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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 (I.R.S 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of the last business day of the registrant's most recently completed
second fiscal quarter, the registrant had no common equity held by
non-affiliates.
As of February 20, 2003, the registrant had outstanding 1,000 shares of
common stock, all of which were held by its parent, Doane Pet Care Enterprises,
Inc.
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TABLE OF CONTENTS
PART I
Item 1. Business ........................................................................................... 1
Item 2. Properties.......................................................................................... 18
Item 3. Legal Proceedings................................................................................... 19
Item 4. Submissions of Matters to a Vote of Security Holders................................................ 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................... 20
Item 6. Selected Financial Data............................................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................... 34
Item 8. Financial Statements and Supplementary Data......................................................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................................ 36
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................. 37
Item 11. Executive Compensation.............................................................................. 40
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................................................... 43
Item 13. Certain Relationships and Related Transactions...................................................... 46
Item 14. Controls and Procedures............................................................................. 48
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 49
Signatures.................................................................................................... 53
Certification of Principal Executive Officer.................................................................. 54
Certification of Principal Financial Officer.................................................................. 55
Index to Financial Statements.................................................................................F-1
In this annual report on Form 10-K, "Doane," "the Company," "we," "us"
and "our" refer to Doane Pet Care Company and its subsidiaries, unless the
context indicates otherwise.
PART I
ITEM 1 -- BUSINESS
GENERAL
We are the largest manufacturer of private label pet food and the
second largest manufacturer of dry pet food overall in the United States. We are
also a leading manufacturer of private label pet food in Europe. We sell to over
600 customers around the world and serve many of the top pet food retailers in
the United States, Europe and Japan. We offer our customers a full range of pet
food products for both dogs and cats, including dry, semi-moist, wet, treats and
dog biscuits.
We categorize our sales into three product areas: (i) private label,
(ii) co-manufacturing and (iii) regional brands that we own. Our customers in
private label primarily include mass merchandisers, grocery chains, farm and
fleet companies and pet specialty stores. Our co-manufacturing customers include
the top five branded pet food companies in the world, for whom we produce and
package a portion of their products. A majority of our regional brand sales are
sold to the grocery and farm and fleet channels.
We have been the primary supplier of private label pet food to WalMart
Stores, Inc. since 1973 and have been a supplier to its Sam's Club division
since 1990. Collectively, we refer to them as Wal*Mart. We manufacture a wide
variety of products for Wal*Mart, including the majority of WalMart Stores,
Inc.'s top selling private label pet food brands, Ol' Roy and Special Kitty. Ol'
Roy is the number one selling brand of dry pet food in the United States by
volume. Our net sales to Wal*Mart accounted for 40%, 40% and 44% of our total
net sales for fiscal 2000, 2001 and 2002, respectively.
As the primary supplier of private label pet food to WalMart Stores,
Inc., we jointly developed a cost-effective direct store delivery program, which
we refer to as DSD, to address certain logistical issues associated with
distributing dry pet food. Due to its size, bulk and weight, dry pet food bags
are not easily transferable to individual stores from WalMart Stores, Inc.'s
distribution centers. As part of DSD, we serve as a just-in-time supplier to
WalMart Stores, Inc. for dry pet food, whereby we load customized, store
specific pallets on WalMart Stores, Inc.'s private fleet trailers. DSD allows
WalMart Stores, Inc. to bypass its own distribution centers for the delivery of
our products directly to its stores. DSD also allows WalMart Stores, Inc. to
utilize its fleet more efficiently by reducing backhaul miles, lowering working
capital and handling costs and increasing inventory turns. As a result of DSD,
our products are shipped directly to a majority of the 2,800 U.S. stores of
WalMart Stores, Inc. and we ship to these stores an average of two times per
week with one to two days of lead time.
Doane Pet Care Company is a Delaware corporation formed on September
22, 1995. Our principal executive offices are located at 210 Westwood Place
South, Suite 400, Brentwood, Tennessee 37027 and our telephone number is (615)
373-7774.
Doane Pet Care Enterprises, Inc., our parent corporation, was formed in
1995 by a group of private equity investors led by Summit Capital, Inc., DLJ
Merchant Banking Partners, L.P., J.P. Morgan Partners (BHCA), L.P. and certain
members of existing management to acquire our company, formerly known as Doane
Products Company. Our parent has no other material assets or activities other
than the ownership of our common stock.
RECENT DEVELOPMENTS
Refinancing
Senior note offering. On February 28, 2003, we issued $213.0 million
aggregate principal amount of 10-3/4% senior notes due 2010. Our senior notes
mature on March 1, 2010 and are guaranteed on a senior unsecured basis by each
of our domestic subsidiaries. See Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Refinancing."
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Use of proceeds. We used a portion of the net proceeds from the sale of
our senior notes to repay a portion of our senior credit facility and we intend
to use the remaining net proceeds to repay our sponsor facility in full, to the
extent all of the holders of promissory notes under our sponsor facility tender
their notes by March 17, 2003 or any subsequently extended expiration date. We
have no right to require the holders of promissory notes under our sponsor
facility to tender their notes prior to maturity. To the extent that one or more
holders of promissory notes under our sponsor facility do not tender their
promissory notes, we intend to use those proceeds to further reduce indebtedness
under our senior credit facility. Any promissory notes not repaid will remain
outstanding under their original terms. Unless the context otherwise provides,
the discussion in this annual report on Form 10-K assumes that all of the
holders of promissory notes under our sponsor facility tender their promissory
notes and that these promissory notes are paid in full with a portion of the net
proceeds from the sale of our senior notes.
Amendments to senior credit facility. In conjunction with the issuance
of our senior notes, we amended our senior credit facility, effective as of
February 28, 2003. The amendments provide for, among other things: (1) the
concurrent issuance of our senior notes and repayment of our sponsor facility;
(2) the repayment of a portion of the term loans under our senior credit
facility in order of forward maturity; (3) less restrictive covenants on capital
expenditures, investments and certain other activities; (4) the elimination of
certain financial covenants and the restructuring of other financial covenants;
(5) the elimination of the excess leverage fee; (6) the elimination of the fixed
rate debt percentage requirement; and (7) the permanent reduction in our
revolving credit facility from $75.0 million to $60.0 million.
For a further discussion of our refinancing and the amendments to our
senior credit facility, see Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Refinancing" and "-- Liquidity and Capital Resources -- Debt."
European Business
On October 15, 2002, we announced that we were reviewing the potential
sale of our European pet food business. On February 7, 2003, we announced that
we were no longer pursuing a sale of this business.
PRODUCTS AND SERVICES
We provide our customers with comprehensive pet food category
management services designed to expand each customer's pet food product lines
and to improve the category's profitability. Category management services
include:
- product development and testing;
- packaging design services; and
- pricing, formulation and marketing strategy in connection with
our customers' store brand programs.
Our store brand program involves the formulation and supply of a wide
variety of high quality pet food products, including dry, semi-moist, soft dry,
soft treats and dog biscuits as well as wet products in Europe. We believe that
these products are comparable in quality to competing branded pet food products,
except we offer them at a lower price. For our national branded customers, we
manufacture dry pet food, soft treats and dog biscuits to meet those customers'
specifications and quality standards. Our regional brands are generally
economically priced and marketed by our customers as a complement to their other
pet food offerings.
In the United States, we manufacture dry pet food under approximately
175 store brands, including Canine Club, Dura Life, Exceed, Hy Vee, Maxximum
Nutrition, NutraCare, Ol' Roy, Pathmark, Pet Club, PMI-Nutrition, Retriever, and
Special Kitty. Our regional brands, which include Country Prime, Kozy Kitten,
and TrailBlazer, allow our customers to broaden their product offerings. We also
offer Bonkers and Pet Lovers branded treats to our retailers. In Europe, we
manufacture pet food for over 150 customers.
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A description of each of our product lines is set forth below:
- Dry pet food (74% of our 2002 net sales). We are the second
largest manufacturer of dry pet food in the United States. We
produce, market and distribute a wide selection of high
quality dry pet food products, predominately for dogs and
cats. Our dry pet food product lines include high protein,
chunk style, premium-blended, puppy food, gravy style and
super premium meat inclusion products for dogs, and regular
and blended products for cats.
- Biscuits and treats (10% of our 2002 net sales). We are the
largest manufacturer of dog biscuits in the world and a
leading supplier of soft treats. Dog biscuits undergo a
different manufacturing process from dry pet food, which
primarily involves baking rather than the use of extruders.
- Wet, semi-moist and other (16% of our 2002 net sales). These
products are distinguishable from dry pet food based on their
higher moisture level content, the technology used to
manufacture such products and their higher packaging costs.
Europe has a much stronger market for wet products than the
United States. To meet this demand, we manufacture and sell
throughout Europe wet products in all forms, including chunks
and gravy, pate and loaf, and packages, such as cans, alucups
and pouches.
In addition to manufacturing pet food products, we maintain an in-house
engineering services group. Our engineering services group designs and builds
extruders, conveyors, dryers and other parts and equipment, including
replacement parts, for our pet food manufacturing facilities and, to a lesser
extent, for third parties. The engineering services group maintains repair staff
that service and repair machinery and equipment at our production facilities,
giving us the ability to make timely repairs and reduce downtime. Our in-house
engineers generally design and supervise plant construction, thereby reducing
plant construction costs and resulting in consistency in manufacturing processes
and quality control. We believe our engineering services group provides us with
services at a lower cost and more timely and efficiently than we could obtain
from third parties.
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.
SALES AND DISTRIBUTION
Our direct sales force seeks new customers and works directly with mass
merchandisers, membership clubs, farm and fleet stores, pet specialty stores and
grocery chains. We also use independent food brokers. We generate new business,
in part, through the expansion of our product lines and the development of new
marketing programs to existing customers.
A substantial amount of our products are distributed utilizing our
customers' transportation networks. Several of our largest customers utilize us
as a just-in-time supplier and maintain trailers at our manufacturing and
distribution facilities. Proximity to certain of our customers' distribution
centers and retail locations is a key consideration in deciding the location of
our manufacturing and distribution facilities and, we believe, is a significant
competitive advantage. Our customers' trailers can be loaded for shipment either
directly to individual stores or to their own distribution centers. Those
customers that have products shipped directly from our manufacturing and
distribution facilities to their retail stores are able to reduce their
inventory, freight and handling costs by avoiding shipment to their own
distribution centers. Those customers that use their own transportation fleet
are able to utilize their trucks that would otherwise be empty to backhaul a
load of pet food on return to their distribution center or directly to another
store.
For customers that do not utilize their own transportation fleet, we
provide transportation on a contract basis through common carriers or those
customers can arrange their own transportation. We do not own or operate any
transportation equipment.
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We provide vendor managed inventory fulfillment services for both
direct store and warehouse deliveries. We communicate on-line with our
customers' inventory management systems, evaluate their inventory levels and
place orders on their behalf to meet their just-in-time inventory requirements
and manage their inventory levels. We believe this provides our customers with a
significant competitive advantage, which includes shorter lead-time
requirements, higher inventory turns and reduced out-of-stock positions.
CUSTOMERS
We manufacture products for over 600 customers globally. Store brand
customers in the United States include mass merchandisers, such as Wal*Mart and
Costco, pet specialty stores, such as PetsMart, grocery chains, such as
Albertson's, Food Lion, Kroger, Publix, Royal Ahold and Safeway, and farm and
fleet stores, such as Tractor Supply, Mid-States and Purina Mills. In addition,
we manufacture products for many of the largest national branded pet food
companies in the United States. Our European customer base is similar to the
United States. We sell to many of the leading retailers, pet specialty stores
and farm and fleet outlets, as well as several branded customers.
Net sales to Wal*Mart accounted for 40%, 40% and 44% of our total net
sales for fiscal 2000, 2001 and 2002, respectively. We have been the primary
supplier of private label dry pet food products to WalMart Stores, Inc. since
1973 and to its Sam's Club division since 1990. We utilize a computerized order
and distribution system to ship products directly to substantially all domestic
Wal*Mart stores, a majority of which are located within 250 miles of one of our
facilities. We also offer direct delivery programs and electronic data
interchange systems to other customers who see these services as beneficial.
COMPETITION
The pet food industry is highly competitive. The companies that produce
and market the major national branded pet foods are national or international
conglomerates that are substantially larger than us and possess significantly
greater financial and marketing resources than us. Our store brand pet food
products compete for shelf space with national branded pet food products on the
basis of quality and price. In addition, certain national branded companies also
manufacture store brands. National branded products compete principally through
advertising to create brand awareness and loyalty. We experience some price
competition from national branded products. Significant price competition from
national branded products or considerably increased store brand presence by the
national branded manufacturers could adversely affect our operating results and
cash flows. We also compete with regional branded manufacturers and other
regional store brand manufacturers.
We believe we differentiate our company from the national branded pet
food manufacturers by offering comparable, lower-priced products tailored to
each retailer's needs. This provides retailers with the opportunity to increase
pet food category profitability and provides a destination purchase item in this
important consumer category. In addition, we believe we differentiate our
company from other store brand pet food manufacturers by offering higher quality
products and national production and distribution capabilities.
RAW MATERIALS AND PACKAGING
The principal raw materials required for our manufacturing operations,
which we purchase from large national commodity companies and local grain
cooperatives, are bulk commodity grains and foodstocks, including corn, soybean
meal, wheat middling, poultry meal, meat and bone meal, and corn gluten meal. We
generally purchase or lock-in prices on raw materials from one to 12 months in
advance. We purchase the raw material requirements of each of our manufacturing
facilities locally due to the high freight costs of transporting bulk commodity
products. As a result, raw material costs may vary substantially among our
manufacturing facilities due to the impact of local supply and demand and
varying freight costs. While we do not maintain long-term contracts with any of
our suppliers, we believe alternative suppliers are readily available. Our
European operations purchase similar raw materials noted above for the
manufacturing of dry pet food. Manufacturing of our wet food in Europe requires
fresh or frozen pork, beef and poultry products.
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. Our policy does
4
not permit speculative commodity trading. See Item 7A -- "Quantitative and
Qualitative Disclosures About Market Risk."
Packaging is a significant component of our material costs. We have
five main packaging suppliers in the United States and believe that additional
packaging suppliers are readily available. Approximately 40% of our packaging
requirements are covered by contracts with maturities through December 2003.
Our pricing strategy for pet food is based on the costs of raw
materials, packaging and certain other costs plus a conversion charge, which
includes a profit factor. We periodically adjust our prices based on
fluctuations in raw material and packaging costs. Future selling price increases
may not be acceptable to our customers in the event of increased material costs.
See "Risk Factors -- Risks Relating to Our Business Operations -- Increases in
the costs of raw materials, packaging and natural gas have in the past and may
in the future adversely affect our results of operations and reduce our ability
to service our debt obligations" and Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Inflation and
Changes in Prices."
RESEARCH AND DEVELOPMENT
We continuously strive to develop new and improved products and
processes. Our research and development department includes a full-time staff of
food technologists, chemists and companion animal nutritionists, a central
laboratory used for research and development, and quality control laboratories
at each of our production facilities. Our research and development team
formulates new recipes, comprised of raw materials, vitamins and minerals, and
tests the nutritional content of new products. We also use independent
commercial kennels and catteries for comparison taste tests with national
branded products to seek to achieve comparable digestibility and palatability
and to substantiate the nutritional claims of new products.
QUALITY ASSURANCE
We maintain a comprehensive program for qualifying new supplies,
testing raw materials for nutritional adequacy and screening to detect the
presence of bacteria and other harmful substances. We continuously test pet food
production at each of our plants by analyzing the finished pet food product
against specifications, formula and regulatory requirements. Packaging is
inspected for print quality, proper dimensions, construction and compliance with
labeling regulations.
ENVIRONMENTAL AND SAFETY MATTERS
We are subject to a broad range of federal, state, local and foreign
environmental laws and regulations, including those governing discharges to the
air and water, the storage of petroleum substances and chemicals, the handling
and disposal of solid or hazardous wastes and the investigation or remediation
of contamination arising from spills and releases. Failure to comply with these
laws and regulations may result in the assessment of administrative, civil and
criminal penalties, permit revocation and modification, performance of
investigatory or remedial activities, as well as, in certain instances, the
issuance of injunctions. We have not been subject to any material environmental
liabilities, and compliance of our business and operations with environmental
laws and regulations has not had a material adverse effect on our capital
expenditures, earnings, or competitive position. Environmental laws and
regulations have changed substantially over the years and we believe the trend
of more expansive and stricter environmental laws and regulations will continue.
While we believe we are in substantial compliance with applicable environmental,
safety and public health laws, there can be no assurance that additional costs
for compliance will not be incurred in the future or such costs will not be
material.
Our U.S. operations involve the use of aboveground and underground
storage tanks. Under applicable laws and regulations, we are responsible for the
proper use, maintenance and abandonment of regulated storage tanks that we own
or operate and for remediation of soils, groundwater and surface water impacted
by releases from such existing or abandoned aboveground or underground storage
tanks.
Our U.S. operations are also subject to laws and regulations governing
remediation, recycling or disposal. The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, also known as CERCLA or the "Superfund"
law, and analogous state laws impose liability, without regard to fault or the
legality of the original
5
conduct, on certain classes of persons who are considered statutorily
responsible for the release of a "hazardous substance" into the environment.
These persons include the owner or operator of a facility where a hazardous
substance release occurred and companies that disposed or arranged for the
disposal of hazardous substances. Persons who are or were responsible for the
releases of hazardous substances under CERCLA may be subject to joint, several
and retroactive liability for the costs of environmental response measures, and
natural resource damages, and it is not uncommon for neighboring landowners and
other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. We
also generate wastes that are subject to the federal Resource Conservation and
Recovery Act, also known as RCRA, and comparable state statutes. The U.S.
Environmental Protection Agency, or EPA, and various state agencies have limited
the approved methods of disposal for certain hazardous and nonhazardous wastes
and any future changes to such methods that are more rigorous or restrictive can
increase the operating and disposal requirements incurred by us as well as by
the industry in general. In the past, nearby industries have suffered releases
of hazardous substances to the environment that are the subject of CERCLA
investigations. It is possible that these neighboring environmental activities
may have impacted some of our properties. We have not been advised, nor do we
expect to be advised, by any environmental agency that we are considered a
potentially responsible party for the neighboring environmental conditions, and
we have no reason to believe that such conditions would have a material adverse
effect on our company.
We currently own or lease properties and through acquisitions in the
future could own or lease additional properties that, in some instances, have
been used for pet food manufacturing or feed mill operations for many years.
Although we have utilized operating and disposal practices that were standard in
the industry at the time, in some locations environmentally sensitive materials
were spilled or released on or under the properties owned or leased by us or on
or under other locations where such materials were taken for disposal. In
addition, many of these properties have been operated by third parties whose
use, handling and disposal of such environmentally sensitive materials or
similar wastes were not under our control. These properties and the waste
materials spilled, released or otherwise found thereon may be subject to CERCLA,
RCRA, and analogous state laws. Under such laws, we can be required to remove or
remediate previously spilled or released waste materials (including such
materials spilled or released by prior owners or operators) or property
contamination (including groundwater contamination caused by prior owners or
operators), or to perform monitoring or remedial activities to prevent future
contamination (including releases from previously operated underground storage
tanks or existing aboveground bulk petroleum storage facilities). It is possible
that we could incur additional environmental response costs in the future at
existing manufacturing facilities or at other sites where waste material impacts
resulting from historical or ongoing operations may be identified.
Our U.S. operations are also subject to the federal Clean Water Act and
analogous state laws relating to the discharge of pollutants to state and
federal waters. These laws also regulate the discharge of stormwater in process
areas. Local sewerage authorities have established regulations governing
connections to and discharges into their sewer systems and treatment plants.
Pursuant to these laws and regulations, we are required to obtain and maintain
approvals or permits at a number of our facilities for the discharge of our
wastewater and stormwater and develop and implement spill prevention control and
countermeasure plans, also referred to as "SPCC" plans, in connection with
on-site storage of greater than threshold quantities of oil. As part of the
regular overall evaluation of our ongoing operations, we are updating the
stormwater discharge permitting coverage at certain of our facilities. Moreover,
from time to time, we are required to make capital improvements or make certain
operational upgrades at certain of our facilities to assure compliance with
regulatory and permit conditions relating to our wastewaters discharged offsite
as well as our other operating activities. In July 2002, the EPA issued a
revised SPCC rule, whereby SPCC plans are subject to more rigorous review and
certification procedures. While the EPA has delayed the effect of the revised
SPCC rule by at least 60 days, to April 17, 2003, this rule nevertheless will
require us to make certain expenditures to update our SPCC plans at certain of
our facilities where the plans are required. Failure to comply with these laws,
regulations and permit conditions may result in the imposition of
administrative, civil and criminal penalties. We believe that our operations are
in substantial compliance with the Clean Water Act and analogous state and local
requirements, and that the installation of any wastewater discharge capital
improvements will not have a material adverse effect on our operations or
financial position.
6
Our U.S. operations are subject to the federal, state and local
requirements pertaining to air emissions. We have been required from time to
time to install air emission control or odor control devices to satisfy
applicable air requirements. It is possible that in the future, additional air
emission or odor control devices may be required to be installed at facilities
of ours as deemed necessary to satisfy existing or future requirements.
The manufacturing and marketing of our products in the United States
are subject to regulation by federal regulatory agencies, including the
Occupational Safety and Health Administration, the Food and Drug Administration
and the Department of Agriculture, and by various state and local authorities.
The Food and Drug Administration also regulates the labeling of our products.
Substantial administrative, civil and criminal penalties may be imposed for
violations of Occupational Safety and Health Administration, Food and Drug
Administration and Department of Agriculture regulations, and violations may be
restrained through injunction proceedings. We procure and maintain the necessary
permits and licenses to operate our U.S. facilities and consider our company to
be in material compliance with applicable Occupational Safety and Health
Administration, Food and Drug Administration and Department of Agriculture
requirements.
Our manufacturing, distributing and other operating facilities outside
of the United States are potentially subject to similar foreign governmental
controls and restrictions pertaining to the environment, safety, and public
health. Among the controls and restrictions imposed on our facilities outside of
the United States are requirements for obtaining necessary environmental
permits, cleanup of subsurface conditions beneath our facilities arising from
primarily historical operations, control of odors resulting from our operations,
limitation of pollutants that are contained in wastewater effluent discharged or
otherwise transported from our facilities, and development and implementation or
upgrading of environmental management systems at our facilities to assure
compliance with applicable laws and regulations.
We believe our U.S. and foreign operations are in compliance in all
material respects with applicable current environmental, safety and public
health laws and regulations; nevertheless, those laws and regulations may change
in the future and we may incur significant costs in the future to comply with
those laws and regulations or in connection with the effect of these matters on
our business.
TRADEMARKS
Certain of our brands are protected by trademark registrations in the
United States and in certain foreign markets. We believe our registered
trademarks are adequate to protect such brand names.
EMPLOYEES
As of February 1, 2003, our global workforce consisted of 2,707
employees. We had 1,853 employees in the United States and 854 employees in
Europe, comprised of 743 management and administrative personnel and 1,964
manufacturing personnel. Of our workforce, 359 employees are represented by
labor unions at four of our U.S. plants. The collective bargaining agreement
with the Muscatine, Iowa plant covered 51 employees as of December 28, 2002 and
expires on December 4, 2003. The collective bargaining agreement with the
Hillburn, New York plant covered 33 employees as of December 28, 2002 and
expires on May 1, 2004. The collective bargaining agreement with the Birmingham,
Alabama plant covered 77 employees as of December 28, 2002 and expires on
January 22, 2005. The collective bargaining agreement with the Joplin, Missouri
plant covered 198 employees as of December 28, 2002 and expires on February 4,
2006. We consider relations with our employees to be satisfactory.
FOREIGN OPERATIONS
For a discussion of our segment data relating to our United States
(domestic) and European (international) operations, see Note 20 -- "Segment
Data" to our accompanying audited consolidated financial statements included
herein.
FORWARD-LOOKING STATEMENTS
Certain of the statements in this annual report on Form 10-K are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended.
7
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 appear in a number of places and include statements regarding
our plans, beliefs or current expectations, including those plans, beliefs and
expectations of our officers and directors, with respect to, among other things:
- 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
the financial covenants relating to our senior credit
facility;
- our future financial condition or results of operations;
- our business strategies and other plans and objectives for
future operations;
- general economic and business conditions;
- business opportunities that may be presented to and pursued by
us from time to time;
- our exposure to, and our ability to manage, our market risks;
- the impact of existing or new 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,
future investment returns on our pension plans, changes in laws and regulations,
adverse changes in operating performance, adverse economic conditions and other
factors described under "-- Risk Factors" below.
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.
RISK FACTORS
RISKS RELATING TO OUR INDEBTEDNESS
Our level of indebtedness could negatively impact our financial condition,
results of operations and business prospects and prevent us from fulfilling our
debt service obligations.
At December 28, 2002, we had $554.0 million of indebtedness
outstanding, including $355.9 million of debt under our senior credit facility
and $148.4 million of debt under our senior subordinated notes. In addition, we
had $42.5 million of availability out of a total availability of $60.0 million
under the revolving credit facility portion of our senior credit facility. On
February 28, 2003, we issued $213.0 million aggregate principal amount of senior
8
unsecured notes due 2010. We will be permitted to incur additional indebtedness
in the future if we meet certain requirements in our senior credit facility and
the indentures governing our senior notes and senior subordinated notes. Our
ability to meet future debt service obligations will be dependent upon our
future performance, which is subject to general economic conditions and to
financial, business and other factors affecting our operations, many of which
are beyond our control.
Our level of indebtedness could have important consequences on our
operations, including:
- making it more difficult for us to satisfy our debt service
obligations which, if we fail to comply with the requirements
of any of our debt, could result in an event of default;
- requiring us to dedicate a substantial portion of our cash
flow from operations to make repayments on debt, thereby
reducing the availability of cash flow for working capital,
capital expenditures, acquisitions and other general business
activities;
- limiting our ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions
and other general business activities;
- limiting our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate;
- making us vulnerable to fluctuations in interest rates because
indebtedness under our senior credit facility is subject to
variable interest rates;
- detracting from our ability to withstand successfully a
downturn in our business or the general economy; and
- placing us at a competitive disadvantage against other less
leveraged competitors.
Our debt agreements limit certain business activities and could materially
affect our operations.
Our senior credit facility and the indentures governing our senior
notes and senior subordinated notes limit our ability to take a number of
actions that we may otherwise desire to take, including:
- incurring additional indebtedness;
- incurring liens;
- paying dividends or making other restricted payments;
- selling assets;
- entering into transactions with affiliates;
- merging or consolidating with any other entity;
- disposing of substantially all of our assets; or
- entering into certain lines of business.
In addition, our senior credit facility requires us to maintain
specified financial ratios and satisfy certain financial condition tests. Our
ability to meet these financial ratios and tests can be affected by events
beyond our control, such as prevailing economic, financial or industry
conditions, and we may not be able to meet these ratios or tests. We
9
have experienced difficulty in the past satisfying the financial covenants in
our senior credit facility and sought waivers from our lenders for fiscal 2000
and 2001. Our senior credit facility, including these financial covenants, was
amended effective February 28, 2003 concurrently with the sale of our senior
notes. If we violate these amended covenants and are unable to obtain waivers
from our lenders, we could be in default and our lenders may accelerate our
debt, and we would not be able to draw upon additional availability under our
senior credit facility to meet our liquidity needs.
If we are unable to generate sufficient operating cash flows in the
future to service our indebtedness, to comply with financial covenants and to
meet other commitments, we may be required to take certain actions, such as
selling material assets or operations, reducing or delaying capital
expenditures, or revising or delaying our strategic plans. We may not be able to
take any of these actions on a timely basis or on satisfactory terms or take
actions that would enable us to continue to satisfy our capital requirements.
Certain of these actions may be prohibited by the indentures governing our
senior notes and senior subordinated notes or require the consent of the lenders
under our senior credit facility.
Our senior notes and the related guarantees are effectively subordinated to all
of our secured debt, including the debt under our senior credit facility, and if
a default occurs, we may not have sufficient funds to fulfill our obligations
under our senior notes.
Our senior notes and the related guarantees of these notes are not
secured by any of our assets and, therefore, are effectively subordinated to all
of our senior secured debt as well as any secured debt of our subsidiary
guarantors to the extent of the value of the assets securing that debt. We have
pledged substantially all of our assets as collateral to secure our indebtedness
under our senior credit facility. At December 28, 2002, we had $355.9 million of
secured indebtedness under our senior credit facility to which our senior notes
and the related guarantees would have been effectively subordinated as a result
of liens granted by us. We also have secured indebtedness under our industrial
development revenue bonds and our foreign debt. We and our subsidiary guarantors
may also incur additional secured indebtedness in the future.
In the event of our bankruptcy, liquidation, reorganization or other
winding up, our assets that secure our secured indebtedness will be available,
if at all, to pay obligations on our senior notes only after all secured
indebtedness has been repaid in full from those assets. Likewise, because our
obligations under our senior credit facility are secured obligations, our
failure to comply with the terms of our senior credit facility would entitle
those lenders to foreclose on substantially all of our assets that serve as
their collateral. In this event, these lenders would be entitled to be repaid in
full from the proceeds of the liquidation of those assets before those assets
would be available for distribution to other creditors, including holders of our
senior notes. Holders of our senior notes will share in our remaining assets, if
any, ratably with all holders of our unsecured indebtedness that is deemed to be
of the same class as our senior notes, and potentially with all of our other
general creditors. There may not be sufficient assets remaining to pay amounts
due on any or all of our senior notes then outstanding. The guarantees of our
senior notes will similarly be subordinated to secured indebtedness of the
guarantors.
Our senior notes and senior subordinated notes are structurally subordinated to
all indebtedness of our subsidiaries that are not guarantors of the applicable
notes.
Holders of our senior notes and senior subordinated notes will not have
any claim as a creditor against our subsidiaries that are not guarantors of the
applicable notes, and indebtedness and other liabilities, including trade
payables, whether secured or unsecured, of those subsidiaries will effectively
be senior to these holders' claims against the assets of those subsidiaries. All
obligations owed by our non-guarantor subsidiaries would have to be satisfied
before any of the assets of these subsidiaries would be available for
distribution, upon a liquidation or otherwise, to us or a subsidiary that is a
guarantor of our senior notes or senior subordinated notes. Our non-guarantor
subsidiaries are currently the same for both our senior notes and senior
subordinated notes. Our non-guarantor subsidiaries represented 22% of our net
sales and 19% of our operating income for fiscal 2002. At December 28, 2002, our
non-guarantor subsidiaries represented 32% of our total assets (after
eliminations), and had
10
$65.3 million of total liabilities. This amount of total liabilities excludes
$160.4 million of intercompany obligations owed to our guarantor subsidiaries.
