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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 SEPTEMBER 28, 2002
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 1, 2002, the registrant had outstanding 1,000 shares of
common stock.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 28, 2002
and December 29, 2001.......................................................... 1
Unaudited Condensed Consolidated Statements of Income for the three
months and nine months ended September 28, 2002 and September 29, 2001......... 2
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income as of and for the nine months ended September 28, 2002.... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended September 28, 2002 and September 29, 2001.................... 4
Notes to Unaudited Condensed Consolidated Financial Statements................. 5
Independent Accountants' Review Report......................................... 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 23
Item 4. Controls and Procedures........................................................ 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... 25
Signatures.............................................................................. 26
Certification of Principal Executive Officer............................................ 27
Certification of Principal Financial Officer............................................ 28
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
SEPTEMBER 28, DECEMBER 29,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 5,048 $ 6,032
Accounts receivable, net 117,210 120,760
Inventories, net 57,452 54,841
Deferred tax asset 9,597 10,115
Prepaid expenses and other current assets 8,143 5,469
--------- ---------
Total current assets 197,450 197,217
Property, plant and equipment, net 251,757 249,379
Goodwill and other intangible assets, net 356,470 347,081
Other assets 41,866 42,868
--------- ---------
Total assets $ 847,543 $ 836,545
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 29,743 $ 28,488
Accounts payable 76,472 64,013
Accrued liabilities 59,862 57,721
--------- ---------
Total current liabilities 166,077 150,222
Long-term debt, excluding current maturities 511,741 559,335
Other long-term liabilities 18,546 10,805
Deferred tax liability 16,560 12,585
--------- ---------
Total liabilities 712,924 732,947
--------- ---------
Senior Preferred Stock, 3,000,000 shares authorized,
1,200,000 shares issued and outstanding 74,437 65,672
--------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding -- --
Additional paid-in-capital 115,655 115,655
Accumulated other comprehensive income (loss) 6,994 (7,607)
Accumulated deficit (62,467) (70,122)
--------- ---------
Total stockholder's equity 60,182 37,926
--------- ---------
Total liabilities and stockholder's equity $ 847,543 $ 836,545
========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying independent accountants' review report.
1
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 216,334 $ 206,299 $ 640,738 $ 674,325
Cost of goods sold 171,865 166,099 496,589 561,826
--------- --------- --------- ---------
Gross profit 44,469 40,200 144,149 112,499
Operating expenses:
Promotion and distribution 12,849 13,618 39,782 43,250
Selling, general and administrative 11,851 10,021 34,391 35,512
Amortization of intangibles 908 3,421 2,596 10,318
Non-recurring expenses 775 -- 775 6,662
--------- --------- --------- ---------
Income from operations 18,086 13,140 66,605 16,757
Interest expense, net 16,426 14,464 46,251 43,338
Other income, net (355) (44) (990) (648)
--------- --------- --------- ---------
Income (loss) before income taxes 2,015 (1,280) 21,344 (25,933)
Income tax expense (benefit) (745) (1,296) 4,924 (11,010)
--------- --------- --------- ---------
Net income (loss) 2,760 16 16,420 (14,923)
Preferred stock dividends and accretion (3,015) (2,657) (8,765) (7,726)
--------- --------- --------- ---------
Net income (loss) available to common shares $ (255) $ (2,641) $ 7,655 $ (22,649)
========= ========= ========= =========
Basic and diluted net income (loss)
per common share $ (255) $ (2,641) $ 7,655 $ (22,649)
========= ========= ========= =========
Basic and diluted weighted-average common
shares outstanding 1,000 1,000 1,000 1,000
========= ========= ========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying independent accountants' review report.
2
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE ACCUMULATED
------------
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT TOTAL
------ ------ ------- ------------- ------- -----
Balances at December 29, 2001 1,000 $ -- $115,655 $ (7,607) $(70,122) $ 37,926
Comprehensive income:
Net income -- -- -- -- 16,420 16,420
Foreign currency translation, net -- -- -- 14,188 -- 14,188
Unrealized gain, net of
deferred tax expense of $489 -- -- -- 413 -- 413
--------
Total comprehensive income 31,021
--------
Preferred stock dividends -- -- -- -- (7,957) (7,957)
Accretion of preferred stock -- -- -- -- (808) (808)
------- --------- -------- -------- -------- --------
Balances at September 28, 2002 1,000 $ -- $115,655 $ 6,994 $(62,467) $ 60,182
======= ========= ======== ======== ======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying independent accountants' review report.
3
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
-----------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) $ 16,420 $(14,923)
Items not requiring (providing) cash:
Depreciation 20,939 20,792
Amortization of intangibles 2,596 10,318
Deferred income tax expense (benefit) 3,749 (11,104)
Non-cash interest expense 10,663 4,165
Equity in joint ventures (530) (692)
Net loss on divestitures -- 4,660
Other non-cash charges, net 1,212 54
Changes in current assets and liabilities 16,377 (18,168)
-------- --------
Net cash provided by (used in) operating activities 71,426 (4,898)
-------- --------
Cash flows from investing activities:
Capital expenditures (13,442) (9,673)
Proceeds from sale of assets 881 20,884
Other, net (1,487) (2,071)
-------- --------
Net cash provided by (used in) investing activities (14,048) 9,140
-------- --------
Cash flows from financing activities:
Net repayments under revolving credit agreements (38,000) (3,500)
Proceeds from issuance of long-term debt 9,738 17,055
Principal payments on long-term debt (28,120) (20,914)
Payments for debt issuance costs (2,316) (2,831)
Parent capital contribution -- 8,375
-------- --------
Net cash used in financing activities (58,698) (1,815)
Effect of exchange rate changes on cash and cash equivalents 336 17
-------- --------
Increase (decrease) in cash and cash equivalents (984) 2,444
Cash and cash equivalents, beginning of period 6,032 3,158
-------- --------
Cash and cash equivalents, end of period $ 5,048 $ 5,602
======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying independent accountants' review report.
4
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 (the "Company") and its consolidated subsidiaries 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 2002 presentation.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes contained in the Company's 2001 Annual Report on Form 10-K for the
fiscal year ended December 29, 2001 (the "2001 10-K"), including related
exhibits. The accounting policies used in preparing these financial statements
are the same as those summarized in the 2001 10-K, except for the adoption of
Financial Accounting Standards Board's ("FASB's") Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"),
and the adoption of FASB's Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), as
discussed in Note 3 -- "Recently Issued Accounting Pronouncements."
The Company's fiscal year ends on the Saturday nearest to the end of
December. Each month and quarter also end on a Saturday with the third quarters
of fiscal 2001 and 2002 ending on September 29, 2001 and September 28, 2002,
respectively.
(2) PROMOTIONAL ACCOUNTING RECLASSIFICATION
In fiscal 2001, the Company adopted FASB's Emerging Issues Task Force
Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
("EITF 01-9"), which provides guidance on when to record certain sales
incentives as well as the classification of certain sales incentives in the
statement of income. As a result of adopting EITF 01-9, the Company records
volume-based rebates and certain sales incentives as a component of net sales,
and free-goods promotions as a component of cost of goods sold. Prior to
adopting EITF 01-9, the Company recorded these costs as a component of promotion
and distribution expense.
Previously issued quarterly results of fiscal 2001 have been reclassified,
as disclosed in the Company's 2001 10-K, to reflect the proper classification of
sales incentives in the statement of income. This change was made based on a
year end review of the Company's policies and procedures relating to EITF 01-9.
