Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27818
DOANE PET CARE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 43-1350515
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
210 WESTWOOD PLACE SOUTH, SUITE 400
BRENTWOOD, TN 37027
(Address of principal executive office, including zip code)
(615) 373-7774
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of July 30, 2003, the registrant had outstanding 1,000 shares of
common stock, all of which were held by its parent, Doane Pet Care Enterprises,
Inc.
================================================================================
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of June 28, 2003
and December 28, 2002.............................................................. 1
Unaudited Condensed Consolidated Statements of Operations for the three
months and six months ended June 28, 2003 and June 29, 2002........................ 2
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income as of and for the six months ended June 28, 2003.............. 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
six months ended June 28, 2003 and June 29, 2002................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements..................... 5
Independent Accountants' Review Report............................................. 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 26
Item 4. Controls and Procedures............................................................ 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 28
Signatures.................................................................................. 30
Certification of Principal Executive Officer................................................ 31
Certification of Principal Financial Officer................................................ 32
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
JUNE 28, DECEMBER 28,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,913 $ 7,596
Accounts receivable, net 118,474 129,347
Inventories, net 62,542 63,631
Deferred tax assets 4,863 5,859
Prepaid expenses and other current assets 13,316 8,143
--------- ---------
Total current assets 207,108 214,576
Property, plant and equipment, net 262,761 260,092
Goodwill and trademarks, net 371,956 363,080
Other assets 34,795 32,919
--------- ---------
Total assets $ 876,620 $ 870,667
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 7,827 $ 5,720
Accounts payable 88,215 93,528
Accrued liabilities 55,114 56,113
--------- ---------
Total current liabilities 151,156 155,361
Long-term debt, excluding current maturities 562,386 548,300
Deferred tax liabilities 7,563 7,261
Other long-term liabilities 9,708 23,692
--------- ---------
Total liabilities 730,813 734,614
--------- ---------
Senior Preferred Stock (Redeemable), 3,000,000 shares authorized,
1,200,000 shares issued and outstanding 84,084 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 115,674 115,674
Accumulated other comprehensive income 30,590 9,558
Accumulated deficit (84,541) (66,729)
--------- ---------
Total stockholder's equity 61,723 58,503
--------- ---------
Total liabilities and stockholder's equity $ 876,620 $ 870,667
========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying independent accountants' review report.
1
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 234,476 $ 204,298 $ 494,425 $ 424,404
Cost of goods sold 195,967 155,532 410,556 324,724
--------- --------- --------- ---------
Gross profit 38,509 48,766 83,869 99,680
Operating expenses:
Promotion and distribution 12,797 13,074 27,207 26,393
Selling, general and administrative 12,373 11,503 24,481 22,577
Amortization 1,163 1,093 2,317 2,191
--------- --------- --------- ---------
Income from operations 12,176 23,096 29,864 48,519
Interest expense, net 14,857 16,518 28,872 29,825
Loss from debt extinguishment - - 11,113 -
Other income, net (414) (467) (585) (635)
--------- --------- --------- ---------
Income (loss) before income taxes (2,267) 7,045 (9,536) 19,329
Income tax expense 1,137 1,858 1,742 5,669
--------- --------- --------- ---------
Net income (loss) (3,404) 5,187 (11,278) 13,660
Preferred stock dividends and accretion (3,319) (2,920) (6,534) (5,750)
--------- --------- --------- ---------
Net income (loss) available to common shares $ (6,723) $ 2,267 $ (17,812) $ 7,910
========= ========= ========= =========
Basic and diluted net income (loss)
per common share $ (6,723) $ 2,267 $ (17,812) $ 7,910
========= ========= ========= =========
Basic and diluted weighted-average common
shares outstanding 1,000 1,000 1,000 1,000
========= ========= ========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying independent accountants' review report.
2
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL
------ -------- ---------- ------------- ----------- --------
Balances at December 28, 2002 1,000 $ - $115,674 $ 9,558 $(66,729) $ 58,503
--------
Comprehensive income:
Net loss - - - - (11,278) (11,278)
Foreign currency translation - - - 20,411 - 20,411
Unrealized gain on interest rate
swap, net of deferred tax expense
of $396 - - - 621 - 621
--------
Total comprehensive income 9,754
--------
Preferred stock dividends - - - - (5,995) (5,995)
Accretion of preferred stock - - - - (539) (539)
----- ------- -------- -------- -------- --------
Balances at June 28, 2003 1,000 $ - $115,674 $ 30,590 $(84,541) $ 61,723
===== ======= ======== ======== ======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying independent accountants' review report.
3
DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
----------------------
JUNE 28, JUNE 29,
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) $ (11,278) $ 13,660
Items not requiring (providing) cash:
Depreciation 15,120 12,804
Amortization 2,814 2,688
Deferred income tax expense 757 5,065
Non-cash interest expense 2,961 6,073
Equity in joint ventures (298) (553)
Loss from debt extinguishment 11,113 -
Changes in current assets and liabilities (6,527) 18,974
--------- ---------
Net cash provided by operating activities 14,662 58,711
--------- ---------
Cash flows from investing activities:
Capital expenditures (9,616) (6,533)
Proceeds from sale of assets 193 573
Other, net (1,915) (620)
--------- ---------
Net cash used in investing activities (11,338) (6,580)
--------- ---------
Cash flows from financing activities:
Net repayments under revolving credit agreements (15,000) (38,000)
Proceeds from issuance of long-term debt 210,444 9,738
Principal payments on long-term debt (191,215) (21,506)
Payments for debt issuance costs (7,771) (2,695)
--------- ---------
Net cash used in financing activities (3,542) (52,463)
Effect of exchange rate changes on cash and cash equivalents 535 550
--------- ---------
Increase in cash and cash equivalents 317 218
Cash and cash equivalents, beginning of period 7,596 6,032
--------- ---------
Cash and cash equivalents, end of period $ 7,913 $ 6,250
========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying independent accountants' review report.
