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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27818
DOANE PET CARE COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 43-1350515
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
210 WESTWOOD PLACE SOUTH, SUITE 400
BRENTWOOD, TN 37027
(Address of Principal Executive Office, Including Zip Code)
(615) 373-7774
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 10, 2000, registrant had outstanding 1,000 shares of common
stock.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of April 1, 2000
and January 1, 2000....................................................................... 1
Unaudited Condensed Consolidated Statements of Income for the three
months ended April 1, 2000 and April 3, 1999.............................................. 2
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income for the three months ended April 1, 2000............................. 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
three months ended April 1, 2000 and April 3, 1999........................................ 4
Notes to Unaudited Condensed Consolidated Financial Statements............................ 5
Independent Auditors' Review Report....................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K........................................................... 13
Signatures......................................................................................... 14
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DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
April 1, January 1,
2000 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,942 $ 7,194
Accounts receivable, net 82,483 69,156
Inventories, net 56,836 52,938
Deferred tax asset 18,687 14,720
Prepaid expenses and other current assets 3,134 3,799
------------ ------------
Total current assets 163,082 147,807
Property, plant and equipment, net 217,125 216,067
Goodwill and other intangible assets, net 295,785 298,545
Other assets 31,615 30,877
------------ ------------
Total assets $ 707,607 $ 693,296
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 17,612 $ 17,131
Accounts payable 60,521 64,512
Accrued liabilities 33,364 33,332
------------ ------------
Total current liabilities 111,497 114,975
Long-term debt, excluding current maturities 410,578 410,791
Other long-term liabilities 7,381 8,169
Deferred tax liability 39,625 30,450
------------ ------------
Total liabilities 569,081 564,385
------------ ------------
Senior Preferred Stock, 3,000,000 shares authorized,
1,200,000 shares issued and outstanding 48,169 45,965
------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding - -
Additional paid-in-capital 106,786 106,708
Accumulated other comprehensive loss (669) (170)
Accumulated deficit (15,760) (23,592)
------------ ------------
Total stockholder's equity 90,357 82,946
------------ ------------
Total liabilities and stockholder's equity $ 707,607 $ 693,296
============ ============
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three months ended
-----------------------
April 1, April 3,
2000 1999
----------- -----------
Net sales $ 204,463 $ 203,673
Cost of goods sold 147,268 151,273
Gross profit 57,195 52,400
Operating expenses:
Promotion and distribution 16,705 15,831
Selling, general and administrative 10,895 9,549
Amortization of intangibles 2,689 2,514
Non-recurring expenses - 1,946
Income from operations 26,906 22,560
Interest expense, net 10,126 10,335
Other income, net (136) (155)
Income before income taxes and cumulative effect of
a change in accounting principle 16,916 12,380
Income tax expense 6,880 5,015
Income before cumulative effect of a change in
accounting principle 10,036 7,365
Cumulative effect at adoption on January 1, 1999 of a
change in accounting for derivative instruments, net of
income tax benefit of $1,440 - (2,263)
Net income 10,036 5,102
Preferred stock dividends and accretion (2,204) (1,951)
Net income available to common shares $ 7,832 $ 3,151
=========== ===========
Basic and diluted net income per common share:
Income from continuing operations 7,832 5,414
Cumulative effect of accounting change - (2,263)
Net income per common share $ 7,832 $ 3,151
=========== ===========
Basic and diluted weighted-average common shares outstanding 1,000 1,000
=========== ===========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
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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 January 1, 2000 1,000 $ - $ 106,708 $ (170) $ (23,592) $ 82,946
Comprehensive income:
Net income - - - - 10,036 10,036
Unrealized loss on foreign
currency translation, net - - - (579) - (579)
Unrealized gain on cash flow
hedges, net of tax of $50 - - - 80 - 80
---------
Total comprehensive income 9,537
---------
Preferred stock dividends - - - - (1,935) (1,935)
Accretion of preferred stock - - - - (269) (269)
Capital contribution - - 78 - - 78
-------- -------- ---------- ------------ ----------- ---------
Balances at April 1, 2000 1,000 $ - $ 106,708 $ (669) $ (15,760) $ 90,357
======== ======== ========== ============ =========== =========
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three months ended
--------------------------
April 1, April 3,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income $ 10,036 $ 5,102
Items not requiring (providing) cash:
Depreciation 4,494 3,916
Amortization of intangibles 2,689 2,514
Deferred income tax expense 5,163 4,211