These non-guarantor subsidiaries may incur additional indebtedness in the
future.
Our senior subordinated notes are subordinated in right of payment to all of our
existing and future senior indebtedness.
Our senior subordinated notes are general unsecured obligations and
subordinated in the right of payment to all of our existing and future senior
indebtedness, including all indebtedness under our senior credit facility,
sponsor facility and senior notes. At December 28, 2002, we had $405.6 million
of senior indebtedness outstanding. On February 28, 2003, we issued $213.0
million aggregate principal amount of senior notes. As a result of the
subordination, the holders of any senior indebtedness must be paid in full
before the holders of our senior subordinated notes in the event of the
insolvency, liquidation, reorganization, dissolution or other winding-up of our
company or upon a default in payment with respect to, or the acceleration of,
any senior indebtedness. If we incur any additional indebtedness that is on an
equal basis with the senior subordinated notes, the holders of that debt would
be entitled to share on an equal basis with the holders of our senior
subordinated notes in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other winding-up of our
company. This may have the effect of reducing the amount of proceeds paid to
holders of our senior subordinated notes. In addition, we cannot make cash
payments with respect to our senior subordinated notes during a payment default
with respect to senior indebtedness and, under certain circumstances, no
payments may be made with respect to the principal of, and premium, if any, on
our senior subordinated notes for a period of up to 179 days if a non-payment
default exists with respect to designated senior indebtedness.
Our obligations, which mature prior to the maturity of our senior notes, to
repay the outstanding principal on our senior subordinated notes and on a
portion of our foreign debt and to redeem our senior preferred stock and a
portion of our industrial development revenue bonds could adversely affect our
ability to satisfy our obligations under our senior notes.
At December 28, 2002, we had outstanding $148.4 million of our senior
subordinated notes due 2007, with a face value of $150.0 million, and $77.6
million of our senior preferred stock due 2007. The outstanding principal on our
senior subordinated notes matures on May 15, 2007. Our senior preferred stock
has a mandatory redemption date of September 30, 2007. We also have outstanding
industrial development revenue bonds, a portion of which may be subject to
mandatory redemption prior to the maturity of our senior notes, and we have
outstanding foreign debt that matures by 2008.
Our senior notes do not mature until 2010, after these other
obligations mature. As a consequence, our payment of these other obligations may
make it more difficult for us to pay interest due on our senior notes or to
repay the outstanding principal on our senior notes at maturity in 2010. In
addition, if we are unable to satisfy the obligations on our senior subordinated
notes, we would be in default under the indenture governing those notes, which
may result in an event of default under any credit facility then in effect,
possibly allowing the lenders thereunder to accelerate the outstanding debt.
Moreover, all of the subsidiary guarantors of our senior notes are also
guarantors of our senior subordinated notes. Accordingly, if we failed to pay
the senior subordinated notes at maturity, these subsidiary guarantors would be
required to satisfy our payment obligation, possibly making it more difficult
for the guarantors to satisfy any obligations under their guarantees of our
senior notes. Our sponsor facility matures on March 31, 2007. To the extent that
holders of promissory notes under our sponsor facility do not tender their
promissory notes in connection with our sale of senior notes, those promissory
notes would mature prior to our senior notes, which could similarly adversely
affect our ability to satisfy our obligations under our senior notes.
Even if a transaction constitutes a change of control that would obligate us to
offer to repurchase our senior notes, senior subordinated notes or senior
preferred stock, we may not be able to satisfy our obligation to repurchase
these securities.
Upon the occurrence of certain change of control events, holders of our
senior notes, senior subordinated notes and shares of senior preferred stock may
require us to offer to repurchase all or part of their securities. However,
certain important corporate events, such as leveraged recapitalizations that
would increase the level of our indebtedness and transactions that do not
involve a sufficient change in voting power or beneficial ownership, would
11
not constitute a "change of control." Even if a transaction constitutes a change
of control, we may not have sufficient funds at the time of the change of
control to make these required repurchases. Additionally, restrictions in our
senior credit facility may not allow such repurchases and certain events that
would constitute a change of control as defined in the indentures governing our
senior notes and senior subordinated notes or the certificate of designations
governing our senior preferred stock would constitute an event of default under
our senior credit facility. That event would, if it should occur, permit the
lenders to accelerate the debt outstanding under our senior credit facility and
that, in turn, would cause an event of default under the indentures governing
our senior notes and senior subordinated notes.
The source of funds for any repurchase required as a result of any
change of control will be our available cash or cash generated from our
operations or other sources, including borrowings, sales of assets, sales of
equity or funds provided by a new controlling entity. We may not have sufficient
available funds at the time of any change of control to make any required
repurchases of our notes or shares of senior preferred stock tendered and to
repay debt under our senior credit facility. Furthermore, using available cash
to fund the potential consequences of a change of control may impair our ability
to obtain additional financing in the future. Any future credit agreements or
other agreements relating to debt to which we may become a party will most
likely contain similar restrictions on our ability to repurchase our notes and
other securities upon a change of control.
A guarantee of our senior notes or senior subordinated notes could be voided or
subordinated because of federal bankruptcy law or comparable state law
provisions.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, one or more of the guarantees of our senior notes or
senior subordinated notes could be voided, or claims in respect of a guarantee
could be subordinated to all other debts of that guarantor if, among other
things, the guarantor, at the time it incurred the indebtedness evidenced by its
guarantee received less than reasonably equivalent value or fair consideration
for the incurrence of such guarantee; and
- was insolvent or rendered insolvent by reason of such
incurrence;
- was engaged in a business or transaction for which the
guarantor's remaining assets constituted unreasonably small
capital; or
- intended to incur, or believed that it would incur,
indebtedness beyond its ability to pay such debts as they
mature.
In addition, any payment by that guarantor pursuant to its guarantee
could be voided and required to be returned to the guarantor or to a fund for
the benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer
laws will vary depending upon the law applied in any proceeding to determine
whether a fraudulent transfer has occurred. Generally, however, a guarantor
would be considered insolvent if:
- the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all of its assets;
- the present fair saleable value of its assets was less than
the amount that would be required to pay its probable
liability on its existing debts, including contingent
liabilities, as they become absolute and mature; or
- it could not pay its debts as they become due.
A court may apply a different standard in making these determinations.
12
RISKS RELATING TO OUR BUSINESS OPERATIONS
One of our customers accounts for a substantial portion of our revenue and the
loss of this customer would have a material adverse effect on our results of
operations and reduce our ability to service our debt obligations.
Net sales to Wal*Mart accounted for 40%, 40% and 44% of our total net
sales for fiscal 2000, 2001 and 2002, respectively. We do not have a long-term
contract with Wal*Mart. A significant decrease or change in business from
Wal*Mart would have a material adverse effect on our results of operations,
financial condition and cash flows. In addition, our results of operations and
ability to service our debt obligations would be negatively impacted to the
extent that Wal*Mart is unable to make payments or does not make timely payments
on outstanding accounts receivable.
We rely on a small number of customers, certain of which are able to make
greater demands of us.
We rely on a small number of customers to generate a substantial
portion of our net sales. As a result of the leading market positions of many of
our customers, they are able to exert pressure on us with respect to pricing,
promotions, new product introductions and other services that may affect our
results of operations. For our private label and co-manufactured business, we
rely on the strength of brands not owned by us and on the willingness of the
owners of such brands to promote them to increase sales volume. Our net sales
and results of operations may be increasingly sensitive to a deterioration in
the financial condition of, or other adverse developments with, one or more of
our customers.
Increases in the costs of raw materials, packaging and natural gas have in the
past and may in the future adversely affect our results of operations and reduce
our ability to service our debt obligations.
Our financial results depend to a large extent on the costs of raw
materials, packaging and natural gas, 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 outbreaks on protein sources
and the potential effect on supply and demand as well as weather conditions
during the growing and related 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. Our results of operations have in the past been adversely
affected by volatility in the commodity and natural gas market and our results
of operations may be adversely affected in the future by this volatility. See
Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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. 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 price increases implemented by us may adversely affect the volumes
of future purchases from our customers.
Volatility in the commodity markets has in the past and may in the future
adversely affect our results of operations.
We seek to 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.
13
At December 28, 2002, we had open commodity contracts with a fair value
loss of $5.7 million. Although we seek to 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 they may in the future. Our results of operations may be
exposed to volatility in the commodity markets. See Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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.
Effective January 1, 1999, our commodity derivative instruments were
measured at fair value in our consolidated financial statements under Financial
Accounting Standards Board's, or FASB's, Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
or 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. See Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Restrictions imposed in reaction to outbreaks of "mad cow disease" and
"foot-and-mouth disease" could adversely impact the cost and availability of our
raw materials.
In the fourth quarter of fiscal 2000, the cost of our raw materials was
impacted by the publicity surrounding Bovine Spongiform Encephalopathy, or BSE,
in Europe, which is a terminal brain disease of cattle. BSE is also known as
"mad cow disease" and is generally believed to be caused by accumulation of
abnormal prions (proteins found in the brain that are transmitted by ingestion
of infected brains and spinal cord materials) found in cattle feed protein
supplements. As a result of the global publicity and restrictions imposed to
provide safeguards against the disease, the cost of alternative sources for our
raw material proteins, such as soybeans, increased significantly in the fourth
quarter of fiscal 2000. We can provide no assurance that BSE, or resulting
regulations or publicity, will not impact either the cost or availability of our
raw materials in the future. The risk of higher costs and/or supply disruption
would be significant if restrictions are placed on the use of meat and bone meal
in pet food.
In the first quarter of fiscal 2001, there was an outbreak of
foot-and-mouth disease, or FMD, in Europe. FMD affects animals with cloven
hooves, such as cattle, swine, sheep, goats, and deer. While FMD is not
considered a threat to humans, people who come in contact with the virus can
spread it to animals. Our operations could be adversely affected if the disease
were to spread throughout Europe or to the United States.
If BSE or FMD impacts the availability of our raw materials, we would
be required to locate alternative sources for our raw materials. We can give no
assurance that those sources would be available to sustain our volume sales or
that these alternative sources would not be more costly. If BSE or FMD impacts
the cost of our raw materials, or the cost of alternative raw materials compared
to current costs, we would be required to increase the sales price for our
products to avoid margin deterioration. We can give no assurance of the timing
or extent of our ability to implement future price adjustments in the event of
higher costs.
Our acquisition activities, including integration, operation and management of
these businesses, may not be successful or may subject us to losses.
Any acquisition we may pursue would be based on identifying and
acquiring businesses engaged in manufacturing and distributing pet food products
in markets where we currently do not operate or businesses with products that
would complement our product mix. Our lack of experience in new markets we may
enter through future acquisitions could have an adverse effect on our results of
operations and financial condition. Acquisitions may require investment of
operational and financial resources and could require integration of dissimilar
operations, assimilation of new employees, diversion of management time and
resources, increases in administrative costs, potential loss of key employees of
the acquired company and additional costs associated with debt or equity
financing. Acquisitions may also result in losses associated with discontinued
operations. For example, we
14
recognized a net loss of $4.7 million in connection with our divestitures in
2001 of our Perham, Minnesota facility and our Deep Run domestic wet pet food
business, both of which we acquired in our Windy Hill acquisition.
We may encounter increased competition for acquisitions in the future,
which could result in acquisition prices we do not consider acceptable. We may
not have sufficient available capital resources to execute potential
acquisitions, and our ability to enter into acquisitions may be limited by our
senior credit facility and our indentures. We may not find suitable acquisition
candidates at acceptable prices or succeed in integrating any acquired business
into our existing business or in retaining key customers of acquired businesses.
Our operating results and financial condition could be materially and
adversely affected if any of the following occur:
- the expected operating efficiencies from the acquisitions do
not materialize;
- we fail to successfully integrate the acquisitions into our
existing operations; or
- the cost of the acquisition integrations exceeds expectations.
The amount of goodwill and other intangible assets we have recorded from our
acquisitions may not be realized, which could have a material adverse effect on
our results of operations and reduce our ability to service our debt
obligations.
At December 28, 2002, we had $363.1 million of goodwill and trademarks,
net of accumulated amortization. Goodwill has been recorded under the purchase
accounting method to represent the excess of the amount paid over the fair value
of the assets acquired and liabilities assumed. The assets associated with our
goodwill and trademarks may not be realized by us in the future. Goodwill and
trademarks represented 42% of our total assets as of December 28, 2002. Through
December 29, 2001, we amortized our goodwill over 20 and 40 years and trademarks
over 30 years.
Effective December 30, 2001, we adopted FASB's Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS 142,
which requires that goodwill and other intangible assets with indefinite lives
no longer be amortized. Our only intangible asset with an indefinite useful life
other than goodwill is our trademarks. 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 our intangible assets acquired in purchase business combinations
and our intangible assets having estimable useful lives that are classified in
other assets on our consolidated balance sheets, which resulted in no impact on
our accompanying audited consolidated financial statements. During the second
quarter of fiscal 2002, we completed the required transitional 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 existed as of our adoption date for SFAS 142 on December 30, 2001. In the
fourth quarter of fiscal 2002, we performed our required annual assessment of
impairment and determined no such impairment was evident. The adoption of SFAS
142 resulted in the elimination of annual amortization related to goodwill and
trademarks. In fiscal 2001, such amortization was $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 face significant competition from national, regional and store brand
manufacturers, many of whom are larger than we are and have significantly
greater resources than we do.
The pet food industry is highly competitive. The companies that produce
and market the major national branded pet foods are national or international
conglomerates that are substantially larger than us and possess significantly
greater financial and marketing resources than us. Our store brand pet food
products compete for shelf space with national branded pet food products on the
basis of quality and price. In addition, certain national branded manufacturers
also manufacture store brands. National branded products compete principally
through advertising to
15
create brand awareness and loyalty. We experience some price competition from
national branded products. To the extent significant price competition from
national branded products exists or the national branded manufacturers
significantly increase their store brand presence, our operating results and
cash flows could be adversely affected. We also compete with regional branded
manufacturers and other store brand manufacturers.
A portion of our revenues is derived from our international operations, which
subject us to additional business, economic and political risks and could limit
our ability to successfully carry out our business strategy.
We operate a portion of our business and market products
internationally. As of December 28, 2002, we sold our products in more than 30
countries. We have facilities in Austria, Denmark, the United Kingdom, Italy,
Spain and Russia. In fiscal 2002, our foreign subsidiaries had net sales of
$195.1 million, or 22% of our total net sales, with the majority of these sales
in Europe. We are, therefore, subject to the risks customarily attendant to
international operations and investments in foreign countries.
We currently have foreign currency exposures relating to buying,
selling and financing in currencies other than our functional currencies. We
have Euro-denominated debt outstanding and, therefore, are exposed to foreign
currency exchange risk. We also have foreign currency exposure related to
foreign denominated revenues and costs translated into U.S. dollars. These
exposures are primarily concentrated in the Euro, the Danish Krona and British
Pound Sterling. Fluctuations in foreign currency exchange rates may affect the
results of our operations and the value of our foreign assets, which in turn may
adversely affect reported earnings and the comparability of period-to-period
results of operations. Management of our foreign currency exposure may not
protect us from fluctuations in foreign currency exchange rates. Fluctuations in
foreign currency exchange rates could have a material adverse effect on our
business, results of operations and financial condition.
Other risks include:
- import and export license requirements;
- trade restrictions;
- foreign tax laws, tariffs, and other foreign laws and
regulations;
- limitation on repatriating earnings back to the United States;
- difficulties in staffing and managing international
operations;
- nationalization;
- expropriation;
- restrictive actions by local governments;
- war and civil disturbance; and
- disruptions or delays in shipments.
Any of these events could have an adverse effect on our operations in
foreign countries. Interruption of our international operations could have a
material adverse effect on our financial condition and results of operations.
If we lose certain key personnel or are unable to hire additional qualified
personnel, we may not be successful.
Our success depends, in part, upon the continued services of our highly
skilled personnel involved in management, production and distribution, and, in
particular, upon the efforts and abilities of our executive
16
management group. If we lose the service of any of the members of our executive
management group, the loss could have a material adverse effect on our business,
financial condition and results of operations. We do not have key person life
insurance covering any of our employees. Our success also depends upon our
ability to attract and retain highly qualified employees.
We are subject to extensive regulation, and our compliance with existing or
future laws and regulations or making any product recalls pursuant thereto could
cause us to incur substantial expenditures.
We are subject to a broad range of federal, state, local and foreign
laws and regulations intended to protect the public health and the environment,
including those governing discharges to the air and water, the storage of
petroleum substances and chemicals, the handling and disposal of solid or
hazardous wastes and the remediation of contamination associated with releases
of wastes or hazardous substances. Our U.S. operations are also subject to
regulation by the Occupational Safety and Health Administration, the Food and
Drug Administration, the Department of Agriculture and by various state and
local authorities regarding the processing, packaging, storage, distribution,
advertising and labeling of our products, including food safety standards. Our
foreign operations are subject to similar environmental and safety laws and
regulations that are enforced by governmental agencies, such as the European
Commissioner of Foods, which is the controlling body of the European Union. The
European Union is taking a much stronger role in both the regulation of raw
materials for manufacturing and the labeling of pet food. The European
Commissioner of Food is overseeing this movement towards heightened regulation
of pet food. Violations of any of these laws and regulations may result in
administrative, civil or criminal penalties being levied against us, permit
revocation or modification, performance of environmental investigatory or
remedial activities, or a cease and desist order against operations that are not
in compliance. See "Business -- Environmental and Safety Matters." On October
30, 1998, we initiated a voluntary product recall for certain dry dog food
manufactured at our Temple, Texas plant. The cost of the product recall was not
covered by insurance and we recognized a $3.0 million product recall charge in
the fourth quarter of fiscal 1998.
These laws and regulations may change in the future and we may incur
material costs in the future to comply with current or future laws and
regulations or to effect future recalls. These matters may have a material
adverse effect on our business.
The board of directors of Doane Pet Care Enterprises, Inc., our parent company,
and our board of directors are controlled by certain stockholders and their
interests may be different than those of our noteholders.
Doane Pet Care Enterprises, Inc., our parent company, is a holding
company with no operations. We are its sole operating subsidiary. In connection
with our acquisition of Windy Hill Pet Food Company, Inc. in August 1998, we,
Summit/DPC Partners, L.P., Summit Capital, Inc., Chase Manhattan Investment
Holdings, Inc. (predecessor to J.P. Morgan Partners (BHCA), L.P.) and an
affiliate thereof, DLJ Merchant Banking Partners, L.P. and certain of its
affiliates, all of Windy Hill's former stockholders, and certain other
stockholders of Doane Pet Care Enterprises, Inc. entered into an investors'
agreement. The investors' agreement contains provisions providing certain of
these parties with board designation rights. The holders of our senior preferred
stock also have the right to elect two additional directors to our board of
directors in certain circumstances. On November 7, 2002, the holders of our
senior preferred stock elected two directors to our board. Through their control
of the boards of directors of Doane Pet Care Enterprises, Inc. and our company,
these investors will be able to control our policies, management and affairs and
to effectively prevent or cause a change in our control. Each of our significant
stockholders, together with its affiliates, has other business interests and
activities in addition to its ownership interest in us. It is possible that the
significant stockholders may exercise their control in ways that serve their
individual interests but do not serve the best interests of our other
stockholders or our noteholders. It is also possible that conflicts or
disagreements among the stockholders may make it difficult for us to take action
important to the achievement of our goals.
We may be subject to work stoppages at our facilities or those of our principal
customers, which could adversely impact the profitability of our business.
A portion of our global work force is unionized. If our unionized
workers were to engage in a strike, work stoppage or other slowdown in the
future, we could experience a significant disruption of our operations, which
could have a material adverse effect on us. Furthermore, organizations
responsible for shipping our products may be impacted by strikes staged by the
unions representing transportation employees. Any interruption in the delivery
of
17
our products could have a material adverse effect on us.
If the investments in our pension plans do not perform as expected, we may have
to contribute additional amounts to the plans.
We maintain a non-contributory pension plan covering hourly and
salaried workers of a predecessor company. The plan was frozen in 1998 and, as a
result, future benefits no longer accumulate and our annual service cost ceased
as of that date. Our only active plan covers 46 union employees at one facility.
Due to a decline in the market value of these plans' assets in 2002 and the
decline of interest rates used in discounting benefit liabilities, the pension
assets at the end of 2002 were $1.1 million less than the accumulated benefit
obligations. Under FASB's Statement on Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, or SFAS 87, we were required to record a
balance sheet adjustment during the 2002 fourth quarter for the minimum pension
liability. The non-cash adjustment was a reduction of $9.1 million, or $5.6
million net of deferred tax benefit, in accumulated other comprehensive income
(loss) in the accompanying audited consolidated financial statements included
herein. Under federal law, we were not required to make any cash contributions
to the inactive plan in fiscal 2000 through 2002 and do not expect to make any
cash contribution in fiscal 2003. Our contributions to the active plan in fiscal
2000 through 2002 were less than $0.1 million each year and we expect to
contribute less than $0.1 million in 2003. However, if underperformance of the
plans' investments continues, we may be required in the future to contribute
additional funds to ensure that the pension plans will be able to pay out
benefits as scheduled. Such an increase in funding could result in a decrease in
our available cash flow, which would limit our ability to fund our business
activities or pay principal or interest on our debt.
ITEM 2 -- PROPERTIES
Our corporate headquarters are located in Brentwood, Tennessee. We own
23 combined manufacturing and distribution facilities in the following states:
one each in Alabama, Colorado, Georgia, Indiana, Iowa, Minnesota, New York,
Ohio, South Carolina, Tennessee, Texas and Virginia; two each in California,
Oklahoma, Pennsylvania and Wisconsin; and three in Missouri. In Europe, we own
six combined manufacturing and distribution facilities in the following
countries: one each in Austria, Spain and the United Kingdom, and three in
Denmark. In addition, we own or lease three product distribution warehouses in
the United States and we lease a manufacturing and warehouse facility in Russia.
We also have joint venture interests relating to combined manufacturing and
distribution facilities located in Texas and Italy.
Our manufacturing facilities are generally located in rural areas in
close proximity to our customers, raw materials and transportation networks,
including rail transportation. We believe the broad number of strategically
located facilities enhances our position as a low cost provider by reducing
freight costs for raw materials and finished goods and facilitating direct
delivery programs. The rural locations also reduce land and labor costs. We
believe we can construct new manufacturing facilities at a lower cost than
competitors by using our engineering services group to design and construct most
of the necessary production equipment.
18
The following table shows our domestic and European manufacturing,
warehouse and distribution facilities:
LOCATION PRINCIPAL PRODUCTS SQUARE FOOTAGE
- ------------------------------------------------ ------------------------------ --------------
Domestic manufacturing and warehouse facilities:
Allentown, PA Dry dog/cat food 70,000
Birmingham, AL Dry dog/cat food 114,600
Butler, MO Dry dog/cat food 55,000
Cartersville, GA Dry dog/cat food 42,000
Clinton, OK Dry dog/cat food 218,000
Delavan, WI Semi-moist food; treats 55,000
Dexter, MO Dry dog/cat food 70,000
Everson, PA Dry dog/cat food 74,000
Hillburn, NY Dog biscuits 95,000
Joplin, MO Dry dog/cat food; dog biscuits 307,600
LeSueur, MN Dry dog/cat food; dog biscuits 160,000
Manassas, VA Dry dog/cat food 80,000
McKenzie, TN Dry dog/cat food 90,000
Miami, OK Dog and cat treats 76,400
Muscatine, IA Dry dog/cat food 99,500
Orangeburg, SC Dry dog/cat food 138,500
Portland, IN Dry dog/cat food; dog biscuits 120,000
Pueblo, CO Dry dog/cat food 125,000
San Bernardino, CA Dry dog/cat food 169,000
Temple, TX Dry dog/cat food 110,000
Tomah, WI Dry dog/cat food 98,000
Tracy, CA Dry dog/cat food 110,000
Washington Courthouse, OH Dry dog/cat food; dog biscuits 190,000
Domestic distribution warehouses:
Alexandria, LA N/A 35,000
Johnstown, NY(1) N/A 41,000
Ocala, FL N/A 76,000
European manufacturing and warehouse facilities:
Carat, Austria (Arovit) Wet dog/cat food 31,000
Esbjerg, Denmark (Arovit) Wet dog/cat food; treats 487,000
Norwich, England (Larkshall) Dry dog/cat food 81,000
Tver, Russia(1) Dry dog/cat food 14,800
Valladolid, Spain (Ipes) Dry dog/cat food 112,000
Vejen, Denmark (Arovit) Dry dog/cat food 151,000
Vra, Denmark (Arovit) Wet dog/cat food 120,000
Joint venture facilities:(2)
Hereford, TX Dry dog/cat food 42,000
Milano, Italy (Effeffe) Dry dog/cat food 67,000
- --------------------------------------------------------------------------------------------------------
(1) These facilities are leased. All other facilities are owned by us,
other than the joint venture facilities.
(2) We have a joint venture interest relating to these facilities.
ITEM 3 -- LEGAL PROCEEDINGS
In the ordinary course of business, we are party to litigation from
time to time; however, we are not a party to any material pending legal
proceedings that we believe would have a material adverse effect on our
financial condition or results of operations.
ITEM 4 -- SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 7, 2002, the holders of our senior preferred stock elected
Edward H. D'Alelio and Paul E. Suckow
19
to our board of directors. Each of our other directors continues to serve on our
board.
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
All of our common stock is owned by our parent, and there is no
established public trading market for our common stock.
SALES OF UNREGISTERED EQUITY SECURITIES
We did not sell any unregistered equity securities in fiscal 2002.
DIVIDENDS
We did not declare any cash dividends on our common stock during fiscal
2001 or 2002 and we do not anticipate paying any cash dividends in the
foreseeable future, but intend instead to retain any future earnings for
reinvestment in our business or other corporate purposes. Any future
determination as to the payment of dividends will be made at the discretion of
our board of directors and will depend on our operating results, financial
condition, capital requirements, general business conditions and such other
factors as the board of directors deems relevant.
Our ability to pay dividends is also restricted by our senior
credit facility and the indentures governing our senior notes and our senior
subordinated notes.
ITEM 6 -- SELECTED FINANCIAL DATA
The selected financial data presented below (except for pet food sold
data) was derived from our consolidated financial statements, which have been
audited by KPMG LLP, independent auditors. The selected data should be read in
conjunction with the accompanying audited consolidated financial statements and
the notes thereto contained elsewhere in this annual report on Form 10-K.
Effective January 1, 1999, we changed our fiscal year so that it ends on the
Saturday nearest to the end of December; and therefore, fiscal 1999, 2000, 2001
and 2002 ended on January 1, 2000, December 30, 2000, December 29, 2001 and
December 28, 2002, respectively. Fiscal 1999 through 2002 were each 52-week
years.
20
YEARS ENDED
----------------------------------------------------------------------------
DECEMBER 31, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1998(1) 2000(2) 2000(3) 2001(4) 2002
------------ ---------- ------------ ------------ ------------
STATEMENT OF INCOME DATA:
Net sales(5) $ 674,638 $ 754,343 $ 875,761 $ 895,830 $ 887,333
Cost of goods sold(5) 556,249 579,124 687,799 749,092 701,418
--------- --------- --------- --------- ---------
Gross profit 118,389 175,219 187,962 146,738 185,915
Operating expenses:
Promotion and distribution(5) 31,212 42,306 52,285 58,993 53,525
Selling, general and administrative(5) 26,266 40,912 50,507 47,193 48,663
Amortization(6) 6,468 10,357 12,779 13,743 3,552
Non-recurring expenses(5)(7) 10,043 2,539 28,639 8,655 1,447
--------- --------- --------- --------- ---------
Income from operations 44,400 79,105 43,752 18,154 78,728
Interest expense, net 31,136 39,739 51,223 57,020 62,395
Non-recurring finance charges(8) 4,599 -- -- -- --
Other (income) expense, net 164 (1,201) (1,732) (757) (724)
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary loss and cumulative
effect of a change in accounting
principle 8,501 40,567 (5,739) (38,109) 17,057
Income tax expense (benefit) 3,602 16,858 (854) (16,171) 1,786
--------- --------- --------- --------- ---------
Income (loss) before extraordinary loss and
cumulative effect of a change in
accounting principle 4,899 23,709 (4,885) (21,938) 15,271
Extraordinary loss, net of income tax
benefit of $16,001(9) 26,788 -- -- -- --
Cumulative effect at adoption on January 1,
1999 of a change in accounting for commodity
derivative instruments, net of income tax
benefit of $1,440(10) -- (2,263) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (21,889) $ 21,446 $ (4,885) $ (21,938) $ 15,271
========= ========= ========= ========= =========
YEARS ENDED
----------------------------------------------------------------------
DECEMBER 31, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1998(1) 2000(2) 2000(3) 2001(4) 2002
----------- ---------- ------------ ------------ ------------
OTHER DATA:
Basic and diluted net income (loss) per common share $(29,136) $ 13,273 $ (14,125) $(32,405) $ 3,393
Cash flows provided by (used in) operating activities 33,992 59,938 45,388 (23,936) 78,773
Cash flows provided by (used in) investing activities (56,300) (34,458) (181,316) 1,466 (25,902)
Cash flows provided by (used in) financing
activities 25,432 (21,531) 131,972 25,433 (51,731)
Depreciation and amortization 17,877 26,083 36,334 41,430 32,164
Capital expenditures(11) 23,327 26,668 35,347 17,316 24,348
Pet food sold (thousands of U.S tons):
United States 1,471 1,669 1,710 1,653 1,705
Europe 42 72 207 282 258
YEARS ENDED
--------------------------------------------------------------------
DECEMBER 31, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1998(1) 2000(2) 2000(3) 2001(4) 2002
------------ ---------- ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital $ 39,947 $ 32,832 $ 25,812 $ 46,995 $ 59,215
Total assets 710,879 693,296 907,062 836,545 870,667
Total debt 461,974 427,922 573,165 587,823 554,020
Senior Preferred Stock (Redeemable) 37,792 45,965 55,205 65,672 77,550
Stockholder's equity 69,294 82,946 70,881 37,926 58,503
21
(1) Results for fiscal 1998 include the acquisition of Windy Hill Pet Food
Company, Inc. on August 3, 1998 and our acquisition of Ipes Iberica,
S.A., on April 17, 1998.
