000. In the event of an adverse change in interest rates, we
could take action to mitigate our exposure; however, due to the uncertainty of
the actions that would be taken and their 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 (swaps) to limit our exposure
to the interest rate risk associated with our floating rate debt, which was
$411.1 million at July 1, 2000. Amounts received (paid) under interest rate swap
agreements are recorded as reductions (additions) to interest expense. These
contracts are designated as cash flow hedges. The deferred gains associated with
these contracts were $1.1 million, net of tax of $0.7 million, at July 1, 2000
and have been recognized in accumulated other comprehensive income in the
accompanying unaudited condensed consolidated financials statements included
herein.
Foreign currency exchange risk. Our earnings and financial position are
affected by foreign exchange rate fluctuations. We currently have foreign
operations in Western Europe. The translation adjustments during the second
quarter and six months ended July 1, 2000 were gains of $3.8 million and $3.2
million, respectively, which were recognized in accumulated other comprehensive
income in the accompanying unaudited condensed consolidated financial statements
included herein.
Prior to the Arovit acquisition, our normal business operations have
not been exposed to significant foreign exchange risk. Arovit periodically
enters into foreign currency contracts to hedge specific currency exposures from
commercial transactions. At July 1, 2000, the Company had open positions
maturing within the next 12 months with a fair value of $34.3 million. Net
unrealized gains on these foreign currency contracts totaling $0.8 million, net
of deferred tax of $0.4 million, have been recognized as a portion of the
foreign currency translation adjustment in accumulated other comprehensive
income for the second quarter and six months ended July 1, 2000.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Consent of Sole Stockholder, in lieu of an annual
meeting, dated June 27, 2000, the following persons were elected to our Board of
Directors: George B. Kelly, Douglas J. Cahill, Peter T. Grauer, M. Walid Mansur,
Bob L. Robinson, Stephen C. Sherrill and Jeffrey C. Walker. Each such director
shall have a term of office expiring on the earlier of such person's
resignation, removal or death or until such person's successor has been duly
elected and qualified.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index
*10.1 Amended and Restated Credit Agreement dated as of May 8,
2000 among Doane Pet Care Company, as borrower,
the Chase Manhattan Bank, as administrative agent,
DLJ Capital Funding, Inc, as syndication agent, and
Firstar Bank, N.A., as documentation agent, and the
banks named therein
*21.1 Schedule of Subsidiaries and Jurisdiction of
Incorporation
*27.1 Financial Data Schedule
* Filed herewith
(b) Reports on Form 8-K
A current report on Form 8-K/A dated May 10, 2000 was filed by the
Company, to disclose the acquisition of A/S Arovit Petfood, to
provide pro forma consolidated financial information for the
Company for the year ended January 1, 2000 and the quarter ended
April 1, 2000 that reflects pro forma adjustments associated with
the acquisition, and to provide historical audited financial
statements of Arovit on a stand-alone basis.
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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 15, 2000 By: /s/ PHILIP K. WOODLIEF
-------------------------------
Philip K. Woodlief
Vice President and
Chief Financial Officer
Dated: August 15, 2000 By: /s/ STEPHEN P. HAVALA
-------------------------------
Stephen P. Havala
Corporate Controller and
Principal Accounting Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
*10.1 Amended and Restated Credit Agreement dated as of May 8,
2000 among Doane Pet Care Company, as borrower,
the Chase Manhattan Bank, as administrative agent,
DLJ Capital Funding, Inc, as syndication agent, and
Firstar Bank, N.A., as documentation agent, and the
banks named therein
*21.1 Schedule of Subsidiaries and Jurisdiction of
Incorporation
*27.1 Financial Data Schedule