4
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Doane Pet Care Company, or the Company, and its consolidated subsidiaries do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying year
end condensed consolidated balance sheet data was derived from the Company's
audited consolidated financial statements. In the opinion of management, all
material adjustments, consisting of normal and recurring adjustments, have been
made which were considered necessary to present fairly the financial position
and the results of operations and cash flows at the dates and for the periods
presented. Certain reclassifications have been made to previously reported
consolidated financial statements to conform with the fiscal 2003 presentation.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes contained in the Company's 2002 Annual Report on Form 10-K for the
fiscal year ended December 28, 2002, or the 2002 10-K, including related
exhibits. Except as noted herein, the accounting policies used in preparing
these condensed consolidated financial statements are the same as those
summarized in the 2002 10-K.
The Company's fiscal year ends on the Saturday nearest to the end of
December. Each quarter also ends on a Saturday with the second quarters and
first six months of fiscal 2002 and 2003 ending on June 29, 2002 and June 28,
2003, respectively.
(2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective December 29, 2002, the Company adopted Financial Accounting
Standards Board's, or FASB's, Statement of Financial Accounting Standards No.
145, Rescission of FASB Statement Nos. 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 the 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. In
accordance with SFAS 145, the Company recognized a charge to net income in the
first quarter of fiscal 2003 associated with the issuance of senior notes that
does not meet the criteria for classification as an extraordinary item. See Note
4 -- "Long-Term Debt and Liquidity."
Effective December 29, 2002, the Company adopted FASB's 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 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 applies to exit or disposal
activities initiated after December 31, 2002. The Company has not had any such
exit or disposal activities since the effective date.
Effective December 29, 2002, the Company adopted FASB's 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. See Note 6 -- "Stock Option Plan of
Parent."
5
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In May 2003, the FASB issued Statement of Financial Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities, or SFAS 150. SFAS 150 requires issuers to classify as
liabilities, or assets in some circumstances, three classes of freestanding
financial instruments that embody obligations of the issuer. Generally, SFAS 150
is effective for financial instruments entered into or modified after May 31,
2003 and is otherwise effective for interim periods beginning after June 15,
2003. For mandatory redeemable financial instruments of a nonpublic entity, both
as defined by SFAS 150, the statement is effective for fiscal periods beginning
after December 15, 2003. In the opinion of management, the Company meets the
nonpublic entity criteria of SFAS 150. As a result, beginning in the first
quarter of fiscal 2004, the Company will reflect its Senior Preferred Stock
(Redeemable) as a liability on its consolidated balance sheets, and the related
dividends and accretion as interest expense in its consolidated statements of
operations.
(3) INVENTORIES
A summary of inventories, net of valuation allowances, follows (in
thousands):
JUNE 28, DECEMBER 28,
2003 2002
--------- ------------
Raw materials $ 13,841 $ 14,957
Packaging materials 18,639 19,002
Finished goods 30,062 29,672
--------- ---------
Total $ 62,542 $ 63,631
========= =========
(4) LONG-TERM DEBT AND LIQUIDITY
A summary of long-term debt follows (in thousands):
JUNE 28, DECEMBER 28,
2003 2002
--------- ------------
Revolving credit facility $ - $ 15,000
Term loan facilities 181,086 340,924
Sponsor facility - 17,245
Senior notes 210,596 -
Senior subordinated notes 148,609 148,430
Industrial development revenue bonds 14,477 14,471
Debt of foreign subsidiaires 15,445 17,950
--------- ---------
570,213 554,020
Less: Current maturities (7,827) (5,720)
--------- ---------
Total $ 562,386 $ 548,300
========= =========
In February 2003, the Company issued $213.0 million in aggregate
principal amount of 10 3/4% senior notes due March 1, 2010 at a price of 98.8%
of par, with interest payable semi-annually in arrears on March 1 and September
1 of each year, commencing on September 1, 2003. The net proceeds from the 10
3/4% senior notes were used to repay $169.3 million of the Company's Amended
Credit Facility and $33.3 million was used to repay the Sponsor Facility in
full. The senior notes are unconditionally guaranteed on a senior unsecured
basis by the Company's domestic subsidiaries.
In conjunction with the issuance of the 10 3/4% senior notes, the
Company amended its Amended Credit Facility. These amendments 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 Loan
Facilities and Revolving Credit
6
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Facility under the Company's Amended 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
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 of the Revolving Credit Facility from $75.0
million to $60.0 million.
As of June 28, 2003, the Company's Amended Credit Facility provided for
total commitments of a Euro 32.8 million Euro Term Loan Facility ($37.5 million
assuming a Euro to USD exchange rate of 1.1427) and $203.6 million, consisting
of a $143.6 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.
As of June 28, 2003, the principal amounts due under the Company's
senior credit facility and the final maturity dates, unless terminated sooner
upon an event of default, were as follows (in thousands):
MATURITIES BY FISCAL YEAR
-----------------------------------------
FINAL MATURITY 2004 2005 2006 TOTAL
----------------- -------- -------- -------- --------
Revolving Credit Facility March 31, 2005 $ - $ - $ - $ -
Euro Term Loan Facility December 30, 2005 - 37,500 - 37,500
USD Term Loan Facility:
Tranche A March 31, 2005 9,760 5,000 - 14,760
Tranche B December 31, 2005 - 86,235 - 86,235
Tranche C December 31, 2006 - - 42,591 42,591
-------- -------- -------- --------
Total $ 9,760 $128,735 $ 42,591 $181,086
======== ======== ======== ========
At June 28, 2003, the Company had no outstanding borrowings under its
Revolving Credit Facility and $4.3 million of letters of credit outstanding,
resulting in $55.7 million of availability under its Revolving Credit Facility.
Availability of funds under the Amended Credit Facility is subject to certain
customary terms and conditions.
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
repayment of the Sponsor Facility as described above, the Company incurred a
loss from debt extinguishment of $11.1 million. This pre-tax charge included:
(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 $6.2 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; and (4) a credit of $6.7 million for the reversal of an
Excess Leverage Fee accrual.