Changes in fair value of derivative instruments (3,391) (573)
Non-cash interest expense 405 452
Other non-cash (credits) charges , net (323) 111
Equity in joint ventures (357) -
Cumulative effect of accounting change - 2,263
Changes in current assets and liabilities (17,950) (16,555)
----------- -----------
Net cash provided by operating activities 766 1,441
----------- -----------
Cash flows from investing activities:
Capital expenditures, including interest capitalized (6,368) (6,925)
Other, net (1,093) (309)
----------- -----------
Net cash used in investing activities (7,461) (7,234)
----------- -----------
Cash flows from financing activities:
Capital contribution 78 3
Net borrowings under revolving credit agreements 4,000 9,400
Principal payments on long-term debt (3,547) (2,925)
----------- -----------
Net cash provided by financing activities 531 6,478
Effect of exchange rate changes on cash and
cash equivalents 912 (220)
----------- -----------
Increase (decrease) in cash and cash equivalents (5,252) 465
Cash and cash equivalents, beginning of period 7,194 3,349
----------- -----------
Cash and cash equivalents, end of period $ 1,942 $ 3,814
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See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying auditors' review report.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Doane Pet Care Company and Subsidiaries (the "Company") do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The year end condensed
consolidated balance sheet data was derived from audited financial statements.
In the opinion of management, all material adjustments, consisting of normal and
recurring adjustments, have been made which were considered necessary to present
fairly the financial position and the results of operations and cash flows at
the dates and for the periods presented. Certain reclassifications have been
made to previously reported consolidated financial statements to conform with
the fiscal 2000 presentation.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes contained in the Company's 1999 annual report on Form 10-K for the fiscal
year ended January 1, 2000 (the "1999 10-K"), including related exhibits. The
accounting policies used in preparing these financial statements are the same as
those summarized in the 1999 10-K.
Effective January 1, 1999, the Company implemented a fiscal year that
ends on the Saturday nearest to the end of December. Each month and quarter also
end on a Saturday with the first quarters of 1999 and 2000 ending on April 3,
1999 and April 1, 2000, respectively.
(2) CHANGE IN ACCOUNTING PRINCIPLE AND RESTATEMENT OF 1999 QUARTERLY
FINANCIAL DATA
Effective January 1, 1999, the Company adopted Statement on Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, ("SFAS 133") which establishes new accounting and reporting
guidelines for derivatives and hedging transactions. SFAS 133 requires
derivatives in place at the date of adoption to be re-evaluated and documented
as to the specific planned or expected future purchase being hedged to defer
losses on the derivative instruments. The Company's process and strategy used to
manage price risk associated with future purchases of commodities does not meet
the requirements of SFAS 133 to allow the derivatives to be designated as cash
flow hedges and to defer losses.
The Company disclosed in its 1999 10-K a restatement of its financial
results for the first three quarters of 1999 relating to the adoption of SFAS
133. The adjustments are the result of a change from the previous methodology
for offsetting or reversing commodity derivative instrument contract fair value
gains and losses recognized in cost of goods sold in future periods when actual
cash settlement occurs or contract dates have passed. This change was
implemented based on a year end review of the Company's policies and procedures
relating to SFAS 133. The restated balances and results from operations as of
and for the quarter ended April 3, 1999, as disclosed in this quarterly report
on Form 10-Q, reflect the fair value gains and losses of the Company's commodity
derivative instruments in cost of goods sold immediately as required by SFAS
133. As a result, the Company recorded the cumulative effect of a change in
accounting principle related to derivative instruments of $2.3 million, net of
income tax benefit of $1.4 million, at adoption on January 1, 1999. In addition,
an adjustment was made for the first quarter of 1999 to decrease costs of goods
sold by $0.6 million and to recognize the related income tax expense of $0.2
million. The comparable amounts for the first quarter of 2000 was to decrease
cost of goods sold by $5.7 million and to recognize the related income tax
expense of $2.2 million.
SFAS 133 also applies to the Company's accounting for interest rate
swap agreements and foreign currency derivative transactions. The Company has
designated its interest rate swap agreements as cash flow hedges and its foreign
currency transactions as derivative instruments in accordance with SFAS 133. The
Company had no outstanding foreign currency derivative transactions at the date
SFAS 133 was adopted. As a result, no transition amount was recorded related to
either interest rate swap agreements or
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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
foreign currency derivative transactions as part of the cumulative effect of a
change in accounting principle mentioned above.