The reclassification resulted in a reduction in net sales of $5.3 million and
$15.8 million for the three months and nine months ended September 29, 2001,
respectively, and an increase in cost of goods sold of $0.9 million for the nine
months ended September 29, 2001, offset by a decrease in promotion and
distribution expense of $5.3 million and $16.7 million for the three months and
nine months ended September 29, 2001, respectively.
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective December 30, 2001, the Company adopted SFAS 142 which requires
that goodwill and other intangible assets with indefinite lives no longer be
amortized and further requires that the fair value of goodwill and other
intangible assets with indefinite lives be tested for impairment upon adoption
of SFAS 142, annually and upon the occurrence of certain events, and be written
down to fair value if considered impaired. In the first quarter of fiscal 2002,
the Company reassessed the useful lives and residual values of all intangible
assets acquired in purchase business combinations, which resulted in no impact
on its accompanying unaudited condensed consolidated financial statements. As of
June 29, 2002, the Company completed the required impairment tests of goodwill
and other intangible assets with indefinite lives and, based on the results of
the tests, determined no impairment to the carrying values of these assets was
needed. The adoption of SFAS 142 resulted in the elimination of annual
amortization expense related to goodwill and other intangible assets of
approximately $10.3 million, or $7.6 million
5
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
net of income tax benefit. The Company will perform its annual impairment test
of goodwill and other intangible assets in the fourth quarter of 2002.
Results of operations of the Company adjusted to give effect to SFAS
142 as if it were adopted on December 31, 2000 follows (in thousands, except per
share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss), as reported $ 2,760 $ 16 $ 16,420 $ (14,923)
Add back: amortization,
net of income tax benefit -- 2,006 -- 5,708
---------- ---------- ---------- ----------
Net income (loss), as adjusted $ 2,760 $ 2,022 $ 16,420 $ (9,215)
========== ========== ========== ==========
Basic and diluted net income (loss)
per common share, as adjusted $ (255) $ (635) $ 7,655 $ (16,941)
========== ========== ========== ==========
Effective December 30, 2001, the Company adopted SFAS 144, which requires
that long-lived assets to be disposed of by sale be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS 144 also broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The adoption of SFAS 144 as of the beginning of fiscal 2002 had no
material impact on the Company's financial position or results of operations.
(4) INVENTORIES
A summary of inventories, net of valuation allowances, follows (in
thousands):
SEPTEMBER 28, DECEMBER 29,
2002 2001
---- ----
Raw materials $ 13,942 $ 13,669
Packaging materials 16,350 16,271
Finished goods 27,160 24,901
-------- --------
Total $ 57,452 $ 54,841
======== ========
6
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) LONG-TERM DEBT AND LIQUIDITY
A summary of long-term debt follows (in thousands):
SEPTEMBER 28, DECEMBER 29,
2002 2001
---- ----
Bank revolving credit facility $ -- $ 38,000
Bank term loans 342,660 352,804
Sponsor facility 17,084 16,777
Senior subordinated notes 148,340 148,071
Industrial development revenue bonds 14,469 14,461
Debt of foreign subsidiaries 18,931 17,710
--------- ---------
541,484 587,823
Less: Current maturities (29,743) (28,488)
--------- ---------
Total $ 511,741 $ 559,335
========= =========
Effective March 25, 2002, all loans under the Company's senior credit
facility started bearing interest at the Euro dollar rate plus 4.75%, or the
prime rate plus 3.75%, until maturity. At September 28, 2002, the Euro term loan
facility bore interest at 8.07% per annum, the USD term loan facility bore
interest at 8.23% per annum and the revolving credit facility bore interest at
8.50% per annum.
The Company's senior credit facility contains certain financial covenant
requirements. The Company has experienced difficulty in the past satisfying
financial covenants under its senior credit facility. The amendments to its
senior credit facility in 2001 and 2002 waived certain financial covenant
requirements for the fiscal years ended December 30, 2000 and December 29, 2001,
and amended the Company's existing financial covenants through March 31, 2003.
Without such waivers, the Company would not have been in compliance with the
waived covenants at December 30, 2000 or December 29, 2001. The Company may
experience difficulty satisfying these financial covenants in the future, which,
if it is unable to secure a waiver from its lenders, could result in, among
other things, an event of default and acceleration of outstanding debt under the
Company's senior credit facility.
If the Company is unable to restructure its senior credit facility prior
to the expiration of the reduced financial covenant requirements that are in
effect through March 31, 2003, the Company does not believe that it will be able
to comply with the financial covenant requirements that would go into effect on
that date. See Note 8 -- "Subsequent Events."
7
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) ACCRUALS FOR RESTRUCTURING COSTS
A roll-forward of the Company's accrued restructuring costs for fiscal
2002 through September 28, 2002 follows (in thousands):
NINE MONTHS
ENDED
SEPTEMBER 28,
2002
----
Balance at December 29, 2001 $ 4,784
Cash payments (1,928)
-------
Balance at September 29, 2002 $ 2,856
=======
The future expected payout of the Company's accrued restructuring costs as
of September 28, 2002 follows (in thousands):
FISCAL YEARS ENDING PAYOUT
- ------------------- ------
2002 $ 506
2003 2,170
2004 180
-------
Total $ 2,856
=======
(7) 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.
(8) SUBSEQUENT EVENTS
On October 15, 2002, the Company announced that it is reviewing the
potential sale of its European pet food business. The Company expects that the
net proceeds from any such sale would be used to pay down the Company's
outstanding senior debt. In addition, the Company expects that any potential
sale would be completed in the first half of 2003, although it cannot make
assurances that this transaction will be completed at that time or at all, or
what price would be received in any such sale. The carrying value of the related
assets will be evaluated as the sale process proceeds. See Note 9 -- "Financial
Information Related to Guarantor Subsidiaries" for unaudited condensed
consolidated financial information related to the Company's non-guarantor
subsidiaries, which would be divested in connection with any sale of its
European pet food business.
The Company has agreed to appoint two new members to its Board of
Directors at the request of holders of its 14.25% Senior Exchangeable Preferred
Stock Due 2007. Such appointment is expected to be finalized in the fourth
quarter of 2002.