(5) ACCRUALS FOR RESTRUCTURING COSTS
A roll-forward of the Company's accrued restructuring costs for fiscal
2003 through June 28, 2003 follows (in thousands):
SIX MONTHS ENDED
JUNE 28,
2003
------------------
Balance at December 28, 2002 $ 2,752
Cash payments (754)
-------
Balance at June 28, 2003 $ 1,998
=======
7
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The future expected payout of the Company's accrued restructuring costs
as of June 28, 2003 follows (in thousands):
FISCAL YEARS ENDING PAYOUT
- ------------------- ------
2003 $1,742
2004 256
------
Total $1,998
======
(6) STOCK OPTION PLAN OF PARENT
The Company and its Parent have elected to continue to follow
Accounting Principle Board's, or APB, Opinion No. 25, Accounting for Stock
Issued to Employees, or APB Opinion No. 25, to account for fixed stock awards
granted to employees; however, if the Company adopted 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 the three months and
six months ended June 29, 2002 and June 28, 2003 would have been adjusted as
follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) available to common shares,
as reported $ (6,723) $ 2,267 $(17,812) $ 7,910
Less: Total stock-based employee
compensation expense determined based on
the fair value method for all awards,
net of income tax benefit (2) (32) (4) (64)
-------- -------- -------- --------
Pro forma net income (loss) available to
common shares $ (6,725) $ 2,235 $(17,816) $ 7,846
======== ======== ======== ========
Earnings per share:
Basic and diluted net income (loss) per
common share, as reported $ (6,723) $ 2,267 $(17,812) $ 7,910
======== ======== ======== ========
Basic and diluted net income (loss) per
common share, pro forma $ (6,725) $ 2,235 $(17,816) $ 7,846
======== ======== ======== ========
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 3.60% for the three
months and six months ended June 29, 2002 and June 28, 2003, 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.
(7) COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in a case styled Petguard,
Inc. v. Doane Pet Care Company, which was filed on May 3, 2002 in the U.S.
District Court for the Middle District of Florida, Jacksonville Division. The
plaintiff alleges breach of contract, breach of express warranty, breach of
implied warranty and fraud regarding alleged defects in canned pet food that was
manufactured by the Company at its former Deep Run facility and sold to the
plaintiff. For each of the four counts, the plaintiff claims compensatory
damages in excess of the $75,000 jurisdictional limit and unspecified punitive
damages. In April 2003, the plaintiff filed its expert's report alleging
8
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
compensatory damages in the amount of approximately $2.7 million. The Company
has filed a counterclaim in the amount of approximately $85,000 for unpaid
invoices owed to the Company by the plaintiff. The Company believes that it has
valid defenses to the claims asserted by the plaintiff, and that this proceeding
will not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
The Company is also a party to other legal proceedings in the ordinary
course of business. The resolution of such matters is not expected to have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
(8) FINANCIAL INFORMATION RELATED TO GUARANTOR SUBSIDIARIES
Unaudited condensed consolidated financial information related to the
Company and its guarantor subsidiaries and non-guarantor subsidiaries as of
June 28, 2003 and December 28, 2002 and for the three months and six months
ended June 28, 2003 and June 29, 2002 is disclosed to comply with the reporting
requirements of the Company's guarantor subsidiaries. The guarantor subsidiaries
are wholly-owned domestic subsidiaries of the Company which have fully and
unconditionally guaranteed the Company's 10 3/4% Senior Notes due March 1, 2010
and the Company's 9 3/4% Senior Subordinated Notes due May 15, 2007. The
non-guarantor subsidiaries are wholly-owned foreign subsidiaries of the Company
which have not fully and unconditionally guaranteed the Company's 10 3/4% Senior
Notes due March 1, 2010 or the Company's 9 3/4% Senior Subordinated Notes due
May 15, 2007. See Note 9 -- "Long-Term Debt and Liquidity" in the Company's 2002
10-K. Unaudited condensed consolidated financial information follows (in
thousands):
9
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
JUNE 28, 2003
-----------------------------------------------------
NON- INTERCOMPANY
GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 81 $ 7,832 $ - $ 7,913
Accounts receivable, net 72,619 45,855 - 118,474
Inventories, net 39,792 22,750 - 62,542
Deferred tax assets 4,863 - - 4,863
Prepaid expenses and other current assets 10,460 2,856 - 13,316
--------- --------- --------- ---------
Total current assets 127,815 79,293 - 207,108
Property, plant and equipment, net 157,256 105,505 - 262,761
Goodwill and trademarks, net 267,730 104,226 - 371,956
Other assets 239,680 11,428 (216,313) 34,795
--------- --------- --------- ---------
Total assets $ 792,481 $ 300,452 $(216,313) $ 876,620
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,510 $ 4,317 $ - $ 7,827
Accounts payable 49,940 38,275 - 88,215
Accrued liabilities 40,150 14,964 - 55,114
--------- --------- --------- ---------
Total current liabilities 93,600 57,556 - 151,156
Long-term debt, excluding current maturities 551,258 167,319 (156,191) 562,386
Deferred tax liabilities 5,871 1,692 - 7,563
Other long-term liabilities 9,708 - - 9,708
--------- --------- --------- ---------
Total liabilities 660,437 226,567 (156,191) 730,813
--------- --------- --------- ---------
Senior Preferred Stock (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding 84,084 - - 84,084
--------- --------- --------- ---------
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 60,590 (60,590) 115,674
Accumulated other comprehensive income (loss) (14,289) 44,411 468 30,590
Accumulated deficit (53,425) (31,116) - (84,541)
--------- --------- --------- ---------
Total stockholder's equity 47,960 73,885 (60,122) 61,723
--------- --------- --------- ---------
Total liabilities and stockholder's equity $ 792,481 $ 300,452 $(216,313) $ 876,620
========= ========= ========= =========
10
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
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 assets 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
Deferred tax liabilities 5,571 1,690 - 7,261
Other long-term liabilities 23,692 - - 23,692
--------- --------- --------- ---------
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
========= ========= ========= =========
11
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
THREE MONTHS ENDED JUNE 28, 2003
-------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
---------- ---------- ------------
Net sales $ 175,882 $ 58,594 $ 234,476
Cost of goods sold 149,489 46,478 195,967
--------- --------- ---------
Gross profit 26,393 12,116 38,509