(3) ACQUISITIONS
DIPP Acquisition
On July 30, 1999, the Company acquired a 50% interest in the business
of North American Pet Products, Inc., a privately held international pet food
distribution and brokerage company. The jointly owned business has operated
under the name of Doane International Pet Products LLC ("DIPP") since the
acquisition and will be the Company's exclusive distributor of Doane
manufactured products, as well as DIPP's existing product lines, in the Asian
and Latin American markets. The Company's investment in DIPP is being accounted
for under the equity method. The purchase price was $0.8 million in cash and
40,000 shares in Parent's common stock valued at $0.4 million.
Caldwell Acquisition
On August 31, 1999, the Company terminated its joint venture agreement
associated with the manufacturing operations of a pet food plant in Caldwell,
Idaho. Upon termination, the Company assumed control of 100% of the pet food
operations at the facility.
Larkshall Acquisition
On October 14, 1999, the Company acquired all of the assets of the
Larkshall Extrusions ("Larkshall") division of Buxted Chicken Limited for $5.0
million in cash. Larkshall is a manufacturer of a complete range of dry pet
foods, with an emphasis on super premium pet foods, located in England. This
acquisition has been accounted for as a purchase with the purchase price and
direct acquisition costs allocated based on the fair value of assets acquired
and liabilities assumed.
Arovit Acquisition
On May 10, 2000, the Company acquired A/S Arovit Petfood ("Arovit"),
headquartered in Esbjerg, Denmark, for approximately DKK 1.2 billion and assumed
indebtedness, net of cash, of approximately DKK 97.0 million. The decline in the
value of the DKK compared to the U.S. dollar since signing the share purchase
agreement in March 2000 reduced the U.S. dollar purchase price to approximately
$144.4 million from $156.0 million. The Company did not realize the full impact
of the DKK currency fluctuation because it hedged a portion of the DKK purchase
price against the U.S. dollar to limit exposure to fluctuations in this foreign
currency in accordance with its risk management policy, and will record a
non-recurring charge of approximately $4.6 million ($0.4 million in the first
quarter and $4.2 million in the second quarter of 2000) to reflect the hedged
portion of the foreign currency fluctuation.
Arovit manufactures and sells a full range of pet food products,
throughout Europe, for dogs and cats, including wet, dry and treats, primarily
through private label programs. This acquisition will be accounted for as a
purchase with the purchase price and direct acquisition costs allocated based on
the fair value of assets acquired and liabilities assumed. The Company financed
this acquisition through an amendment to its existing credit facilities.
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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) INVENTORIES
A summary of inventories, net of valuation allowances, follows (in
thousands):
(UNAUDITED)
APRIL 1, JANUARY 1,
2000 2000
----------- ----------
Raw materials $ 13,977 $ 15,321
Packaging materials 23,535 20,199
Finished goods 19,324 17,418
----------- ----------
$ 56,836 $ 52,938
=========== ==========
(5) COMMITMENTS AND CONTINGENCIES
The Company is party, in the ordinary course of business, to claims and
litigation. In management's opinion, the resolution of such matters is not
expected to have a material impact on the future financial condition, results of
operations or cash flows of the Company.
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INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Doane Pet Care Company
We have reviewed the condensed consolidated balance sheet of Doane Pet Care
Company and Subsidiaries as of April 1, 2000, the related condensed consolidated
statements of income for the three-month periods ended April 1, 2000 and April
3, 1999, the condensed consolidated statement of stockholder's equity and
comprehensive income for the three-month period ended April 1, 2000 and the
condensed consolidated statements of cash flows for the three-month periods
ended April 1, 2000 and April 3, 1999. These condensed consolidated financial
statements are the responsibility of the Company's management.
We have conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Doane Pet Care Company and
Subsidiaries as of January 1, 2000, and the related consolidated statements of
income, stockholder's equity and comprehensive income and cash flows for the
year then ended (not presented herein); and in our report dated February 25,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of January 1, 2000 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
As discussed in Note 2 to the condensed consolidated financial statements,
effective January 1, 1999, the Company adopted Statement on Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
/s/ KPMG LLP
Houston, Texas
April 27, 2000
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking
statements which are based on management's current views and assumptions
regarding future events and financial performance. These statements are
qualified by reference to the sections "Forward-Looking Statements" and "Risk
Factors" in Item 1 of our 1999 annual report on Form 10-K, which lists important
factors that could cause actual results to differ materially from those
discussed in this report.