(9) FINANCIAL INFORMATION RELATED TO GUARANTOR SUBSIDIARIES
Condensed consolidated financial information related to the Company and
its guarantor subsidiaries and non-guarantor subsidiaries as of December 29,
2001 and September 28, 2002 and for the three months and nine months ended
September 29, 2001 and September 28, 2002 is disclosed to comply with the
reporting requirements of the Company's guarantor subsidiaries. The guarantor
subsidiaries are wholly-owned domestic subsidiaries of the Company which have
fully and unconditionally guaranteed the Company's 9-3/4% Senior Subordinated
Notes due May 15, 2007. The non-guarantor subsidiaries are wholly-owned foreign
subsidiaries of the Company which have not fully and unconditionally guaranteed
the Company's 9-3/4% Senior Subordinated Notes due May 15, 2007. See
8
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- "Long-Term Debt" in the Company's 2001 10-K. Condensed consolidated
financial information follows (in thousands):
SEPTEMBER 28, 2002
------------------
INTERCOMPANY
GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 123 $ 4,925 $ -- $ 5,048
Accounts receivable, net 77,833 39,377 -- 117,210
Inventories, net 38,411 19,041 -- 57,452
Deferred tax asset 9,597 -- -- 9,597
Prepaid expenses and other current assets 6,402 1,741 -- 8,143
--------- --------- --------- ---------
Total current assets 132,366 65,084 -- 197,450
Property, plant and equipment, net 159,250 92,507 -- 251,757
Goodwill and other intangible assets, net 267,376 89,094 -- 356,470
Other assets 233,524 11,930 (203,588) 41,866
--------- --------- --------- ---------
Total assets $ 792,516 $ 258,615 $(203,588) $ 847,543
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 23,578 $ 6,165 $ -- $ 29,743
Accounts payable 48,493 27,979 -- 76,472
Accrued liabilities 46,856 12,820 186 59,862
--------- --------- --------- ---------
Total current liabilities 118,927 46,964 186 166,077
Long-term debt, excluding current maturities 498,975 172,288 (159,522) 511,741
Other long-term liabilities 18,546 -- -- 18,546
Deferred tax liability 15,008 1,552 -- 16,560
--------- --------- --------- ---------
Total liabilities 651,456 220,804 (159,336) 712,924
--------- --------- --------- ---------
Senior Preferred Stock 74,437 -- -- 74,437
--------- --------- --------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock -- -- -- --
Additional paid-in-capital 115,655 43,889 (43,889) 115,655
Accumulated other comprehensive income (loss) (7,979) 15,336 (363) 6,994
Accumulated deficit (41,053) (21,414) -- (62,467)
--------- --------- --------- ---------
Total stockholder's equity 66,623 37,811 (44,252) 60,182
--------- --------- --------- ---------
Total liabilities and stockholder's equity $ 792,516 $ 258,615 $(203,588) $ 847,543
========= ========= ========= =========
9
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEET
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
DECEMBER 29, 2001
-----------------
INTERCOMPANY
GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,950 $ 4,082 $ -- $ 6,032
Accounts receivable, net 81,916 38,844 -- 120,760
Inventories, net 38,566 16,275 -- 54,841
Deferred tax asset 10,115 -- -- 10,115
Prepaid expenses and other current assets 4,226 1,243 -- 5,469
--------- --------- --------- ---------
Total current assets 136,773 60,444 -- 197,217
Property, plant and equipment, net 162,324 87,055 -- 249,379
Goodwill and other intangible assets, net 267,376 79,705 -- 347,081
Other assets 227,654 10,741 (195,527) 42,868
--------- --------- --------- ---------
Total assets $ 794,127 $ 237,945 $(195,527) $ 836,545
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 22,708 $ 5,780 $ -- $ 28,488
Accounts payable 33,088 30,925 -- 64,013
Accrued liabilities 44,674 12,857 190 57,721
--------- --------- --------- ---------
Total current liabilities 100,470 49,562 190 150,222
Long-term debt, excluding current maturities 547,405 174,906 (162,976) 559,335
Other long-term liabilities 10,744 61 -- 10,805
Deferred tax liability 9,505 3,080 -- 12,585
--------- --------- --------- ---------
Total liabilities 668,124 227,609 (162,786) 732,947
--------- --------- --------- ---------
Senior Preferred Stock 65,672 -- -- 65,672
--------- --------- --------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock -- -- -- --
Additional paid-in-capital 115,655 31,181 (31,181) 115,655
Accumulated other comprehensive loss (1,805) (4,242) (1,560) (7,607)
Accumulated deficit (53,519) (16,603) -- (70,122)
--------- --------- --------- ---------
Total stockholder's equity 60,331 10,336 (32,741) 37,926
--------- --------- --------- ---------
Total liabilities and stockholder's equity $ 794,127 $ 237,945 $(195,527) $ 836,545
========= ========= ========= =========
10
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
THREE MONTHS ENDED SEPTEMBER 28, 2002
-------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales $ 165,516 $ 50,818 $ 216,334
Cost of goods sold 134,533 37,332 171,865
--------- --------- ---------
Gross profit 30,983 13,486 44,469
Operating expenses:
Promotion and distribution 7,521 5,328 12,849
Selling, general and administrative 8,475 3,376 11,851
Amortization of intangibles 732 176 908
Non-recurring expenses 775 -- 775
--------- --------- ---------
Income from operations 13,480 4,606 18,086
Interest expense, net 11,756 4,670 16,426
Other income, net (582) 227 (355)
--------- --------- ---------
Income (loss) before income taxes 2,306 (291) 2,015
Income tax benefit (606) (139) (745)
--------- --------- ---------
Net income (loss) 2,912 (152) 2,760
Preferred stock dividends and accretion (3,015) -- (3,015)
--------- --------- ---------
Net loss available to common shares $ (103) $ (152) $ (255)
========= ========= =========
THREE MONTHS ENDED SEPTEMBER 29, 2001
-------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales $ 158,347 $ 47,952 $ 206,299
Cost of goods sold 128,356 37,743 166,099
--------- --------- ---------
Gross profit 29,991 10,209 40,200
Operating expenses:
Promotion and distribution 8,325 5,293 13,618
Selling, general and administrative 6,846 3,175 10,021
Amortization of intangibles 2,748 673 3,421
Non-recurring expenses -- -- --
--------- --------- ---------
Income from operations 12,072 1,068 13,140
Interest expense, net 9,336 5,128 14,464
Other income, net (66) 22 (44)
--------- --------- ---------
Income (loss) before income taxes 2,802 (4,082) (1,280)
Income tax benefit (590) (706) (1,296)
--------- --------- ---------
Net income (loss) 3,392 (3,376) 16
Preferred stock dividends and accretion (2,657) -- (2,657)
--------- --------- ---------
Net income (loss) available to common shares $ 735 $ (3,376) $ (2,641)
========= ========= =========
11
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 28, 2002
------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales $ 503,010 $ 137,728 $ 640,738
Cost of goods sold 394,102 102,487 496,589
--------- --------- ---------
Gross profit 108,908 35,241 144,149
Operating expenses:
Promotion and distribution 24,865 14,917 39,782
Selling, general and administrative 24,549 9,842 34,391
Amortization of intangibles 2,096 500 2,596
Non-recurring expenses 775 -- 775
--------- --------- ---------
Income from operations 56,623 9,982 66,605
Interest expense, net 31,287 14,964 46,251
Other (income) expense, net (1,398) 408 (990)
--------- --------- ---------
Income (loss) before income taxes 26,734 (5,390) 21,344
Income tax expense (benefit) 5,503 (579) 4,924
--------- --------- ---------
Net income (loss) 21,231 (4,811) 16,420
Preferred stock dividends and accretion (8,765) -- (8,765)
--------- --------- ---------
Net income (loss) available to common shares $ 12,466 $ (4,811) $ 7,655
========= ========= =========
NINE MONTHS ENDED SEPTEMBER 29, 2001
------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales $ 528,063 $ 146,262 $ 674,325
Cost of goods sold 445,651 116,175 561,826
--------- --------- ---------
Gross profit 82,412 30,087 112,499
Operating expenses:
Promotion and distribution 27,695 15,555 43,250
Selling, general and administrative 25,764 9,748 35,512
Amortization of intangibles 8,271 2,047 10,318
Non-recurring expenses 6,662 -- 6,662
--------- --------- ---------
Income from operations 14,020 2,737 16,757
Interest expense, net 28,794 14,544 43,338
Other income, net (551) (97) (648)
--------- --------- ---------
Loss before income taxes (14,223) (11,710) (25,933)
Income tax benefit (8,914) (2,096) (11,010)
--------- --------- ---------
Net loss (5,309) (9,614) (14,923)
Preferred stock dividends and accretion (7,726) -- (7,726)
--------- --------- ---------
Net loss available to common shares $ (13,035) $ (9,614) $ (22,649)
========= ========= =========
12
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 28, 2002
------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Cash flows from operating activities:
Net income (loss) $ 21,231 $ (4,811) $ 16,420
Items not requiring (providing) cash:
Depreciation and amortization of intangibles 14,944 8,591 23,535
Deferred income tax expense (benefit) 5,503 (1,754) 3,749
Other non-cash charges, net 11,107 238 11,345
Changes in current assets and liabilities