(2) Results for fiscal 1999 include the results of our acquisition on
October 14, 1999 of the Larkshall Extrusions, division of Buxted
Chicken Limited for approximately $5.0 million in cash.
(3) Results for fiscal 2000 include the results of our acquisition on May
10, 2000 of A/S Arovit Petfood, headquartered in Esbjerg, Denmark, for
approximately $144.4 million and assumed indebtedness, net of cash, of
approximately $11.8 million. Arovit manufacturers and sells throughout
Europe a full range of pet food products for dogs and cats, including
wet, dry and treats, primarily through private label programs. See Item
7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
(4) Results for fiscal 2001 include the results of two divestitures until
the date of sale: our Perham, Minnesota facility from December 31, 2000
to April 27, 2001 and our Deep Run domestic wet pet food business from
December 31, 2000 to May 3, 2001. See Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
(5) Results for fiscal 2001 include $16.9 million of expenses associated
with strategic initiatives that commenced in fiscal 2001 and consist of
$6.7 million of non-recurring expenses related to the divestitures and
$10.2 million of Project Focus expenses. The Project Focus expenses
were classified as follows: (1) $0.3 million as a reduction in net
sales; (2) $6.6 million as cost of goods sold; (3) $0.9 million as
promotion and distribution expenses; (4) $0.4 million as selling,
general and administrative expenses; and (5) $2.0 million as
non-recurring expenses. See Note 16 - "Non-Recurring and Project Focus
Implementation Expenses" to our accompanying audited consolidated
financial statements included herein.
(6) Effective December 30, 2001, we adopted Statement on Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. As
a result, we ceased amortization of goodwill and trademarks as of the
beginning of fiscal 2002. See Note 2 -- "Changes in Accounting
Principles" to our accompanying audited consolidated financial
statements included herein for our results of operations for fiscal
2000 and 2001, as adjusted to give effect to SFAS 142 as if it were
adopted on January 2, 2000. Net income (loss) for fiscal 1998 and 1999,
as adjusted to give effect to the adoption of SFAS 142 on January 1,
1998, would be $(18.6) million and $27.9 million, respectively.
(7) Non-recurring expenses of $10.0 million in fiscal 1998 include
transition expenses of $7.0 million in connection with the Windy Hill
acquisition and a $3.0 million charge related to a product recall.
Non-recurring expenses of $2.5 million in fiscal 1999 include $1.1
million of transition expenses in connection with the Windy Hill
acquisition and $1.4 million of expenses related to the proposed
initial public offering by our parent, which was subsequently
withdrawn. Non-recurring expenses of $28.6 million in fiscal 2000
include: (1) restructuring costs of $22.3 million consisting of asset
impairments of $15.3 million related to closure of certain inefficient
manufacturing facilities, severance costs of $3.5 million related to
these facility closures and the elimination of corporate positions and
$3.5 million of shutdown expenses for these facility closures; and (2)
transaction costs of $6.3 million, consisting of a $4.6 million loss on
a foreign currency forward contract associated with the Arovit
acquisition, a $1.5 million charge for the write-off of costs for
unconsummated acquisitions and $0.2 million of miscellaneous
transaction costs. Non-recurring expenses of $8.7 million in fiscal
2001 include a $4.7 million net loss from the divestitures and $4.0
million of restructuring costs consisting of (1) $2.0 million of
severance costs for the elimination of corporate positions following
the divestitures; and (2) $2.0 million of Project Focus related costs
comprised of $1.0 million of asset impairments and other plant closure
costs for the shutdown of an inefficient manufacturing facility and
$1.0 million of severance costs for the elimination of additional
corporate positions in the fourth quarter of fiscal 2001. Non-recurring
expenses of $1.4 million in fiscal 2002 include a $0.8 million
write-off of costs related to our postponed bond offering and $0.6
million write-off of costs related to our abandoned European sale
process. See Note 16 -- "Non-Recurring and Project Focus Implementation
Expenses" to our accompanying audited consolidated financial statements
included herein.
22
(8) Non-recurring finance charges include $4.6 million of interim bridge
financing costs incurred in conjunction with our refinancing
transactions.
(9) The extraordinary loss represents non-recurring finance charges
associated with the early extinguishment of debt incurred in connection
with our refinancing transactions.
(10) The cumulative effect of a change in accounting principle as of January
1, 1999 relates to a change in accounting for derivative instruments in
accordance with SFAS 133.
(11) Capital expenditures exclude payments for acquisitions.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion with the accompanying audited
consolidated financial statements and related notes included elsewhere in this
annual report on Form 10-K.
BASIS OF PRESENTATION
Our fiscal year ends on the Saturday nearest to the end of December;
and therefore, fiscal 2000, 2001 and 2002 ended on December 30, 2000, December
29, 2001 and December 28, 2002, respectively. Each month and quarter also ends
on the Saturday nearest to the end of the month. Fiscal 2000 through Fiscal 2002
were each 52-week years.
CRITICAL ACCOUNTING POLICIES
Accounts receivable allowances. As of December 28, 2002, our gross
accounts receivable were $134.6 million. We had a valuation allowance of $5.3
million at December 28, 2002, primarily for outstanding deductions with
customers. Our policy is to estimate our allowance by applying a recovery
percentage based on historical collection experience and performing a specific
identification review of customer account balances. We may revise our allowances
against accounts receivable as we receive more information on this matter or as
we assess other factors impacting the realizability of our accounts receivable.
Inventories valuation allowance. As of December 28, 2002, our gross
inventories were $68.3 million. We had a valuation allowance for obsolescence of
$4.7 million at December 28, 2002, primarily related to packaging inventories.
Our policy is to estimate our allowance based on specific identification of
obsolete SKUs or probable SKUs to be rationalized. We may revise our allowance
against inventories as we receive more information on this matter or as we
assess other factors impacting the realizability of our inventories.
Deferred tax assets. As of December 28, 2002, our federal net operating
loss, or NOL, carryforwards were approximately $77.3 million and our foreign NOL
carryforwards totaled approximately $5.8 million. Our deferred tax assets
related to federal, foreign, state and local NOL carryforwards totaled
approximately $32.1 million as of December 28, 2002. As of December 28, 2002, we
had net deferred tax liabilities, excluding the NOL carryforwards, of
approximately $32.9 million. The realization of our deferred tax assets depends
upon the future reversal of our net deferred tax liabilities and upon our
ability to generate sufficient taxable income during the periods in which our
deferred tax assets may be utilized. Although realization is not assured, we
believe that it is more likely than not that our deferred tax assets will be
realized, with the exception of certain foreign NOL carryforwards against which
we have recorded a valuation allowance of $0.6 million.
Goodwill and trademarks. As of December 28, 2002, our goodwill and
trademarks, net of accumulated amortization, totaled $363.1 million. Our policy
is to test goodwill and other intangible assets for impairment in accordance
with SFAS 142, which we adopted as of the beginning of fiscal 2002. See "--
Recently Issued Accounting Pronouncements."
23
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.
Expenses related to 2001 strategic initiatives. In fiscal 2001, we
commenced strategic initiatives that resulted in non-recurring and other
expenses totaling $16.9 million, which consisted of $6.7 million of
non-recurring expenses related to two divestitures and $10.2 million of expenses
related to Project Focus, including $2.0 million of non-recurring expenses.
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.
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 continue
to permanently reduce our cost structure by streamlining our available product
offerings and thereby significantly reducing 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
continue 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 4 -- "Divestitures" and Note 16 -- "Non-Recurring and Project Focus
Implementation Expenses" to our accompanying audited consolidated financial
statements included herein.
In connection with Project Focus, we closed one manufacturing facility
and had a corporate workforce reduction, which resulted in the termination of 45
employees in the fourth quarter of fiscal 2001. We recorded a fourth quarter
charge related to these actions of $10.2 million classified as follows:
- $0.3 million as a reduction in net sales;
- $6.6 million as cost of goods sold;
- $0.9 million as promotion and distribution expenses;
- $0.4 million as selling, general and administrative expenses;
and
- $2.0 million as non-recurring expenses, comprised of $1.0
million of asset impairments and other plant closure costs for
the shutdown of an inefficient manufacturing facility and $1.0
million of severance costs for the elimination of corporate
positions.
24
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
(table in thousands, except percentages):
YEARS ENDED
-------------------------------------------------------------------------------
DECEMBER 30, 2000 DECEMBER 29, 2001 DECEMBER 28, 2002
--------------------- --------------------- ---------------------
Net sales $ 875,761 100.0% $ 895,830 100.0% $ 887,333 100.0%
Cost of goods sold 687,799 78.5 749,092 83.6 701,418 79.0
--------- ----- --------- ----- --------- -----
Gross profit 187,962 21.5 146,738 16.4 185,915 21.0
Operating expenses:
Promotion and distribution 52,285 6.0 58,993 6.6 53,525 6.0
Selling, general and administrative 50,507 5.8 47,193 5.3 48,663 5.5
Amortization 12,779 1.4 13,743 1.5 3,552 0.4
Non-recurring expenses 28,639 3.3 8,655 1.0 1,447 0.2
--------- ----- --------- ----- --------- -----
Income from operations 43,752 5.0 18,154 2.0 78,728 8.9
Interest expense, net 51,223 5.9 57,020 6.4 62,395 7.0
Other income, net (1,732) (0.2) (757) (0.1) (724) --
--------- ----- --------- ----- --------- -----
Income (loss) before income taxes (5,739) (0.7) (38,109) (4.3) 17,057 1.9
Income tax expense (benefit) (854) (0.1) (16,171) (1.8) 1,786 0.2
--------- ----- --------- ----- --------- -----
Net income (loss) $ (4,885) (0.6)% $ (21,938) (2.5)% $ 15,271 1.7%
========= ===== ========= ===== ========= =====
FISCAL YEAR ENDED DECEMBER 28, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 29,
2001
Net sales. Net sales for fiscal 2002 decreased 0.9% to $887.3 million
from $895.8 million in fiscal 2001. Net sales in fiscal 2001 included $16.6
million of net sales from our Deep Run and Perham businesses prior to their
divestiture in the second quarter of 2001. Excluding the fiscal 2001 net sales
associated with these divestitures, our net sales for fiscal 2002 increased
0.9%, or $8.1 million. This increase was primarily due to the increase in our
sales volume as a result of new business awards, partially offset by lower sales
volume from Project Focus implementation.
Gross profit. Gross profit for fiscal 2002 increased 26.7%, or $39.2
million, to $185.9 million from $146.7 million in fiscal 2001 partially due to
the favorable impact caused by the volatility of commodity prices as recognized
under the SFAS 133 fair value accounting of our commodity derivative
instruments. Such accounting resulted in a $4.9 million reduction in our cost of
goods sold in fiscal 2002 compared to a $12.6 million increase in our cost of
goods sold in fiscal 2001, which accounts for $17.5 million of the $39.2 million
increase in gross profit. Also, our fiscal 2001 gross profit was impacted by the
implementation of Project Focus. Of the total $10.2 million Project Focus
related charges, $6.9 million negatively impacted gross profit and was primarily
due to the write-down in packaging inventories. See Note 16 -- "Non-Recurring
and Project Focus Implementation Expenses" to our accompanying audited
consolidated financial statements included herein. The remaining increase in our
gross profit is primarily due to Project Focus implementation, including
improvements in manufacturing efficiencies, customer mix and/or product mix, and
our European operations. Wage inflation was offset by lower natural gas costs.
Promotion and distribution. Promotion and distribution expenses for
fiscal 2002 decreased 9.3% to $53.5 million from $59.0 million in fiscal 2001
primarily due to Project Focus mix improvement, freight outsourcing and
improved cost control measures.
Selling, general and administrative. Selling, general and
administrative expenses for fiscal 2002 increased 3.2% to $48.7 million from
$47.1 million in fiscal 2001 primarily due to higher variable compensation
incentives tied to our business performance and higher fringe benefit costs,
partially offset by lower costs resulting from Project Focus cost savings
initiatives.
25
Amortization. Amortization expense for fiscal 2001 decreased 74.2% to
$3.6 million from $13.7 million in fiscal 2001 primarily due to goodwill and
trademarks no longer being amortized. See "--Recently Issued Accounting
Pronouncements."
Non-recurring expenses. Non-recurring expenses of $1.4 million for
fiscal 2002 consist of a $0.8 million write-off of costs related to our
postponed bond offering and a $0.6 million write-off of costs related to our
abandoned European sale process. Fiscal 2001 non-recurring expenses of $8.7
million included a $4.7 million net loss from the divestitures and $4.0 million
of restructuring costs. These restructuring costs consist of: (1) $2.0 million
of severance costs for the elimination of corporate positions following the
divestitures; and (2) $2.0 million of Project Focus related costs comprised of
$1.0 million of asset impairments and other plant closure costs for the shutdown
of an inefficient manufacturing facility and $1.0 million of severance costs for
the elimination of additional corporate positions in the fourth quarter of
fiscal 2001.
Interest expense, net. Interest expense, net of interest income, for
fiscal 2002 increased 9.4% to $62.4 million from $57.0 million in fiscal 2001
primarily due to a $6.7 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 in fiscal 2002
compared to fiscal 2001.
Income tax expense (benefit). We recognized income tax expense of $1.8
million for fiscal 2002 compared to an income tax benefit of $16.2 million in
fiscal 2001. Our effective tax rate was different from the combined U.S. federal
and state statutory rate of 38.9% due to the difference between U.S. and foreign
effective tax rates which results primarily from certain items being deductible
in the United States and also in certain foreign jurisdictions. In addition, our
effective tax rate in fiscal 2001 was impacted by certain goodwill amortization
that was not deductible for income tax purposes. We may not recognize additional
deferred tax assets in 2003 and beyond unless we generate significant current
taxable income. Accordingly, the effective tax rate in 2003 could increase.
FISCAL YEAR ENDED DECEMBER 29, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
2000
Net sales. Net sales for fiscal 2001 increased 2.3% to $895.8 million
from $875.8 million in fiscal 2000 primarily due to the impact of the Arovit
acquisition in May 2000 and the price increase implemented in the first quarter
of fiscal 2001, partially offset by the impact of the divestitures of the Deep
Run and Perham businesses as well as lower sales volume. Excluding the impact of
the Arovit acquisition, net sales for fiscal 2001 decreased 4.4% from fiscal
2000. See "-- Inflation and Changes in Prices." The lower sales volume was
impacted by unusually warm weather in the fourth quarter of fiscal 2001, lost
sales volume with WalMart Stores, Inc., competitive pricing issues related to
the price increase implemented in fiscal 2001 and a decline in promotional
activity.
Gross profit. Gross profit for fiscal 2001 decreased 21.9%, or $41.3
million, to $146.7 million from $188.0 million in fiscal 2000 partially due to
the unfavorable impact caused by the volatility of commodity prices as
recognized under the SFAS 133 fair value accounting of our commodity derivative
instruments. Such accounting resulted in a $12.6 million increase in our cost of
goods sold in fiscal 2001 compared to a $9.0 million reduction in our cost of
goods sold in fiscal 2000, which accounts for $21.6 million of the $41.3 million
reduction in gross profit. Also, our gross profit was impacted by the
implementation of Project Focus. Of the total $10.2 million Project Focus
related charges, $6.9 million affected gross profit and was primarily due to the
write-down in packaging inventories. See Note 16 -- "Non-Recurring and Project
Focus Implementation Expenses" to our accompanying audited consolidated
financial statements included herein. In addition, our gross profit was
negatively affected by significantly higher ingredient costs in fiscal 2001, a
substantial increase in natural gas and healthcare costs, increases in annual
wages as well as an unfavorable global sales mix. The favorable impact of the
Arovit acquisition in fiscal 2001, a price increase implemented in the first
quarter of fiscal 2001, the closure of certain inefficient manufacturing
facilities in both fiscal 2000 and 2001, as well as manufacturing efficiencies
achieved at our remaining plants, partially offset our gross profit decrease.
Excluding the impact of the Arovit acquisition, gross profit for fiscal 2001
decreased $56.4 million.
Promotion and distribution. Promotion and distribution expenses for
fiscal 2001 increased 12.8% to $59.0 million from $52.3 million in fiscal 2000
primarily due to the Arovit acquisition. Excluding the impact of the Arovit
acquisition, promotion and distribution expenses for fiscal 2001 decreased 1.2%.
26
Selling, general and administrative. Selling, general and
administrative expenses for fiscal 2001 decreased 6.6% to $47.2 million from
$50.5 million in fiscal 2000 due to lower costs resulting from corporate
restructurings and other cost savings initiatives, partially offset by the
impact of the Arovit acquisition, increases in annual salaries and higher
healthcare costs. Excluding the impact of the Arovit acquisition, selling,
general and administrative expenses for fiscal 2001 decreased 15.7%.
Amortization. Amortization expense for fiscal 2001 increased 7.5% to
$13.7 million from $12.8 million in fiscal 2000 primarily due to the Arovit
acquisition. Excluding the impact of the Arovit acquisition, amortization
expense for fiscal 2001 increased 1.9%.
Non-recurring expenses. Non-recurring expenses of $8.7 million for
fiscal 2001 included a $4.7 million net loss from the divestitures of the Deep
Run and Perham businesses and $4.0 million of restructuring costs. These
restructuring costs consist of: (1) $2.0 million of severance costs for the
elimination of corporate positions following these divestitures; and (2) $2.0
million of Project Focus related costs, comprised of $1.0 million of asset
impairments and other plant closure costs for the shutdown of an inefficient
manufacturing facility and $1.0 million of severance costs for the elimination
of additional corporate positions.
Fiscal 2000 non-recurring expenses of $28.6 million included: (1)
restructuring costs of $22.3 million consisting of asset impairments of $15.3
million related to closure of certain inefficient manufacturing facilities,
severance costs of $3.5 million related to these facility closures and the
elimination of corporate positions and $3.5 million of shutdown expenses for
these facility closures; and (2) transaction costs of $6.3 million, consisting
of a loss of $4.6 million on a foreign currency forward contract related to the
Arovit acquisition, unconsummated acquisition costs of $1.5 million and
miscellaneous transaction costs of $0.2 million.
Interest expense, net. Interest expense, net of interest income, for
fiscal 2001 increased 11.3% to $57.0 million from $51.2 million in fiscal 2000
primarily due to the borrowings obtained in May 2000 to finance the Arovit
acquisition. In addition, this increase was partially due to the issuance of
long-term debt under the our sponsor facility in March 2001. See Note 9 --
"Long-Term Debt and Liquidity" to our accompanying audited consolidated
financial statements included herein. The impact of this increase in our
outstanding indebtedness on interest expense was partially offset by a decrease
in interest rates associated with our floating rate debt in fiscal 2001 compared
to fiscal 2000.
Income tax benefit. We recognized an income tax benefit of $16.2
million for fiscal 2001 compared to $0.9 million in fiscal 2000. Our effective
tax rate was different from the combined U.S. federal and state statutory rate
of 38.9% due to the difference between U.S. and foreign effective tax rates. In
addition, our effective tax rate 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 December 28, 2002, we had working
capital of $59.2 million.
Cash Flows
Net cash provided by our operating activities was $78.8 million for
fiscal 2002 compared to net cash used in our operating activities of $23.9
million in fiscal 2001. This increase was due to higher income before
depreciation, amortization, deferred taxes and non-cash charges as well as
improved working capital management.
Net cash used in our investing activities was $25.9 million for fiscal
2002 compared to net cash provided by our investing activities of $1.5 million
in fiscal 2001. This decrease is primarily associated with the proceeds received
in fiscal 2001 related to the divestitures of our Deep Run and Perham
businesses. Capital expenditures for fiscal 2002 were $24.3 million compared
to $17.3 million in fiscal 2001.
27
Net cash used in financing activities was $51.7 million for fiscal 2002
compared to net cash provided by our financing activities of $25.4 million in
fiscal 2001. The favorable reduction in long-term debt in fiscal 2002 is
primarily due to higher cash flow from operations. In addition to $28.7 million
of principal payments on long-term debt, net of debt issuance costs and
refinancing activities, we reduced our revolving credit facility borrowings by
$23.0 million, or reduced our total long-term debt by $51.7 million. In addition
we borrowed $25.0 million under the sponsor facility in fiscal 2001.
Refinancing
Senior note offering. On February 28, 2003, we issued $213.0 million
aggregate principal amount of 10-3/4% senior notes due 2010. Our senior notes
mature on March 1, 2010, with interest payable semiannually in arrears on March
1 and September 1 of each year, commencing on September 1, 2003. The notes are
general unsecured senior obligations, are effectively subordinated to all of our
secured debt, including debt under our senior credit facility, and are senior to
all of our existing and future subordinated debt, including debt under our
senior subordinated notes. The senior notes are effectively subordinated to all
liabilities, including trade payables, of each of our subsidiaries that is not a
guarantor of the senior notes. Our senior notes are unconditionally guaranteed
on a senior unsecured basis by DPC Investment Corp. and Doane/Windy Hill Joint
Venture L.L.C., representing each of our domestic subsidiaries as of the issue
date of the senior notes, and may be guaranteed by additional subsidiaries in
the future.
Use of proceeds. We used approximately $169.0 million of the net
proceeds from the sale of our senior notes to repay a portion of our senior
credit facility and we intend to use the remaining net proceeds to repay our
sponsor facility in full, to the extent all of the holders of promissory notes
under our sponsor facility tender their notes by March 17, 2003 or any
subsequently extended expiration date. We have no right to require the holders
of promissory notes under our sponsor facility to tender their notes prior to
maturity. To the extent that one or more holders of promissory notes under our
sponsor facility do not tender their promissory notes, we intend to use those
proceeds to further reduce indebtedness under our senior credit facility. Any
promissory notes not repaid will remain outstanding under their original terms.
Unless the context otherwise provides, the discussion in this annual report on
Form 10-K assumes that all of the holders of promissory notes under our sponsor
facility tender their promissory notes and that these promissory notes are paid
in full with the net proceeds from the sale of our senior notes.
Amendments to senior credit facility. In conjunction with the issuance
of our senior notes, we amended our senior credit facility, effective as of
February 28, 2003. The amendments provide for, among other things: (1) the
concurrent issuance of our senior notes and repayment of our sponsor facility;
(2) the repayment of a portion of the term loans under our senior credit
facility in order of forward maturity; (3) less restrictive covenants on capital
expenditures, investments and certain other activities; (4) the elimination of
certain financial covenants and the revision of other financial covenants; (5)
the elimination of the excess leverage fee; (6) the elimination of the fixed
rate debt percentage requirement; and (7) the permanent reduction in our
revolving credit facility from $75.0 million to $60.0 million.
Debt
We are highly leveraged and have significant cash requirements for debt
service relating to our senior credit facility, senior notes, 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 indentures governing our
senior notes and 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, March 2002 and February 2003 as discussed
above.
The following summary of certain provisions of our senior credit
facility reflects the application of the net proceeds of our senior notes and
the amendments to our senior credit facility in February 2003.
The facilities. As of February 28, 2003, as adjusted for the
application of the net proceeds of the senior notes, our senior credit facility
provides for total commitments as follows:
28
- a Euro 34.8 million ($37.7 million assuming a USD to Euro
exchange rate of 1.0825) Euro term loan facility; and
- $201.6 million, consisting of
-- a $141.6 million USD term loan facility; and
-- a $60.0 million revolving credit facility, with a
$20.0 million sub-limit for issuance of letters of
credit.
Availability of funds under our senior credit facility is subject to
certain customary terms and conditions.
Interest rates. All loans under our senior credit facility bear
interest at the Euro dollar rate plus 4.75%, or the prime rate of the
administrative agent plus 3.75%, until maturity.
Amortization of outstanding indebtedness. As of February 28, 2003,
the principal amount due under the Euro term loan facility was approximately
Euro 34.8 million in 2005; and the principal amounts due under the USD term loan
facility were approximately (i) $10.7 million in 2004, (ii) $88.3 million in
2005, and (iii) $42.6 million in 2006. We had approximately $9.0 million
outstanding under our revolving credit facility and $2.5 million of letters of
credit outstanding, resulting in approximately $48.5 million of availability
under our revolving credit facility.
Maturity. 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.
Prepayments. The loans may be prepaid and commitments may be reduced in
certain specified minimum amounts. Optional prepayments of the term loans are
generally applied pro rata to the four tranches and ratably to the respective
installments thereof. Optional prepayments of the term loans may not be
reborrowed.
Our senior credit facility also provides for mandatory prepayments of
the borrowings upon certain specified events and in certain specified
percentages, including:
- 100% of the net cash proceeds received by our parent, us or
any of our restricted subsidiaries from the issuance of
indebtedness not currently expressly permitted by our senior
credit facility;
- 100% of the net cash proceeds of any sale or other disposition
of any assets, subject to certain exceptions;
- 50% of excess cash flow; and
- 100% of the net proceeds of any sale or issuance of equity,
subject to certain exceptions.
Guarantees; collateral. We, our parent company and our restricted
domestic subsidiaries are required to guarantee amounts outstanding under our
senior credit facility. In order to secure the indebtedness and obligations
under our senior credit facility, we, our parent company and our restricted
domestic subsidiaries have pledged the following U.S. assets:
- substantially all of our personal property assets, subject to
certain exceptions;
- substantially all of our real property assets and any
subsequently acquired real property having a fair market value
in excess of $0.5 million, subject to certain exceptions;
- substantially all of our intellectual property assets; and
29
- substantially all of the stock owned or subsequently acquired
by each of us in each of our respective domestic subsidiaries
and 65% of the foreign subsidiaries owned directly by us or a
domestic subsidiary.
In addition, pursuant to the pledge agreement between DPC Investment
Corp. and Doane Pet Care Europe (ApS), 65% of the capital stock of Doane Pet
Care Europe (ApS) is pledged to secure the obligations under our senior credit
facility.
Covenants. Our senior credit facility contains financial and other
covenants that we believe are usual and customary for a secured credit
agreement, including covenants that limit our and our restricted subsidiaries'
abilities to, among other things:
- incur indebtedness or issue guarantees;
- grant liens;
- make investments;
- make certain capital expenditures;
- make certain restricted payments; and
- enter into certain lines of business.
Our senior credit facility also contains the following financial
covenant requirements:
- our consolidated leverage ratio as of certain specified
periods must not exceed ratios ranging from 6.30:1.00 at the
end of the first quarter of 2003 to 5.50:1.00 at the end of
the first quarter of 2006 and thereafter until maturity;
- our consolidated senior secured debt ratio as of certain
specified periods must not exceed ratios ranging from
2.25:1.00 at the end of the first quarter of 2003 to 2.00:1.00
at the end of the first quarter of 2004 and thereafter until
maturity;
- our consolidated interest coverage ratio as of certain
specified periods must meet or exceed ratios ranging from
1.50:1.00 at the end of the first quarter of 2003 to 1.55:1.00
at the end of the third quarter of 2003 and thereafter until
maturity; and
- our consolidated fixed charge coverage ratio as of the last
day of any period of four consecutive fiscal quarters must
meet or exceed 1.00:1.00.
We have experienced difficulty in the past satisfying financial
covenants in our senior credit facility and sought waivers in fiscal 2001 and
2002. Our senior credit facility, including these financial covenants, was
amended effective February 28, 2003 concurrently with the sale of our senior
notes. We may experience difficulty satisfying these amended covenants in the
future, which, if we were unable to secure a waiver from our lenders, could
result in an event of default under our senior credit facility and permit a
majority of the lenders to accelerate outstanding debt under our senior credit
facility and permit a majority of our lenders under our revolving credit
facility to terminate our revolving credit commitment (without acceleration of
such debt). Such acceleration would result in a cross-default under our senior
notes and our senior subordinated notes.
Events of default. Our senior credit facility contains default
provisions that we believe are customary for facilities and transactions of this
type, including default provisions relating to:
30
- our failure to pay principal or interest when and as due or
any other amount under our senior credit facility within five
days after such amount becomes due;
- representations or warranties being inaccurate in any material
respect when made;
- cross-default to certain other indebtedness and agreements
(including the notes offered hereby);
- bankruptcy or insolvency;
- actual invalidity, or invalidity asserted by us, of any
security document;
- material judgments;
- ERISA events; and
- change of control or ownership.
Liquidity After Our Refinancing
As of February 28, 2003, on an as adjusted basis after giving effect to
the sale of our senior notes and the application of the net proceeds therefrom
as described in "-- Refinancing -- Use of Proceeds," and the amendments to our
senior credit facility effective February 28, 2003, we had approximately $48.5
million of remaining availability under the revolving credit facility portion of
our senior credit facility out of a total availability of $60.0 million. We
believe that cash flows generated from our business, together with future
borrowings, will be sufficient for the foreseeable future to enable us to make
interest payments on our debt and to provide us with the necessary liquidity for
operational and capital requirements in the current operating environment. We
may be required, however, to refinance all or a portion of the principal amount
of our outstanding debt on or prior to maturity or a mandatory redemption date.
We also believe the capital expenditures permitted under our senior credit
facility are sufficient to provide us with the necessary flexibility to spend
required maintenance capital and at the same time fund the planned expansion and
customer requirements for fiscal 2003.
As of December 28, 2002, the expected future payout of our accrued
restructuring cost was $2.5 million in fiscal 2003 and $0.3 million in fiscal
2004.
Any future acquisitions, joint ventures or similar transactions will
likely require additional capital and we may not have such capital available to
us on commercially reasonable terms, on terms acceptable to us, or at all. Our
business may not generate sufficient cash flows or future borrowings may not be
available in an amount sufficient to enable us to make principal and interest
payments on our debt, including our senior notes and senior subordinated notes,
or to fund our other liquidity needs and, as a result, we may not be able to
comply with the financial covenants in our senior credit facility.