RESULTS OF OPERATIONS
Readers are encouraged to consider carefully the accompanying unaudited
condensed consolidated financial statements and related notes contained
elsewhere in this quarterly report on Form 10-Q and our consolidated financial
statements and related notes contained in our 1999 annual report on Form 10-K as
they read the discussion below (table in thousands, except percentages):
THREE MONTHS ENDED
---------------------------------------------------
April 1, 2000 April 3, 1999
---------------------- ------------------------
Net sales $ 204,463 100.0% $ 203,673 100.0%
Cost of goods sold 147,268 72.0 151,273 74.3
---------- ----- ------------ -----
Gross profit 57,195 28.0 52,400 25.7
Operating expenses:
Promotion and distribution 16,705 8.2 15,831 7.8
Selling, general and administrative 10,895 5.3 9,549 4.6
Amortization of intangibles 2,689 1.3 2,514 1.2
Non-recurring expenses - - 1,946 1.0
---------- ----- ------------ -----
Income from operations 26,906 13.2 22,560 11.1
Interest expense, net 10,126 4.9 10,335 5.0
Other income, net (136) - (155) -
---------- ----- ------------ -----
Income before income taxes and
cumulative effect of a change in
accounting principle 16,916 8.3 12,380 6.1
Income tax expense 6,880 3.4 5,015 2.5
---------- ----- ------------ -----
Income before cumulative effect of a
change in accounting principle 10,036 4.9 7,365 3.6
Cumulative effect at adoption on
January 1, 1999 of a change in accounting
for derivative instruments, net of income
tax benefit of $1,440 - - (2,263) (1.1)
---------- ----- ------------ -----
Net income $ 10,036 4.9% $ 5,102 2.5%
========== ===== ============ =====
THREE MONTHS ENDED APRIL 1, 2000 COMPARED TO THREE MONTHS ENDED APRIL 3, 1999
Net sales. Our net sales of $204.5 million in the first quarter of 2000
increased less than 1% from the comparable 1999 period. The net sales and
tonnage volume growth was mitigated by two industry factors: 1) our customers'
reduced purchases following a year end build-up of inventory due to year 2000
concerns and 2) our mass merchandise, grocery, and club customers reduced first
quarter purchases to make room for the launch of a major national brand into
these channels following development of the brand in select specialty channels.
In addition to the industry factors, our sales growth was mitigated by certain
low
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margin sales, which we ceded towards the end of the first quarter of 1999,
and lower selling prices from the pass through of certain raw material cost
decreases to our customers.
Gross profit. Our gross profit in the first quarter of 2000 increased
9.2% to $57.2 million from $52.4 million in the comparable 1999 period primarily
due to the change in the fair value of our commodity derivative instruments. As
required by SFAS 133, we recognized in cost of goods sold a favorable fair
market value adjustment associated with our derivative instruments of $5.7
million in 2000 compared to a favorable fair market value adjustment of $0.6
million in the 1999 period. In addition, the gross margin for the 2000 period
was favorably impacted by reductions in certain raw material costs. These
favorable items were partially offset by reductions in our selling prices.
Promotion and distribution expenses. Our promotion and distribution
expenses in the first quarter of 2000 increased to $16.7 million from $15.8
million in the comparable 1999 period primarily because of freight and
warehousing expenses associated with a new customer relationship.
Selling, general and administrative. Our selling, general and
administrative expenses in the first quarter of 2000 increased to $10.9 million
from $9.5 million in the comparable 1999 period primarily due to expenses
associated with our Larkshall acquisition, depreciation on hardware and software
put in place during 1999 and annual salary adjustments.
Non-recurring expenses. Non-recurring expenses in the 1999 period
include $1.4 million of costs associated with a proposed initial public stock
offering by our parent, Doane Pet Care Enterprises, Inc., and $0.5 million of
transition expenses related to our acquisition of Windy Hill.
Interest expense, net. Interest expense, net, for the first quarter of
2000 decreased 2.0% to $10.1 million from $10.3 million in the comparable 1999
period. This decrease is due to the net pay down of our debt during 1999 and
2000 partially offset by increases in interest rates.