Operating expenses:
Promotion and distribution 6,470 6,327 12,797
Selling, general and administrative 8,064 4,309 12,373
Amortization 982 181 1,163
--------- --------- ---------
Income from operations 10,877 1,299 12,176
Interest expense, net 8,363 6,494 14,857
Other income, net (405) (9) (414)
--------- --------- ---------
Income (loss) before income taxes 2,919 (5,186) (2,267)
Income tax expense 900 237 1,137
--------- --------- ---------
Net income (loss) 2,019 (5,423) (3,404)
Preferred stock dividends and accretion (3,319) - (3,319)
--------- --------- ---------
Net loss available to common shares $ (1,300) $ (5,423) $ (6,723)
========= ========= =========
THREE MONTHS ENDED JUNE 29, 2002
-------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
---------- ---------- ------------
Net sales $ 161,594 $ 42,704 $ 204,298
Cost of goods sold 123,953 31,579 155,532
--------- --------- ---------
Gross profit 37,641 11,125 48,766
Operating expenses:
Promotion and distribution 7,961 5,113 13,074
Selling, general and administrative 7,962 3,541 11,503
Amortization 929 164 1,093
--------- --------- ---------
Income from operations 20,789 2,307 23,096
Interest expense, net 11,706 4,812 16,518
Other income, net (222) (245) (467)
--------- --------- ---------
Income (loss) before income taxes 9,305 (2,260) 7,045
Income tax expense (benefit) 2,028 (170) 1,858
--------- --------- ---------
Net income (loss) 7,277 (2,090) 5,187
Preferred stock dividends and accretion (2,920) - (2,920)
--------- --------- ---------
Net income (loss) available to common shares $ 4,357 $ (2,090) $ 2,267
========= ========= =========
12
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
SIX MONTHS ENDED JUNE 28, 2003
-------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
---------- ---------- ------------
Net sales $ 377,727 $ 116,698 $ 494,425
Cost of goods sold 320,739 89,817 410,556
--------- --------- ---------
Gross profit 56,988 26,881 83,869
Operating expenses:
Promotion and distribution 14,506 12,701 27,207
Selling, general and administrative 16,103 8,378 24,481
Amortization 1,942 375 2,317
--------- --------- ---------
Income from operations 24,437 5,427 29,864
Interest expense, net 14,704 14,168 28,872
Loss from debt extinguishment 11,113 - 11,113
Other expense (income), net (723) 138 (585)
--------- --------- ---------
Loss before income taxes (657) (8,879) (9,536)
Income tax expense 900 842 1,742
--------- --------- ---------
Net loss (1,557) (9,721) (11,278)
Preferred stock dividends and accretion (6,534) - (6,534)
--------- --------- ---------
Net loss available to common shares $ (8,091) $ (9,721) $ (17,812)
========= ========= =========
SIX MONTHS ENDED JUNE 29, 2002
-------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
---------- ---------- ------------
Net sales $ 337,494 $ 86,910 $ 424,404
Cost of goods sold 259,569 65,155 324,724
--------- --------- ---------
Gross profit 77,925 21,755 99,680
Operating expenses:
Promotion and distribution 16,804 9,589 26,393
Selling, general and administrative 16,112 6,465 22,577
Amortization 1,867 324 2,191
--------- --------- ---------
Income from operations 43,142 5,377 48,519
Interest expense, net 19,531 10,294 29,825
Other expense (income), net (816) 181 (635)
--------- --------- ---------
Income (loss) before income taxes 24,427 (5,098) 19,329
Income tax expense (benefit) 6,109 (440) 5,669
--------- --------- ---------
Net income (loss) 18,318 (4,658) 13,660
Preferred stock dividends and accretion (5,750) - (5,750)
--------- --------- ---------
Net income (loss) available to common shares $ 12,568 $ (4,658) $ 7,910
========= ========= =========
13
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
SIX MONTHS ENDED JUNE 28, 2003
---------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
--------- ------------- ------------
Cash flows from operating activities:
Net loss $ (1,557) $ (9,721) $ (11,278)
Items not requiring (providing) cash:
Depreciation and amortization 10,627 7,307 17,934
Deferred income tax expense (benefit) 900 (143) 757
Loss from debt extinguishment 11,113 - 11,113
Other non-cash charges (income), net 2,778 (115) 2,663
Changes in current assets and liabilities (20,310) 13,783 (6,527)
--------- --------- ---------
Net cash provided by operating activities 3,551 11,111 14,662
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (4,766) (4,850) (9,616)
Proceeds from sale of assets 27 166 193
Other, net 2,631 (4,546) (1,915)
--------- --------- ---------
Net cash used in investing activities (2,108) (9,230) (11,338)
--------- --------- ---------
Cash flows from financing activities:
Net repayments under revolving credit agreements (15,000) - (15,000)
Proceeds from issuance of long-term debt 210,444 - 210,444
Principal payments on long-term debt (189,092) (2,123) (191,215)
Payments for debt issuance costs (7,771) - (7,771)
--------- --------- ---------
Net cash used in financing activities (1,419) (2,123) (3,542)
Effect of exchange rate changes on cash and cash
equivalents - 535 535
--------- --------- ---------
Increase in cash and cash equivalents 24 293 317
Cash and cash equivalents, beginning of period 57 7,539 7,596
--------- --------- ---------
Cash and cash equivalents, end of period $ 81 $ 7,832 $ 7,913
========= ========= =========
14
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
SIX MONTHS ENDED JUNE 29, 2002
---------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
--------- ------------- ------------
Cash flows from operating activities:
Net income (loss) $ 18,318 $ (4,658) $ 13,660
Items not requiring (providing) cash:
Depreciation and amortization 9,907 5,585 15,492
Deferred income tax expense (benefit) 6,109 (1,044) 5,065
Other non-cash charges, net 5,281 239 5,520
Changes in current assets and liabilities 10,698 8,276 18,974
-------- --------- --------
Net cash provided by operating activities 50,313 8,398 58,711
-------- --------- --------
Cash flows from investing activities:
Capital expenditures (3,580) (2,953) (6,533)
Proceeds from sale of assets 3 570 573
Other, net 3,652 (4,272) (620)
-------- --------- --------
Net cash provided by (used in) investing activities 75 (6,655) (6,580)
-------- --------- --------
Cash flows from financing activities:
Net repayments under revolving credit agreements (38,000) - (38,000)
Proceeds from issuance of long-term debt - 9,738 9,738
Principal payments on long-term debt (11,571) (9,935) (21,506)
Payments for debt issuance costs (2,695) - (2,695)
-------- --------- --------
Net cash used in financing activities (52,266) (197) (52,463)
Effect of exchange rate changes on cash and cash equivalents - 550 550
-------- --------- --------
Increase (decrease) in cash and cash equivalents (1,878) 2,096 218
Cash and cash equivalents, beginning of period 1,950 4,082 6,032
-------- --------- --------
Cash and cash equivalents, end of period $ 72 $ 6,178 $ 6,250
======== ========= ========
15
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Doane Pet Care Company:
We have reviewed the condensed consolidated balance sheet of Doane Pet Care
Company and subsidiaries as of June 28, 2003, the related condensed consolidated
statements of operations for the three-month and six-month periods ended June
28, 2003 and June 29, 2002, the condensed consolidated statement of
stockholder's equity and comprehensive income as of and for the six-month period
ended June 28, 2003 and the condensed consolidated statements of cash flows for
the six-month periods ended June 28, 2003 and June 29, 2002. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Doane Pet Care Company and subsidiaries as of December 28, 2002, and the related
consolidated statements of operations, stockholder's equity and comprehensive
income and cash flows for the year then ended (not presented herein); and in our
report dated February 14, 2003, except as to Note 26, which was as of February
28, 2003, we expressed an unqualified opinion on those consolidated financial
statements. Our report refers to a change in accounting for goodwill and other
intangible assets in fiscal 2002. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 28, 2002 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG LLP
Nashville, Tennessee
July 24, 2003
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The reader is encouraged to refer to the accompanying unaudited
condensed consolidated financial statements and related notes included elsewhere
in this Quarterly Report on Form 10-Q and our audited consolidated financial
statements and related notes in our 2002 Annual Report on Form 10-K for the
fiscal year ended December 28, 2002, or the 2002 10-K.
FORWARD-LOOKING STATEMENTS
Certain of the statements in this quarterly report on Form 10-Q are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Some of these statements can be identified by terms and phrases such
as "anticipate," "believe," "assume," "intend," "estimate," "expect,"
"continue," "could," "may," "plan," "project," "predict," "will" and similar
expressions. These statements 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 under our debt agreements;
- 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;
- risks related to our international operations; and
- the outcome of any legal proceedings to which we or our
subsidiaries may be a party.
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,
foreign currency exchange rate fluctuations, 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" in our 2002 10-K.
We undertake no obligation to revise the forward-looking statements to
reflect any future events or circumstances. All forward-looking statements
attributable to us are expressly qualified in their entirety by this cautionary
statement.
17
CRITICAL ACCOUNTING POLICIES
Accounts receivable allowance. As of June 28, 2003, our gross accounts
receivable were $122.9 million. We had a valuation allowance of $4.4 million as
of June 28, 2003, primarily for doubtful accounts and 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 June 28, 2003, our gross
inventories were $67.3 million. We had a valuation allowance for obsolescence of
$4.8 million as of June 28, 2003, primarily related to packaging inventories.
Our policy is to estimate our allowance based on specific identification of
obsolete stock keeping units, or 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 June 28, 2003, our federal net operating
loss, or NOL, carryforwards were approximately $99.3 million and our foreign NOL
carryforwards were approximately $5.5 million. Our gross deferred tax assets,
including federal, foreign, state and local NOL carryforwards, were
approximately $48.8 million as of June 28, 2003 and our gross deferred tax
liabilities were approximately $42.0 million. The realization of our deferred
tax assets depends upon our ability to generate sufficient taxable income during
the periods in which our deferred tax assets may be utilized. As of June 28,
2003, we had valuation allowances of $6.3 million against U.S. federal and state
deferred tax assets and $3.2 million against foreign deferred tax assets that
take into consideration tax planning strategies, historical and projected
earnings, and the future reversal of taxable temporary differences. Management
will continue to assess in future periods whether it is more likely than not
that we will realize the benefit of our existing deferred tax assets. We
currently expect to record valuation allowances against deferred tax assets that
we generate in the near future.
Goodwill and trademarks. As of June 28, 2003, our net goodwill and
other intangible assets totaled $372.0 million. Our accounting policy is to test
the fair value of goodwill and other intangible assets for impairment in
accordance with Financial Accounting Standards Board's, or FASB's, Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or
SFAS 142.
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.
Statements of operations data. The following table sets forth our
statements of operations data expressed as a percentage of net sales for the
periods indicated, which together with the discussion that follows the table, is
based on our accompanying unaudited condensed consolidated financial statements
and notes thereto (in thousands, except percentages):
18
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------ -------------------------------------
JUNE 28, 2003 JUNE 29, 2002 JUNE 28, 2003 JUNE 29, 2002
---------------------- ----------------- ----------------- -----------------
Net sales $ 234,476 100.0% $204,298 100.0% $ 494,425 100.0% $424,404 100.0%
Cost of goods sold 195,967 83.6 155,532 76.1 410,556 83.0 324,724 76.5
----------- ----- -------- ----- --------- ----- -------- -----
Gross profit 38,509 16.4 48,766 23.9 83,869 17.0 99,680 23.5
Operating expenses:
Promotion and distribution 12,797 5.4 13,074 6.4 27,207 5.5 26,393 6.2
Selling, general and administrative 12,373 5.3 11,503 5.6 24,481 5.0 22,577 5.3
Amortization 1,163 0.5 1,093 0.5 2,317 0.5 2,191 0.5
----------- ----- -------- ----- --------- ----- -------- -----
Income from operations 12,176 5.2 23,096 11.4 29,864 6.0 48,519 11.5
Interest expense, net 14,857 6.4 16,518 8.1 28,872 5.8 29,825 7.0
Loss from debt extinguishment - - - - 11,113 2.2 - -
Other income, net (414) (0.2) (467) (0.2) (585) (0.1) (635) (0.1)
----------- ----- -------- ----- --------- ----- -------- -----
Income (loss) before income taxes (2,267) (1.0) 7,045 3.5 (9,536) (1.9) 19,329 4.6
Income tax expense 1,137 0.5 1,858 0.9 1,742 0.4 5,669 1.4
----------- ----- -------- ----- --------- ----- -------- -----
Net income (loss) $ (3,404) (1.5)% $ 5,187 2.6% $ (11,278) (2.3)% $ 13,660 3.2%
=========== ===== ======== ===== ========= ===== ======== =====
THREE MONTHS ENDED JUNE 28, 2003 COMPARED TO THREE MONTHS ENDED JUNE 29, 2002
Net sales. Net sales for the second quarter of fiscal 2003 increased
14.8% to $234.5 million from $204.3 million in the 2002 second quarter.