31
CONTRACTUAL OBLIGATIONS
The following tables show the maturities of our contractual obligations and
other commercial obligations as of December 28, 2002 (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
2008 AND
2003 2004-2005 2006-2007 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ----------
Contractual obligations:
Long-term debt $ 29,840 $ 259,236 $ 248,983 $ 15,961 $ 554,020
Operating leases 4,072 7,866 4,552 2,550 19,040
Construction in progress 5,897 -- -- -- 5,897
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 39,809 $ 267,102 $ 253,535 $ 18,511 $ 578,957
========== ========== ========== ========== ==========
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
2008 AND
2003 2004-2005 2006-2007 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ----------
Other commercial obligations:
Lines of credit $ 13,814 $ -- $ -- $ -- $ 13,814
Standby letters of credit 2,456 -- -- -- 2,456
---------- ---------- ---------- ---------- ----------
Total commercial commitments $ 16,270 $ -- $ -- $ -- $ 16,270
========== ========== ========== ========== ==========
The following table shows the maturities of our contractual obligations as
of December 28, 2002, as adjusted to reflect the issuance of our senior notes,
the expected repayment of the sponsor facility and the amendments to the senior
credit facility that were effected contemporaneously with the issuance of senior
notes (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
2008 AND
2003 2004-2005 2006-2007 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ----------
Contractual obligations:
Long-term debt $ 5,720 $ 150,074 $ 194,795 $ 226,405 $ 576,994
Operating leases 4,072 7,866 4,552 2,550 19,040
Construction in progress 5,897 -- -- -- 5,897
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 15,689 $ 157,940 $ 199,347 $ 228,955 $ 601,931
========== ========== ========== ========== ==========
COMMITMENTS AND CONTINGENCIES
We believe our operations are in compliance in all material respects with
environmental, safety and other regulatory requirements; however, these
requirements may change in the future and, if they do, we may incur material
costs in the future to comply with these requirements, including to effect
future recalls, or in connection with the effect of these matters on our
business. See Item 1 -- "Business -- Environmental and Safety Matters."
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 their 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 outbreaks on protein sources and the potential effect on
supply and demand, as well as weather conditions during the growing and related
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. Our results of
operations may 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. 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 any price increases implemented by us may affect the volumes of
future purchases from our customers.
32
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 FASB's Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, which
requires that goodwill and other intangible assets with indefinite lives no
longer be amortized. Our only intangible asset with an indefinite useful life
other than goodwill is our trademarks. 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 our intangible assets acquired in purchase business combinations
and our intangible assets having estimable useful lives that are classified in
other assets on our balance sheets, which resulted in no impact on our
accompanying audited consolidated financial statements included herein. During
the second quarter of 2002, we completed the required transitional 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 existed as of the beginning of fiscal 2002. In the fourth quarter
of fiscal 2002, we performed our required annual assessment of impairment and
determined no such impairment was evident. The adoption of SFAS 142 resulted in
the elimination of annual amortization related to our goodwill and trademarks.
In fiscal 2001, such amortization was $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 trademarks are determined to be impaired
under SFAS 142.
In June 2001, FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations, or SFAS 143, which requires
companies to record the fair value of an asset retirement obligation as a
liability in the period in which they incur a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or normal use of the assets. SFAS 143 also
requires companies to record a corresponding asset that is depreciated over the
life of the asset. Subsequent to the initial measurement of an asset retirement
obligation, SFAS 143 requires the obligation to be adjusted at the end of each
period to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. SFAS 143 became effective for us as of the
beginning of fiscal 2003. We are evaluating the impact, if any, that adoption of
SFAS 143 will have on our consolidated financial statements.
Effective December 30, 2001, we adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, or 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 had no material
impact on our financial position or results of operations.
In April 2002, 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, or 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
became effective for us as of the beginning of fiscal 2003. In accordance with
SFAS 145, we will recognize a charge to net income in the first quarter of
fiscal 2003 associated with the issuance of senior notes in February 2003 that
does not meet the criteria for classification as an extraordinary item. See
Note 26 -- "Subsequent Events" to our accompanying audited consolidated
financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or
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
33
Force, or 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 became effective for us as of the beginning of
fiscal 2003. We are evaluating the impact, if any, that adoption of SFAS 146
will have on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, or FIN 45, which elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. We are evaluating the
impact, if any, that adoption of the recognition and measurement provisions of
FIN 45 will have on our consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123, or SFAS 148, which amends
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, or SFAS 123, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal 2002
and are included in Note 13 -- "Stock Option Plan of Parent" in the accompanying
audited consolidated financial statements included herein.
ITEM 7A -- 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.
Commodity price risk. We seek to 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 December 28, 2002, we had open
commodity contracts with a fair value loss of $5.7 million.
Based upon an analysis we completed as of December 28, 2002 in which we
utilized our actual derivative contractual volumes and assumed a 5% adverse
movement in commodity prices, we determined the potential decrease in the fair
value of our commodity derivative instruments would be approximately $3.8
million, or $2.3 million net of deferred tax benefit.
34
Although we seek to 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 may in the
future. Our results of operations may 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 under SFAS
133 in our accompanying audited consolidated financial statements included
herein. 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 domestic
floating rate debt, which totaled $355.9 million at December 28, 2002. Of that
amount, $60.0 million of our domestic 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 interest rate cap contracts are recorded as interest income
(expense) in our consolidated financial statements. Changes in fair value of
interest rate swap contracts that qualify for hedge accounting are recorded in
accumulated other comprehensive income (loss), net of deferred taxes, in our
consolidated balance sheets until they are realized, at which point, they are
recognized in interest expense, net, in the accompanying consolidated statements
of income. As of December 28, 2002, we had a cumulative unrealized loss on our
interest rate swap contracts of $2.2 million, or $1.3 million net of deferred
tax benefit, that has been recognized in accumulated other comprehensive income
(loss) our accompanying audited consolidated financial statements included
herein.
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 $2.5 million, or $1.5 million net of income tax
benefit, for fiscal 2002. In addition, such a change would result in a decrease
of approximately $7.1 million in the fair value of our fixed rate debt at
December 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. We
currently have European operations that sell pet food products throughout
Europe. In connection with our acquisition of Arovit on May 10, 2000, 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. The cumulative
translation adjustment for the net investment in our foreign operations is
recorded in accumulated other comprehensive income (loss) in our consolidated
financial statements. As of December 28, 2002, we had a cumulative translation
gain of $16.5 million, which included an unrealized cumulative loss of $10.0
million for the translation of our Euro-denominated debt to U.S. dollars, that
has been recognized in our accompanying audited 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. Changes in fair value of foreign currency forward
contracts that qualify for hedge accounting are recorded in accumulated other
comprehensive income (loss), net of deferred taxes, in our consolidated balance
sheets until they are realized, at which point, they are recognized in other
income, net, in the accompanying consolidated statements of income. All other
gains and losses on foreign currency forward contracts are recorded as an
increase or decrease in net sales in our consolidated statements of income as
they occur. At December 28, 2002, the Company had an open foreign currency
forward contract that matures within the next 12 months with a notional value of
$3.1 million and a fair value loss of $0.2 million that has been recognized in
the accompanying audited consolidated statements of income included herein.
35
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the information beginning on page F-1, which is filed
as a part of this annual report on Form 10-K.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and titles of the current
directors and executive officers of Doane and Doane Pet Care Enterprises, Inc.
Pursuant to an investors' agreement, our board of directors and the board of
directors of Doane Pet Care Enterprises, Inc. each consist of at least seven
members. Except as indicated below, each of the members of the board of
directors of Doane named below also serves on the board of directors of Doane
Pet Care Enterprises, Inc. See Item 13 -- "Certain Relationships and Related
Transactions -- Investors' Agreement." Officers serve at the discretion of the
boards of directors. For information regarding employment agreements with the
executive officers of Doane, see Item 11 -- "Executive Compensation --
Employment and Retirement Agreements." Additionally, as of November 7, 2002, the
board of directors of Doane approved the addition of two new board members
designated by a majority of holders of our senior preferred stock. These board
members will remain as board members until the next annual meeting, at which
time the holders of our preferred stock will vote to fill such director seats.
NAME AGE POSITION
- ---------------------------- ---- -------------------------------------------------------------------
George B. Kelly 53 Chairman of the Board
Douglas J. Cahill (1) 43 Chief Executive Officer, President and Director
Philip K. Woodlief (1) 49 Vice President, Finance and Chief Financial Officer
David L. Horton 42 Vice President and General Manager, North American Operations
Joseph J. Meyers 41 Vice President, Supply Chain, Quality and Chief Information Officer
Terry W. Bechtel 60 Vice President, Wal*Mart
Tonny Carstensen 47 Vice President and Managing Director of European Operations
Richard A. Hannasch 49 Vice President, Co-Manufacturing and Specialty
Debra J. Shecterle 50 Vice President, People
Lawrence S. Benjamin 47 Director
Edward H. D'Alelio (2) 50 Director
Jerry W. Finney, Jr. 34 Director
Mathew J. Lori 39 Director
Terry R. Peets 58 Director
Stephen C. Sherrill 49 Director
Paul E. Suckow (2) 55 Director
Jeffrey C. Walker 47 Director
- ----------
(1) These executive officers hold the same positions at Doane and Doane Pet
Care Enterprises, Inc.
(2) Does not serve on the board of directors of Doane Pet Care Enterprises,
Inc.
Set forth below is a brief description of the business experience of the
directors and executive officers of Doane and Doane Pet Care Enterprises, Inc.
Each of the directors of Doane Pet Care Enterprises, Inc. is elected to serve a
three-year term. The terms of Messrs. Sherrill and Peets expire in 2003. The
terms of Messrs. Benjamin, Cahill and Lori expire in 2004. The terms of Messrs.
Kelly, Finney and Walker have expired but they continue to serve as directors
pending the annual meeting of shareholders of Doane Pet Care Enterprises, Inc.
The directors of Doane are elected at each annual meeting to serve for the
ensuing year.
George B. Kelly has served as Chairman of the Board of Doane since
October 1995 and Chairman of the Board of Doane Pet Care Enterprises, Inc. since
June 1995. Mr. Kelly is Chairman of The CapStreet Group, LLC (formerly known as
Summit Capital Group, LLC), Summit Capital, Inc., and Jackson Products, Inc.,
and is a
37
director of FS Strategies, Switch & Data Facilities Company, Inc., Susser
Holdings and other privately held companies.
Douglas J. Cahill became Chief Operating Officer of Doane and Doane Pet Care
Enterprises, Inc. in December 1997, began serving as President of Doane and
Doane Pet Care Enterprises, Inc. in January 1998 and began serving as Chief
Executive Officer of Doane and Doane Pet Care Enterprises, Inc. in July 1998. He
has been a director of Doane and Doane Pet Care Enterprises, Inc. since December
1998 and currently serves as the Chairman of the Pet Food Institute. Prior to
joining us, Mr. Cahill served as President of Olin Corporation's Winchester
Division, Corporate Vice President of Olin Corporation and held various other
positions with Olin Corporation during the period from July 1984 through
December 1997.
Philip K. Woodlief became Vice President, Finance and Chief Financial
Officer of Doane and Doane Pet Care Enterprises, Inc. in June 2000 and served as
Vice President, Finance for Doane from February 1999 to June 2000. Prior to
joining us, Mr. Woodlief was an independent financial consultant from June 1998
to January 1999. From April 1997 to May 1998, Mr. Woodlief was Vice President
and Corporate Controller of Insilco Corporation, a diversified consumer and
industrial products manufacturing company, and served as Corporate Controller of
Insilco from January 1989 to April 1997.
David L. Horton joined Doane in December 1997, began serving as Vice
President and General Manager of North American Operations in June 2001, served
as Vice President, Manufacturing, Engineering, and Quality from January 1999 to
June 2001 and Vice President, Fulfillment from December 1997 to January 1999.
Prior to joining us, Mr. Horton served as Vice President of Manufacturing and
Engineering for Olin Corporation's Winchester Division and held various other
positions with Olin Corporation from January 1984 to November 1997.
Joseph J. Meyers became Chief Information Officer of Doane in August 1998,
and began serving as Vice President Supply Chain, Quality in June 2001 and
served as Vice President, Fulfillment from January 1999 to June 2001. Prior to
joining us, Mr. Meyers held various information technology positions at Realtime
Consulting, PricewaterhouseCoopers LLP and Olin Corporation from 1992 to 1998.
Terry W. Bechtel joined Doane in June 1973 and began serving as Vice
President, Wal*Mart in March 2000, served as Vice President, Co-Manufacturing
(Sales) from November 1997 to March 2000, Vice President, Administration from
March 1990 to November 1997 and Vice President, Sales from December 1976 through
February 1990. Mr. Bechtel has announced his retirement effective March 31,
2003.
Tonny F. Carstensen became Vice President and Managing Director of European
Operations in June 2001. At that time, he also became Managing Director of our
wholly-owned subsidiary, A/S Arovit Petfood. Mr. Carstensen joined Arovit in
1979 as Purchasing Manager, served as Logistic Director from 1992 to 1995 and
from 1995 to June 2001 served as Director, and as a member of the Board of
Directors of Arovit, with responsibility for purchasing, product development and
logistics.
Richard A. Hannasch joined Doane in October 1996, began serving as Vice
President, Co-Manufacturing and Specialty in March 2000, served as Vice
President, Business Integration from August 1999 to March 2000, Vice President,
Fulfillment from January 1999 to October 1999, Vice President, Strategic
Planning from June 1998 to January 1999 and Vice President, Marketing from
November 1997 to January 1999. Prior to joining us, Mr. Hannasch served as
Director, Business Development for Ralston Purina Company's International
Division and held various other positions at Ralston Purina Company from
December 1978 to October 1996.
Debra J. Shecterle began serving as Vice President, People in January 2000
and served as Director of Human Resources from December 1998 to January 2000.
Prior to joining us, Ms. Shecterle was Vice President of Human Resources for
DeKalb Genetics from 1997 to 1998 and held various human resources positions
with Wisconsin Power and Light and Ameritech from 1991 to 1997.
Lawrence S. Benjamin became a director of Doane and Doane Pet Care
Enterprises, Inc. in May 2002. Since October 2002, Mr. Benjamin has been chief
executive officer of The NutraSweet Company. Mr. Benjamin was a partner with
Roark Capital Group, a private equity investment firm, and president of Lake
Field Partners, a private equity advisory firm. He held these positions from
June 2002 and April 2001, respectively, to October 2002. Prior to
38
his current roles, Mr. Benjamin worked for Oak Hill Capital Management, a
private equity fund, and its predecessor funds between August 1994 and May 2002.
During that time, Mr. Benjamin was President and Chief Executive Officer of
Specialty Foods Corporation from January 1997 to March 2001 and Stella Foods
from August 1994 to January 1997. Mr. Benjamin also served in a number of senior
executive positions with Kraft Foods from June 1986 to August 1994, including as
President of Budget Gourmet/Birdseye, a division of Kraft Foods.
Edward H. D'Alelio became a director of Doane in November 2002. Mr.
D'Alelio has served as an Executive in Residence at the School of Management of
the University of Massachusetts. From 1989 until 2002, Mr. D'Alelio was a
Managing Director of Putnam Investments, where he also served as the Chief
Investment Officer of the Taxable Fixed Income area. Mr. D'Alelio is also a
director of Archibald Candy Corporation. Mr. D'Alelio is also a member of the
board of trustees of the Newman School, St Mary's Woman's and Infant's Center
and Caritas Christi Health Care System.
Jerry W. Finney, Jr. became a director of Doane and Doane Pet Care
Enterprises, Inc. in August 2001. He is a director of the Private Equity Group
of Credit Suisse First Boston, which includes DLJ Merchant Banking Partners,
L.P. In November 2000, Credit Suisse Group acquired Donaldson, Lufkin &
Jenrette, Inc. Prior to the acquisition, Mr. Finney was a principal of Credit
Suisse First Boston Equity Partners since May 2000. Previously, he was a Vice
President in the Mergers & Acquisitions Group of Credit Suisse First Boston,
Inc. from 1999 to 2000 and an associate from 1995 to 1999.
Mathew J. Lori became a director of Doane and Doane Pet Care
Enterprises, Inc. in March 2001 and currently serves as a principal of J.P.
Morgan Partners, LLC., the private equity investment arm of J.P. Morgan Chase &
Co. Mr. Lori joined the predecessor of J.P. Morgan Partners, LLC in 1993 after
completing his M.B.A. from Kellogg Graduate School of Management at Northwestern
University. Prior to receiving his M.B.A., he worked in the Corporate Finance
Group at Ernst & Young in Toronto. Mr. Lori is also a director of Berry Plastics
Corporation.
Terry R. Peets became a director of Doane and Doane Pet Care
Enterprises, Inc. in October 2001. Mr. Peets is currently a consultant to
JPMorgan Partners. Over the past 25 years, Mr. Peets has served as Chairman of
Bruno's Supermarkets, Inc., Executive Vice President of Vons Grocery Company,
Executive Vice President of Ralphs Grocery Company, and President and CEO of PIA
Merchandising, Inc. Mr. Peets is a director of Diamond Brands, Inc., PSC, Inc.,
the Park City Group, the City of Hope and the Children's Museum of Orange
County.
Stephen C. Sherrill became a director of Doane and Doane Pet Care
Enterprises, Inc. in August 1998. He has been a Managing Director of Bruckmann,
Rosser, Sherrill & Co., Inc. since its formation in 1995. Bruckmann, Rosser,
Sherrill & Co., Inc. is the management company for Bruckmann, Rosser, Sherrill &
Co., L.P. Mr. Sherrill previously served as a director of Windy Hill. Mr.
Sherrill was an officer of Citicorp Venture Capital from 1983 through 1994.
Previously, he was an associate at the New York law firm of Paul, Weiss,
Rifkind, Wharton & Garrison. Mr. Sherrill is a director of Galey & Lord, Inc.,
B & G Foods, Inc., HealthPlus Corporation and Alliance Laundry Systems, L.L.C.
Paul E. Suckow became a director of Doane in November 2002. Mr. Suckow
is an adjunct professor of economics and finance at Villanova University and
Widener University. Prior to his teaching career, he spent 25 years in the
investment management industry, retiring in 1999. Mr. Suckow held positions as
Executive Vice President, Chief Investment Officer-Fixed Income at Delaware
Investment Advisers, Inc. and Executive Vice President, Director of Fixed Income
Securities at Oppenheimer Management Corporation. He is a director of Ascent
Assurance, Inc., Prandium, Inc. and Dunwoody Village, a non-profit continuing
care community.
Jeffrey C. Walker has been a director of Doane and Doane Pet Care
Enterprises, Inc. since April 1996. Mr. Walker is Vice Chairman of J.P. Morgan
Chase & Co. and has been Managing Partner of J.P. Morgan Partners, LLC, the
private equity investment arm of J.P. Morgan Chase & Co., since 1988 and a
General Partner thereof since 1984. Mr. Walker is a director of 1-800-Flowers
and Guitar Center. He is also a director of a number of privately held
companies.
Messrs. Peets, Sherrill and Walker serve on our Audit Committee, and
Messrs. Cahill, Kelly and Walker serve on our Compensation Committee.
39
ITEM 11 -- EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the Chief
Executive Officer of Doane and the other four most highly compensated
individuals serving as executive officers for the fiscal year ended December 28,
2002 who earned $100,000 or more in combined salary and bonus during such year
(collectively, the "Named Executive Officers"):
LONG-TERM
COMPENSATION
AWARDS OF
ANNUAL COMPENSATION(1) SECURITIES
-------------------------------------- UNDERLYING
NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTIONS/SARS
POSITION AT DOANE YEAR SALARY BONUS COMPENSATION (#) ALL OTHER COMPENSATION
- --------------------------------------- ------ -------- ----- ------------ ------------ -------------------------
Douglas J. Cahill 2002 $400,000 (2) $ -- -- $207,506(3)(4)(5)(6)
President and Chief 2001 400,000 -- -- 298,000 7,006(3)(4)(5)
Executive Officer 2000 400,000 -- -- 158,500 7,656(3)(4)(5)
Philip K. Woodlief 2002 225,000 (2) -- -- 61,139(3)(4)(5)(6)
Vice President, Finance and 2001 220,833 -- -- 135,000 4,164(3)(4)(5)
Chief Financial Officer 2000 175,000 -- 5,600(7) 50,000 44,523(3)(4)(5)(8)(9)
David L. Horton 2002 225,000 (2) -- -- 62,973(3)(4)(5)(6)
Vice President and General Manager 2001 200,000 -- -- 135,000 6,782(3)(4)(5)
of North American Operations 2000 175,000 -- -- 50,000 7,548(3)(4)(5)
Joseph J. Meyers 2002 200,000 (2) -- -- 57,053(3)(4)(5)(6)
Vice President, Supply Chain, Quality 2001 187,500 -- -- 100,000 6,768(3)(4)(5)
and Chief Information Officer 2000 175,000 -- -- 50,000 7,146(3)(4)(5)
Terry W. Bechtel 2002 200,000 (2) -- -- 102,324(4)(5)(6)(10)
Vice President, Wal*Mart 2001 183,999 -- -- 75,000 119,020(4)(5)(10)
2000 168,000 -- -- 21,200 72,978(3)(4)(5)(10)
- ----------
(1) Amounts exclude perquisites and other personal benefits that did not
exceed the lesser of either $50,000 or 10% of the total annual salary
and bonus reported for each executive officer.
(2) Our Compensation Committee has not reviewed and approved bonus payments
for fiscal 2002. Subject to this committee's review and approval each
year, the annual bonus for the Named Executive Officers is calculated
by multiplying their respective target bonus amounts times a factor
that is determined according to the achievement of a corporate
performance incentive target. Actual corporate performance can result
in the actual bonus being less than or greater than the target bonus.
The target bonus for Mr. Cahill is 100% of his annual base salary
amount and the target bonuses for each of Messrs. Woodlief, Horton,
Meyers and Bechtel are 50% of their respective annual base salary
amounts. Actual corporate performance for fiscal 2002 was approximately
120% of the incentive target.
(3) Amounts include a company match and profit sharing contribution under
the Doane Pet Care Retirement Savings Plan as follows: Mr. Cahill --
$5,650 in 2000, $5,000 in 2001 and $5,500 in 2002; Mr. Woodlief --
$7,518 in 2000, $2,250 in 2001 and $2,969 in 2002; Mr. Horton -- $5,650
in 2000, $4,875 in 2001 and $4,803 in 2002; Mr. Meyers -- $5,248 in
2000, $4,865 in 2001 and $5,144 in 2002; and Mr. Bechtel -- $400 in
2000.
(4) Amounts include term life insurance premiums as follows: Mr. Cahill --
$192 in 2000, 2001 and 2002; Mr. Woodlief -- $84 in 2000, $100 in 2001
and $106 in 2002; Mr. Horton -- $84 in 2000, $93 in 2001 and $106 in
2002; Mr. Meyers -- $84 in 2000, $89 in 2001 and $94 in 2002; and Mr.
Bechtel -- $84 in 2000, $86 in 2001 and $94 in 2002.
(5) Amounts include disability insurance premiums in 2000, 2001 and 2002 of
$1,814.
(6) Amounts include retention bonuses paid as follows: Mr. Cahill --
$200,000; Mr. Woodlief -- $56,250; Mr. Horton -- $56,250; Mr. Meyers --
$50,000; and Mr. Bechtel -- $50,000.
(7) Amount includes reimbursement for the payment of taxes associated with
relocation.
(8) Amount includes bonus received in connection with the acquisition of
Arovit in 2000 for Mr. Woodlief of $25,000.
(9) Amounts include relocation expenses for Mr. Woodlief of $10,107.
40
(10) Amount includes annual vested benefit under the non-qualified salary
continuation agreement for Mr. Bechtel of $70,680 in 2000, $117,120 in
2001 and $33,600 in 2002.
EMPLOYMENT AND RETIREMENT AGREEMENTS
We entered into employment agreements with Messrs. Cahill, Horton, and
Bechtel effective January 1, 1998, Mr. Meyers effective August 17, 1998 and Mr.
Woodlief effective February 15, 1999, all of which renew annually. The terms of
their employment agreements are substantially similar except for salary and
bonus amounts. The agreements are subject to early termination for cause without
severance. The employment agreements for Messrs. Woodlief, Horton and Meyers
provide (1) that terminations without cause entitle the executive to receive
severance payments equal to two year's base salary and bonus and (2) for a two
year non-competition agreement commencing upon termination for any reason. The
employment agreements of Messrs. Cahill and Bechtel contain similar provisions
except that the severance and non-competition terms are three years and one
year, respectively. Mr. Bechtel has announced his retirement, effective March
31, 2003.
In connection with the pending retirement of Mr. Bechtel, effective on March
31, 2003, we entered into a retirement agreement with Mr. Bechtel. The
retirement agreement provides for a three year non-competition agreement in
exchange for the continued payment to Mr. Bechtel of an amount equal to his
current base salary during the first year following his retirement and the
payment of an amount equal to one-half of his current base salary during the
second and third years following his retirement.
Each of the Named Executive Officers was awarded a retention bonus in an
amount equal to their annual bonus target amount. One-half of the bonus was paid
in fiscal 2002 and the other one-half will be paid on June 30, 2003 if the
officer is still employed by us. Pursuant to the terms of his retirement
agreement, Mr. Bechtel will receive the second half of his retention bonus.
COMPENSATION OF DIRECTORS
Lawrence S. Benjamin and Terry R. Peets serve as independent directors of
Doane and Doane Pet Care Enterprises, Inc. Pursuant to agreements entered at the
time of their appointments, Mr. Benjamin and Mr. Peets are paid a $1,500 per
month retainer fee and $2,000 for each board of directors meeting they attend
and each informal operations meeting of Doane Pet Care Enterprises, Inc. they
attend. Pursuant to these agreements, Mr. Benjamin and Mr. Peets were also
granted stock options covering 20,000 shares under the 1999 Stock Incentive
Plan. These options have a "time-vesting" schedule pursuant to which one-third
of the stock options will vest after each of the first three years following the
grant date. Edward H. D'Alelio and Paul E. Suckow serve as independent directors
of Doane. Mr. D'Alelio and Mr. Suckow are paid $2,000 for each board of
directors meeting they attend. In fiscal 2002, Messrs, Peets, Benjamin, D'Alelio
and Suckow were paid $34,000, $22,500, $2,000 and $2,000, respectively. No
compensation was paid by us to our other directors.
STOCK OPTION PLANS
Effective November 1, 1996, our parent adopted its 1996 Stock Option Plan,
as amended. On July 14, 1999, our parent adopted the 1999 Stock Incentive Plan.
In connection with the adoption of the 1999 Stock Incentive Plan, no new grants
can be made under the 1996 Stock Option Plan. Effective October 31, 2001, our
parent approved the "repricing" of all vested and unvested stock options under
the 1996 Stock Option Plan and the 1999 Stock Incentive Plan that had an
exercise price exceeding $2.50 per share. All such eligible stock options were
given a new exercise price of $2.50 per share. However, because there was a
change in the vesting of the stock options, with all eligible stock options
being put on a new "time-vesting" schedule, the repricing involved a surrender
of the eligible stock options in exchange for a grant of new stock options
covering an equivalent number of shares at the new exercise price. Stock options
covering 566,000 shares under the 1996 Stock Option Plan and stock options
covering 950,300 shares under the 1999 Stock Incentive Plan were surrendered.
Stock options covering a total of 1,516,300 shares were granted at the $2.50 per
share exercise price, and all such grants were made under the 1999 Stock
Incentive Plan and are accounted for as variable plan awards. Since the fair
value of our Parent's Class A common stock was less than $2.50 per share at
December 29, 2001, no compensation expense was recorded in fiscal 2001 for these
variable awards. While the estimated fair value of our Parent's Class A common
stock exceeded $2.50 per share at December 28, 2002, the compensation expense in
fiscal 2002 was minimal. Pursuant to the time-vesting schedule
41
for the stock options granted to our employees, 50% of an individual's stock
options will vest two years after the grant date, 25% will vest after the third
year, and the remaining 25% will vest after the fourth year. Generally, all
stock options vest upon a change of control of our parent. Under the 1996 Stock
Option Plan, 594,200 shares were outstanding at December 28, 2002. Under the
1999 Stock Incentive Plan, 4,200,000 shares are authorized for issuance, and as
of December 28, 2002, options covering 3,209,800 shares had been granted and
remain outstanding.
STOCK OPTION GRANTS
No stock options were granted to the Named Executive Officers during fiscal
2002.
STOCK OPTION EXERCISES
The following table sets forth certain information with respect to exercises
of stock options during fiscal 2002 by the Named Executive Officers and the
number of shares underlying unexercised stock options held by such officers as
of December 28, 2002:
NUMBER OF NUMBER OF SHARES UNDERLYING VALUE OF SHARES UNDERLYING IN THE
SHARES UNEXERCISED OPTIONS MONEY UNEXERCISED OPTIONS
ACQUIRED ON ----------------------------- ---------------------------------
NAME EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- ------------ ----------- ------------- ----------- -------------
Douglas J. Cahill - - 900,200 $ - $ 72,016
Philip K. Woodlief - - 241,200 - 19,296
David L. Horton - - 281,200 - 22,496
Joseph J. Meyers - - 221,200 - 17,696
Terry W. Bechtel - 79,601 165,799 6,368 13,264
The value of the exercisable and unexercisable options is calculated based on
the difference between the option exercise price and the fair market value as of
December 28, 2002.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Douglas J. Cahill, our President and Chief Executive Officer, served as
a member of our Compensation Committee in fiscal 2002. Messrs. Kelly and Walker
also served on our Compensation Committee in fiscal 2002.
OTHER COMPENSATORY ARRANGEMENTS
401(k) plans. We currently have two active plans. On January 1, 2000, we
adopted the Doane Pet Care Retirement Savings Plan, which was formed through the
merger of two predecessor plans. The merged plan was amended and restated and is
intended to be a qualified plan under the Internal Revenue Code. The plan
provides coverage for eligible employees and permits employee contributions from
1% to 60% of pre-tax earnings, subject to annual dollar limits set by the IRS.
We match 50% of the first 6% of the participant's contribution with a provision
for other contributions at the board of directors' discretion. Employer
contributions are vested 25% per year for each full year of service.
The Doane Pet Care Savings and Investment Plan -- Union Plan covers eligible
union employees at the Joplin, Missouri and Muscatine, Iowa plants. This plan is
intended to be a qualified retirement plan under the Internal Revenue Code and
permits employee contributions between 1% and 60% of pre-tax earnings, subject
to annual dollar limits set by the IRS, and provides for a variety of investment
options.