(excluding amounts acquired) 6,834 9,543 16,377
-------- -------- --------
Net cash provided by operating activities 59,619 11,807 71,426
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (8,897) (4,545) (13,442)
Proceeds from sale of assets 289 592 881
Other, net 4,929 (6,416) (1,487)
-------- -------- --------
Net cash used in investing activities (3,679) (10,369) (14,048)
-------- -------- --------
Cash flows from financing activities:
Net repayments under revolving credit agreements (38,000) -- (38,000)
Proceeds from issuance of long-term debt -- 9,738 9,738
Principal payments on long-term debt (17,451) (10,669) (28,120)
Payments for debt issuance costs (2,316) -- (2,316)
-------- -------- --------
Net cash used in financing activities (57,767) (931) (58,698)
Effect of exchange rate changes on cash and cash equivalents -- 336 336
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,827) 843 (984)
Cash and cash equivalents, beginning of period 1,950 4,082 6,032
-------- -------- --------
Cash and cash equivalents, end of period $ 123 $ 4,925 $ 5,048
======== ======== ========
13
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 29, 2001
------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Cash flows from operating activities:
Net loss $ (5,309) $ (9,614) $(14,923)
Items not requiring (providing) cash:
Depreciation and amortization of intangibles 21,761 9,349 31,110
Deferred income tax benefit (8,796) (2,308) (11,104)
Other non-cash charges, net 8,099 88 8,187
Changes in current assets and liabilities
(excluding amounts acquired) (31,775) 13,607 (18,168)
-------- -------- --------
Net cash provided by (used in) operating activities (16,020) 11,122 (4,898)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (5,606) (4,067) (9,673)
Proceeds from sale of assets 20,884 -- 20,884
Other, net (3,551) 1,480 (2,071)
-------- -------- --------
Net cash provided by (used in) investing activities 11,727 (2,587) 9,140
-------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving credit agreements (3,500) -- (3,500)
Proceeds from issuance of long-term debt 16,666 389 17,055
Principal payments on long-term debt (14,185) (6,729) (20,914)
Payments for debt issuance costs (2,831) -- (2,831)
Parent capital contribution 8,375 -- 8,375
-------- -------- --------
Net cash provided by (used in) financing activities 4,525 (6,340) (1,815)
Effect of exchange rate changes on cash and cash equivalents (131) 148 17
-------- -------- --------
Increase in cash and cash equivalents 101 2,343 2,444
Cash and cash equivalents, beginning of period 42 3,116 3,158
-------- -------- --------
Cash and cash equivalents, end of period $ 143 $ 5,459 $ 5,602
======== ======== ========
14
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Doane Pet Care Company
We have reviewed the condensed consolidated balance sheet of Doane Pet Care
Company and its consolidated subsidiaries as of September 28, 2002, the related
condensed consolidated statements of income for the three-month and nine-month
periods ended September 28, 2002 and September 29, 2001, the condensed
consolidated statement of stockholder's equity and comprehensive income as of
and for the nine-month period ended September 28, 2002 and the condensed
consolidated statements of cash flows for the nine-month periods ended September
28, 2002 and September 29, 2001. These condensed consolidated financial
statements are the responsibility of the Company's management.
We 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 auditing standards generally accepted in the United States of America, the
objective of 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 accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Doane Pet Care Company and its consolidated subsidiaries as of December 29,
2001, 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 March 22, 2002, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 29, 2001 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
As discussed in Note 3 to the condensed consolidated financial statements,
effective December 30, 2001, Doane Pet Care Company and its consolidated
subsidiaries adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" and Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets."
/s/ KPMG LLP
Nashville, Tennessee
October 29, 2002
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The reader is encouraged to refer to the accompanying unaudited condensed
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q and our audited consolidated financial statements
and related notes in our 2001 Annual Report on Form 10-K for the fiscal year
ended December 29, 2001 ("2001 10-K").
FORWARD-LOOKING STATEMENTS
Certain of the statements set forth below and elsewhere in this Quarterly
Report on Form 10-Q are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Some of these statements can be
identified by terms and phrases such as "anticipate," "believe," "assume,"
"intend," "estimate," "expect," "continue," "could," "may," "plan," "project,"
"predict," "will" and similar expressions. These statements address activities,
events or developments that we expect, believe, anticipate or estimate will or
may occur in the future, including statements regarding, among other things:
- - the potential sale of our European pet food business;
- - reliance on a few customers for a large portion of our sales and our
ability to maintain our relationships with these customers;
- - future capital expenditures and our ability to finance these capital
expenditures;
- - our ability to finance our debt service requirements under our senior
credit facility and our other debt and to comply with our financial
covenants relating to this debt;
- - our future financial condition and results of operations;
- - our business strategy, and other plans and objectives for future
operations;
- - business opportunities that may be presented to and pursued by us from
time to time;
- - our exposure to, and ability to manage, our market risks;
- - the impact of existing accounting pronouncements; and
- - risks related to our international operations.
These forward-looking statements are based on our assumptions and analyses
and are not guarantees of our future performance. These statements are subject
to risks, many of which are beyond our control, that could cause our actual
results to differ materially from those contained in our forward-looking
statements. Factors that could cause results to differ materially include
without limitation: decreases or changes in demand for our products, changes in
market trends, general competitive pressures from existing and new competitors,
price volatility of commodities, natural gas, other raw materials and packaging,
changes in expected investment returns on our future pension costs, changes in
laws and regulations, adverse changes in operating performance, adverse economic
conditions and other factors described under Item 1 -- "Business -- Risk
Factors" of our 2001 10-K.
We undertake no obligation to revise the forward-looking statements to
reflect any future events or circumstances. All forward-looking statements
attributable to us are expressly qualified in their entirety by this cautionary
statement.
CRITICAL ACCOUNTING POLICIES
Accounts Receivable Allowance. At September 28, 2002, our gross accounts
receivable were $122.8 million. We had a valuation allowance of $5.6 million at
September 28, 2002, primarily for outstanding deductions with customers. Our
accounting policy is to estimate the allowance by applying a recovery percentage
based on historical collection experience and performing a specific
identification review of customer account balances. We may revise the allowance
against accounts receivable as we receive more information on this matter.
Inventories Valuation Allowance. At September 28, 2002, our gross
inventories were $62.1 million. We had a valuation allowance for obsolescence of
$4.6 million at September 28, 2002, primarily related to packaging inventories.
Our accounting policy is to estimate the allowance based on specific
identification of obsolete products
16
or potential products to be rationalized, taking into account both the
probability and timing of rationalization. We may revise the allowance against
inventories as we receive more information on this matter.
Deferred Tax Assets. At September 28, 2002, our gross deferred tax assets
totaled $25.8 million, of which $10.8 million related to the deferred tax
benefit associated with our federal net operating loss carryforwards of $30.8
million that are available to offset future taxable income through 2021.
Realization of the deferred tax assets is dependent upon our ability to generate
sufficient taxable income prior to the expiration of the federal net operating
loss carryforwards. Our results of operations reflect net losses in fiscal 2000
and 2001, which are primarily due to non-recurring and Project Focus
implementation expenses. See -- "Results of Operations -- Expenses
Related to 2001 Strategic Initiatives" for a discussion of Project Focus.
Although realization is not assured, we believe that it is more likely than not
that our deferred tax assets will be realized.