Excluding the impact of foreign currency exchange fluctuations, net sales
increased 9.2% for the 2003 second quarter primarily due to the increase in our
sales volume from new business in 2002.
Gross profit. Gross profit for the second quarter of fiscal 2003
decreased 21.0%, or $10.3 million, to $38.5 million from $48.8 million in the
2002 second quarter. This decrease was primarily due to higher commodity and
natural gas costs, partially offset by the increase in our sales volume and the
favorable impact of foreign currency exchange fluctuations. In addition, we had
a $4.0 million decrease in our gross profit due to the volatility of commodity
prices under SFAS 133 fair value accounting of our commodity derivative
instruments, which resulted in a $3.0 million reduction in our cost of goods
sold in the 2003 second quarter compared to a $7.0 million reduction in our cost
of goods sold in the 2002 second quarter.
Promotion and distribution. Promotion and distribution expenses for the
second quarter of fiscal 2003 decreased 2.1% to $12.8 million from $13.1 million
in the 2002 second quarter. As a percentage of net sales, promotion and
distribution expenses decreased 1.0% resulting from the mix of business in the
2003 second quarter requiring less promotions than in the 2002 second quarter.
Selling, general and administrative. Selling, general and
administrative expenses for the second quarter of fiscal 2003 increased 7.6% to
$12.4 million from $11.5 million in the 2002 second quarter primarily due to the
impact of foreign currency exchange fluctuations.
Amortization. Amortization expense, which relates to intangible assets
with estimable useful lives, for the second quarter of fiscal 2003 was $1.2
million compared to $1.1 million in the 2002 second quarter.
Interest expense, net. Interest expense, net of interest income, for
the second quarter of fiscal 2003 decreased 10.1% to $14.9 million from $16.5
million in the 2002 second quarter. This decrease was primarily due to the
elimination of the excess leverage fee accrual under our senior credit facility
and a decrease in interest rates associated with our floating rate debt,
partially offset by a higher interest rate on the portion of our long-term debt
refinanced in February 2003. See "-- Liquidity and Capital Resources -- Debt."
Income tax expense. We recognized income tax expense of $1.1 million
for the second quarter of fiscal 2003 compared to $1.9 million for the 2002
second quarter. We recorded valuation allowances against deferred tax assets
generated during these periods of $3.7 million in the 2003 second quarter and
19
$0.6 million in the 2002 second quarter. The overall effective tax rate for both
periods differs from the expected combined federal and state rate of 38.9% due
to the valuation allowances described above and the tax benefit arising from
certain foreign tax planning strategies.
SIX MONTHS ENDED JUNE 28, 2003 COMPARED TO SIX MONTHS ENDED JUNE 29, 2002
Net sales. Net sales for the first six months of fiscal 2003 increased
16.5% to $494.4 million from $424.4 million in the first six months of 2002.
Excluding the impact of foreign currency exchange fluctuations, net sales
increased 11.3% for the 2003 period primarily due to the increase in our sales
volume from new business in 2002.
Gross profit. Gross profit for the first six months of fiscal 2003
decreased 15.9%, or $15.8 million, to $83.9 million from $99.7 million in the
first six months of 2002. This decrease was primarily due to higher commodity
and natural gas costs, partially offset by the increase in our sales volume and
the favorable impact of foreign currency exchange fluctuations. In addition, we
had a $10.3 million decrease in our gross profit due to the volatility of
commodity prices under SFAS 133 fair value accounting of our commodity
derivative instruments, which resulted in a $3.5 million reduction in our cost
of goods sold in the 2003 period compared to a $13.8 million reduction in our
cost of goods sold in the 2002 period.
Promotion and distribution. Promotion and distribution expenses for the
first six months of fiscal 2003 increased 3.1% to $27.2 million from $26.4
million in the first six months of 2002 primarily due to the increase in net
sales. As a percentage of net sales, promotion and distribution expenses
decreased 0.7% resulting from the mix of business in the 2003 period requiring
less promotions than in the 2002 period.
Selling, general and administrative. Selling, general and
administrative expenses for the first six months of fiscal 2003 increased 8.4%
to $24.5 million from $22.6 million in the first six months of 2002 primarily
due to the impact of foreign currency exchange fluctuations.
Amortization. Amortization expense, which relates to intangible assets
with estimable useful lives, for the first six months of fiscal 2003 was $2.3
million compared to $2.2 million in the first six months of 2002.
Interest expense, net. Interest expense, net of interest income, for
the first six months of fiscal 2003 decreased 3.2% to $28.9 million from $29.8
million in the first six months of 2002. This decrease was primarily due to the
elimination of the excess leverage fee accrual under our senior credit facility
and a decrease in interest rates associated with our floating rate debt,
partially offset by a higher interest rate on the portion of our long-term debt
refinanced in February 2003. See "-- Liquidity and Capital Resources -- Debt."
Loss from debt extinguishment. We incurred a loss from debt
extinguishment of $11.1 million in the first six months of fiscal 2003. This
pre-tax charge included: (1) a $4.0 million write-off of deferred financing
costs, primarily related to our senior credit facility; (2) a charge of $7.6
million for the accretion of our sponsor facility to face value; (3) a charge of
$6.2 million realized foreign currency translation loss as a result of retiring
a portion of our Euro term loan facility with a corresponding credit to
accumulated other comprehensive income; and (4) a credit of $6.7 million for the
reversal of the excess leverage fee accrual.