Non-qualified salary continuation agreements. Doane has entered into
agreements with all of the Named Executive Officers to provide benefits to those
employees or their beneficiaries in the event of the death of the employee or
retirement by the employee at age 65 or on or after age 55 with 10 years of
service with Doane. If the employee remains employed until age 65, the employee
or the employee's beneficiary will receive an annual retirement benefit payable
for 10 years as set forth in the agreement. If the employee terminates
employment before age 65 but after age 55 and with 10 years of service with
Doane, the employee's retirement benefit will be reduced in accordance with
percentages specified in the agreement, depending upon the employee's age at
retirement ranging from 100% at age 65 to 55.8% at age 55. Assuming that the
Named Executive Officers remain employed with
42
Doane until age 65, they will receive the following annual amounts for ten
years: Mr. Cahill -- $160,000; Mr. Woodlief -- $90,000; Mr. Horton -- $90,000;
and Mr. Meyers -- $80,000. Following Mr. Bechtel's retirement on March 31, 2003,
he will receive an annual amount of $60,656 for ten years. Under the terms of
the agreements, each employee may, with the consent of Doane, elect to receive
the benefit in a lump-sum payment equal to the actuarial equivalent of the
installment payments discounted at a 6% interest rate.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
All of our issued and outstanding shares of common stock are held by
Doane Pet Care Enterprises, Inc. As of February 1, 2003, we had 1,200,000 shares
of senior preferred stock issued and outstanding, 200,000 of which were held by
J.P. Morgan Partners (BHCA), L.P. and one of its affiliates and 1,000,000 of
which were held by qualified institutional buyers, as defined in Rule 144A under
the Securities Act. The following table sets forth certain information regarding
the beneficial ownership of Doane Pet Care Enterprises, Inc.'s common stock as
of February 1, 2003 by:
- each director of Doane;
- each Named Executive Officer;
- each person who is known by us to own beneficially more than
5% of the common stock of Doane Pet Care Enterprises, Inc.;
- all parties to the investors' agreement as a group; and
- all directors and executive officers as a group.
Unless otherwise indicated, each person has sole voting and dispositive
power over the shares indicated as owned by that person. Certain of Doane Pet
Care Enterprises, Inc.'s principal stockholders are parties to the investors'
agreement. See Item 13 -- "Certain Relationships and Related Transactions --
Investors' Agreement."
43
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER (1) OWNED BENEFICIALLY PERCENT OF CLASS (2)
- ---------------------------------------------------- ------------------ --------------------
J.P. Morgan Partners (BHCA), L.P. (3) 9,682,246 34.9
Bruckmann, Rosser, Sherrill & Co., L.P. (4) 6,162,868 26.1
DLJ Merchant Banking Partners, L.P. (5) 4,866,356 19.1
Equus II Inc. 1,943,598 9.2
Summit Capital, Inc. (6) 1,892,769 9.0
Laura Hawkins Mansur (7) 1,781,000 8.5
Bob L. Robinson (8) 1,181,546 5.6
PNC Capital Corp. (9) 1,111,304 5.2
Jeffrey C. Walker (3) 9,682,246 34.9
Stephen C. Sherrill (4) 6,162,868 26.1
Lawrence S. Benjamin - *
Jerry W. Finney, Jr. (5) 4,866,356 19.1
George B. Kelly (6) 1,892,769 9.0
Mathew J. Lori (10) - *
Edward H. D'Alelio (11) - *
Paul E. Suckow (11) - *
Terry R. Peets (12) 6,666 *
Douglas J. Cahill (12) 245,562 1.2
Philip K. Woodlief (12) 27,781 *
David L. Horton (12) 47,781 *
Joseph J. Meyers - *
Terry W. Bechtel (12) 306,819 1.5
All parties to the investors' agreement as a group 33,808,751 95.5
All executive officers and
directors as a group (17 persons) 23,342,541 66.7
- ----------
* Represents less than one percent.
(1) The address of J.P. Morgan Partners (BHCA), L.P. and Messrs. Walker and
Lori is 1221 Avenue of the Americas, New York, New York 10020. The
address of Bruckmann, Rosser, Sherrill & Co., L.P. and Mr. Sherrill is
126 East 56th Street, New York, New York 10022. The address of DLJ
Merchant Banking Partners, L.P. and Mr. Finney is 11 Madison Avenue,
16th Floor, New York, New York 10010. The address of Equus II Inc. is
2929 Allen Parkway, Suite 2500, Houston, Texas 77019. The address of
Summit Capital, Inc. and Mr. Kelly is 600 Travis, Suite 6110, Houston,
Texas 77002. The address of Mrs. Mansur is 5602 Indian Circle, Houston,
Texas 77056. The address of Mr. Robinson is 8591 SE Highway 166, Baxter
Springs, Kansas 66713. The address of PNC Capital Corp. is 3150 CNG
Tower, 625 Liberty Avenue, Pittsburgh, Pennsylvania 15222. The address
of Mr. Benjamin is 200 South Wacker Drive, Suite 3100, Chicago,
Illinois 60606. The address of Mr. Peets is 327 Coral Avenue, Balboa
Island, Newport Beach, California 92662. The address of Messrs. Cahill,
Woodlief, Horton, Meyers and Bechtel is 210 Westwood Place South, Suite
400, Brentwood, Tennessee 37027. The address of Mr. D'Alelio is 7
Ringbolt Road, Hingman, Massachusetts 02043. The address of Mr. Suckow
is 1219 Denbigh Lane, Radnor, Pennsylvania 19087.
(2) In accordance with Rule 13d-3(d) under the Securities Exchange Act of
1934, the calculation of this percentage assumes that securities
subject to options, warrants, rights or conversion privileges are
outstanding for the purpose of computing the percentage of outstanding
securities of the class owned by each beneficial owner, but such
securities subject to options, warrants, rights or conversion
privileges are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person.
(3) Amount represents shares held by J.P. Morgan Partners (BHCA), L.P. and
related parties. Of the 9,682,246 shares indicated as owned by J.P.
Morgan Partners (BHCA), L.P., (i) 428,000 represent shares of Class A
Common Stock; (ii) 2,560,093 represent shares of Class B Common Stock;
and (iii) 6,694,153 are shares issuable within 60 days upon
44
exercise of warrants. Mr. Walker, a director of Doane, serves as
President of JPMP Capital Corp., the general partner of JPMP Master
Fund Manager, L.P., the general partner of J.P. Morgan Partners (BHCA),
L.P. As such, Mr. Walker may be deemed to beneficially own the shares
indicated as owned by J.P. Morgan Partners (BHCA), L.P. Mr. Walker
disclaims beneficial ownership of these shares within the meaning of
Rule 13d-3 of the Securities Exchange Act of 1934.
(4) Amount includes shares held by Bruckmann, Rosser, Sherrill & Co., L.P.
and certain other entities and individuals affiliated with it. Of the
6,162,868 shares indicated as owned by Bruckmann, Rosser, Sherrill &
Co., L.P., (i) 3,585,822 represent shares of Class A Common Stock and
(ii) 2,577,046 are shares issuable within 60 days upon exercise of
warrants. Of the shares indicated as owned by Bruckmann, Rosser,
Sherrill & Co., L.P., (i) 60,617 shares of Class A Common Stock and
(ii) 44,042 shares issuable within 60 days upon exercise of warrants
are owned individually by Mr. Sherrill, a director of Doane. Mr.
Sherrill may be deemed to beneficially own 5,924,484 shares
beneficially owned by Bruckmann, Rosser, Sherrill & Co., L.P. and
certain other entities and individuals affiliated with it. Mr. Sherrill
disclaims beneficial ownership of 238,384 of such shares within the
meaning of Rule 13d-3 of the Securities Exchange Act of 1934.
(5) Amount represents shares held by DLJ Merchant Banking Partners, L.P.
and related parties. Of the 4,866,356 shares held by DLJ Merchant
Banking Partners, L.P., (i) 351,428 represents shares of Class A common
stock and (ii) 4,514,928 are shares issuable within 60 days upon the
exercise of warrants. Of the shares indicated, 150,494 shares, 80,135
shares, 81,474 shares, 34,917 shares and 4,408 shares are held by DLJ
Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ
ESC II, L.P., DLJ Merchant Banking Funding, Inc. and DLJ Offshore
Partners, C.V., respectively. Of the warrants indicated, warrants to
purchase 2,126,748 shares, 950,960 shares, 524,444 shares, 857,640 and
55,136 shares are held by DLJ Merchant Banking Partners, L.P., DLJ
International Partners, C.V., DLJ First ESC L.P., DLJ Merchant Banking
Funding, Inc., and DLJ Offshore Partners, C.V., respectively. In
November 2000, Credit Suisse First Boston, Inc. acquired Donaldson,
Lufkin & Jenrette, Inc. DLJ Merchant Banking Partners, L.P. is a
limited partnership, the general partner of which is DLJ Merchant
Banking, Inc., an indirect affiliate of Credit Suisse First Boston,
Inc. and Credit Suisse Group. Mr. Finney is a director of Doane and
serves as a Director of the Private Equity Group of Credit Suisse First
Boston and as such may be deemed to beneficially own such shares. Mr.
Finney disclaims beneficial ownership of such shares within the meaning
of Rule 13d-3 of the Securities Exchange Act of 1934.
(6) Amount includes shares held by Summit Capital, Inc. Summit/DPC
Partners, L.P. was dissolved in 2001 and all of the shares it held were
distributed to its partners, including Summit Capital, Inc. Mr. Kelly,
a director of Doane, is Chairman of the Board and a stockholder of
Summit Capital, Inc. Mr. Kelly may be deemed to beneficially own the
shares indicated. Mr. Kelly disclaims beneficial ownership of 24,006
shares within the meaning of Rule 13d-3 of the Securities Exchange Act
of 1934.
(7) Of the shares indicated as owned by Mrs. Mansur, 634,500 are held by
the estate of Walid Mansur, 846,500 are owned by Mrs. Mansur and
300,000 are held in trust for their children.
(8) Of the shares indicated as owned by Mr. Robinson, 264,566 are held in
Mr. Robinson's name, 560,000 are held in a limited partnership of which
Mr. Robinson is the Managing Partner, 150,371 are held in trust for Mr.
Robinson, 150,371 are held in trust for Mr. Robinson's wife, Jeanine L.
Robinson, and 56,238 are held in Mrs. Robinson's name.
(9) Amount represents shares held by PNC Capital Corp. and related
entities. Of the 1,111,304 shares indicated as owned by PNC Capital
Corp., (i) 711,384 represent shares of Class A Common Stock; and (ii)
399,920 are shares issuable within 60 days upon the exercise of
warrants.
(10) Amount excludes shares held by J.P. Morgan Partners (BHCA), L.P. and
related parties. Mr. Lori, a director of Doane, is a limited partner of
JPMP Master Fund Manager, L.P., the general partner of J.P. Morgan
Partners (BHCA), L.P. As such, Mr. Lori is not deemed to beneficially
own the shares indicated as owned by J.P. Morgan Partners (BHCA), L.P.
(11) These directors serve only on our board of directors, and not on the
board of directors of Doane Pet Care Enterprises, Inc.
(12) Amounts include shares which are issuable within 60 days upon exercise
of warrants as follows:, Mr. Cahill -- 45,562; Mr. Woodlief -- 22,781;
and Mr. Horton -- 22,781. In addition, amount includes 79,601 options
which are exerciseable within 60 days for Mr. Bechtel and 6,666 options
which are exercisable within 60 days by Mr. Peets.
45
EQUITY COMPENSATION PLANS
Neither we nor our parent, subsidiaries or affiliates have any
compensation plans or individual compensation arrangements under which our
equity securities are authorized for issuance to employees or non-employees in
exchange for consideration in the form of goods or services as described in SFAS
123, or any successor standard. The compensation plans under which the equity
securities of our parent are authorized for issuance are discussed above.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INVESTORS' AGREEMENT
Doane Pet Care Enterprises, Inc., Doane, Summit Capital, Inc., J.P.
Morgan Partners (BHCA), L.P. and an affiliate thereof, DLJ Merchant Banking
Partners, L.P. and certain of its affiliates, Bruckmann, Rosser, Sherrill & Co.,
L.P. and certain affiliated entities and individuals, all of the former
stockholders of Windy Hill and certain other stockholders of Doane are parties
to a second amended and restated investors' agreement. The investors' agreement
contains provisions concerning our governance and the governance of Doane Pet
Care Enterprises, Inc., restrictions on the transferability of our securities
and those of Doane Pet Care Enterprises, Inc. and registration rights for such
securities.
The governance provisions of the investors' agreement provide that our
board of directors and the board of directors of Doane Pet Care Enterprises,
Inc. each consist of at least seven members. The investors' agreement provides
that at any time the number of shares of common stock (which, for the purposes
of the investors' agreement, includes warrants on an as-if-exercised basis) of
Doane Pet Care Enterprises, Inc. owned of record by:
- J.P. Morgan Partners (BHCA), L.P. is 5% or more, it will have
the right to designate two individuals as directors.
- DLJ Merchant Banking Partners, L.P. is 5% or more, it will
have the right to designate one individual as director.
- the former investors in Summit/DPC Partners, L.P. (including
after its dissolution and the distribution of its shares) is
50% or more of the number of shares of common stock of Doane
Pet Care Enterprises, Inc. it owned as of August 3, 1998,
Summit Capital, Inc. will have the right to designate one
individual as director.
- the Windy Hill investors is 50% or more of the number of
shares of common stock of Doane Pet Care Enterprises, Inc.
owned by them as of August 3, 1998, Bruckmann, Rosser,
Sherrill & Co., L.P. will have the right to designate one
individual.
Additionally, one designee as director is required to be the Chief
Executive Officer of Doane Pet Care Enterprises, Inc. and one is required to be
an independent director designated by a majority of the board of directors.
SPONSOR FACILITY
In March 2001, we refinanced $25.0 million of indebtedness under our
senior credit facility with loans from shareholders of our parent and Messrs.
Cahill, Woodlief and Horton, and certain other executive officers. Our sponsor
facility is a senior unsecured loan bearing interest at 15%. Principal and
accrued interest under the loan is due on March 31, 2007. Our parent issued
warrants in connection with the sponsor facility that give the warrantholders
the right to purchase 30% of the outstanding stock of our parent for a nominal
amount.
46
We intend to use approximately $33.7 million of the net proceeds of the
sale of our senior notes to repay the sponsor facility in full, although we have
no right to require the holders of promissory notes under our sponsor facility
to tender their notes prior to maturity. See Item 7 -- "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Refinancing - Use of Proceeds."
TRANSACTIONS WITH DLJ MERCHANT BANKING PARTNERS, L.P. AND ITS AFFILIATES
DLJ Merchant Banking Partners, L.P. and certain other affiliates of
Credit Suisse First Boston LLC are the owners of 351,428 shares of common stock
and warrants to purchase 4,514,928 shares of Doane Pet Care Enterprises, Inc.
Credit Suisse First Boston LLC was one of the joint book-running managers in the
offering of our senior notes. Credit Suisse First Boston LLC and its affiliates
have received certain payments of fees, including fees for various investment
banking and commercial banking services provided to us and to Doane Pet Care
Enterprises, Inc. DLJ Capital Funding, Inc., an affiliate of Credit Suisse First
Boston LLC, is the syndication agent and a lender under our senior credit
facility and received a portion of our repayment of loans under our senior
credit facility from the net proceeds of the sale of our senior notes. In
connection with the sale of our senior notes, Credit Suisse First Boston LLC and
its affiliates received fees of approximately $3.3 million. There are currently
no agreements to make any such additional payments.
DLJ Merchant Banking Partners, L.P. and certain other affiliates of
Credit Suisse First Boston LLC are parties to the investors' agreement. In
accordance with the investors' agreement, DLJ Merchant Banking Partners, L.P.
has designated Mr. Finney to the boards of directors of Doane and Doane Pet Care
Enterprises, Inc.
TRANSACTIONS WITH J.P. MORGAN PARTNERS (BHCA), L.P. AND ITS AFFILIATES
J.P. Morgan Partners (BHCA), L.P. is an affiliate of JPMorgan Chase
Bank and J.P. Morgan Securities Inc. J.P. Morgan Partners (BHCA), L.P. and one
of its affiliates own:
- 200,000 shares of our senior preferred stock;
- 428,000 shares of Class A Common Stock of Doane Pet Care
Enterprises, Inc. and 2,560,093 shares of Class B (non-voting)
Common Stock of Doane Pet Care Enterprises, Inc.; and
- warrants to purchase 6,694,153 shares of common stock of Doane
Pet Care Enterprises, Inc.
JPMorgan Chase Bank, J.P. Morgan Securities Inc. and their affiliates
perform various commercial banking and investment banking services from time to
time for us and our affiliates. J.P. Morgan Securities Inc. was one of the joint
book-running managers in the offering of our senior notes. Affiliates of J.P.
Morgan Securities Inc. are holders of promissory notes under our sponsor
facility. Assuming these affiliates tender all of their promissory notes by the
applicable expiration date and assuming a repayment date of February 28, 2003,
these affiliates would receive approximately $16.9 million of the net proceeds
from the sale of our senior notes. JPMorgan Chase Bank serves as the
administrative agent and a lender under our senior credit facility and received
a portion of our repayment of loans under our senior credit facility from the
net proceeds of our recent sale of senior notes. Since the beginning of fiscal
2001 through February 1, 2003, JPMorgan Chase Bank, J.P. Morgan Securities Inc.
and their affiliates have received a total of $1.0 million for acting in the
foregoing capacities, excluding interest and other charges earned generally by
all lenders under our senior credit facility. JPMorgan Chase Bank received a
$0.5 million fee in connection with the amendments to our senior credit facility
effected contemporaneously with the sale of our senior notes. In connection with
the sale of our senior notes, J.P. Morgan Securities Inc. and its affiliates
received fees of approximately $1.6 million. There are currently no agreements
to make any additional commercial banking or investment banking payments to
JPMorgan Chase Bank, J.P. Morgan Securities Inc. or their affiliates, except
that J. P. Morgan Securities Inc. may receive investment banking fees in the
future, under certain circumstances, if we decide to sell our European business.
47
J.P. Morgan Partners (BHCA), L.P. is a party to the investors'
agreement. In accordance with the investors' agreement, it has designated
Messrs. Walker and Lori to the boards of directors of Doane and Doane Pet Care
Enterprises, Inc.
PROPOSED REPAYMENT OF SPONSOR FACILITY NOTES HELD BY CERTAIN BENEFICIAL OWNERS
In addition to the affiliates of J.P. Morgan Securities Inc. that hold
promissory notes under our sponsor facility, as discussed above, affiliates of
other persons known to us to beneficially own more than 5% of the common stock
of Doane Pet Care Enterprises, Inc. also hold promissory notes under our sponsor
facility and may receive payments from us from the net proceeds of our recent
senior note offering. Assuming these persons tender all of their promissory
notes by the applicable expiration date and assuming a repayment date of
February 28, 2003, Bruckmann, Rosser, Sherrill & Co., L.P. and its affiliates
would receive approximately $7.5 million, Summit Capital, Inc. and its
affiliates would receive approximately $2.3 million and PNC Capital Corp. and
its affiliates would receive approximately $1.2 million of the net proceeds from
the sale of our senior notes. Additionally, Messrs. Cahill, Woodlief and Horton
each will receive $0.1 million from the repayment of their promissory notes
under our sponsor facility in connection with the sale of our senior notes.
ITEM 14 -- CONTROLS AND PROCEDURES
Evaluation and 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 SEC'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 Securities Exchange Act of 1934, as amended, 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 annual report on Form 10-K, 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.
48
PART IV
ITEM 15 -- EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The following financial statements and the Independent
Auditors' Report thereon are included on pages F-1 through
F-41 of this annual report on Form 10-K:
- Independent Auditors' Report
- Consolidated Balance Sheets as of December 29, 2001
and December 28, 2002
- Consolidated Statements of Income for the years ended
December 30, 2000, December 29, 2001 and December 28,
2002
- Consolidated Statements of Stockholder's Equity and
Comprehensive Income for the years ended December 30,
2000, December 29, 2001 and December 28, 2002
- Consolidated Statements of Cash Flows for the years
ended December 30, 2000, December 29, 2001 and
December 28, 2002
- Notes to Consolidated Financial Statements
(2) No financial statement schedules are required to be filed.
(3) Exhibits
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------
3.1 -- Certificate of Incorporation of Doane Pet Care Company
(incorporated by reference to Exhibit 3.1 to Doane Pet Care
Company's Registration Statement on Form S-1, Reg. No.
33-98110 (the "Form S-1"))
3.2 -- Certificate of Designations, Preferences and Rights of 14.25%
Senior Exchangeable Preferred Stock due 2007, dated October 4,
1995 (incorporated by reference to Exhibit 3.2 to Doane Pet
Care Company's Annual Report on Form 10-K for the year ended
December 29, 2001 (the "2001 Form 10-K"))
3.3 -- Certificate of Amendment to Certificate of Incorporation of
Doane Pet Care Company - dated February 4, 1998 (incorporated
by reference to Exhibit 3.2 to Doane Pet Care Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (the
"1997 Form 10-K"))
3.4 -- Certificate of Amendment of Certificate of Incorporation of
Doane Pet Care Company dated November 10, 1998 (incorporated
by reference to Exhibit 3.4 to the 2001 Form 10-K)
3.5 -- Certificate of Amendment of Certificate of Designations,
Preferences and Rights of 14.25% Senior Exchangeable Preferred
Stock due 2007 dated November 11, 1998 (incorporated by
reference to Exhibit 3.5 to the 2001 Form 10-K)
49
3.6 -- Amended and Restated Bylaws of Doane Pet Care Company
(incorporated by reference to Exhibit 3.6 to the 2001 Form
10-K)
4.1 -- Indenture dated November 12, 1998 between Doane Pet Care
Company and Wilmington Trust Company (incorporated by
reference to Exhibit 10.12 of Doane Pet Care Enterprises,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-61027
("Enterprises' Form S-1"))
4.2 -- Registration Agreement among Doane Pet Care Company,
Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc. dated November 12, 1998 (incorporated by
reference to Exhibit 4.2 to Doane Pet Care Company's
Registration Statement on Form S-4, Reg. No. 333-70759 (the
"Form S-4"))
*4.3 -- Indenture dated February 28, 2003 between Doane Pet Care
Company and Wilmington Trust Company
*4.4 -- Registration Rights Agreement dated as of February 28, 2002
between Doane Pet Care Company, DPC Investment Corp.,
Doane/Windy Hill Joint Venture L.L.C., Credit Suisse First
Boston LLP and J.P. Morgan Securities, Inc.
9.1 -- Second Amended and Restated Investors' Agreement dated as of
March 26, 2001 among Doane Pet Care Company, Doane Pet Care
Enterprises, Inc., Summit Capital Inc., Summit/DPC Partners
Inc., J. P. Morgan Partners (BHCA), L.P., Baseball Partners,
DLJ Merchant Banking Partners, L.P., DLJ International
Partners, C.V., DLJ Offshore Partners, C.V., DLJ Merchant
Banking Funding, Inc., DLJ First ESC, L.P., Bruckmann, Rosser,
Sherrill & Co., L.P., PNC Capital Corp., and certain other
persons name therein (incorporated by reference to Exhibit 9.1
to Doane Pet Care Company's Annual Report on Form 10-K/A for
the year ended December 30, 2000 (the "2000 Form 10-K/A"))
+10.1 -- Employment Agreement dated January 1, 1998, between Doane Pet
Care Company and Douglas J. Cahill (incorporated by reference
to Exhibit 10.3 to the 1997 Form 10-K)
+10.2 -- Employment Agreement dated February 15, 1999, between Doane
Pet Care Company and Philip K. Woodlief (incorporated by
reference to Exhibit 10.14 to Enterprises' Form S-1)
+10.3 -- First Amendment to Employment Agreement dated as of January 1,
2001, between Doane Pet Care Company and Philip K. Woodlief
(incorporated by reference to Exhibit 10.4 to the 2000 Form
10-K/A)
+10.4 -- Employment Agreement dated January 1, 1998, between Doane Pet
Care Company and David L. Horton (incorporated by reference to
Exhibit 10.6 to the Form S-4)
+10.5 -- First Amendment to Employment Agreement dated as of January 1,
2001, between Doane Pet Care Company and David L. Horton
(incorporated by reference to Exhibit 10.6 to the 2000 Form
10-K/A)
+10.6 -- Employment Agreement dated August 17, 1998 between Doane Pet
Care Company and Joseph J. Meyers (incorporated by reference
to Exhibit 10.7 to the 2000 Form 10-K/A)
+10.7 -- First Amendment to Employment Agreement dated as of January 1,
2001, between Doane Pet Care Company and Joseph J. Meyers
(incorporated by reference to Exhibit 10.8 to the 2000 from
10-K/A)
+10.8 -- Employment Agreement dated January 1, 1998 between Doane Pet
Care Company and Terry W. Bechtel (incorporated by reference
to Exhibit 10.5 to the 1997 Form 10-K)
50
+10.9 -- Doane Pet Care Enterprises Inc.'s, 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to Doane Pet Care
Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
+10.10 -- First Amendment to Doane Pet Care Enterprises, Inc.'s 1996
Stock Option Plan (incorporated by reference to Exhibit 10.8
to the 1997 Form 10-K)
+10.11 -- Second Amendment to Doane Pet Care Enterprises, Inc.'s, 1996
Stock Option Plan (incorporated by reference to Exhibit 10.9
to the 1997 Form 10-K)
+10.12 -- Doane Pet Care Enterprises, Inc.'s 1999 Stock Incentive Plan
(incorporated by reference to Exhibit 10.10 to Doane Pet Care
Company's Annual Report on Form 10-K for the fiscal year ended
January 1, 2000)
10.13 -- 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 (incorporated by reference
to Exhibit 10.1 to Doane Pet Care Company's Quarterly Report
on Form 10-Q for the quarterly period ended July 1, 2000)
10.14 -- Amendment No. 1 to Amended and Restated Credit Agreement dated
as of March 26, 2001 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
(incorporated by reference to Exhibit 10.14 to the 2000 Form
10-K/A)
10.15 -- Amendment No. 2 to Amended and Restated Credit Agreement dated
as of March 22, 2002 among Doane Pet Care Company, as
borrower, JPMorgan Chase Bank, as administrative agent,
Wachovia Bank N.A., as co-agent, J.P. Morgan Securities Inc.,
as lead arranger, Wachovia Bank N.A. and Danske Bank A/S, as
co-arrangers, and the banks named therein (incorporated by
reference to Exhibit 10.15 to the 2001 Form 10-K)
*10.16 -- Amendment No. 3 to Amended and Restated Credit Agreement dated
as of February 10, 2003 among Doane Pet Care Enterprises,
Inc., Doane Pet Care Company, as borrower, Doane/Windy Hill
Joint Venture L.L.C., DPC Investment Corp., and JPMorgan Chase
Bank, as administrative agent, and the lenders party thereto
*10.17 -- Amendment No. 4 to Amended and Restated Credit Agreement dated
as of February 26, 2003 among Doane Pet Care Enterprises,
Inc., Doane Pet Care Company, as borrower, Doane/Windy Hill
Joint Venture L.L.C., DPC Investment Corp., and JPMorgan Chase
Bank, as administrative agent, and the lenders party thereto
10.18 -- Loan and Warrant Agreement dated as of March 26, 2001 among
Doane Pet Care Enterprises, Inc., Doane Pet Care Company and
each of the lenders named therein (incorporated by reference
to Exhibit 10.15 to the 2000 Form 10-K/A)
*21.1 -- List of Subsidiaries of Doane Pet Care Company
*23.1 -- Consent of KPMG LLP
51
- ----------
* Filed herewith
+ Management contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K from fourth quarter of fiscal 2002.
A report on Form 8-K, dated November 11, 2002, was furnished
pursuant to Item 9 of Form 8-K in connection with our issuance of a
press release announcing our fiscal 2002 third quarter results. We also
announced that we provided the SEC with certifications from our Chief
Executive Officer and Chief Financial Officer on November 12, 2002 in
accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to our security holder
as of the date hereof. We do not expect to furnish our security holder with an
annual shareholder's report or proxy soliciting material subsequent to the
filing of this Form 10-K.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------------------- ---------------------
/s/ GEORGE B. KELLY Chairman of the Board and Director February 28, 2003
- ------------------------------------------
George B. Kelly
/s/ DOUGLAS J. CAHILL Chief Executive Officer, President and February 28, 2003
- ------------------------------------------ Director (Principal Executive Officer)
Douglas J. Cahill
/s/ PHILIP K. WOODLIEF Vice President, Finance and Chief Financial Officer February 28, 2003
- ------------------------------------------ (Principal Financial Officer)
Philip K. Woodlief
/s/ STEPHEN P. HAVALA Corporate Controller and Principal Accounting Officer February 28, 2003
- ------------------------------------------
Stephen P. Havala
Director February 28, 2003
- ------------------------------------------
Lawrence S. Benjamin
Director February 28, 2003
- ------------------------------------------
Edward H. D'Alelio
/s/ JERRY W. FINNEY, JR. Director February 28, 2003
- ------------------------------------------
Jerry W. Finney, Jr.