Goodwill and Other Intangible Assets. At September 28, 2002, our net
goodwill and other intangible assets totaled $356.5 million. Our accounting
policy is to test the fair value of goodwill and other intangible assets for
impairment in accordance with Financial Accounting Standards Board's ("FASB's")
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), which we adopted as of the beginning of fiscal
2002. See -- "Recently Issued Accounting Pronouncements."
RESULTS OF OPERATIONS
General. We derive substantially all of our revenue from the sale of dry
and wet pet food. Historically, approximately 75% of our cost of goods sold has
been comprised of raw material and packaging costs with the remainder primarily
comprised of salaries, wages and related fringe benefits, utilities and
depreciation. Our operating expenses consist of promotion and distribution
expenses and selling, general and administrative expenses. Promotion and
distribution expenses are primarily comprised of promotions, freight, brokerage
fees and warehousing expenses. Selling, general and administrative expenses
primarily include salaries and related fringe benefits, amortization and other
corporate overhead costs, which typically do not increase proportionately with
increases in volume and product sales.
Our results of operations reflect the reclassification of volume-based
rebates and certain sales incentives as a reduction in net sales, and free-goods
promotions as an increase in cost of goods sold with the offset being a decrease
in promotion and distribution expense. Results for the three months and nine
months ended September 29, 2001 have been reclassified, as discussed in our 2001
10-K. See Note 2 -- "Promotional Accounting Reclassification" to our
accompanying unaudited condensed consolidated financial statements included
herein.
Expenses Related to 2001 Strategic Initiatives. In April 2001, we sold our
Perham, Minnesota dry dog and cat food facility and related assets, including
the Tuffy's brand, for $7.0 million. In May 2001, we sold our Deep Run domestic
wet pet food business and related assets, other than real estate, for $13.9
million. We recognized a $4.7 million net loss on the sale of these businesses.
In addition, we recognized $2.0 million of severance costs for the elimination
of certain corporate positions following these divestitures. Each of these
expenses was classified as a non-recurring expense. See Note 4 --
"Divestitures" to our audited consolidated financial statements included in our
2001 10-K.
In October 2001, we initiated a new market and operational strategy,
Project Focus, which is designed to better focus our resources on providing
"best-in-class" services and products to our customers. Our goal is to
permanently reduce our cost structure by streamlining our available product
offerings and thereby significantly reducing stock-keeping units, or SKUs,
increasing the efficiency of our production facilities and reducing our
workforce. We believe the changes will benefit our customers by simplifying and
distinguishing our product offerings and associated pricing, improving our
planning and marketing support services, and reducing the complexity of our
operations. We also plan to improve our margins by focusing on initiatives that
enhance our customer mix and/or product mix. We seek to be the high quality, low
cost global producer of customer branded pet food in our highly competitive
markets. See Note 16 -- "Non-Recurring and Project Focus Implementation
Expenses" to our audited consolidated financial statements included in our 2001
10-K. We recorded a charge of $10.2 million in the fourth quarter of fiscal 2001
related to our Project Focus initiative. We have also experienced, and may
experience in the future, a decline in sales volumes with certain of our
customers as a result of reducing SKUs in connection with Project Focus.
17
Potential sale of European pet food business. On October 15, 2002, we
announced that we were reviewing the potential sale of our European pet food
business. We expect that the net proceeds from any such sale would be used to
pay down our outstanding senior debt. We expect that any potential sale would be
completed in the first half of 2003, although we cannot assure you that this
transaction will be completed at that time or at all, or what price would be
received in any such sale. The carrying value of the related assets will be
evaluated as the sale process proceeds. See Note 9 -- "Financial Information
Related to Guarantor Subsidiaries" for unaudited condensed consolidated
financial information related to our non-guarantor subsidiaries, which would be
divested in connection with any sale of our European pet food business.
Statement of Income Data. The following table sets forth our statement of
income data expressed as a percentage of net sales for the periods indicated,
which together with the discussion that follows the table, is based on our
accompanying unaudited condensed consolidated financial statements and notes
thereto included herein (in thousands, except percentages):
Three months ended Nine months ended
------------------------------------------- -------------------------------------------
September 28, 2002 September 29, 2001 September 28, 2002 September 29, 2001
------------------ ------------------ ------------------ ------------------
Net sales $ 216,334 100.0% $ 206,299 100.0% $ 640,738 100.0% $ 674,325 100.0%
Cost of goods sold 171,865 79.4 166,099 80.5 496,589 77.5 561,826 83.3
--------- ----- --------- ----- --------- ----- --------- -----
Gross profit 44,469 20.6 40,200 19.5 144,149 22.5 112,499 16.7
Operating expenses:
Promotion and distribution 12,849 5.9 13,618 6.6 39,782 6.2 43,250 6.4
Selling, general and
administrative 11,851 5.5 10,021 4.9 34,391 5.4 35,512 5.3
Amortization of intangibles 908 0.4 3,421 1.6 2,596 0.4 10,318 1.5
Non-recurring expenses 775 0.4 -- -- 775 0.1 6,662 1.0
--------- ----- --------- ----- --------- ----- --------- -----
Income from operations 18,086 8.4 13,140 6.4 66,605 10.4 16,757 2.5
Interest expense, net 16,426 7.6 14,464 7.0 46,251 7.2 43,338 6.4
Other income, net (355) (0.2) (44) -- (990) (0.2) (648) (0.1)
--------- ----- --------- ----- --------- ----- --------- -----
Income (loss) before
income taxes 2,015 1.0 (1,280) (0.6) 21,344 3.4 (25,933) (3.8)
Income tax expense (benefit) (745) (0.3) (1,296) (0.6) 4,924 0.8 (11,010) (1.6)
--------- ----- --------- ----- --------- ----- --------- -----
Net income (loss) $ 2,760 1.3% $ 16 --% $ 16,420 2.6% $ (14,923) (2.2)%
========= ===== ========= ===== ========= ===== ========= =====
THREE MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
29, 2001
Net sales. Our net sales in the third quarter of 2002 increased 4.8% to
$216.3 million from $206.3 million in the comparable 2001 period primarily due
to increased U.S. dry dog food volume and new business awards.
Gross profit. Our gross profit in the third quarter of 2002 increased $4.3
million to $44.5 million from $40.2 million in the comparable 2001 period. This
increase is primarily due to improved quarter-over-quarter performance at our
European operations, increased sales volume, lower ingredient and natural gas
costs, partially offset by start-up costs related to new business. The increase
in gross profit was also partially offset by the unfavorable impact caused by
the volatility of commodity prices under FASB's Statement on Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), fair value accounting of our commodity derivative
instruments. Such accounting resulted in a $0.8 million increase in our cost of
goods sold in the third quarter of 2002 compared to a $0.1 million decrease in
our cost of goods sold in the same 2001 period, which accounted for a $0.9
million decrease in gross profit.
Promotion and distribution. Promotion and distribution expenses for the
third quarter of 2002 decreased 5.6% to $12.8 million from $13.6 million in the
comparable 2001 period primarily due to Project Focus margin improvement.
Selling, general and administrative. Selling, general and administrative
expenses for the third quarter of 2002 increased 18.3% to $11.9 million from
$10.0 million in the comparable 2001 period primarily due to higher
18
variable compensation incentive accruals tied to our business performance,
partially offset by lower costs from restructuring and other cost saving
initiatives from Project Focus implementation.
Amortization of intangibles. Amortization expense for the third quarter of
2002 decreased 73.5% to $0.9 million from $3.4 million in the comparable 2001
period primarily due to goodwill and other intangible assets with indefinite
lives no longer being amortized. See -- "Recently Issued Accounting
Pronouncements."
Non-recurring expenses. Non-recurring expenses of $0.8 million in the
third quarter of 2002 related to the write-off of costs associated with our
potential bond offering. In accordance with Securities and Exchange Commission's
("SEC's") Staff Accounting Bulletin 71 ("SAB 71"), we are required to write-off
these costs after a postponement of the transaction exceeds 90 days. See --
"Liquidity and Capital Resources -- Capitalization."
Interest expense, net. Interest expense, net of interest income, for the
third quarter of 2002 increased 13.6% to $16.4 million from $14.5 million in the
comparable 2001 period primarily due to a $2.2 million accrual of non-cash
interest expense for the excess leverage fee under our senior credit facility.
See -- "Liquidity and Capital Resources."
Income tax expense (benefit). We recognized an income tax benefit of $0.7
million for the third quarter of 2002 compared to $1.3 million for the same 2001
period. Our effective tax rates of 37.0% for the third quarter of 2002 and
101.3% for the 2001 period are different from the combined U.S. federal and
state statutory rate of 38.9% primarily due to the difference between U.S. and
foreign effective tax rates. In addition, our effective tax rate in the 2001
period was impacted by certain goodwill amortization that was not deductible for
income tax purposes.
NINE MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 29,
2001
Net sales. Our net sales in the first nine months of 2002 decreased 5.0%
to $640.7 million from $674.3 million in the comparable 2001 period. Net sales
in the 2001 nine month period included $16.6 million of net sales from the Deep
Run and Perham businesses prior to their divestiture in the second quarter of
2001. Excluding the 2001 net sales associated with these divestitures, our net
sales for the first nine months of 2002 decreased 2.6%, or $17.0 million, from
the first nine months of 2001. The decrease was primarily due to lower sales
volume from Project Focus implementation, partially offset by the increase in
sales volume as a result of new business awards.
Gross profit. Our gross profit in the first nine months of 2002 increased
$31.6 million to $144.1 million from $112.5 million in the comparable 2001
period primarily due to the favorable impact caused by the volatility of
commodity prices under SFAS 133 fair value accounting of our commodity
derivative instruments. Such accounting resulted in a $13.0 million reduction in
our cost of goods sold in the first nine months of 2002 compared to a $10.0
million increase in our cost of goods sold in the same 2001 period, which
accounted for $23.0 million of the $31.6 million increase in gross profit. This
increase is primarily due to improved performance at our European operations,
lower natural gas costs and lower operating costs as a result of the closure of
certain inefficient manufacturing facilities in fiscal 2001 as well as
efficiencies achieved at our remaining plants in both fiscal 2001 and 2002 from
Project Focus implementation, partially offset by higher salaries and wage rate
inflation and start-up costs related to new business. In addition, the
improvement is partially due to the impact of the divestitures of the Deep Run
and Perham businesses.
Promotion and distribution. Promotion and distribution expenses for the
first nine months of 2002 decreased 8.0% to $39.8 million from $43.3 million in
the comparable 2001 period primarily due to the reduction in sales volume,
Project Focus margin improvement and freight outsourcing.
Selling, general and administrative. Selling, general and administrative
expenses for the first nine months of 2002 decreased 3.2% to $34.4 million from
$35.5 million in the comparable 2001 period primarily due to lower costs from
restructuring and other cost saving initiatives from Project Focus
implementation, partially offset by higher variable compensation incentive
accruals tied to our business performance.
Amortization of intangibles. Amortization expense for the first nine
months of 2002 decreased 74.8% to $2.6 million from $10.3 million in the
comparable 2001 period primarily due to goodwill and other intangible assets
with indefinite lives no longer being amortized. See -- "Recently Issued
Accounting Pronouncements."
19
Non-recurring expenses. Non-recurring expenses of $0.8 million in the
first nine months of 2002 related to the write-off costs associated with our
potential bond offering. In accordance with SAB 71, we are required to write-off
these costs after a postponement of the transaction exceeds 90 days. See --
"Liquidity and Capital Resources -- Capitalization." Non-recurring expenses of
$6.7 million for the first nine months of 2001 consisted of a $4.7 million net
loss on the sale of certain assets related to the divestitures of the Deep Run
and Perham businesses and a $2.0 million charge associated with a workforce
reduction following the divestitures.
Interest expense, net. Interest expense, net of interest income, for the
first nine months of 2002 increased 6.7% to $46.3 million from $43.3 million in
the comparable 2001 period primarily due to a $4.5 million accrual of non-cash
interest expense for the excess leverage fee under our senior credit facility,
partially offset by a decrease in interest rates associated with our floating
rate debt. See -- "Liquidity and Capital Resources."
Income tax expense (benefit). We recognized income tax expense of $4.9
million for the first nine months of 2002 and an income tax benefit of $11.0
million in the comparable 2001 period. Our effective tax rates of 23.1% for the
2002 period and 42.5% for the 2001 period are different from the combined U.S.
federal and state statutory rate of 38.9% primarily due to the difference
between U.S. and foreign effective tax rates. In addition, our effective tax
rate in the 2001 period was impacted by certain goodwill amortization that was
not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and
working capital requirements with cash flows from operations, bank borrowings
and industrial development revenue bonds. At September 28, 2002, we had working
capital of $31.4 million.
Cash Flows. Net cash provided by our operating activities was $71.4
million in the first nine months of 2002 compared to net cash used in our
operating activities of $4.9 million in the comparable 2001 period. This
increase was primarily due to (1) the increase in our income before income
taxes, depreciation and amortization, (2) lower deposit amounts in our commodity
margin accounts and (3) an increase in accounts payable in the first nine months
of 2002 compared to a decrease in accounts payable in the same 2001 period. As
of September 28, 2002, we had $6.2 million of margin deposits associated with
our derivative contracts for corn, soybean meal and natural gas commodity
requirements compared to $10.5 million of margin deposits as of December 29,
2001.
Net cash used in our investing activities was $14.0 million in the first
nine months of 2002 compared to net cash provided by our investing activities of
$9.1 million in the same 2001 period. This decrease is primarily associated with
the proceeds received in the first nine months of 2001 related to the
divestitures of the Deep Run and Perham businesses. Estimated capital
expenditures for the full year fiscal 2002 are $25.0 million. We spent $13.4
million on capital expenditures in the first nine months of 2002.
Net cash used in financing activities was $58.7 million in the first nine
months of 2002 compared to $1.8 million in the same 2001 period. This increase
is primarily due to using cash provided by operating activities to reduce our
revolving credit borrowings in 2002 and proceeds received from the sponsor
facility in 2001. Our sponsor facility is a senior unsecured loan from the
shareholders of our parent company and certain of our executive officers bearing
interest at 15% per annum and maturing on March 31, 2007. The proceeds from the
sponsor facility were used to refinance $25.0 million of indebtedness under our
senior credit facility.
Debt. We are highly leveraged and have significant cash requirements for
debt service relating to our senior credit facility, our 9-3/4% senior
subordinated notes, industrial development revenue bonds and foreign debt. Our
ability to borrow is limited by our senior credit facility and the limitations
on the incurrence of additional indebtedness in the indenture governing our
9-3/4% senior subordinated notes.
We entered into an amended and restated senior credit facility dated as of
May 8, 2000 with a syndicate of banks and other institutional investors, as
lenders, and JPMorgan Chase Bank, as administrative agent. Our senior credit
facility was amended in March 2001 and March 2002.
20
As of September 28, 2002, our senior credit facility provides for total
commitments of:
- Euro 68.9 million ($67.9 million) for a Euro term loan facility; and
- $349.8 million, consisting of:
- a $274.8 million USD term loan facility; and
- a $75.0 million revolving credit facility with a $20.0 million
sub-limit for issuance of letters of credit.