Income tax expense. We recognized income tax expense of $1.7 million
for the first six months of fiscal 2003 compared to $5.7 million for the first
six months of 2002. We recorded valuation allowances against deferred tax assets
that were generated during these periods of $8.8 million in the 2003 period and
$0.6 million in the 2002 period. The overall effective tax rate for both periods
differs from the expected combined federal and state rate of 38.9% due to the
valuation allowances described above and the tax benefit arising from certain
foreign tax planning strategies.
20
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and
working capital requirements with cash flows from operations, bank borrowings
and issuance of other term indebtedness. At June 28, 2003, we had working
capital of $56.0 million.
Cash Flows
Net cash provided by our operating activities was $14.7 million for the
first six months of fiscal 2003 compared to $58.7 million in the first six
months of 2002. This decrease was primarily due to an unfavorable change in
working capital and the impact of higher commodity and natural gas costs on
net income (loss). The unfavorable change in working capital was primarily due
to higher sales activity in the 2003 period, an $8.3 million interest payment in
the 2003 period on the sponsor facility that was repaid in full with a portion
of the net proceeds from our senior note offering, as well as an unusually
favorable change in working capital in the 2002 period.
Net cash used in our investing activities was $11.3 million for the
first six months of fiscal 2003 compared to $6.6 million in the first six months
of 2002. Capital expenditures for the first six months of fiscal 2003 were $9.6
million compared to $6.5 million in the 2002 period.
Net cash used in financing activities was $3.5 million for the first
six months of fiscal 2003 compared to $52.5 million in the first six months of
2002. In the 2003 period, we received $210.4 million of gross proceeds from the
issuance of our senior notes that was used to repay a portion of the outstanding
debt under our senior credit facility and repay our sponsor facility in full. In
addition, we paid transaction fees and expenses in the 2003 period in connection
with the issuance of our senior notes and amendments to our senior credit
facility. In the 2002 period, we refinanced certain foreign debt, paid related
transaction costs and used cash provided by operating activities to paydown our
revolving credit facility.
Refinancing
Senior note offering. On February 28, 2003, we issued $213.0 million
aggregate principal amount of 10 3/4% senior notes due March 1, 2010 at a price
of 98.8% of par, with interest payable semiannually in arrears on March 1 and
September 1 of each year, commencing on September 1, 2003. The notes are our
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 $169.3 million of the net proceeds from the
sale of our senior notes to repay a portion of our senior credit facility and
used $33.3 million of these proceeds to repay our sponsor facility in full.
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 provided 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 and revolving credit facility
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.
21
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.
The facilities. As of June 28, 2003, our senior credit facility
provided for total commitments as follows:
- a Euro 32.8 million Euro term loan facility ($37.5 million
assuming a Euro to USD exchange rate of 1.1427); and
- $203.6 million, consisting of
-- a $143.6 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 higher of the Euro dollar rate plus 4.75%, or the prime rate of
the administrative agent plus 3.75%, until maturity. As of June 28, 2003, our
Euro term facility bore interest at 6.91%, our USD term facility bore interest
at 7.50% and our revolving credit facility bore interest at 7.75%.
Amortization of outstanding indebtedness. As of June 28, 2003, the
principal amounts due under our senior credit facility and the final maturity
dates, unless terminated sooner upon an event of default, were as follows (in
thousands):
MATURITIES BY FISCAL YEAR
--------------------------------------------
FINAL MATURITY 2004 2005 2006 TOTAL
----------------- ------- --------- -------- ---------
Revolving credit facility March 31, 2005 $ - $ - $ - $ -
Euro term loan facility December 30, 2005 - 37,500 - 37,500
USD term loan facility:
Tranche A March 31, 2005 9,760 5,000 - 14,760
Tranche B December 31, 2005 - 86,235 - 86,235
Tranche C December 31, 2006 - - 42,591 42,591
------- --------- -------- ---------
Total $ 9,760 $ 128,735 $ 42,591 $ 181,086
======= ========= ======== =========
As of June 28, 2003, we had no borrowings outstanding under our
revolving credit facility and $4.3 million of letters of credit outstanding,
resulting in $55.7 million of availability under our revolving credit facility.
22
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
- 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
23
- 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 the 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:
- 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 our senior notes and senior subordinated notes;
- bankruptcy or insolvency;
- actual invalidity, or invalidity asserted by us, of any security
document;
- material judgments;
- certain ERISA events; and
- change of control or ownership.
Liquidity
As of June 28, 2003, we had $55.7 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
24
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 June 28, 2003, the expected future payout of our accrued
restructuring cost is $1.7 million in the second half of 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.
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 we may incur material costs in the
future to comply with these requirements or in connection with the effect of
these matters on our business.
In 1996 and 1997, we entered into partial guarantees of certain
third-party loans made to 11 employees in connection with their purchase of our
parent's common stock under our parent's 1996 and 1997 Management Stock Purchase
Plans. We guaranteed to cover up to a maximum of $0.3 million of such loans in
the event one or more of the employees default in the loan repayment. None of
the individuals who received such loans currently serve as one of our executive
officers.
INFLATION AND CHANGES IN PRICES
Our financial results depend to a large extent on the costs of raw
materials and packaging and our ability to pass along increased costs to our
customers. Historically, market prices for commodity grains and food stocks have
fluctuated in response to a number of factors, including changes in U.S.
government farm support programs, changes in international agricultural trading
policies, impacts of disease outbreaks on protein sources and the potential
effect on supply and demand, as well as weather conditions during the growing
and harvesting seasons. Fluctuations in paper prices, which affect our costs for
packaging materials, have resulted from changes in supply and demand, general
economic conditions and other factors. In addition, we have exposure to changes
in pricing of natural gas, which affects our manufacturing costs. Our results of
operations have been exposed to volatility in the commodity and natural gas
markets in the past and may be exposed to such volatility in the future.