/s/ MATHEW J. LORI Director February 28, 2003
- ------------------------------------------
Mathew J. Lori
/s/ TERRY R. PEETS Director February 28, 2003
- ------------------------------------------
Terry R. Peets
/s/ STEPHEN C. SHERRILL Director February 28, 2003
- ------------------------------------------
Stephen C. Sherrill
Director February 28, 2003
- ------------------------------------------
Paul E. Suckow
/s/ JEFFREY C. WALKER Director February 28, 2003
- ------------------------------------------
Jeffrey C. Walker
53
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Douglas Cahill, President and Chief Executive Officer of Doane Pet
Care Company, hereby certify that:
1. I have reviewed this annual report on Form 10-K of Doane Pet Care
Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date");
and
(c) presented in this annual 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 the 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
annual report whether 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: February 28, 2003
/s/ DOUGLAS J. CAHILL
-----------------------------------
Douglas J. Cahill
President and Chief Executive Officer
Doane Pet Care Company
54
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Philip K. Woodlief, Vice President, Finance and Chief Financial
Officer of Doane Pet Care Company, hereby certify that:
1. I have reviewed this annual report on Form 10-K of Doane Pet Care
Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date");
and
(c) presented in this annual 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 the 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
annual report whether 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: February 28, 2003
/s/ PHILIP K. WOODLIEF
---------------------------------
Philip K. Woodlief
Vice President, Finance and Chief
Financial Officer
Doane Pet Care Company
55
DOANE PET CARE COMPANY AND SUBSIDIARIES
FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 29, 2001 and December 28, 2002 F-3
Consolidated Statements of Income for the years ended December 30, 2000, December 29, 2001 F-4
and December 28, 2002
Consolidated Statements of Stockholder's Equity and Comprehensive Income for the years
ended December 30, 2000, December 29, 2001 and December 28, 2002 F-5
Consolidated Statements of Cash Flows for the years ended December 30, 2000, December 29, 2001 F-6
and December 28, 2002
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Doane Pet Care Company
We have audited the accompanying consolidated balance sheets of Doane Pet Care
Company and subsidiaries as of December 29, 2001 and December 28, 2002 and the
related consolidated statements of income, stockholder's equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 28, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Doane Pet Care
Company and subsidiaries at December 29, 2001 and December 28, 2002 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 28, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective
December 30, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ KPMG LLP
Nashville, Tennessee
February 14, 2003, except as
to Note 26, which is as of
February 28, 2003
F-2
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,032 $ 7,596
Accounts receivable, net 120,760 129,347
Inventories, net 54,841 63,631
Deferred tax asset 10,115 5,859
Prepaid expenses and other current assets 5,469 8,143
------------ ------------
Total current assets 197,217 214,576
Property, plant and equipment, net 249,379 260,092
Goodwill and trademarks, net 347,081 363,080
Other assets 42,868 32,919
------------ ------------
Total assets $ 836,545 $ 870,667
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 28,488 $ 5,720
Accounts payable 64,013 93,528
Accrued liabilities 57,721 56,113
------------ ------------
Total current liabilities 150,222 155,361
Long-term debt, excluding current maturities 559,335 548,300
Other long-term liabilities 10,805 23,692
Deferred tax liability 12,585 7,261
------------ ------------
Total liabilities 732,947 734,614
------------ ------------
Senior Preferred Stock (Redeemable), 3,000,000 shares authorized,
1,200,000 shares issued and outstanding 65,672 77,550
------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding -- --
Additional paid-in-capital 115,655 115,674
Accumulated other comprehensive income (loss) (7,607) 9,558
Accumulated deficit (70,122) (66,729)
------------ ------------
Total stockholder's equity 37,926 58,503
------------ ------------
Total liabilities and stockholder's equity $ 836,545 $ 870,667
============ ============
See accompanying notes to consolidated financial statements.
F-3
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED
--------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Net sales $ 875,761 $ 895,830 $ 887,333
Cost of goods sold 687,799 749,092 701,418
------------ ------------ ------------
Gross profit 187,962 146,738 185,915
Operating expenses:
Promotion and distribution 52,285 58,993 53,525
Selling, general and administrative 50,507 47,193 48,663
Amortization 12,779 13,743 3,552
Non-recurring expenses 28,639 8,655 1,447
------------ ------------ ------------
Income from operations 43,752 18,154 78,728
Interest expense, net 51,223 57,020 62,395
Other income, net (1,732) (757) (724)
------------ ------------ ------------
Income (loss) before income taxes (5,739) (38,109) 17,057
Income tax expense (benefit) (854) (16,171) 1,786
------------ ------------ ------------
Net income (loss) (4,885) (21,938) 15,271
Preferred stock dividends and accretion (9,240) (10,467) (11,878)
------------ ------------ ------------
Net income (loss) available to common shares $ (14,125) $ (32,405) $ 3,393
============ ============ ============
Basic and diluted net income (loss) per common share $ (14,125) $ (32,405) $ 3,393
============ ============ ============
Basic and diluted weighted-average common
shares outstanding 1,000 1,000 1,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL OTHER
--------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT TOTAL
------ ------ ---------- ------------ ------------ ----------
Balances at January 1, 2000 1,000 $ -- $ 106,708 $ (170) $ (23,592) $ 82,946
Comprehensive loss:
Net loss -- -- -- -- (4,885) (4,885)
Foreign currency translation, net -- -- -- 2,260 -- 2,260
Unrealized loss, net of deferred
tax benefit of $600 -- -- -- (772) -- (772)
----------
Total comprehensive loss (3,397)
----------
Preferred stock dividends -- -- -- -- (8,163) (8,163)
Accretion of preferred stock -- -- -- -- (1,077) (1,077)
Parent capital contribution -- -- 572 -- -- 572
------ ------ ---------- ------------ ------------ ----------
Balances at December 30, 2000 1,000 $ -- $ 107,280 $ 1,318 $ (37,717) $ 70,881
Comprehensive loss:
Net loss -- -- -- -- (21,938) (21,938)
Foreign currency translation, net -- -- -- (7,352) -- (7,352)
Unrealized loss, net of deferred
tax benefit of $1,196 -- -- -- (1,573) -- (1,573)
----------
Total comprehensive loss (30,863)
----------
Preferred stock dividends -- -- -- -- (9,390) (9,390)
Accretion of preferred stock -- -- -- -- (1,077) (1,077)
Parent capital contribution -- -- 8,375 -- -- 8,375
------ ------ ---------- ------------ ------------ ----------
Balances at December 29, 2001 1,000 $ -- $ 115,655 $ (7,607) $ (70,122) $ 37,926
------ ------ ---------- ------------ ------------ ----------
Comprehensive income:
Net income -- -- -- -- 15,271 15,271
Foreign currency translation, net -- -- -- 22,792 -- 22,792
Unrealized loss, net of deferred
tax benefit of $313 -- -- -- (43) -- (43)
Minimum pension liability, net of
deferred tax benefit of $3,556 (5,584) (5,584)
----------
Total comprehensive income 32,436
----------
Preferred stock dividends -- -- -- -- (10,801) (10,801)
Accretion of preferred stock -- -- -- -- (1,077) (1,077)
Parent capital contribution -- -- 19 -- -- 19
------ ------ ---------- ------------ ------------ ----------
Balances at December 28, 2002 1,000 $ -- $ 115,674 $ 9,558 $ (66,729) $ 58,503
====== ====== ========== ============ ============ ==========
See accompanying notes to consolidated financial statements.
F-5
DOANE PET CARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
--------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (4,885) $ (21,938) $ 15,271
Items not requiring (providing) cash:
Depreciation 23,555 27,687 28,612
Amortization 12,779 13,743 3,552
Deferred tax expense (benefit) (1,780) (18,082) 1,258
Non-cash interest expense 2,368 5,844 15,058
Equity in joint ventures (895) (788) (705)
Plant closures and Project Focus 15,337 8,866 --
Net loss on divestitures -- 4,660 --
Other non-cash charges (credits), net (998) 500 2,352
Changes in current assets and liabilities (excluding
amounts acquired):
Accounts receivable (31,300) (661) (2,669)
Inventories (4,103) 5,112 (5,587)
Prepaid expenses and other current assets (960) 154 (1,632)
Accounts payable 27,626 (44,479) 25,541
Accrued liabilities 8,644 (4,554) (2,278)
------------ ------------ ------------
Net cash provided by (used in) operating activities 45,388 (23,936) 78,773
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (35,347) (17,316) (24,348)
Proceeds from sale of assets -- 20,884 1,766
Acquisition related payments, net of cash received (145,764) -- --
Other, net (205) (2,102) (3,320)
------------ ------------ ------------
Net cash provided by (used in) investing activities (181,316) 1,466 (25,902)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements (2,400) 30,400 (23,000)
Proceeds from issuance of long-term debt 159,007 17,511 9,738
Principal payments on long-term debt (22,706) (27,925) (36,172)
Payments for debt issuance costs (2,501) (2,928) (2,316)
Parent capital contribution 572 8,375 19
------------ ------------ ------------
Net cash provided by (used in) financing activities 131,972 25,433 (51,731)
Effect of exchange rate changes on cash and
cash equivalents (80) (89) 424
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (4,036) 2,874 1,564
Cash and cash equivalents, beginning of year 7,194 3,158 6,032
------------ ------------ ------------
Cash and cash equivalents, end of year $ 3,158 $ 6,032 $ 7,596
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Doane Pet Care Company ("Company") is a wholly-owned subsidiary of Doane Pet
Care Enterprises, Inc. ("Parent"). The Company is a leading global provider of
pet food, primarily private label, with 32 combined manufacturing and
distribution facilities in the United States and Europe. The Company
manufactures pet food products primarily for dogs and cats, including dry, wet,
semi-moist, soft dry, soft treats and biscuits, to retailers of all types. The
Company also operates a machine shop and a structural steel fabrication plant
that sells to third parties and supports the Company's facilities.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated. The
Company's 50% joint venture investments are accounted for under the equity
method. Equity from the joint venture investments is recorded in other income,
net, in the accompanying consolidated statements of income.
52-53 Week Fiscal Year
The Company's fiscal year ends on the Saturday nearest to the end of
December; and therefore, fiscal 2000, 2001 and 2002 ended on December 30, 2000,
December 29, 2001 and December 28, 2002, respectively. Fiscal 2000 through 2002
were each 52-week years.
Reclassifications
Certain fiscal 2000 and 2001 amounts have been reclassified to conform with
fiscal 2002 presentation.
Use of Estimates
In conformity with accounting principles generally accepted in the United
States of America, preparation of the Company's financial statements requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the consolidated financial statements; and therefore, actual
results could ultimately differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all liquid investments with original
maturities of three months or less.
Accounts Receivable
Accounts receivable are stated at net realizable value through recording a
valuation allowance for outstanding deductions with customers, doubtful accounts
and cash discounts. The Company's policy is to estimate its allowance by
applying a recovery percentage based on historical collection experience and
performing a specific identification review of customer account balances. The
Company had allowances against accounts receivable of $8.6 million and $5.3
million at December 29, 2001 and December 28, 2002, respectively.
The Company extends unsecured credit in the form of accounts receivable,
principally to retailers and national branded companies throughout the United
States and Europe, with credit extended to one customer representing 45% and 49%
of accounts receivable, net, at December 29, 2001 and December 28, 2002,
respectively.
F-7
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories are stated net of a valuation
allowance for obsolescence, primarily related to packaging inventories. The
Company's policy is to estimate its allowance based on specific identification
of obsolete SKUs or probable SKUs to be rationalized. The Company had allowances
against inventories of $7.6 million and $4.7 million at December 29, 2001 and
December 28, 2002, respectively.
Property, Plant and Equipment
Property, plant and equipment are depreciated using the straight-line method
over the estimated useful lives of 20 to 40 years for buildings and improvements
and 3 to 12 years for machinery and equipment.
Goodwill and Trademarks
Goodwill has been recorded under the purchase accounting method to represent
the excess of the purchase price over the fair value of the assets acquired and
liabilities assumed. The Company's only intangible asset with an indefinite
useful life other than goodwill is its trademarks. See Note 2 -- "Changes in
Accounting Principles" for a discussion of the Company's adoption of Financial
Accounting Standards Board's ("FASB's") Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which
became effective for the Company as of the beginning of fiscal 2002.
Prior to the adoption of SFAS 142, the Company amortized goodwill over 20
and 40 years and trademarks over 30 years using the straight-line method. The
recovery of the carrying value of goodwill and trademarks was periodically
evaluated for impairment in relation to the operating performance and expected
future operating cash flows of the Company on an undiscounted basis. If the
carrying value of such assets exceeded the expected undiscounted future
operating cash flows, an impairment loss was recognized to the extent the
carrying amount of the acquired net assets exceeded the fair value and was
calculated using expected discounted future operating cash flows.
Other Assets
Other assets on the accompanying consolidated balance sheets of the Company
consists of (1) debt issuance costs; (2) other intangible assets with estimable
useful lives; (3) investments in joint ventures; and (4) other miscellaneous
long-term assets. The Company's policy is to amortize into interest expense its
debt issuance costs over the life of the related indebtedness. Other intangible
assets with estimable useful lives, primarily consisting of plate costs and
software, are being amortized generally over three to five years.
Impairment of Long-Lived Assets
In accordance with FASB's Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("SFAS 144"), long-lived assets, including property, plant and equipment and
intangible assets with estimable useful lives are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Goodwill and other intangible assets with
indefinite lives not subject to amortization are tested annually for impairment,
and are tested for impairment more frequently if events and circumstances
indicate that the asset might be impaired. An impairment loss is recognized to
the extent that the carrying amount exceeds the asset's fair value. Prior to
adoption of SFAS 144, the Company accounted for long-lived assets in accordance
with FASB's Statement of Financial Accounting Standards No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
See Note 2 -- "Changes in Accounting Principles" for a discussion of the
Company's adoption of SFAS 144 effective December 30, 2001.
F-8
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates book value. The fair value of
long-term debt is based upon market value, if traded, or discounted at the
estimated rate the Company would currently incur on similar debt. See Note 10 --
"Fair Value of Financial Instruments."
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are determined based upon differences
between the financial reporting and tax basis of assets and liabilities. The
differences are measured by applying enacted tax rates and laws to taxable years
in which such differences are expected to reverse.
Revenue Recognition
The Company recognizes revenue when products are shipped and the customer
takes ownership and assumes risk of loss, collection of the relevant receivable
is probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable.
Promotion and Distribution
Promotion and distribution expenses are primarily promotions, freight,
brokerage fees, and warehousing expenses. Distribution expenses were $31.2
million, $34.7 million and $33.7 million in fiscal 2000, 2001 and 2002,
respectively.
Commodity Derivative Instruments
The Company seeks to manage its commodity price risk associated with market
fluctuations by using derivative instruments for portions of its corn, soybean
meal, alternative proteins and natural gas purchases, principally through
exchange traded futures and options contracts. The terms of these contracts are
generally less than one year. During the term of the contract, the Company
balances positions daily with cash payments to or from the exchanges. At the
termination of a contract, the Company has the ability to settle financially or
by exchange for the physical commodity, in which case, the Company would deliver
the contract against the acquisition of the physical commodity. The Company's
policy does not permit speculative commodity trading. All changes in the fair
value of the Company's commodity derivative instruments are included in cost of
goods sold in the accompanying consolidated statements of income.
Interest Rates Swap and Cap Contracts
The Company periodically uses interest rate swap and cap contracts to limit
its exposure to the interest rate risk associated with its domestic floating
rate debt. The Company's policy does not permit speculative trading related to
its debt. 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 contracts. In accordance with FASB's Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), the Company's interest rate swap contracts
have been designated as cash flow hedges with changes in fair value recognized
in accumulated other comprehensive income (loss), net of deferred taxes, in the
accompanying consolidated balance sheets until they are realized, at which
point, they are recognized in interest expense, net, in the accompanying
consolidated statements of income. Amounts received or paid under interest rate
swap contracts and interest rate cap contracts are recorded as interest income
(expense) in the accompanying consolidated statements of income.
Foreign Currency Derivative Instruments
The Company seeks to manage its exposure to exchange rate fluctuations on
foreign currency transactions by
F-9
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
using foreign currency forward contracts to manage its exposure to exchange rate
fluctuations. 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 contracts. In accordance with SFAS 133, changes in fair
value of foreign currency forward contracts that qualify for hedge accounting
are recorded in accumulated other comprehensive income (loss), net of deferred
taxes, in the accompanying consolidated balance sheets until they are realized,
at which point, they are recognized in other income, net, in the accompanying
consolidated statements of income. All other gains and losses on foreign
currency forward contracts are recorded as an increase or reduction in net sales
in the accompanying consolidated statements of income as they occur.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of (1) net income (loss); (2) foreign
currency translation, including changes in the fair value of the Company's
Euro-denominated debt designated as a hedge of the Company's net investment in
Europe; (3) changes in the fair value of interest rate swap contracts and
foreign currency derivative instruments designated as hedges; and (4) changes in
the minimum pension liability. Comprehensive income (loss) is presented in the
accompanying consolidated statements of stockholder's equity and comprehensive
income.
Foreign Currency Gains and Losses
The Company's foreign-owned assets and liabilities have been translated to
U.S. dollars using the exchange rates in effect at the period end dates in the
accompanying consolidated balance sheets. Results of foreign operations have
been translated using the average exchange rates during the periods presented in
the accompanying consolidated statements of income. The cumulative translation
adjustment for the Company's net investment in foreign operations has been
recognized in accumulated other comprehensive income (loss) in the accompanying
consolidated financial statements. Foreign currency transaction gains and losses
are recognized in the accompanying consolidated statements of income as they
occur.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is calculated using the
weighted-average number of shares of common stock outstanding during the period
after adjusting net income (loss) for unpaid preferred stock dividends and the
accretion of the preferred stock. Diluted net income (loss) per common share is
the same as basic net income (loss) per common share as no common stock
equivalents exist.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"), which
requires the Company to record the fair value of an asset retirement obligation
as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development and/or normal use of the assets. SFAS 143
also requires the Company to record a corresponding asset that is depreciated
over the life of the asset. Subsequent to the initial measurement of an asset
retirement obligation, SFAS 143 requires the obligation be adjusted at the end
of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. SFAS 143 became effective for the
Company as of the beginning of fiscal 2003. The Company is evaluating the
impact, if any, that adoption of SFAS 143 will have on its consolidated
financial statements.
F-10
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
became effective for the Company as of the beginning of fiscal 2003. In
accordance with SFAS 145, the Company will recognize a charge to net income in
the first quarter of fiscal 2003 associated with the issuance of its 10 3/4%
senior notes in February 2003 that does not meet the criteria for
classification as an extraordinary item. See Note 26 - "Subsequent Events."
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 became
effective for the Company as of the beginning of fiscal 2003. The Company is
evaluating the impact, if any, that adoption of SFAS 146 will have on its
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), which elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company is evaluating
the impact, if any, that adoption of the recognition and measurement provisions
of FIN 45 will have on its consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123 ("SFAS 148"), which amends
Statement on Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal 2002
and are included in Note 13 -- "Stock Option Plan of Parent."
(2) CHANGES IN ACCOUNTING PRINCIPLES
Effective December 30, 2001, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. SFAS 142
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, the Company reassessed the useful lives and residual values of
all intangible assets acquired in purchase business combinations, including
those intangible assets having estimable useful lives that are classified as
other assets in the Company's balance sheets which resulted in no impact on its
consolidated financial statements. During
F-11
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the second quarter of fiscal 2002, the Company completed the required
transitional 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 existed as of December 29,
2001. In the fourth quarter of fiscal 2002, the Company performed its required
annual assessment of impairment and determined no such impairment was evident.
Results of operations of the Company, as adjusted to give effect to SFAS 142
as if it were adopted on January 2, 2000, follows (in thousands):
YEARS ENDED
-------------------------------
DECEMBER 30, DECEMBER 29,
2000 2001
------------ ------------
Net loss, as reported $ (4,885) $ (21,938)
Add back: Amortization, net of income tax benefit 7,221 7,591
------------ ------------
Net income (loss), as adjusted $ 2,336 $ (14,347)
============ ============
Basic and diluted net loss per common share, as adjusted $ (6,904) $ (24,814)
============ ============
Effective December 30, 2001, the Company adopted FASB's Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, 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 had
no material impact on the Company's financial position or results of operations.
(3) ACQUISITION
On May 10, 2000, the Company acquired A/S Arovit Petfood ("Arovit"),
headquartered in Esbjerg, Denmark, for approximately $144.4 million and assumed
indebtedness, net of cash, of approximately $11.8 million. Arovit manufactures
and sells throughout Europe a full range of pet food products 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 $72.7 million of goodwill and trademarks that were amortized over 40
years through December 29, 2001 and $9.4 million of other intangible assets with
estimable useful lives that were 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 senior credit facility,
which included Euro 82.0 million ($73.7 million) of new Euro Tranche A loans
with the remainder being additional borrowings under Tranche B of the USD term
facility. The Euro-denominated debt has been designated as a hedge of the
foreign currency exposure inherent in the Company's net investment in Europe.
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 (loss) in the accompanying consolidated financial
statements.
Set forth below is certain unaudited pro forma consolidated financial
information of the Company for the year ended December 30, 2000 that has been
adjusted to reflect the Company's acquisition of Arovit as if such transaction
occurred at January 2, 2000 (in thousands, except per share amount):
YEAR ENDED
DECEMBER 30,
2000
------------
Net sales $ 926,184
Net loss (6,893)
Basic and diluted net loss per common share (16,133)
F-12
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 date or indicative of future financial position and results of
operations.
(4) DIVESTITURES
On April 27, 2001, the Company sold its Perham, Minnesota dry dog and cat
food facility and related assets, including the Tuffy's brand, for $7.0 million.
On May 3, 2001, the Company sold its Deep Run domestic wet pet food business and
related assets, other than real estate, for $13.9 million (collectively, the
"Divestitures"). The Company recognized a $4.7 million net loss on the sale of
these businesses. In addition, the Company recognized $2.0 million of severance
costs for the elimination of certain corporate positions following the
Divestitures. These charges were recognized in fiscal 2001 non-recurring
expenses in the accompanying consolidated statements of income. See Note 16 --
"Non-Recurring and Project Focus Implementation Expenses."
(5) INVENTORIES
A summary of inventories, net of valuation allowance, follows (in
thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Raw materials $ 12,312 $ 14,957
Packaging materials 16,139 19,002
Finished goods 26,390 29,672
------------ ------------
Total $ 54,841 $ 63,631
============ ============
(6) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Land $ 10,788 $ 11,136
Buildings and improvements 84,991 90,444
Machinery and equipment 219,367 243,738
Construction in progress 6,710 14,465
------------ ------------
321,856 359,783
Less: Accumulated depreciation (72,477) (99,691)
------------ ------------
Total $ 249,379 $ 260,092
============ ============
F-13
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) GOODWILL AND TRADEMARKS
A summary of goodwill and trademarks follows (in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Goodwill $ 323,216 $ 339,941
Trademarks 66,000 67,181
------------ ------------
389,216 407,122
Less: Accumulated amortization (42,135) (44,042)
------------ ------------
Total $ 347,081 $ 363,080
============ ============
(8) ACCRUED LIABILITIES
A summary of accrued liabilities follows (in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Rebates and promotions $ 14,326 $ 15,356
Compensation 5,501 11,977
Derivative instruments 13,322 8,433
Restructuring costs 4,784 2,752
Divestitures 950 706
Interest 6,367 5,620
Healthcare costs and workers' compensation 4,232 3,650
Real estate, franchise and income taxes 3,003 2,561
Other 5,236 5,058
------------ ------------
Total $ 57,721 $ 56,113
============ ============
(9) LONG-TERM DEBT AND LIQUIDITY
A summary of long-term debt follows (in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Revolving credit facility $ 38,000 $ 15,000
Term loan facilities 352,804 340,924
Sponsor facility 16,777 17,245
Senior subordinated notes 148,071 148,430
Industrial development revenue bonds 14,461 14,471
Debt of foreign subsidiaries 17,710 17,950
------------ ------------
587,823 554,020
Less: Current maturities (28,488) (5,720)
------------ ------------
Total $ 559,335 $ 548,300
============ ============
Current maturities of long-term debt as of December 28, 2002 have been
reclassified to reflect the refinancing in February 2003. See Note 26 --
"Subsequent Events."
F-14
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Bank Loans
The information disclosed below relates to the Company's Amended Credit
Facility, as amended and in effect at December 28, 2002. The Company entered
into additional amendments to its Amended Credit Facility on February 28, 2003
concurrently with the issuance of new senior notes. For a discussion of the
Company's Amended Credit Facility, as amended in February 2003, see Note 26 --
"Subsequent Events."
In May 2000, the Company entered into a new senior credit facility with a
syndicate of banks and other institutional investors, as lenders, and JPMorgan
Chase Bank, as administrative agent, as amended in March 2001 and 2002 (the
"Amended Credit Facility"). As of December 28, 2002, the Amended Credit Facility
provided for total commitments of a Euro 66.7 million term loan facility (the
"Euro Term Loan Facility") and $346.0 million, consisting of a $271.0 million
term loan facility (the "USD Term Loan Facility") and a $75.0 million revolving
credit facility (the "Revolving Credit Facility") with a $20.0 million sub-limit
for issuance of letters of credit of which $2.6 million and $2.5 million was
outstanding December 29, 2001 and December 28, 2002, respectively. In March
2001, the commitments under the Revolving Credit Facility were reduced to $60.0
million until certain financial performance tests are achieved. Such tests were
not met in fiscal 2001 or 2002. All loans under the Amended Credit Facility bear
interest at the higher of the Euro dollar rate plus 4.75%, or the prime rate of
the administrative agent plus 3.75%, until maturity in 2006. The Company also
pays certain fees with respect to the Amended Credit Facility. The Euro Term
Loan Facility bore interest at 6.72% and 7.84%, the USD Term Loan Facility bore
interest at 7.81% and 7.12% and the Revolving Credit Facility bore interest at
7.00% and 8.00% at December 29, 2001 and December 28, 2002, respectively. The
Euro Term Loan Facility has a final maturity of December 30, 2005. As of
December 28, 2002, the principal amounts due under the Euro Term Loan Facility
were as follows: (i) approximately Euro 8.7 million in 2003; (ii) approximately
Euro 11.0 million in 2004; and (iii) approximately Euro 47.0 million in 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. As of December 28, 2002, the
principal amounts due under the USD Term Loan Facility were as follows: (i)
approximately $15.0 million in 2003 and 2004; (ii) approximately $162.0 million
in 2005; and (iii) approximately $79.0 million in 2006. The Revolving Credit
Facility has a final maturity of March 31, 2005. At December 28, 2002, the
Company had $15.0 million of outstanding borrowings under its Revolving Credit
Facility and $2.5 million letters of credit outstanding, resulting in $42.5
million of availability under its Revolving Credit Facility. The Amended Credit
Facility provides for mandatory prepayments of the Company's borrowings upon
certain specified events and in certain specified percentages, and the Company
may also prepay borrowings under the Amended Credit Facility.
The Company and certain restricted subsidiaries are required to guarantee
amounts outstanding under the Amended Credit Facility. The indebtedness incurred
pursuant to the Amended Credit Facility is secured by a first priority lien on
substantially all of the material assets of the Company and its restricted
domestic subsidiaries. The Amended Credit Facility contains certain financial
and other covenants usual and customary for a secured credit agreement.
In March 2002, the Company amended its Amended Credit Facility to provide
for, among other things: (1) an increase in interest rates to the Eurodollar
rate plus 4.75% for all loans and an increase in the commitment fee rate on the
Revolving Credit Facility to 1.00%; (2) a grant to the Company's lenders of a
lien on its material operating accounts, (3) a limit on the amount of future
capital expenditures up to a total of $25.0 million for fiscal 2002 and
$7.0 million for the first quarter of 2003; (4) a limit on certain permitted
investments; (5) an amendment to its existing financial covenants through
March 31, 2003; (6) a new minimum EBITDA covenant; and (7) the issuance of new
senior subordinated notes if the net proceeds of such new subordinated notes are
used to repay the loans under the senior credit facility. In addition, an Excess
Leverage Fee, as defined in the Amended Credit Facility, 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. As of December 28, 2002, the Company had accrued $6.7 million related to
the Excess Leverage Fee as it appeared probable at that date that such amounts
would be payable.
F-15
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Amended Credit Facility, as amended in March 2001 and 2002, also waived
certain financial covenant requirements for the fiscal years ended December 30,
2000 and December 29, 2001 and reduced the financial covenant requirements
through March 31, 2003. Without such waivers, the Company would not have been in
compliance with the covenants at December 30, 2000 or December 29, 2001. Any
such event of default could permit a majority of the lenders to accelerate
outstanding debt under the Amended Credit Facility and permit a majority of the
lenders under the Revolving Credit Facility to terminate the Revolving Credit
Commitment (without acceleration of such debt). Such acceleration would result
in a cross-default under the Company's existing 9-3/4% senior subordinated
notes.
The Company is required to keep a certain percentage of its outstanding debt
at a fixed interest rate. In connection with this requirement, the Company may
enter into interest rate swap and cap agreements from time to time to seek to
manage its interest rate risk exposure under the Amended Credit Facility. At
December 28, 2002, the Company had interest rate swap contracts with a total
notional amount of $60.0 million for which the Company pays fixed rates and
receives floating rate LIBOR and had an interest rate cap contract with a
notional amount of $50.0 million for which the Company would receive payments if
floating rate LIBOR exceeds the cap rate.
Sponsor Facility
The sponsor facility ("Sponsor Facility") is a senior unsecured loan bearing
interest at 15.0%. Principal and accrued interest under the loan is due on March
31, 2007. The Amended Credit Facility restricts the payment of any interest or
principal on the Sponsor Facility until the ratio of the Company's Average
Senior Debt to EBITDA, as defined in the Amended Credit Facility, calculated on
a pro forma basis giving effect to any such principal or interest payments, is
no greater than 2.75 to 1.00 and the Company maintains at least $35.0 million of
credit availability (the "Payment Test"). The Sponsor Facility requires that all
unpaid interest and principal be paid at the end of each quarter in which the
Payment Test is achieved, to the extent allowed by the Amended Credit Facility.
The Company did not make any payments in 2001 or 2002. The Company's Parent
issued warrants in connection with the Sponsor Facility that gave the
warrantholders the right to purchase 30.0% of the outstanding stock of the
Company's Parent for a nominal amount. The cash proceeds of $25.0 million were
allocated between the warrants and the Sponsor Facility, based on their relative
fair values. As a result, $8.4 million was allocated to the warrants and
recognized as a capital contribution from the Company's Parent in the
accompanying consolidated statement of stockholder's equity and comprehensive
income. The Sponsor Facility is being accreted to its $25.0 million face value
as a charge to interest expense in the accompanying consolidated statements of
income to reflect an effective interest rate over the life of the Sponsor
Facility. See Note 26 -- "Subsequent Events" for a discussion of the repayment
of the Company's Sponsor Facility in conjunction with the issuance of new senior
notes.
Senior Subordinated Notes
On November 12, 1998, the Company issued $150.0 million in aggregate
principal amount of its 9-3/4% Senior Subordinated Notes due May 15, 2007 with
interest payable semi-annually. The senior subordinated notes were issued at a
discount that is being amortized as interest expense on a straight-line basis
over the term of the notes. The senior subordinated notes are general unsecured
obligations and are subordinated in right of payment to all senior indebtedness
and senior in right of payment to any current or future indebtedness of the
Company that, by its terms, is subordinated to the senior subordinated notes.
The payment of obligations of each subsidiary guarantor are subordinated to the
payment of senior indebtedness of such subsidiary guarantor.