The commitments under the revolving credit facility are limited to $60.0
million until certain financial performance tests are achieved. These tests were
not met in fiscal 2001 and we do not believe they will be met in fiscal 2002.
Availability of funds under our senior credit facility is also subject to
certain customary terms and conditions.
Effective March 25, 2002, all loans started bearing interest at the Euro
dollar rate plus 4.75%, or the prime rate plus 3.75%, until maturity. At
September 28, 2002, the Euro term loan facility bore interest at 8.07%, the USD
term loan facility bore interest at 8.23% and the revolving credit facility bore
interest at 8.50%.
As of September 28, 2002, the principal amounts due under the Euro term
loan facility were approximately: (i) Euro 8.7 million in 2002 and 2003; (ii)
Euro 11.0 million in 2004; and (iii) Euro 47.0 million in 2005; and the
principal amounts due under the USD term loan facility were approximately: (i)
$15.0 million in 2002, 2003 and 2004; (ii) $162.0 million in 2005; and (iii)
$79.1 million in 2006. At September 28, 2002, we had no borrowings under our
revolving credit facility and we had $3.4 million letters of credit outstanding,
resulting in $56.6 million in availability under our revolving credit facility.
The Euro term loan facility has a final maturity of December 30, 2005. The
USD term loan facility consists of three tranches with final maturities of March
31, 2005, December 31, 2005 and December 31, 2006, respectively, unless
terminated sooner upon an event of default. The revolving credit facility has a
final maturity of March 31, 2005. Our senior credit facility provides for
mandatory prepayments of our borrowings upon certain specified events and in
certain specified percentages, and we may also prepay borrowings under our
senior credit facility.
In March 2002, we amended the senior credit facility to provide, among
other things: 1) for an increase in interest rates, as described above, and an
increase in the commitment fee rate on our revolving credit facility to 1.00%;
2) a grant to our lenders of a lien on our material operating accounts; 3) a
limit on the amount of future capital expenditures up to a total of $25.0
million for 2002 and $7.0 million for the first quarter of 2003; 4) a limit on
certain permitted investments; 5) an amendment to our existing financial
covenants through March 31, 2003; 6) a new minimum EBITDA covenant; and 7) for
the issuance of new senior subordinated notes if the net proceeds of such new
senior subordinated notes are used to repay the loans under our senior credit
facility. In addition, the amendment provides that an excess leverage fee will
accrue if the "senior leverage" ratio exceeds 3.25 to 1.00 as of March 31, 2003
at a rate equal to 2.5% of the sum of the daily average of the aggregate unpaid
principal amount of the loans from March 31, 2002 to March 31, 2003. If the
excess leverage fee is earned, it will generally be payable only from any future
asset sales and debt and equity offerings, but in any event not later than March
31, 2005.
Our senior credit facility contains certain financial covenant
requirements. We have experienced difficulty in the past satisfying financial
covenants in our senior credit facility. The amendments to our senior credit
facility in 2001 and 2002 waived certain financial covenant requirements for the
fiscal years ended December 30, 2000 and December 29, 2001. Without such
waivers, we would not have been in compliance with the waived covenants at
December 30, 2000 or December 29, 2001. We may experience difficulty satisfying
these financial covenants in the future, which, if we are unable to secure a
waiver from our lenders, could result in, among other things, an event of
default and acceleration of outstanding debt under our senior credit facility.
See -- "Capitalization."
Liquidity. We believe the cash flows generated from our business, together
with future borrowings, will be sufficient to enable us to make principal and
interest payments on our debt and to provide us with the necessary liquidity for
operational and investment requirements in the current operating environment. We
also believe the capital expenditures permitted under our senior credit facility
are sufficient to provide us with the necessary
21
flexibility to spend required maintenance capital and fund our planned expansion
and customer requirements for fiscal 2002. We cannot assure you, however, that
our business will generate sufficient cash flows or that future borrowings will
be available in an amount sufficient to enable us to make principal and interest
payments on our debt or to fund our other liquidity needs. In addition, any
future acquisitions, joint ventures or similar transactions that we may consider
will likely require additional capital and we cannot assure you that any such
capital will be available to us on commercially reasonable terms, on terms
acceptable to us, or at all.
As of September 28, 2002, we expected the future payout of our accrued
restructuring cost of $2.9 million would be $0.5 million in 2002, $2.2 million
in 2003 and $0.2 million in 2004.
Capitalization. During fiscal 2002, our goal is to improve our ability to
comply with the covenants in our credit agreements and ultimately reduce our
leverage. We are exploring several alternatives to achieve this goal, either
alone or in some combination. Some of these alternatives include the possible
sale of our European pet food business, raising additional equity capital,
restructuring our senior credit facility, strategic acquisitions, sales of
non-strategic assets and issuing longer term debt securities. We cannot assure
you that we will be able to achieve these goals or that we will be able to
comply with the financial covenants in our senior credit facility. If we are
unable to restructure our senior credit facility prior to the expiration of the
reduced financial covenant requirements that are in effect through March 31,
2003, we do not believe that we will be able to comply with the financial
covenant requirements that would go into effect on that date. See Note 8 --
"Subsequent Events."
COMMITMENTS AND CONTINGENCIES
We believe our operations are in compliance in all material respects with
environmental, safety and other regulatory requirements; however, we cannot
provide assurance these requirements will not change in the future or we will
not incur material costs in the future to comply with these requirements or in
connection with the effect of these matters on our business.
In 1996 and 1997, we entered into partial guarantees of certain
third-party loans made to 11 employees in connection with their purchase of our
parent's common stock under our parent's 1996 and 1997 Management Stock Purchase
Plans. We guaranteed to cover up to a maximum of $0.3 million of such loans in
the event one or more of the employees default in the loan repayment. None of
the individuals who received such loans currently serve as one of our executive
officers.
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 increased 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 trading
policies, impacts of disease breakouts in protein sources and the potential
effect on supply and demand, as well as 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. We cannot
assure you that our results of operations will not be exposed to volatility in
the commodity and natural gas market.
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.
In fiscal 2001, we implemented a price increase consistent with industry
announcements, which was intended to help offset non-commodity inflationary
increases. Domestic sales volumes were negatively impacted in fiscal 2001
compared to fiscal 2000 due to competition resulting from the price increase.
22
SEASONALITY
Our sales are moderately seasonal. We normally experience an increase in
net sales during the first and fourth quarters of each year, which is typical in
the pet food industry. Generally, cooler weather results in increased dog food
consumption.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective December 30, 2001, we adopted SFAS 142, which requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized. SFAS 142 further requires that the fair value of goodwill and other
intangible assets with indefinite lives be tested for impairment upon adoption
of this statement, annually and upon the occurrence of certain events, and be
written down to fair value if considered impaired. In the first quarter of
fiscal 2002, we reassessed the useful lives and residual values of all
intangible assets acquired in purchase business combinations which resulted in
no impact on our accompanying unaudited condensed consolidated financial
statements. As of June 29, 2002, we completed the required impairment tests of
goodwill and other intangible assets with indefinite lives and, based on the
results of the tests, determined no impairment to the carrying values of these
assets was needed. The adoption of SFAS 142 resulted in the elimination of
annual amortization expense related to goodwill and other intangible assets of
approximately $10.3 million, or $7.6 million net of income tax benefit. Our
results of operations in future periods could be adversely affected if our
goodwill and other intangible assets are determined to be impaired under SFAS
142. We will perform our annual impairment test of goodwill and other intangible
assets in the fourth quarter of 2002.