In the event of any increases in raw materials, packaging and natural
gas costs, we may be required to increase sales prices for our products to avoid
margin deterioration. We cannot assure you of the timing or extent of our
ability to implement future price adjustments in the event of increased raw
materials, packaging and natural gas costs or of whether any price increases
implemented by us may affect the volumes of future shipments to our customers.
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.
25
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 - "Recently Issued Accounting Pronouncements" in the
accompanying unaudited condensed consolidated financial statements for a
discussion of the impact, if any, to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which may give rise to losses from
adverse changes in market prices and rates. Our market risks could arise from
changes in commodity prices, interest rates and foreign currency exchange rates.
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 June 28, 2003, we had open commodity
contracts with a fair value loss of $1.4 million.
Based upon an analysis we completed as of June 28, 2003 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 $2.1
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
may in the future. 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,
financial position, results of operations or cash flows.
Our commodity derivative instruments are measured at fair value under
SFAS 133 in our accompanying unaudited condensed consolidated financial
statements. 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 $181.1 million at June 28, 2003. 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 accompanying unaudited condensed consolidated statements of
operations. 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 accompanying unaudited condensed
consolidated financial statements until they are realized, at which point, they
are recognized in interest expense, net, in the accompanying unaudited condensed
consolidated statements of operations. As of June 28, 2003, we had a cumulative
unrealized loss on our interest rate swap contracts of $1.2 million, or $0.7
million net of deferred tax benefit, that has been recognized in accumulated
other comprehensive income (loss) in our accompanying unaudited condensed
consolidated financial statements.
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 $0.2 million and $0.4 million for the second quarter and first six
months of fiscal 2003, respectively. In addition, such a change would result in
a decrease of approximately $16.4 million in the fair value of our fixed rate
debt at June 28, 2003. 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.
26
Foreign currency exchange risk. Our financial position and results of
operations are affected by foreign currency exchange rate fluctuations. Our
European operations sell pet food products throughout Europe. In connection with
our acquisition of A/S Arovit Petfood 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 accompanying unaudited
condensed consolidated financial statements. As of June 28, 2003, we had a
cumulative translation gain of $36.9 million, which included an unrealized
cumulative loss of $8.0 million for the translation of our Euro-denominated debt
to U.S. dollars, that has been recognized in our accompanying unaudited
condensed consolidated financial statements.
We are exposed to foreign currency exchange risk arising from
transactions in the normal course of business in Europe. From time to time, 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 accompanying unaudited condensed consolidated financial
statement until they are realized, at which point, they are recognized in other
income, net, in the accompanying unaudited condensed consolidated statements of
operations. All other gains and losses on foreign currency forward contracts are
recorded as an increase or decrease in net sales in our accompanying unaudited
condensed consolidated statements of operations as they occur. At June 28, 2003,
we had no open foreign currency forward contracts.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our disclosure
controls and procedures are designed to ensure that information required to be
disclosed in the reports that we file or submit under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Our Chief Executive Officer and Chief Financial Officer, after
evaluating the design and operation of our disclosure controls and procedures
within 90 days of the filing date of this quarterly report, and based on their
evaluation, have concluded that these controls and procedures are effective.
Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect our
internal controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in our internal controls. As a
result, no corrective actions were required or undertaken.
27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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)
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)
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)
4.2 Registration Rights 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)
4.3 Indenture dated February 28, 2003 among Doane Pet Care Company, DPC
Investment Corp., Doane/Windy Hill Joint Venture, L.L.C. and
Wilmington Trust Company (incorporated by reference to Exhibit 4.3 to
Doane Pet Care Company's Annual Report on Form 10-K for the year
ended December 28, 2002 (the "2002 Form 10-K"))
28
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
4.4 Registration Rights Agreement dated as of February 28, 2003 among
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. (incorporated by reference to Exhibit 4.4 to the 2002
Form 10-K)
15.1* Letter from KPMG LLP dated July 24, 2003, regarding unaudited interim
financial information
32.1* Accompanying Section 906 Certification of Chief Executive Officer
32.2* Accompanying Section 906 Certification of Chief Financial Officer
- ---------------------
* Filed or furnished herewith, as the case may be
(b) Reports on Form 8-K
The following report on Form 8-K was furnished during the second
quarter of fiscal 2003:
Report on Form 8-K dated May 8, 2003, was furnished pursuant to Item 9
and Item 12 of Form 8-K in connection with our issuance of a press
release announcing our first quarter 2003 results and fiscal 2003
outlook and discussing other matters set forth therein.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOANE PET CARE COMPANY
By: /s/ PHILIP K. WOODLIEF
--------------------------------------
Philip K. Woodlief
Vice President, Finance and
Chief Financial Officer
By: /s/ STEPHEN P. HAVALA
--------------------------------------
Stephen P. Havala
Corporate Controller and
Principal Accounting Officer
Date: July 30, 2003
30
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Douglas J. Cahill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Doane Pet Care
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: July 30, 2003
/s/ DOUGLAS J. CAHILL
--------------------------------------
Douglas J. Cahill
President and Chief Executive Officer
Doane Pet Care Company
31
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Philip K. Woodlief, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Doane Pet Care
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: July 30, 2003
/s/ PHILIP K. WOODLIEF
--------------------------------------
Philip K. Woodlief
Vice President, Finance and Chief Financial Officer
Doane Pet Care Company
32
EXHIBIT INDEX
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)
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)
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)
4.2 Registration Rights 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)
4.3 Indenture dated February 28, 2003 among Doane Pet Care Company, DPC
Investment Corp., Doane/Windy Hill Joint Venture, L.L.C. and
Wilmington Trust Company (incorporated by reference to Exhibit 4.3 to
Doane Pet Care Company's Annual Report on Form 10-K for the year
ended December 28, 2002 (the "2002 Form 10-K"))
4.4 Registration Rights Agreement dated as of February 28, 2003 among
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. (incorporated by reference to Exhibit 4.4 to the 2002
Form 10-K)
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
15.1* Letter from KPMG LLP dated July 24, 2003, regarding unaudited interim
financial information
32.1* Accompanying Section 906 Certification of Chief Executive Officer
32.2* Accompanying Section 906 Certification of Chief Financial Officer
- ---------------
* Filed or furnished herewith, as the case may be