F-16
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company may redeem the senior subordinated notes at any time on or after
May 15, 2002, in whole or in part, at the option of the Company, at the
redemption prices set forth below, plus accrued and unpaid interest, if any, to
the redemption date:
YEARS PERCENTAGE
------------------- ----------
2003 103.250%
2004 101.625%
2005 and thereafter 100.000%
At any time prior to May 15, 2002, the senior subordinated notes may also be
redeemed in whole, but not in part, at the option of the Company upon the
occurrence of a Change in Control (as defined in the Note Indenture) at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium (as defined in the Note Indenture) and the unpaid accrued
interest, if any, to the date of redemption. Upon a Change in Control, holders
of the senior subordinated notes may require the Company to purchase all or a
portion of the senior subordinated notes at a purchase price equal to 101% of
their principal amount plus accrued interest, if any. The senior subordinated
notes have certain covenants that have restrictions on dividends, distributions,
indebtedness, affiliate transactions and lines of business.
Industrial Development Revenue Bonds
On March 12, 1997, the Company issued $6.0 million of 7.25% Ottawa County
Finance Authority Industrial Development Revenue Bonds (the "Miami Bonds"). The
Miami Bonds are subject to mandatory redemption, under certain circumstances,
prior to maturity at a redemption price of 110% of the principal amount thereof,
plus accrued interest to the redemption date, in varying principal amounts on
June 1 of each year from 2007 through 2017. The Miami Bonds are senior secured
obligations of the Company and effectively rank senior to the Company's
unsecured debt to the extent of the value of the assets that serve as collateral
and otherwise rank on a parity in right of payment with all other senior
indebtedness of the Company.
On July 24, 1998, the Company issued $9.0 million of 6.25% Oklahoma
Development Finance Authority Industrial Development Revenue Bonds, Series 1998
(the "Clinton Bonds") through the Oklahoma Development Finance Authority. The
Clinton Bonds are subject to mandatory redemption prior to maturity, under
certain circumstances, at a redemption price of 105% of the principal amount
thereof, plus accrued interest to the redemption date, in varying principal
amounts on July 15 of each year from 2018 through 2023. The Clinton Bonds are
senior secured obligations of the Company and effectively rank senior to the
Company's unsecured debt to the extent of the value of the assets that serve as
collateral and otherwise rank on a parity in right of payment with all other
senior indebtedness of the Company. On July 24, 1998, the Clinton Bonds were
purchased by the Company's wholly-owned subsidiary, Doane/Windy Hill Joint
Venture Corporation, which sold the bonds on May 6, 1999 at a net price of $8.7
million.
Debt of Foreign Subsidiaries
Debt of foreign subsidiaries at December 29, 2001 consisted of peseta
denominated borrowings for which the HSBC Branch in Spain was the facility
agent. At December 29, 2001, the borrowings were comprised of Tranche A of $5.7
million (PTA 1,069 million) outstanding and amortizing semi-annually until
maturity in April 2005 and Tranche B of $3.0 million (PTA 554 million)
outstanding and payable in full in April 2006. The interest rates were 5.78% on
Tranche A and 6.78% on Tranche B at December 29, 2001, and adjust with changes
in MIBOR (Madrid Inter-Bank Offer Rate).
In February 2002, the peseta denominated loan was refinanced. The new loan
is with FIH (Finansierings Instituttet for Industri og Handvaerk A/S), a Danish
lender, and denominated in Euro. As of December 28, 2002, the outstanding
balance was $10.1 million (Euro 9.7 million). The loan amortizes evenly on a
quarterly basis until the final maturity in 2008. The interest rate on the loan
was 5.37% at December 28, 2002 and is fixed at this rate until the end of the
third year, at which point it resets to the then current three year rate plus
interest margin. At December 29, 2001, the loan was classified between long term
debt and current maturities of long term debt based on the terms of the new
loan.
F-17
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Debt of foreign subsidiaries also consists of Danish Krona ("DKK")
denominated borrowings from various financial institutions totaling $5.9 million
(DKK 49.5 million) and $5.4 million (DKK 37.5 million) at December 29, 2001 and
December 28, 2002, respectively. These borrowings are comprised of both fixed
and variable rate loans with interest rates ranging from 4.14% to 7.80% and
maturity dates ranging from 2003 to 2014.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the estimated fair value of financial instruments, other than
current assets and liabilities, follows (in thousands):
DECEMBER 29, 2001 DECEMBER 28, 2002
------------------------ ------------------------
ESTIMATED ESTIMATED
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
Debt - liability:
Revolving credit facility $ 38,000 $ 38,000 $ 15,000 $ 15,000
Term loan facilities 352,804 335,164 340,924 328,138
Sponsor facility 16,777 15,938 17,245 16,598
Senior subordinated notes 148,071 121,418 148,430 118,744
Other 32,171 32,171 32,421 32,421
---------- ---------- ---------- ----------
$ 587,823 $ 542,691 $ 554,020 $ 510,901
========== ========== ========== ==========
Derivative instruments and
hedges - asset (liability):
Commodities $ (7,513) $ (7,513) $ (5,730) $ (5,730)
Interest rate (4,492) (4,492) (2,181) (2,181)
Foreign currency (705) (705) (178) (178)
The fair value of debt is, where available, based on the traded market price
on the date closest to the Company's year end. The Company considers the
Revolving Credit Facility and other long-term debt, as recorded in the
accompanying consolidated balance sheets, to approximate fair value. At December
28, 2002, the Company had open commodity contracts with a fair value loss of
$5.7 million.
The Company periodically uses interest rate swap and cap contracts to limit
its exposure to the interest rate risk associated with its domestic floating
rate debt, which totaled $390.8 million and $355.9 million at December 29, 2001
and December 28, 2002, respectively. At December 29, 2001 and December 28, 2002,
$165.0 million and $110.0 million, respectively, of the Company's domestic
floating rate debt was hedged by interest rate swap and cap contracts. The
Company had a cumulative unrealized loss of $4.5 million and $2.2 million, or
$2.8 million and $1.3 million net of deferred tax benefit, at December 29, 2001
and December 28, 2002, respectively. The maturity dates of the Company's open
interest rate swap and cap contracts extend through November 2003.
At December 29, 2001, the Company had a cumulative unrealized gain on
foreign currency forward contracts of $0.7 million, or $0.5 million net of
deferred tax expense. At December 28, 2002, the Company had an open foreign
currency forward contract that matures within the next 12 months with a notional
value of $3.1 million and a fair value loss of $0.2 million that has been
recognized in the accompanying consolidated statements of income.
(11) SENIOR PREFERRED STOCK (REDEEMABLE)
The Senior Preferred Stock has an initial liquidation preference of $25 per
share (aggregate initial liquidation preference is $30.0 million). The Senior
Preferred Stock was recorded at the net proceeds of $17.1 million at October 5,
1995 after deducting $12.9 million paid to the Company for 1,354,478 warrants of
Parent, which were issued in conjunction with the Senior Preferred Stock. The
excess of the liquidation preference over the carrying
F-18
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
value is being accreted quarterly by a direct reduction to retained earnings
over a 12 year period that ends December 30, 2007.
Dividends on the Senior Preferred Stock are payable quarterly at the rate of
14.25% per annum on the most recent quarterly liquidation value of each share.
Dividends on the Senior Preferred Stock accrete to the liquidation value of the
Senior Preferred Stock. The Company has not paid dividends in cash or additional
shares of Senior Preferred Stock since the initial issuance of the Senior
Preferred Stock. Cumulative dividends on Senior Preferred Stock that have not
been paid at December 29, 2001 and December 28, 2002 are $41.9 million and $52.6
million, respectively, and are included in the carrying amount of the Senior
Preferred Stock in the accompanying consolidated balance sheets. As of December
29, 2001 and December 28, 2002, the cumulative accretion to redemption value on
the Senior Preferred Stock was $6.7 million and $7.8 million, respectively.
The Company may, at its option, redeem the Senior Preferred Stock, in whole
or in part, at redemption prices per share, together with accrued and unpaid
dividends as follows:
PERCENTAGE OF
YEARS BEGINNING LIQUIDATION
SEPTEMBER 30, VALUE
--------------- -------------
2003 102.850%
2004 101.425%
2005 100.000%
2006 100.000%
The Company is required to redeem all outstanding shares of Senior Preferred
Stock on September 30, 2007 at 100% of the liquidation value at this date,
together with accrued and unpaid dividends.
In the event of a Change of Control, as defined, the holders of Senior
Preferred Stock have the right to require the Company to redeem such Senior
Preferred Stock, in whole or in part, at a price equal to 101% of liquidation
value at the Change of Control date together with any unpaid dividends.
The terms of the Senior Preferred Stock prohibit (1) the payment of
dividends on securities ranking on a parity with or junior to the Senior
Preferred Stock; and (2) redemption, repurchase or acquisition of any Junior
Securities with certain exceptions, in each case, unless full cumulative
dividends have been paid on the Senior Preferred Stock.
Holders of the Senior Preferred Stock have limited voting rights customary
for preferred stock and the right to elect two additional directors to the
Company's board of directors upon certain events such as the Company failing to
declare and pay dividends on any six consecutive dividend payment dates.
(12) COMMON STOCK OF PARENT
The Parent's common stock consists of two classes, Class A Common Stock and
Class B Common Stock. The Class A and Class B Common Stock are identical except
the Class B Common Stock has no voting rights. The Class B Common Stock is
convertible into shares of Class A Common Stock at any time at the option of the
holder thereof. Each holder of Class A Common Stock is entitled to one vote for
each share of Class A Common Stock held of record on all matters submitted to a
vote of stockholders. The holders of Class A Common Stock do not have cumulative
voting rights in the election of directors to the Parent's board of directors.
The holders of Common Stock have no preemptive, subscription, redemptive or
conversion rights, except that holders of Class B Common Stock may at their
option, convert their shares into Class A Common Stock.
F-19
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) STOCK OPTION PLAN OF PARENT
Effective November 1, 1996, Parent adopted its 1996 Stock Option Plan, as
amended. Certain employees of the Company are covered under this plan. Each
stock option granted under this plan allows for the purchase of one share of
Parent's Class A common stock. Under the 1996 Stock Option Plan, options
covering 640,327 and 594,200 shares were outstanding as of December 29, 2001 and
December 28, 2002, respectively.
On July 14, 1999, Parent adopted the 1999 Stock Incentive Plan. In
connection with the adoption of the 1999 Stock Incentive Plan, no new grants
could be made under the 1996 Stock Option Plan.
Effective October 31, 2001, Parent approved the "repricing" of all vested
and unvested stock options under the 1996 Stock Option Plan and the 1999 Stock
Incentive Plan that had an exercise price exceeding $2.50 per share. All such
eligible stock options were given a new exercise price of $2.50 per share and
the vesting period was re-started. The repricing involved a surrender of the
eligible stock options in exchange for a grant of new stock options covering an
equivalent number of shares at the new exercise price. Stock options covering a
total of 1,516,300 shares were granted at the $2.50 per share exercise price,
and all such grants were made under the 1999 Stock Incentive Plan and are
accounted for as variable plan awards. Since the fair value of Parent's Class A
common stock was less than $2.50 per share at December 29, 2001, no compensation
expense was recorded in fiscal 2001 on the variable plan awards. While the
estimated fair value of the Parent's Class A common stock exceeded $2.50 per
share at December 28, 2002, the compensation expense in fiscal 2002 was minimal.
All of the grants have a time-vesting schedule pursuant to which 50% of an
individual's stock options will vest two years after the grant date, 25% will
vest after the third year, and the remaining 25% will vest after the fourth
year. Under the 1999 Stock Incentive Plan, 4,200,000 shares are authorized for
issuance, and as of December 29, 2001 and December 28, 2002, options covering
3,230,300 and 3,209,800 shares, respectively, had been granted and remained
outstanding.
The Company and its Parent have elected to continue to follow APB Opinion
No. 25, Accounting for Stock Issued to Employees, ("APB Opinion No. 25") to
account for fixed stock awards granted to employees; however, if the Company
adopted Statement on Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation, ("SFAS 123") to account for fixed stock awards granted
to employees, the Company's net income (loss) and basic and diluted net income
(loss) per common share for fiscal 2000, 2001 and 2002 would have been reduced
as follows (in thousands, except per share amounts):
Years ended
-----------------------------------------------------------
December 30, 2000 December 29, 2001 December 28, 2002
----------------- ----------------- -----------------
Net income (loss) available
to common shares, as reported $(14,125) $(32,405) $ 3,393
======== ======== =======
Less: Total stock-based
employee compensation expense
determined based on the fair value
method for all awards, net of
income tax benefit (759) 896 (128)
-------- -------- -------
Pro forma net income (loss)
available to common shares $(14,884) $(31,509) $ 3,265
======== ======== =======
Earnings per share:
Basic and diluted net income
(loss) per common share, as
reported $(14,125) $(32,405) $ 3,393
Basic and diluted net income
(loss) per common share,
pro forma (14,884) (31,509) 3,265
In fiscal 2001, the pro forma net loss per common share is lower than the
net loss per common share primarily due to the reversal of compensation expense
associated with unvested stock options cancelled during fiscal 2001. Pro forma
information regarding net income (loss) and basic and diluted net income (loss)
per common share has been determined as if the Company had accounted for its
employee stock options under the minimum value method of SFAS 123 under the
assumptions of a risk free rate of return of 6.03%, 5.02% and 3.60% for fiscal
2000, 2001 and 2002, respectively, and an expected life of options ranging from
5 to 10 years. The Company has no present plans to pay dividends on its common
stock. The effect of applying SFAS 123, as calculated above, may not be
representative of the effect on reported net income (loss) for future years.
F-20
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
A summary of the components of accumulated other comprehensive income (loss)
follows (in thousands):
ACCUMULATED
FOREIGN MINIMUM UNREALIZED OTHER
CURRENCY PENSION GAIN COMPREHENSIVE
TRANSLATION LIABILITY (LOSS),NET INCOME (LOSS)
------------ ------------ ------------ ------------
Balances at January 1, 2000 $ (1,225) $ -- $ 1,055 $ (170)
Comprehensive income (loss) 2,260 -- (772) 1,488
------------ ------------ ------------ ------------
Balances at December 30, 2000 1,035 -- 283 1,318
Comprehensive loss (7,352) -- (1,573) (8,925)
------------ ------------ ------------ ------------
Balances at December 29, 2001 (6,317) -- (1,290) (7,607)
Comprehensive income (loss) 22,792 (5,584) (43) 17,165
------------ ------------ ------------ ------------
Balances at December 28, 2002 $ 16,475 $ (5,584) $ (1,333) $ 9,558
============ ============ ============ ============
(15) OPERATING LEASES
The Company leases certain facilities, machinery and equipment under
operating lease agreements with varying terms and conditions. A summary of the
future annual minimum lease payments under these leases follows (in thousands):
MINIMUM
YEARS ENDING ANNUAL PAYMENTS
------------------- ---------------
2003 $ 4,072
2004 3,955
2005 3,911
2006 2,966
2007 1,586
2008 and thereafter 2,550
Rent expense was $4.9 million, $5.8 million and $6.0 million for fiscal
2000, 2001 and 2002, respectively.
(16) NON-RECURRING AND PROJECT FOCUS IMPLEMENTATION EXPENSES
In October 2001, the Company initiated a new market and operational strategy
("Project Focus") designed to provide more focused service to its customers by
simplifying and distinguishing its product offerings and associated pricing,
improving its planning and marketing support services, and reducing the
complexity of its operations. The Company has permanently reduced its cost
structure by streamlining its available product offerings, optimizing its
production facilities and reducing its workforce. In connection with Project
Focus, the Company closed one manufacturing facility and had a corporate
workforce reduction, which resulted in the termination of 45 employees in the
fourth quarter of fiscal 2001. The Company recognized Project Focus related
costs of $10.2 million, consisting of $2.0 million of non-recurring
restructuring charges and $8.2 million of implementation expenses. The major
components of these charges are included in the table below.
F-21
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of non-recurring and other Project Focus implementation expenses
follows (in thousands):
YEARS ENDED
------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Non-recurring expenses:
Transaction costs $ 6,275 $ -- $ 1,447
Divestitures -- 4,660 --
------------ ------------ ------------
Restructuring costs:
Severance 3,541 2,836 --
Asset impairments 15,337 618 --
Plant closure costs 3,486 541 --
------------ ------------ ------------
Total restructuring costs 22,364 3,995 --
------------ ------------ ------------
Total non-recurring expenses 28,639 8,655 1,447
============ ============ ============
Project Focus implementation expenses:
Allowances for inventories -- 6,609 --
Allowances for accounts receivable -- 1,639 --
------------ ------------ ------------
Total Project Focus implementation expenses -- 8,248 --
------------ ------------ ------------
Total non-recurring expenses and Project
Focus implementation expenses $ 28,639 $ 16,903 $ 1,447
============ ============ ============
Transaction Costs
Fiscal 2000 transaction costs of $6.3 million included: (1) a loss of $4.6
million on a foreign currency purchase contract associated with the Arovit
acquisition; (2) $1.5 million of costs for unconsummated acquisitions; and (3)
$0.2 million of miscellaneous transaction costs.
Fiscal 2002 transaction costs of $1.4 million included a $0.8 million charge
related to the write-off of costs for the Company's postponed bond offering and
a $0.6 million charge related to the Company's abandoned sale of its European
business.
Divestitures
In fiscal 2001, the Company recorded a $4.7 million net loss related to the
Divestitures. See Note 4 -- "Divestitures."
Restructuring Costs
Fiscal 2000 restructuring costs included: (1) severance costs of $1.5
million for the elimination of positions associated with the closure of certain
inefficient manufacturing facilities, $1.6 million for the elimination of
corporate positions and $0.4 million for restructuring associated with the
Arovit acquisition; (2) asset impairment costs, primarily related to property,
plant and equipment, associated with these facility closures; and (3) related
plant shutdown expenses. Fiscal 2001 restructuring costs included: (1) severance
costs of $2.0 million for the elimination of corporate positions following the
Divestitures, $0.8 million for additional corporate headcount reductions in
connection with Project Focus and $0.2 million for restructuring at the
Company's foreign operations; (2) asset impairment costs, primarily related to
property, plant and equipment, associated with the closure of a manufacturing
F-22
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and distribution facility in connection with Project Focus; and (3) related
plant shutdown expenses of $0.4 million for this facility closure. These 2001
restructuring costs were offset by adjustments to previously accrued
restructuring charges as described below. The Company terminated 330 employees
in fiscal 2001 as a result of plant closings and corporate headcount reductions.
A roll-forward of the Company's accrued restructuring costs for fiscal 2000,
2001 and 2002 follows (In thousands):
Balance at January 1, 2000 $ --
--------
Fiscal 2000 restructuring costs:
Severance 3,541
Plant closure costs 3,486
--------
Total restructuring costs 7,027
Fiscal 2000 cash payments (2,422)
--------
Balance at December 30, 2000 4,605
--------
Fiscal 2001 restructuring costs:
Severance 2,836
Plant closure costs 541
--------
Total restructuring costs 3,377
Fiscal 2001 cash payments (3,198)
--------
Balance at December 29, 2001 4,784
Fiscal 2002 cash payments (2,032)
--------
Balance at December 28, 2002 $ 2,752
========
The future expected payout of the Company's accrued restructuring costs as
of December 28, 2002 follows (in thousands):
MINIMUM
FISCAL YEARS ENDING ANNUAL PAYMENTS
------------------- ---------------
2003 $ 2,496
2004 256
---------------
Total $ 2,752
===============
Project Focus Implementation Expenses
Project Focus implementation expenses in fiscal 2001 consist of valuation
allowances against packaging inventories and accounts receivable associated with
SKU reduction and customer mix shift. These expenses totaling $8.2 million are
in addition to the $2.0 million of non-recurring expenses discussed above and
were classified in the accompanying consolidated statements of income as
follows: (1) $0.3 million as a reduction in net sales; (2) $6.6 million as cost
of goods sold; (3) $0.9 million as promotion and distribution expenses; and (4)
$0.4 million as selling, general and administrative expenses.
F-23
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(17) INCOME TAXES
A summary of income tax expense (benefit) follows (in thousands):
YEARS ENDED
----------------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Current:
Federal $ 177 $ -- $ (625)
State and local 171 -- --
Foreign 578 1,911 1,153
------------ ------------ ------------
Total current tax expense 926 1,911 528
------------ ------------ ------------
Deferred:
Federal 528 (11,130) 2,603
State and local (42) (1,952) 363
Foreign (2,266) (5,000) (1,708)
------------ ------------ ------------
Total deferred tax expense (benefit) (1,780) (18,082) 1,258
------------ ------------ ------------
Total income tax expense (benefit) $ (854) $ (16,171) $ 1,786
============ ============ ============
A summary of income (loss) before income taxes and cumulative effect of a
change in accounting principle by domestic and foreign source follows (in
thousands):
YEARS ENDED
----------------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Domestic $ 1,303 $ (20,852) $ 22,404
Foreign (7,042) (17,257) (5,347)
------------ ------------ ------------
$ (5,739) $ (38,109) $ 17,057
============ ============ ============
Income tax expense (benefit) differs from the amount computed by applying
the U.S. federal statutory rate of 35.0% to pre-tax income (loss) as follows (in
thousands):
YEARS ENDED
--------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Computed "expected" federal tax expense (benefit) $ (2,009) $ (13,338) $ 5,970
State and local tax expense 84 (1,269) 236
Foreign tax benefit (1,752) (2,776) (4,462)
Non-deductible loss on foreign currency forward contract 1,599 -- --
Non-deductible amortization of goodwill 1,156 1,156 --
Meals and entertainment and other 68 56 42
------------ ------------ ------------
$ (854) $ (16,171) $ 1,786
============ ============ ============
F-24
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the income tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and liabilities follows (in
thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Current deferred tax assets:
Accounts receivable $ 2,525 $ 772
Inventory 761 801
Accruals and provisions 6,829 4,286
------------ ------------
Net current deferred tax asset $ 10,115 $ 5,859
============ ============
Noncurrent deferred tax assets (liabilities):
Net operating loss carryforwards $ 18,378 $ 30,392
Property and equipment (13,183) (19,239)
Goodwill and other intangible assets (17,491) (21,616)
Accumulated other comprehensive income 1,761 4,405
Foreign (3,080) (1,689)
Other 1,030 486
------------ ------------
Net noncurrent deferred tax liability (12,585) (7,261)
------------ ------------
Total net deferred tax liability $ (2,470) $ (1,402)
============ ============
In assessing the realizable value of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which these temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the historical taxable income of the Company and projections for future taxable
income over the periods that the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the future benefits
of these deductible differences and net operating loss carryforwards at December
28, 2002.
At December 28, 2002, the Company had federal net operating loss
carryforwards of $77.3 million, that are available to offset future taxable
income through 2022. The deferred tax assets resulting from the Company's
federal and state net operating loss carryforwards total $30.4 million. The
Company's foreign subsidiaries had net operating loss carryforwards of $5.8
million, which results in a deferred tax asset of $1.7 million. The Company has
a valuation allowance of $0.6 million against its foreign net operating loss
carryforwards.
(18) EMPLOYEE BENEFIT PLANS
Pension Plans
The Company had a defined benefit, non-contributory pension plan covering
hourly and salaried employees of the former Hubbard Milling Company, which was
frozen on May 28, 1998. As a result, future benefits no longer accumulate and
the Company's service cost ceased. The Company's funding policy for this plan
was to make the minimum annual contribution required by applicable regulations.
In addition, the Company terminated a defined benefit, non-contributory pension
plan on May 31, 1998 that previously covered all non-bargaining employees. The
Company's only active pension plan covers 46 union employees at one of its
facilities.
F-25
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of net periodic pension income for the Company's pension
plans follows (in thousands):
YEARS ENDED
----------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Service cost $ 16 $ 19 $ 20
Interest cost 1,145 1,115 1,104
Expected return on plan assets (1,728) (1,670) (1,494)
Net amortization and deferral 7 8 9
Recognition of actuarial loss -- -- 291
------- ------- -------
Net periodic pension income $ (560) $ (528) $ (70)
======= ======= =======
A summary of assumptions used by the Company in the determination of
pension plan information follows:
YEARS ENDED
------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Discount rate 7.90% 7.60% 6.75%
Rate of increase in compensation levels N/A N/A N/A
Expected long-term rate of return on plan assets 8.50% 8.50% 8.50%
A summary of the funded status of the pension plans reconciled with
amounts recognized in other assets or other long-term liabilities in the
accompanying consolidated balance sheets follows (in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Actuarial present value of benefit obligations:
Accumulated and projected benefits $(15,189) $(16,485)
Plan assets at fair value 18,301 15,406
-------- --------
Projected plan assets in excess of (less than) benefit obligation 3,112 (1,079)
Items not yet recognized in earnings:
Unrecognized net loss 4,797 --
-------- --------
Pension asset (liability) $ 7,909 $ (1,079)
======== ========
A rollforward of the Company's pension benefit obligation for fiscal
2001 and 2002 follows (in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
----------- ------------
Projected benefit obligation, beginning of year $ 15,043 $ 15,189
Service cost 19 20
Interest cost 1,115 1,104
Benefits paid (1,164) (1,175)
Actuarial gain 176 1,347
-------- --------
Projected benefit obligation, end of year $ 15,189 $ 16,485
======== ========
F-26
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A rollforward of the Company's plan assets at fair value for fiscal
2001 and 2002 follows (in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Plan assets at fair value, beginning of year $ 20,337 $ 18,301
Employer contributions 48 48
Actual loss on plan assets (819) (1,770)
Benefits paid (1,265) (1,173)
-------- --------
Plan assets at fair value, end of year $ 18,301 $ 15,406
======== ========
Under FASB's Statement on Financial Accounting Standards No. 87,
Employers' Accounting for Pensions ("SFAS 87"), the Company was required to
record a balance sheet adjustment during the 2002 fourth quarter for the minimum
pension liability. The non-cash adjustment was a reduction of $9.1 million, or
$5.6 million net of deferred tax benefit, in accumulated other comprehensive
income (loss) in the accompanying consolidated financial statements. Under
federal law, the Company was not required to make any cash contributions to the
inactive plan in fiscal 2000, 2001 and 2002. The Company's contributions to its
active plan in fiscal 2000, 2001 and 2002 were less than $0.1 million each year.
Post-Retirement Plans
The Company maintained two post-retirement healthcare plans that
provided medical coverage for eligible retirees and their dependents that were
merged on February 1, 2000. The Company pays benefits under the merged plan when
due and does not fund its plan obligations as they accrue.
The net periodic post-retirement benefit cost included the following
components (in thousands):
YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Service cost $ 14 $ 15 $ 15
Interest and amortization cost 236 259 298
---- ---- ----
Net periodic post-retirement benefit cost $250 $274 $313
==== ==== ====
F-27
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the funded status of the post-retirement plans reconciled
with amounts recognized in other long-term liabilities in the accompanying
consolidated balance sheets follows (in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Accumulated post-retirement benefit obligation:
Retirees and dependents $ 3,353 $ 4,271
Fully eligible active plan participants 297 505
Other active plan participants 344 262
Unrecognized prior service cost 333 292
Unrecognized net loss (586) (1,515)
------- -------
Post-retirement benefit liability $ 3,741 $ 3,815
======= =======
A rollforward of the accumulated post-retirement benefit obligation for
fiscal 2001 and 2002 follows (in thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Projected benefit obligation, beginning of year $ 3,776 $ 3,741
Service cost 15 15
Interest and amortization cost 259 298
Benefits paid (309) (239)
------- -------
Projected benefit obligation, end of year $ 3,741 $ 3,815
======= =======
The weighted-average discount rate used in determining the net periodic
post-retirement benefit cost was 7.90%, 7.60%, and 6.75% for fiscal 2000, 2001
and 2002, respectively. The weighted-average discount rate used in determining
the accumulated post-retirement benefit obligation was 7.60% and 6.75% as of
December 29, 2001 and December 28, 2002, respectively. An increase in the cost
of covered healthcare benefits of 8.00% was assumed for 2003 and gradually
trended down to 5.50% for 2008 and thereafter. Increasing the assumed medical
cost trend rates by one percentage point in each year would increase the
accumulated post-retirement benefit obligation by $0.4 million and $0.4 million
as of December 29, 2001 and December 28, 2002, respectively, and the aggregate
of the service cost and interest cost components of net periodic post-retirement
benefit cost for fiscal 2000, 2001 and 2002 by $30,000, $32,000 and $34,000,
respectively.
Defined Contribution Plans
As of January 1, 2000, the Company adopted the Doane Pet Care
Retirement Savings Plan, which was formed through the merger of two predecessor
plans. The merged plan was amended and restated and is intended to be a
qualified plan under the Internal Revenue Code. The plan provides coverage for
eligible employees and permits employee contributions from 1% to 60% of pre-tax
earnings, subject to annual dollar limits set by the IRS. The Company matches
50% of the first 6% of the employee contribution with a provision for other
contributions at the board of directors' discretion. Participant vesting for the
employer's matching contributions are 25% per year for each full year of
service. For fiscal 2000, 2001 and 2002, the Company contributed $1.3 million,
$1.2 million and $1.0 million, respectively, to the Doane Pet Care Retirement
Savings Plan.
The Company also has a plan called the Doane Pet Care Savings and
Investment Plan -- Union Plan which was adopted on June 1, 1998 and covers
eligible union employees at the Joplin, Missouri plant. This plan is intended to
be a qualified retirement plan under the Internal Revenue Code. The plan permits
employee contributions between 1% and 60% of pre-tax earnings, subject to annual
dollar limits set by the IRS, and provides for a variety of
F-28
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment options. Effective April 1, 2000, the union employees of the
Muscatine, Iowa plant became eligible for coverage by the Doane Pet Care Savings
and Investment Plan -- Union Plan under the existing terms and conditions. The
Company does not contribute to this plan.
(19) DEFERRED COMPENSATION AGREEMENTS AND SALARY CONTINUATION PLAN
The Company has deferred compensation agreements with two individuals
that provide for annual payments upon retirement to be paid over 10 consecutive
years. The Company had a liability of $0.7 million and $0.6 million at December
29, 2001 and December 28, 2002, respectively.
The Company also has a salary continuation plan with 21 participants at
December 28, 2002. Participants in the plan who reach age 55 and have 10 years
of service with the Company begin vesting in their benefits, which are payable
in 10 equal annual installments after retirement. The Company had an expected
future liability equal to the present value of future payments under this plan
of $1.5 million and $2.2 million at December 29, 2001 and December 28, 2002,
respectively. The liabilities associated with the Company's deferred
compensation agreements and salary continuation plan are recognized in other
long-term liabilities in the accompanying consolidated balance sheets.