Effective December 30, 2001, we adopted FASB's Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment of Disposal of
Long-Lived Assets ("SFAS 144"), which requires that long-lived assets to be
disposed of by sale be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in discontinued
operations. SFAS 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS 144 as
of the beginning of fiscal 2002 had no material impact on our financial position
or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS 145"), which amends existing
authoritative pronouncements to make various technical corrections, clarify
meanings and describe their applicability under changed conditions. SFAS 145
requires gains and losses from the extinguishment of debt to be classified as
extraordinary items only if they meet the criteria of unusual or infrequent or
they meet the criteria for classification as an extraordinary item. SFAS 145
will be effective for us as of the beginning of fiscal 2003.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"), which addresses significant issues regarding the recognition, measurement
and reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for pursuant to
the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires companies to recognize costs associated with
exit or disposal activities when these costs are incurred rather than at the
date of a commitment to an exit or disposal plan. The scope of SFAS 146 also
includes costs related to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS 146 will be
effective for us as of the beginning of fiscal 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which may give rise to losses from adverse
changes in market prices and rates. Our market risks could arise from changes in
commodity prices, interest rates and foreign currency exchange rates.
23
Commodity price risk. We manage our commodity price risk associated with
market fluctuations by using derivative instruments for portions of our corn,
soybean meal, alternative proteins and natural gas purchases, principally
through exchange traded futures and options contracts. The terms of such
contracts are generally less than one year. During the term of a contract, we
balance positions daily with cash payments to or from the exchanges. At the
termination of a contract, we have the ability to settle financially or by
exchange for the physical commodity, in which case, we would deliver the
contract against the acquisition of the physical commodity. Our policy does not
permit speculative commodity trading. At September 28, 2002, we had open
commodity contracts with a fair value loss of $4.2 million.
Based upon an analysis we completed as of September 28, 2002 in which we
utilized our actual derivative contractual volumes and assumed a 5.0% adverse
movement in commodity prices, we determined the potential decrease in the fair
value of our commodity derivative instruments would be approximately $5.1
million, or $3.1 million net of deferred tax benefit.
Although we manage the price risk of market fluctuations by hedging
portions of our primary commodity product purchases, our results of operations
have been adversely affected in the past by these fluctuations and we cannot
assure you that in the future we will be successful or that our results of
operations will not be exposed to volatility in the commodity markets. The use
of futures contracts also reduces our ability to take advantage of short term
reductions in raw material prices. If one or more of our competitors is able to
reduce their production costs by taking advantage of any reductions in raw
material prices, we may face pricing pressures from these competitors and may be
forced to reduce our prices or face a decline in net sales either of which could
have a material adverse effect on our business, results of operations and
financial condition.
Our commodity derivative instruments are measured at fair value in our
unaudited condensed consolidated financial statements under SFAS 133. Our
results of operations have been adversely affected in the past by volatility in
commodity prices under the SFAS 133 fair value accounting of our commodity
derivative instruments and our results of operations may be adversely affected
in the future by SFAS 133 accounting.
Interest rate risk. We are exposed to market risk related to changes in
interest rates. We periodically use interest rate swap and cap contracts to
limit our exposure to the interest rate risk associated with our floating rate
debt, which totaled $342.7 million at September 28, 2002. Of that amount, $115.0
million of our floating rate debt was hedged by interest rate swap contracts and
$50.0 million was hedged by an interest rate cap contract. Changes in market
values of these financial instruments are highly correlated with changes in
market values of the hedged item both at inception and over the life of the
contract. Amounts received or paid under interest rate swap contracts and gains
and losses on interest rate cap contracts are recorded as interest income
(expense) in the accompanying unaudited condensed consolidated financial
statements included herein. Gains and losses on interest rate swap contracts are
recorded in accumulated other comprehensive income (loss) in the accompanying
unaudited condensed consolidated financial statements included herein. At
September 28, 2002, we had a cumulative unrealized loss on our interest rate
swap contracts of $3.2 million, or $2.0 million net of cumulative deferred tax
benefit.
Accordingly, our net income is affected by changes in interest rates.
Assuming a 100 basis point increase in interest rates on our current floating
rate debt and interest rate swap and cap contracts, our net income would
decrease by approximately $0.4 million and $1.8 million, or $0.3 million and
$1.1 million net of income tax benefit, for the three months and nine months
ended September 28, 2002, respectively. In addition, such a change would result
in a decrease of approximately $7.3 million in the fair value of our fixed rate
debt at September 28, 2002. In the event of an adverse change in interest rates,
we could take action to mitigate our exposure; however, due to the uncertainty
of these potential actions and their possible effects, our analysis assumes no
such actions. Furthermore, our analysis does not consider the effect of any
changes in the level of overall economic activity that may exist in such an
environment.
Foreign currency exchange risk. Our financial position and results of
operations are affected by foreign currency exchange rate fluctuations. Although
we have announced that we are reviewing the potential sale of our European pet
food business, we currently have European operations that sell pet food products
throughout Europe. In connection with our acquisition on May 10, 2000 of A/S
Arovit Petfood, which manufactures and sells throughout Europe a full range of
pet food products for dogs and cats, we funded a portion of the acquisition with
Euro-denominated debt and designated our Euro-denominated debt as a hedge of our
net investment in Europe.
24
Even upon the consummation of any sale of our European pet food business, we
would continue to have Euro-denominated debt outstanding and, therefore, will
continue to be exposed to foreign currency exchange risk. As of September 28,
2002, the cumulative translation adjustment for the net investment in our
foreign operations was a net gain of $9.0 million, which includes an unrealized
cumulative loss of $6.0 million for the translation of our Euro-denominated debt
to U.S. dollars. The cumulative translation adjustment is recorded in
accumulated other comprehensive income (loss) in the accompanying unaudited
condensed consolidated financial statements included herein.
We are exposed to foreign currency exchange risk arising from transactions
in the normal course of business in Europe. To mitigate the risk from foreign
currency exchange rate fluctuations in those transactions, we enter into foreign
currency forward contracts for the purchase or sale of a currency. Accordingly,
changes in market values of these financial instruments are highly correlated
with changes in the market values of the hedged items both at inception and over
the life of the contracts. Gains and losses on foreign currency forward
contracts are recorded in accumulated other comprehensive income (loss) in the
accompanying unaudited condensed consolidated financial statements included
herein. At September 28, 2002, we had no open foreign currency forward
contracts.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our disclosure controls
and procedures are designed to ensure that information required to be disclosed
in the reports that we file or submit under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer, after evaluating
the design and operation of our disclosure controls and procedures within 90
days of the filing date of this quarterly report, and based on their evaluation,
have concluded that these controls and procedures are effective.
Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect our
internal controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in our internal controls. As a
result, no corrective actions were required or undertaken.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
15.1 -- Independent Accountants' Review Report dated October 29,
2002, incorporated in Item 1 of this Form 10-Q.
(b) Reports on Form 8-K
A report on Form 8-K, dated August 7, 2002, was furnished pursuant to Item
9 of Form 8-K in connection with our issuance of a press release
announcing our second quarter results.
25
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
By: /s/ PHILIP K. WOODLIEF
-------------------------------
Philip K. Woodlief
Vice President, Finance and
Chief Financial Officer
By: /s/ STEPHEN P. HAVALA
-------------------------------
Stephen P. Havala
Corporate Controller and
Principal Accounting Officer
Date: November 12, 2002
26
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Douglas J. Cahill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Doane Pet Care
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ DOUGLAS J. CAHILL
-------------------------------------
Douglas J. Cahill
President and Chief Executive Officer
Doane Pet Care Company
27
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Philip K. Woodlief, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Doane Pet Care
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ PHILIP K. WOODLIEF
------------------------
Philip K. Woodlief
Vice President, Finance and Chief Financial Officer
Doane Pet Care Company
28