Income tax expense. Income tax expense in the first quarter of 2000
increased due to higher pre-tax income compared to the 1999 period. Our
effective income tax rate was 40.7% and remained consistent for these periods.
Cumulative effect of a change in accounting principle. The cumulative
effect of a change in accounting principle in the first quarter of 1999 relates
to our adoption of SFAS 133, which applies to derivative commodity purchase
transactions. The loss recorded of $3.7 million in the 1999 period is presented
net of income tax benefit of $1.4 million.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and
working capital requirements from cash flows from operations, bank borrowings
and industrial development revenue bonds. We had working capital of $51.6
million at April 1, 2000. As of April 1, 2000, we had borrowing capacity of
$84.0 million under our revolving credit agreements, which was net of $2.0
million for outstanding letters of credit.
The net cash provided by our operating activities of $0.8 million in
the first quarter of 2000 is comparable to the $1.4 million provided in the 1999
period.
The net cash used in our investing activities of $7.5 million in the
first quarter of 2000 and $7.2 million in the 1999 period were primarily the
result of capital expenditures.
Net cash provided by our financing activities was approximately $0.5
million in the first quarter of 2000 compared to $6.5 million for the 1999
period. In 2000, we borrowed $4.0 million under our revolving credit agreements
which was offset by $3.5 million in principal payments on our long-term debt.
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The acquisition of Arovit, in May 2000, was financed through borrowings
under an amendment to our senior credit agreement. The amended credit agreement
provides for $80.0 million of incremental Tranche B loans and Euro 82.0 million
(approximately $73.0 million) of new Euro Tranche A loans. The final maturity of
each is December 2005, and each amortizes over the five-year term with balloon
payments at maturity.
We expect that existing manufacturing facilities will not be sufficient
to meet our anticipated volume growth. We have continued to examine alternatives
for expanding our business either through construction of additional
manufacturing capacity or acquisitions of manufacturing assets. Potential
acquisitions could include acquisitions of operating companies. We intend to
finance these expansions or acquisitions with borrowings under existing or
expanded credit facilities, or the issuance of additional equity or debt
securities.
We are highly leveraged and have significant cash requirements for debt
service relating to the senior credit facility, the senior subordinated notes,
the Ipes debt and industrial development revenue bonds. Our ability to borrow is
limited by the senior credit facility and the limitations on the incurrence of
indebtedness in the indenture governing our senior subordinated notes. We
anticipate our operating cash flows, together with amounts available to us under
our senior credit facility, will be sufficient to finance working capital
requirements, debt service requirements and capital expenditures through fiscal
2000.
EURO
Effective January 1, 1999, 11 of the 15 countries comprising the
European Union began a transition to a single monetary unit, the "Euro," which
is scheduled to be completed by July 1, 2002. We are currently considering
options to ensure our European operations can operate effectively after
transitioning to the Euro. Our operations in Italy, Spain and the United Kingdom
may incur significant costs in conversion of their systems to the Euro. We are
unable to predict whether these costs can be passed through to our customers in
Europe. These customers may also begin conducting business using the Euro prior
to the completion of the conversion of our European systems. Delays in
conversion could have a material adverse effect on the results of our operations
in Europe. In addition, the introduction of the Euro may increase competition,
as manufacturers in other European countries become able to compete more easily
in our markets. We do not believe that the implementation of the Euro will have
a material effect on our operations or financial condition taken as a whole.
INFLATION AND CHANGES IN PRICES
Our financial results depend to a large extent on the costs of raw
materials and packaging and our ability to pass along increases in these costs
to our customers. Historically, market prices for commodity grains and food
stocks have fluctuated in response to a number of factors, including changes in
U.S. government farm support programs, changes in international agricultural and
trading policies and weather conditions during the growing and harvesting
seasons. Fluctuations in paper prices, which affect our costs for packaging
materials, have resulted from changes in supply and demand, general economic
conditions and other factors. In the event of any increases in raw materials and
packaging 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 and packaging costs or of whether any price increases implemented by
us may affect the volumes of future shipments to our customers.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks. Market risk is the potential loss
arising from adverse changes in market prices and rates. We do not enter into
derivative or other financial instruments for trading or speculative purposes.
Our market risks could arise from changes in commodity prices, interest rates
and foreign currency exchange rates.