(20) SEGMENT DATA
The Company has combined manufacturing and distribution facilities in two
distinct geographical markets, the United States ("Domestic") and Europe
("International"); however, its operations in both of these markets have similar
manufacturing processes, as well as products and services. Long-lived assets of
the Company are attributed to individual countries on the basis of where these
assets are domiciled. The Company's net sales are attributed to individual
countries on the basis of where its products are manufactured and distributed. A
summary of long-lived assets and net sales by geographical segment follows (in
thousands):
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Long-lived assets:
Domestic $429,700 $428,133
International:
Denmark 137,166 159,902
Spain 22,030 27,764
United Kingdom 7,564 7,373
-------- --------
Total international 166,760 195,039
-------- --------
Total long-lived assets $596,460 $623,172
======== ========
YEARS ENDED
----------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Net sales:
Domestic $739,216 $697,597 $692,237
-------- -------- --------
International:
Denmark 101,246 155,071 151,354
Spain 29,545 28,905 33,676
United Kingdom 5,754 14,257 10,066
-------- -------- --------
Total international 136,545 198,233 195,096
-------- -------- --------
Total net sales $875,761 $895,830 $887,333
======== ======== ========
F-29
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(21) MAJOR CUSTOMER
For fiscal 2000, 2001 and 2002, the same customer accounted for
approximately 40%, 40% and 44%, respectively, of the Company's net sales. The
Company does not have a long-term contract with this customer. The loss of this
customer would have a material adverse impact on the Company's financial
position, results of operations and liquidity.
(22) ADDITIONAL CASH FLOW INFORMATION
Additional cash flow information for fiscal 2000, 2001 and 2002 follows
(in thousands):
YEARS ENDED
------------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------ ------------ ------------
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest paid, net of amounts capitalized $ 47,310 $ 50,591 $ 48,226
Income taxes paid 235 2,184 236
Schedule of non-cash investing and financing activities:
Fair value adjustment for interest swap rate agreements (2,122) (4,097) 2,347
Fair value adjustment for foreign currency derivatives 749 1,327 625
Exchange rate effect on Euro-denominated debt 3,452 (4,414) (11,553)
(23) RELATED PARTY TRANSACTIONS
DLJ Merchant Banking Partners, L.P. and certain other affiliates of
Credit Suisse First Boston LLC own shares of common stock of the Company and
warrants to purchase common stock of Parent. Credit Suisse First Boston LLC and
its affiliates have received certain payments of fees, including fees for
various investment banking and commercial banking services provided to the
Company and Parent.
DLJ Merchant Banking Partners, L.P. and certain other affiliates of
Credit Suisse First Boston LLC are parties to the investors' agreement. In
accordance with the investors' agreement, DLJ Merchant Banking Partners, L.P.
has designated one individual to the boards of directors of the Company and
Parent.
The Company previously had a management advisory agreement with Summit
Capital Inc. ("SCI") which is a stockholder of the Company and has a member who
is a director of the Company. The Company paid SCI an annual fee of $0.2 million
for these advisory services provided. The agreement expired on October 5, 2000.
J.P. Morgan Partners (BHCA), L.P. is an affiliate of JPMorgan Chase
Bank and J.P. Morgan Securities Inc. J.P. Morgan Partners (BHCA), L.P. and one
of its affiliates own senior preferred stock in the Company and common stock and
warrants to purchase common stock of Parent.
JPMorgan Chase Bank, J.P. Morgan Securities Inc. and their affiliates
perform various commercial banking and investment banking services from time to
time for the Company and its affiliates.
F-30
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since the beginning of fiscal 2001 through February 1, 2003, JPMorgan Chase
Bank, J.P. Morgan Securities Inc. and their affiliates have received a total of
$1.0 million for acting in the foregoing capacities, excluding interest and
other charges earned generally by all lenders under the senior credit facility.
J.P. Morgan Partners (BHCA), L.P. is a party to the investors'
agreement. In accordance with the investors' agreement, it has designated two
individuals to the boards of directors of the Company and Parent.
See Note 26 -- "Subsequent Events" for a discussion of the Company's
related party transactions associated with its issuance of 10-3/4% senior notes
on February 28, 2003.
(24) 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.
(25) QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly results follows (in thousands, except per share
amounts):
FIRST SECOND THIRD FOURTH
Fiscal 2001 QUARTER QUARTER QUARTER QUARTER
------------ --------- --------- --------- ---------
Net sales $ 250,764 $ 217,262 $ 206,299 $ 221,505
Gross profit 31,747 40,552 40,200 34,239
Net income (loss) (8,777) (6,162) 16 (7,015)
Basic and diluted net loss per common share (11,272) (8,736) (2,641) (9,756)
FIRST SECOND THIRD FOURTH
Fiscal 2002 QUARTER QUARTER QUARTER QUARTER
------------ -------- -------- --------- ---------
Net sales $220,106 $204,298 $ 216,334 $ 246,595
Gross profit 50,914 48,766 44,469 41,766
Net income (loss) 8,473 5,187 2,760 (1,149)
Basic and diluted net income (loss) per
common share 5,643 2,267 (255) (4,262)
F-31
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the fourth quarter of fiscal 2001 and 2002, the Company recognized
$10.2 million of Project Focus related charges and $0.7 million of non-recurring
expenses, respectively. See Note 16 -- "Non-Recurring and Project Focus
Implementation Expenses." In the fourth quarter of fiscal 2002, the Company
recognized a non-cash adjustment of $9.1 million, or $5.6 million net of
deferred tax benefit, in accumulated other comprehensive income (loss) in its
accompanying consolidated financial statements for minimum pension liability.
See Note 18 -- "Employee Benefit Plans."
(26) SUBSEQUENT EVENTS
In February 2003, the Company issued $213.0 million in aggregate
principal amount of 10-3/4% senior unsecured notes due March 1, 2010 at a price
of 98.8% of par with interest payable semi-annually on March 1 and September 1
of each year, commencing on September 1, 2003. The senior unsecured notes are
general unsecured obligations and are subordinated in right of payment to all
senior secured indebtedness and senior in right of payment to any current or
future indebtedness of the Company that, by its terms, is subordinated to the
senior unsecured notes. The payments of obligations of each subsidiary guarantor
are subordinated to the payment of senior indebtedness of such subsidiary
guarantor.
The proceeds from the 10-3/4% senior notes were used to repay $169.0 of
the Company's Amended Credit Facility and $33.7 million was deposited into a
defeasance fund to repay any Sponsor Facility notes tendered during the tender
period. The Company intends to use these funds to repay the Sponsor Facility in
full, although the Company has no right to require the holders of the Sponsor
Facility notes to tender their notes prior to maturity. Any notes not tendered
prior to the expiration of the tender period will remain outstanding under their
original terms, and excess funds in the defeasance fund will be used to make
additional repayments on the Amended Credit Facility.
In conjunction with the issuance of the 10-3/4% senior notes, the
Company amended its Amended Credit Facility. The Amended Credit Facility entered
into in February 2003, provided for, among other things: (1) the issuance of the
10-3/4% senior notes and repayment of the Sponsor Facility; (2) the repayment of
a portion of the term loans and Revolving Credit Facility under the Company's
senior credit facility in order of forward maturity; (3) less restrictive
covenants on capital expenditures, investments and other activities; (4) the
elimination of certain financial covenants and restructuring of other financial
covenants; (5) the elimination of the Excess Leverage Fee; (6) the elimination
of the fixed rate debt percentage requirement; and (7) the permanent reduction
of the Revolving Credit Facility from $75.0 million to $60.0 million.
As adjusted for the application of the net proceeds of the senior
notes, the Company's Amended Credit Facility, as amended on February 28, 2003,
provides for total commitments of a Euro 34.8 million ($37.7 million assuming a
USD to Euro exchange rate of 1.0825) Euro Term Loan Facility and $201.6 million,
consisting of a $141.6 million USD Term Loan Facility and a $60.0 million
Revolving Credit Facility, with a $20.0 million sub-limit for issuance of
letters of credit. Availability of funds under the Amended Credit Facility is
subject to certain customary terms and conditions. After the application of the
net proceeds from the sale of the 10-3/4% senior notes, the principal amounts
due under the Euro Term Loan Facility are as follows: (i) approximately Euro
34.8 million in 2005; and the principal amounts due under the USD Term Loan
Facility are approximately (i) $10.7 million in 2004, (ii) $88.3 million in
2005, and (iii) $42.6 million in 2006.
In connection with the repayments made by the Company on its Amended
Credit Facility concurrent with the issuance of the 10-3/4% senior notes and
deposits into the Sponsor Facility defeasance fund as described above, the
Company estimates it will incur a pre-tax charge to earnings of $10.8 million.
This pre-tax charge includes: (1) a $4.0 million write-off of deferred financing
costs, primarily related to the Company's Amended Credit Facility; (2) a charge
of $7.6 million for the accretion of the Sponsor Facility to face value; (3) a
charge of $5.9 million realized foreign currency translation loss as a result of
retiring a portion of the Euro Term Loan Facility with a corresponding credit to
accumulated other comprehensive income (loss); and (4) a credit of $6.7 million
for the reversal of an Excess Leverage Fee accrual.
F-32
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual Maturities of Long-Term Debt
A summary of the annual maturities of long-term debt as of December 28,
2002, as adjusted to reflect the issuance of the 10-3/4% senior notes, the
expected repayment of the Sponsor Facility and the amendments to the Amended
Credit Facility that were effected contemporaneously with the issuance of senior
notes is as follows (in thousands):
YEARS ENDING MATURITIES
------------------- ---------
2003 $ 5,720
2004 13,910
2005 136,164
2006 44,260
2007 150,535
2008 and thereafter 226,405
--------
$576,994
========
Related Party Transactions
Credit Suisse First Boston LLC was one of the joint book-running
managers in the Company's offering of 10-3/4% senior notes. DLJ Capital Funding,
Inc., an affiliate of Credit Suisse First Boston LLC, is the syndication agent
and a lender under the senior credit facility and received a portion of the
repayment of loans under the senior credit facility from the net proceeds of the
sale of the 10-3/4% senior notes. In connection with the sale of the 10-3/4%
senior notes, Credit Suisse First Boston LLC and its affiliates received fees of
approximately $3.3 million. J.P. Morgan Securities Inc. was also a joint
book-running manager in the offering of the 10-3/4% senior notes. Affiliates of
J.P. Morgan Securities Inc. are holders of promissory notes under the Sponsor
Facility. Assuming these affiliates tender all of their promissory notes by the
applicable expiration date and assuming a repayment date of February 28, 2003,
these affiliates would receive approximately $16.9 million of the net proceeds
from the sale of the 10-3/4% senior notes. JPMorgan Chase Bank serves as the
administrative agent and a lender under the senior credit facility and received
a portion of the repayment of loans under the senior credit facility from the
net proceeds of the sale of 10-3/4% senior notes. JPMorgan Chase Bank received a
$0.5 million fee in connection with the amendments to the senior credit facility
effected contemporaneously with the sale of the 10-3/4% senior notes. In
connection with the sale of the 10-3/4% senior notes, J.P. Morgan Securities
Inc. and its affiliates received fees of approximately $1.6 million.
In addition to the affiliates of J.P. Morgan Securities Inc. that hold
promissory notes under the Sponsor Facility, as discussed above, affiliates of
other persons known to the Company to beneficially own more than 5% of the
common stock of Parent also hold promissory notes under the Sponsor Facility.
Assuming these persons tender all of their promissory notes by the applicable
expiration date and assuming a repayment date of February 28, 2003, Bruckmann,
Rosser, Sherrill & Co., L.P. would receive approximately $7.5 million, Summit
Capital Inc. would receive approximately $2.3 million and PNC Capital Corp.
would receive approximately $1.2 million of the net proceeds from the sale of
the 10-3/4% senior notes. Additionally, certain executive officers of the
Company each received $0.1 million, from the repayment of their promissory notes
under the Sponsor Facility in connection with the sale of the 10-3/4% senior
notes.
(27) FINANCIAL INFORMATION RELATED TO GUARANTOR SUBSIDIARIES
Consolidated financial information related to the Company and its
guarantor subsidiaries and non-guarantor subsidiaries as of December 29, 2001
and December 28, 2002, and for each of the fiscal years ended December 30, 2000,
December 29, 2001 and December 28, 2002 is disclosed to comply with the
reporting requirements of the guarantor subsidiaries. The guarantor subsidiaries
are wholly-owned domestic subsidiaries of the Company who have fully and
unconditionally guaranteed the Company's 9-3/4% Senior Subordinated Notes due
May 15, 2007. See Note 9 -- "Long-term Debt and Liquidity." Condensed
consolidated financial information follows (in thousands, except share and par
value amounts):
F-33
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 29, 2001
-----------------------------------------------------------------
NON- INTERCOMPANY
GUARANTOR 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 trademarks, 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 (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding 65,672 -- -- 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 31,181 (31,181) 115,655
Accumulated other comprehensive loss (1,805) (4,242) (1,560) (7,607)
Accumulated earnings (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
========= ========= ========= =========
F-34
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 28, 2002
--------------------------------------------------------------
NON- INTERCOMPANY
GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 57 $ 7,539 $ -- $ 7,596
Accounts receivable, net 86,190 43,157 -- 129,347
Inventories, net 43,068 20,563 -- 63,631
Deferred tax asset 5,859 -- -- 5,859
Prepaid expenses and other current assets 6,853 1,290 -- 8,143
--------- --------- --------- ---------
Total current assets 142,027 72,549 -- 214,576
Property, plant and equipment, net 160,757 99,335 -- 260,092
Goodwill and trademarks, net 267,376 95,704 -- 363,080
Other assets 230,170 10,709 (207,960) 32,919
--------- --------- --------- ---------
Total assets $ 800,330 $ 278,297 $(207,960) $ 870,667
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 5,720 $ -- $ 5,720
Accounts payable 59,218 34,310 -- 93,528
Accrued liabilities 44,758 11,355 -- 56,113
--------- --------- --------- ---------
Total current liabilities 103,976 51,385 -- 155,361
Long-term debt, excluding current maturities 536,069 172,636 (160,405) 548,300
Other long-term liabilities 23,692 -- -- 23,692
Deferred tax liability 5,571 1,690 -- 7,261
--------- --------- --------- ---------
Total liabilities 669,308 225,711 (160,405) 734,614
--------- --------- --------- ---------
Senior Preferred Stock (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding 77,550 -- -- 77,550
--------- --------- --------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 per share; 1,000 shares
authorized, issued and outstanding -- -- -- --
Additional paid-in-capital 115,674 47,690 (47,690) 115,674
Accumulated other comprehensive income (loss) (16,868) 26,291 135 9,558
Accumulated deficit (45,334) (21,395) -- (66,729)
--------- --------- --------- ---------
Total stockholder's equity 53,472 52,586 (47,555) 58,503
--------- --------- --------- ---------
Total liabilities and stockholder's equity $ 800,330 $ 278,297 $(207,960) $ 870,667
========= ========= ========= =========
F-35
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 30, 2000
--------------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
--------- --------- ------------
Net sales $ 739,216 $ 136,545 $ 875,761
Cost of goods sold 579,809 107,990 687,799
--------- --------- ---------
Gross profit 159,407 28,555 187,962
Operating expenses:
Promotion and distribution 38,317 13,968 52,285
Selling, general and administrative 40,827 9,680 50,507
Amortization 10,822 1,957 12,779
Non-recurring expenses 28,097 542 28,639
--------- --------- ---------
Income from operations 41,344 2,408 43,752
Interest expense, net 41,138 10,085 51,223
Other income, net (1,097) (635) (1,732)
--------- --------- ---------
Income (loss) before income taxes 1,303 (7,042) (5,739)
Income tax expense (benefit) 834 (1,688) (854)
--------- --------- ---------
Net income (loss) 469 (5,354) (4,885)
Preferred stock dividends and accretion (9,240) -- (9,240)
--------- --------- ---------
Net loss available to common shares $ (8,771) $ (5,354) $ (14,125)
========= ========= =========
F-36
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 29, 2001
--------------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
--------- --------- ------------
Net sales $ 697,597 $ 198,233 $ 895,830
Cost of goods sold 592,525 156,567 749,092
--------- --------- ---------
Gross profit 105,072 41,666 146,738
Operating expenses:
Promotion and distribution 37,642 21,351 58,993
Selling, general and administrative 33,821 13,372 47,193
Amortization 11,038 2,705 13,743
Non-recurring expenses 8,440 215 8,655
--------- --------- ---------
Income from operations 14,131 4,023 18,154
Interest expense, net 37,237 19,783 57,020
Other (income) expense, net (2,254) 1,497 (757)
--------- --------- ---------
Loss before income taxes (20,852) (17,257) (38,109)
Income tax benefit (13,082) (3,089) (16,171)
--------- --------- ---------
Net loss (7,770) (14,168) (21,938)
Preferred stock dividends and accretion (10,467) -- (10,467)
--------- --------- ---------
Net loss available to common shares $ (18,237) $ (14,168) $ (32,405)
========= ========= =========
F-37
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 28, 2002
--------------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
--------- --------- ------------
Net sales $ 692,237 $ 195,096 $ 887,333
Cost of goods sold 556,967 144,451 701,418
--------- --------- ---------
Gross profit 135,270 50,645 185,915
Operating expenses:
Promotion and distribution 32,573 20,952 53,525
Selling, general and administrative 34,560 14,103 48,663
Amortization 2,872 680 3,552
Non-recurring expenses 1,447 -- 1,447
--------- --------- ---------
Income from operations 63,818 14,910 78,728
Interest expense, net 42,558 19,837 62,395
Other (income) expense, net (1,144) 420 (724)
--------- --------- ---------
Income before income taxes 22,404 (5,347) 17,057
Income tax expense (benefit) 2,341 (555) 1,786
--------- --------- ---------
Net income (loss) 20,063 (4,792) 15,271
Preferred stock dividends and accretion (11,878) -- (11,878)
--------- --------- ---------
Net income (loss) available to common shares $ 8,185 $ (4,792) $ 3,393
========= ========= =========
F-38
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 30, 2000
--------------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
--------- -------- ------------
Cash flows from operating activities:
Net income (loss) $ 469 $ (5,354) $ (4,885)
Items not requiring (providing) cash:
Depreciation and amortization 27,814 8,520 36,334
Deferred tax expense (benefit) 486 (2,266) (1,780)
Other non-cash charges, net 15,806 6 15,812
Changes in current assets and liabilities (excluding
amounts acquired) (13,570) 13,477 (93)
--------- -------- ---------
Net cash provided by operating activities 31,005 14,383 45,388
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures (22,528) (12,819) (35,347)
Acquisition related payments, net of cash received (147,751) 1,987 (145,764)
Other, net (340) 135 (205)
--------- -------- ---------
Net cash used in investing activities (170,619) (10,697) (181,316)
--------- -------- ---------
Cash flows from financing activities:
Net repayments under revolving credit agreements (2,400) -- (2,400)
Proceeds from issuance of long-term debt 153,730 5,277 159,007
Principal payments on long-term debt (14,305) (8,401) (22,706)
Payments for debt issuance costs (2,501) -- (2,501)
Parent capital contribution 572 -- 572
--------- -------- ---------
Net cash provided by (used in) financing activities 135,096 (3,124) 131,972
--------- -------- ---------
Effect of exchange rate changes on cash and cash equivalents (459) 379 (80)
--------- -------- ---------
Increase (decrease) in cash and cash equivalents (4,977) 941 (4,036)
Cash and cash equivalents, beginning of year 5,019 2,175 7,194
--------- -------- ---------
Cash and cash equivalents, end of year $ 42 $ 3,116 $ 3,158
========= ======== =========
F-39
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 29, 2001
------------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
-------- --------- ------------
Cash flows from operating activities:
Net loss $ (7,770) $(14,168) $(21,938)
Items not requiring (providing) cash:
Depreciation and amortization 28,817 12,613 41,430
Deferred tax benefit (12,842) (5,240) (18,082)
Other non-cash charges, net 17,478 1,604 19,082
Changes in current assets and liabilities (62,846) 18,418 (44,428)
-------- -------- --------
Net cash provided by (used in) operating activities (37,163) 13,227 (23,936)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (10,383) (6,933) (17,316)
Proceeds from sale of assets, net of cash received 20,884 -- 20,884
Other, net (4,143) 2,041 (2,102)
-------- -------- --------
Net cash provided by (used in) investing activities 6,358 (4,892) 1,466
-------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 30,400 -- 30,400
Proceeds from issuance of long-term debt 16,666 845 17,511
Principal payments on long-term debt (18,910) (9,015) (27,925)
Payments for debt issuance costs (2,928) -- (2,928)
Parent capital contribution 8,375 -- 8,375
-------- -------- --------
Net cash provided by (used in) financing activities 33,603 (8,170) 25,433
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (890) 801 (89)
-------- -------- --------
Increase in cash and cash equivalents 1,908 966 2,874
Cash and cash equivalents, beginning of year 42 3,116 3,158
-------- -------- --------
Cash and cash equivalents, end of year $ 1,950 $ 4,082 $ 6,032
======== ======== ========
F-40
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 28, 2002
------------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
--------- --------- ------------
Cash flows from operating activities:
Net income (loss) $ 20,063 $ (4,792) $ 15,271
Items not requiring (providing) cash:
Depreciation and amortization 20,202 11,962 32,164
Deferred tax expense (benefit) 2,966 (1,708) 1,258
Other non-cash charges, net 16,740 (35) 16,705
Changes in current assets and liabilities (1,089) 14,464 13,375
-------- -------- --------
Net cash provided by operating activities 58,882 19,891 78,773
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (14,858) (9,490) (24,348)
Proceeds from sale of assets 314 1,452 1,766
Other, net 2,502 (5,822) (3,320)
-------- -------- --------
Net cash used in investing activities (12,042) (13,860) (25,902)
-------- -------- --------
Cash flows from financing activities:
Net repayments under revolving credit agreements (23,000) -- (23,000)
Proceeds from issuance of long-term debt -- 9,738 9,738
Principal payments on long-term debt (23,436) (12,736) (36,172)
Payments for debt issuance costs (2,316) -- (2,316)
Parent capital contribution 19 -- 19
-------- -------- --------
Net cash used in financing activities (48,733) (2,998) (51,731)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents -- 424 424
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,893) 3,457 1,564
Cash and cash equivalents, beginning of year 1,950 4,082 6,032
-------- -------- --------
Cash and cash equivalents, end of year $ 57 $ 7,539 $ 7,596
======== ======== ========
F-41
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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3.1 -- Certificate of Incorporation of Doane Pet Care Company (incorporated by
reference to Exhibit 3.1 to Doane Pet Care Company's Registration
Statement on Form S-1, Reg. No. 33-98110 (the "Form S-1"))
3.2 -- Certificate of Designations, Preferences and Rights of $14.25% Senior
Exchangeable Preferred Stock due 2007, dated October 4, 1995
(incorporated by reference to Exhibit 3.2 to Doane Pet Care Company's
Annual Report on Form 10-K for the year ended December 29, 2001 (the
"2001 Form 10-K"))
3.3 -- Certificate of Amendment to Certificate of Incorporation of Doane Pet
Care Company dated February 4, 1998 (incorporated by reference to
Exhibit 3.2 to Doane Pet Care Company's Annual Report on Form 10-K for
the year ended December 31, 1997 (the "1997 Form 10-K"))
3.4 -- Certificate of Amendment of Certificate of Incorporation of Doane Pet
Care Company dated November 10, 1998 (incorporated by reference to
Exhibit 3.4 to the 2001 Form 10-K)
3.5 -- Certificate of Amendment of Certificate of Designations, Preferences and
Rights of 14.25% Senior Exchangeable Preferred Stock due 2007 dated
November 11, 1998 (incorporated by reference to Exhibit 3.6 to the 2001
Form 10-K)
3.6 -- Amended and Restated Bylaws of Doane Pet Care Company (incorporated by
reference to Exhibit 3.5 to the 2001 Form 10-K)
4.1 -- Indenture dated November 12, 1998 between Doane Pet Care Company and
Wilmington Trust Company (incorporated by reference to Exhibit 10.12 of
Doane Pet Care Enterprises, Inc.'s Registration Statement on Form S-1,
Reg. No. 333-61027 ("Enterprises' Form S-1"))
4.2 -- Registration Agreement among Doane Pet Care Company, Donaldson, Lufkin &
Jenrette Securities Corporation and Chase Securities Inc. dated November
12, 1998 (incorporated by reference to Exhibit 4.2 to Doane Pet Care
Company's Registration Statement on Form S-4, Reg. No. 333-70759 (the
"Form S-4"))
*4.3 -- Indenture dated February 28, 2003 between Doane Pet Care Company and
Wilmington Trust Company
*4.4 -- Registration Rights Agreement dated as of February 28, 2002 between
Doane Pet Care Company, DPC Investment Corp., Doane/Windy Hill Joint
Venture L.L.C., Credit Suisse First Boston LLP and J.P. Morgan
Securities, Inc.
9.1 -- Second Amended and Restated Investors' Agreement dated as of March 26,
2001 among Doane Pet Care Company, Doane Pet Care Enterprises, Inc.,
Summit Capital Inc., Summit/DPC Partners Inc., J. P. Morgan Partners
(BHCA), L.P., Baseball Partners, DLJ Merchant Banking Partners, L.P.,
DLJ International Partners, C.V., DLJ Offshore Partners, C.V., DLJ
Merchant Banking Funding, Inc., DLJ First ESC, L.P., Bruckmann, Rosser,
Sherrill & Co., L.P., PNC Capital Corp., and certain other persons name
therein (incorporated by reference to Exhibit 9.1 to Doane Pet Care
Company's Annual Report on Form 10-K/A for the year ended December 30,
2000 (the "2000 Form 10-K/A"))
+10.1 -- Employment Agreement dated January 1, 1998, between Doane Pet Care
Company and Douglas J. Cahill (incorporated by reference to Exhibit 10.3
to the 1997 Form 10-K)
+10.2 -- Employment Agreement dated February 15, 1999, between Doane Pet Care
Company and Philip K. Woodlief (incorporated by reference to Exhibit
10.14 to Enterprises' Form S-1)
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
+10.3 -- First Amendment to Employment Agreement dated as of January 1, 2001,
between Doane Pet Care Company and Philip K. Woodlief (incorporated by
reference to Exhibit 10.4 to the 2000 Form 10-K/A)
+10.4 -- Employment Agreement dated January 1, 1998, between Doane Pet Care
Company and David L. Horton (incorporated by reference to Exhibit 10.6
to the Form S-4)
+10.5 -- First Amendment to Employment Agreement dated as of January 1, 2001,
between Doane Pet Care Company and David L. Horton (incorporated by
reference to Exhibit 10.6 to the 2000 Form 10-K/A)
+10.6 -- Employment Agreement dated August 17, 1998 between Doane Pet Care
Company and Joseph J. Meyers (incorporated by reference to Exhibit 10.7
to the 2000 Form 10-K/A)
+10.7 -- First Amendment to Employment Agreement dated as of January 1, 2001,
between Doane Pet Care Company and Joseph J. Meyers (incorporated by
reference to Exhibit 10.8 to the 2000 from 10-K/A)
+10.8 -- Employment Agreement dated January 1, 1998 between Doane Pet Care
Company and Terry W. Bechtel (incorporated by reference to Exhibit 10.5
to the 1997 Form 10-K)
+10.9 -- Doane Pet Care Enterprises Inc.'s, 1996 Stock Option Plan (incorporated
by reference to Exhibit 10.7 to Doane Pet Care Company's Annual Report
on Form 10-K for the year ended December 31, 1996)
+10.10 -- First Amendment to Doane Pet Care Enterprises, Inc.'s 1996 Stock Option
Plan (incorporated by reference to Exhibit 10.8 to the 1997 Form 10-K)
+10.11 -- Second Amendment to Doane Pet Care Enterprises, Inc.'s, 1996 Stock
Option Plan (incorporated by reference to Exhibit 10.9 to the 1997 Form
10-K)
+10.12 -- Doane Pet Care Enterprises, Inc.'s 1999 Stock Incentive Plan
(incorporated by reference to Exhibit 10.10 to Doane Pet Care Company's
Annual Report on Form 10-K for the fiscal year ended January 1, 2000)
10.13 -- 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 (incorporated by reference to Exhibit 10.1 to Doane Pet Care
Company's Quarterly Report on Form 10-Q for the quarterly period ended
July 1, 2000)
10.14 -- Amendment No. 1 to Amended and Restated Credit Agreement dated as of
March 26, 2001 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 (incorporated by reference to Exhibit 10.14 to
the 2000 Form 10-K/A)
10.15 -- Amendment No. 2 to Amended and Restated Credit Agreement dated as of
March 22, 2002 among Doane Pet Care Company, as borrower, JPMorgan Chase
Bank, as administrative agent, Wachovia Bank N.A., as co-agent, J.P.
Morgan Securities Inc., as lead arranger, Wachovia Bank N.A. and Danske
Bank A/S, as co-arrangers, and the banks named therein (incorporated by
reference to Exhibit 10.15 to the 2001 Form 10-K)
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.16 -- Amendment No. 3 to Amended and Restated Credit Agreement dated as of
February 10, 2003 among Doane Pet Care Enterprises, Inc., Doane Pet Care
Company, as borrower, Doane/Windy Hill Joint Venture L.L.C., DPC
Investment Corp., and JPMorgan Chase Bank, as administrative agent, and
lenders party thereto
*10.17 -- Amendment No. 4 to Amended and Restated Credit Agreement dated as of
February 26, 2003 among Doane Pet Care Enterprises, Inc., Doane Pet Care
Company, as borrower, Doane/Windy Hill Joint Venture L.L.C., DPC
Investment Corp., and JPMorgan Chase Bank, as administrative agent, and
lenders party thereto
10.18 -- Loan and Warrant Agreement dated as of March 26, 2001 among Doane Pet
Care Enterprises, Inc., Doane Pet Care Company and each of the lenders
named therein (incorporated by reference to Exhibit 10.15 to the 2000
Form 10-K/A)
*21.1 -- List of Subsidiaries of Doane Pet Care Company
*23.1 -- Consent of KPMG LLP
- ---------------
* Filed herewith
+ Management contracts or compensatory plans or arrangements.
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