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Commodity price risk. We manage price risk created by market
fluctuations by using derivative instruments for portions of our primary
commodity products purchases, which are corn and soybean meal, principally
through exchange traded futures and options contracts. The terms of these
contracts are generally less than one year. Settlement of positions are either
through financial settlement with the exchanges or through exchange for the
physical commodity, in which case, we deliver the contract against the
acquisition of the physical commodity.
Based upon an analysis utilizing the actual derivative contractual
volumes and assuming a 10% adverse movement in commodity prices, the potential
decrease in the fair value of the commodity derivative instruments at April 1,
2000 would not have a material adverse effect on our financial position, results
of operations or cash flows.
Interest rate risk. We are subject to market risk exposure related to
changes in interest rates. Accordingly, our net income is affected by changes in
interest rates. Assuming our current level of borrowings, a 100 basis point
increase in interest rates under these borrowings would decrease our net income
for the three months ended April 1, 2000 by approximately $1.1 million. In
addition, such a change would result in a decrease of approximately $8.9 million
in the fair value of our fixed rate debt at April 1, 2000. In the event of an
adverse change in interest rates, we could take action to mitigate our exposure;
however, due to the uncertainty of the actions that would be taken and their
possible effects, this analysis assumes no such actions. Furthermore, this
analysis does not consider the effects of the change in the level of overall
economic activity that could exist in such an environment.
We periodically use interest rate hedges (swaps) to limit our exposure
to the interest rate risk associated with our floating rate debt, which was
$263.2 million at April 1, 2000. Amounts received (paid) under interest rate
swap agreements are recorded as reductions (additions) to interest expense.
These contracts are designated as cash flow hedges, as described below. The
deferred gains associated with these contracts were $1.1 million, net of tax of
$0.7 million, at April 1, 2000.
Foreign currency exchange risk. Our earnings and financial position are
affected by foreign exchange rate fluctuations. We currently have foreign
operations in Spain, Italy and the United Kingdom. The translation adjustment
during the first quarter of 2000 was a loss of $0.6 million which was recognized
in accumulated other comprehensive income in the accompanying unaudited
condensed consolidated financial statements included herein.
Prior to the Arovit acquisition, our normal business operations have
not been exposed to significant foreign exchange risk. We do not currently hedge
against adverse foreign currency fluctuations, but we may hedge part of our
foreign currency exposure resulting from the Arovit acquisition.
Our commitment to purchase Arovit for approximately DKK 1.2 billion
created foreign currency exchange exposure relative to the purchase price. We
made a forward purchase of DKK 462.5 million to hedge our risk associated with
this purchase. The decrease in the fair value of the DKK as of April 1, 2000
resulted in a fair market value adjustment loss of approximately $0.4 million,
which is recognized as an expense in the statement of income for the first
quarter of 2000.
On January 1, 1999, we adopted SFAS 133, which establishes new
accounting and reporting guidelines for derivative instruments and hedging
activities. SFAS 133 requires all derivative instruments be recognized as assets
or liabilities in the balance sheet and measured at fair value. Accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. Designation is established at the
inception of a derivative, but redesignation is permitted. For derivatives
designated as cash flow hedges, changes in fair value are recognized in
accumulated other comprehensive income in the balance sheet until the hedged
item is recognized in earnings. Changes in the fair value of derivative
instruments, which are not designated as hedges, are recorded in earnings as the
changes occur.
Our commodity derivative instruments do not meet the requirements of
SFAS 133 to be designated as hedges. Accordingly, all changes in the fair value
of our derivative instruments for
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commodities are included in cost of goods sold in the statements of income for
the three months ended April 1, 2000 and April 3, 1999 in the accompanying
unaudited condensed consolidated financial statements included herein. We expect
to refine the strategy, process and documentation of our commodity derivative
instruments and redesignate qualifying transactions as cash flow hedges in the
fourth quarter of fiscal year 2000.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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DOANE PET CARE COMPANY AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOANE PET CARE COMPANY
Dated: May 10, 2000 By: /s/ THOMAS R. HEIDENTHAL
---------------------------
Thomas R. Heidenthal
Senior Vice President and
Chief Financial Officer
Dated: May 10, 2000 By: /s/ PHILIP K. WOODLIEF
---------------------------
Philip K. Woodlief
Vice President - Finance and
Principal Accounting Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule