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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 MARCH 29, 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 May 1, 2003, the registrant had outstanding 1,000 shares of
common stock, all of which were held by its parent, Doane Pet Care Enterprises,
Inc.
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TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of March 29, 2003
and December 28, 2002............................................................................... 1
Unaudited Condensed Consolidated Statements of Operations for the three
months ended March 29, 2003 and March 30, 2002...................................................... 2
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income as of and for the three months ended March 29, 2003............................ 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
three months ended March 29, 2003 and March 30, 2002................................................ 4
Notes to Unaudited Condensed Consolidated Financial Statements...................................... 5
Independent Accountants' Review Report.............................................................. 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................... 25
Item 4. Controls and Procedures............................................................................. 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 28
Item 6. Exhibits and Reports on Form 8-K.................................................................... 28
Signatures................................................................................................... 32
Certification of Principal Executive Officer................................................................. 33
Certification of Principal Financial Officer................................................................. 34
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)
MARCH 29, DECEMBER 28,
2003 2002
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,803 $ 7,596
Accounts receivable, net 133,255 129,347
Inventories, net 65,614 63,631
Deferred tax assets 5,072 5,859
Prepaid expenses and other current assets 8,989 8,143
---------- -----------
Total current assets 219,733 214,576
Property, plant and equipment, net 260,474 260,092
Goodwill and trademarks, net 366,796 363,080
Other assets 35,984 32,919
---------- -----------
Total assets $ 882,987 $ 870,667
========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,502 $ 5,720
Accounts payable 91,770 93,528
Accrued liabilities 60,215 56,113
---------- -----------
Total current liabilities 156,487 155,361
Long-term debt, excluding current maturities 570,635 548,300
Other long-term liabilities 9,374 23,692
Deferred tax liabilities 6,635 7,261
---------- -----------
Total liabilities 743,131 734,614
---------- -----------
Senior Preferred Stock (Redeemable), 3,000,000 shares authorized,
1,200,000 shares issued and outstanding 80,765 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 21,235 9,558
Accumulated deficit (77,818) (66,729)
---------- -----------
Total stockholder's equity 59,091 58,503
---------- -----------
Total liabilities and stockholder's equity $ 882,987 $ 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
-------------------------
MARCH 29, MARCH 30,
2003 2002
----------- ----------
Net sales $ 259,949 $ 220,106
Cost of goods sold 214,589 169,192
----------- ----------
Gross profit 45,360 50,914
Operating expenses:
Promotion and distribution 14,410 13,319
Selling, general and administrative 12,108 11,074
Amortization 1,154 1,098
----------- ----------
Income from operations 17,688 25,423
Interest expense, net 14,015 13,307
Loss from debt extinguishment 11,113 -
Other income, net (171) (168)
----------- ----------
Income (loss) before income taxes (7,269) 12,284
Income tax expense 605 3,811
----------- ----------
Net income (loss) (7,874) 8,473
Preferred stock dividends and accretion (3,215) (2,830)
----------- ----------
Net income (loss) available to common shares $ (11,089) $ 5,643
=========== ==========
Basic and diluted net income (loss) per common share $ (11,089) $ 5,643
=========== ==========
Basic and diluted weighted-average common shares outstanding 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 (LOSS) DEFICIT TOTAL
------ ------ ---------- ------------- ----------- ----------
Balances at December 28, 2002 1,000 $ - $ 115,674 $ 9,558 $ (66,729) $ 58,503
Comprehensive income:
Net loss - - - - (7,874) (7,874)
Foreign currency translation - - - 11,384 - 11,384
Unrealized gain on interest rate
swap, net of deferred tax expense
of $187 - - - 293 - 293
----------
Total comprehensive income 3,803
----------
Preferred stock dividends - - - - (2,945) (2,945)
Accretion of preferred stock - - - - (270) (270)
------ ------ ---------- ---------- ---------- ----------
Balances at March 29, 2003 1,000 $ - $ 115,674 $ 21,235 $ (77,818) $ 59,091
====== ====== ========== ========== ========== ==========
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)
THREE MONTHS ENDED
----------------------------
MARCH 29, MARCH 30,
2003 2002
----------- ------------
Cash flows from operating activities:
Net income (loss) $ (7,874) $ 8,473
Items not requiring (providing) cash:
Depreciation 7,121 6,328
Amortization 1,402 1,346
Deferred income tax expense (benefit) (91) 3,709
Non-cash interest expense 1,984 1,892
Equity in joint ventures (107) (177)
Loss from debt extinguishment 11,113 -
Changes in current assets and liabilities (13,403) 16,920
----------- ------------
Net cash provided by operating activities 145 38,491
----------- ------------
Cash flows from investing activities:
Capital expenditures (4,299) (2,128)
Proceeds from sale of assets 52 392
Other, net (895) (485)
----------- ------------
Net cash used in investing activities (5,142) (2,221)
----------- ------------
Cash flows from financing activities:
Net repayments under revolving credit agreements (8,700) (29,000)
Proceeds from issuance of long-term debt 210,444 9,738
Principal payments on long-term debt (189,902) (14,940)
Payments for debt issuance costs (7,771) (2,034)
----------- ------------
Net cash provided by (used in) financing activities 4,071 (36,236)
Effect of exchange rate changes on cash and cash equivalents 133 (29)
----------- ------------
Increase (decrease) in cash and cash equivalents (793) 5
Cash and cash equivalents, beginning of period 7,596 6,032
----------- ------------
Cash and cash equivalents, end of period $ 6,803 $ 6,037
=========== ============
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 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 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. The accounting policies used in preparing these 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 month and quarter also end on a Saturday with the first quarters
of fiscal 2002 and 2003 ending on March 30, 2002 and March 29, 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.
143, Accounting for Asset Retirement Obligations, or SFAS 143, which requires
companies to record the fair value of an asset retirement obligation as a
liability in the period in which they incur a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or normal use of the assets. SFAS 143 also
requires companies to record a corresponding asset that is depreciated over the
life of the asset. Subsequent to the initial measurement of an asset retirement
obligation, SFAS 143 requires the obligation to be adjusted at the end of each
period to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. The adoption of SFAS 143 had no material impact
on the Company's financial position or results of operations.
Effective December 29, 2002, the Company adopted FASB's Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections, or SFAS
145, which amends existing authoritative pronouncements to make various
technical corrections, clarify meanings and describe their applicability under
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 the 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. The adoption of SFAS 146 had no
material impact on the Company's financial position or results of operations.
5
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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."
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, or FIN 45, which elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modifies after December 31, 2002. The adoption of FIN 45
had no material impact on the Company's financial position or results of
operations.
(3) INVENTORIES
A summary of inventories, net of valuation allowances, follows (in
thousands):
MARCH 29, DECEMBER 28,
2003 2002
----------- ------------
Raw materials $ 14,243 $ 14,957
Packaging materials 18,564 19,002
Finished goods 32,807 29,672
----------- -----------
Total $ 65,614 $ 63,631
=========== ===========
(4) LONG-TERM DEBT AND LIQUIDITY
A summary of long-term debt follows (in thousands):
MARCH 29, DECEMBER 28,
2003 2002
----------- ------------
Revolving credit facility $ 6,300 $ 15,000
Term loan facilities 179,341 340,924
Sponsor facility - 17,245
Senior notes 210,505 -
Senior subordinated notes 148,520 148,430
Industrial development revenue bonds 14,474 14,471
Debt of foreign subsidiaries 15,997 17,950
----------- -----------
575,137 554,020
Less: Current maturities (4,502) (5,720)
----------- -----------
Total $ 570,635 $ 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
6
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
September 1 of each year, commencing on September 1, 2003. The 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 notes are the Company's general unsecured senior obligations,
effectively subordinated in right of payment to all of the Company's senior
secured indebtedness, including indebtedness under the Company's Amended Credit
Facility, and senior in right of payment to any current or future subordinated
indebtedness of the Company, including indebtedness under the Company's senior
subordinated notes. The senior notes are effectively subordinated to all
liabilities, including trade payables, of each of the Company's subsidiaries
that is not a guarantor of the senior notes. The 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 the
Company's domestic subsidiaries as of the issue date of the senior notes, and
may be guaranteed by additional subsidiaries in the future.
In conjunction with the issuance of the 10 3/4% senior notes, the
Company amended its Amended Credit Facility. These amendments provide 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 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 March 29, 2003, the Company's Amended Credit Facility provided
for total commitments of a Euro 32.8 million Euro Term Loan Facility ($35.7
million assuming a USD to Euro exchange rate of 1.0896) 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. All loans under the Amended Credit Facility bear interest at
the higher of the Euro dollar rate plus 4.75%, or the prime rate of the
administrative agent plus 3.75%, until maturity in 2006. The Company also pays
certain fees with respect to the Amended Credit Facility. As of March 29, 2003,
the Euro Term Loan Facility bore interest at 7.53%, the USD Term Loan Facility
bore interest at 7.67% and the Revolving Credit Facility bore interest at 8.00%.
The Euro Term Loan Facility has a final maturity of December 30, 2005. The USD
Term Loan Facility consists of three tranches with final maturities of March 31,
2005, December 31, 2005 and December 31, 2006, respectively, unless terminated
sooner upon an event of default. The Revolving Credit Facility has a final
maturity of March 31, 2005. As of March 29, 2003, the principal amount due under
the Euro Term Loan Facility was approximately Euro 32.8 million in 2005 and the
principal amounts due under the USD Term Loan Facility were approximately: (i)
$9.8 million in 2004; (ii) $91.2 million in 2005; and (iii) $42.6 million in
2006. At March 29, 2003, the Company had $6.3 million of outstanding borrowings
under its Revolving Credit Facility and $2.5 million letters of credit
outstanding, resulting in $51.2 million of availability under its Revolving
Credit Facility. Availability of funds under the Amended Credit Facility is
subject to certain customary terms and conditions.
The Amended Credit Facility also provides for mandatory prepayments of
the borrowings upon certain specified events and in certain specified
percentages, including: (1) 100% of the net cash proceeds received by the
Company's Parent, Doane Pet Care Enterprises, Inc., the Company or any of its
restricted subsidiaries from the issuance of indebtedness not currently
expressly permitted by the Amended Credit Facility; (2) 100% of the net cash
proceeds of any sale of other disposition of any assets, subject to certain
exceptions; (3) 50% of excess cash flow; and (4) 100% of the net proceeds of any
sale or issuance of equity, subject to certain exceptions.
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.
7
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) ACCRUALS FOR RESTRUCTURING COSTS
A roll-forward of the Company's accrued restructuring costs for fiscal
2003 through March 29, 2003 follows (in thousands):
THREE MONTHS ENDED
MARCH 29,
2003
------------------
Balance at December 28, 2002 $ 2,752
Cash payments (574)
--------------
Balance at March 29, 2003 $ 2,178
==============
The future expected payout of the Company's accrued restructuring costs
as of March 29, 2003 follows (in thousands):
FISCAL YEARS ENDING PAYOUT
- ------------------- ---------
2003 $ 1,922
2004 256
---------
Total $ 2,178
=========
(6) STOCK OPTION PLAN OF PARENT
The Company and its Parent have elected to continue to follow 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 Statement of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation, or 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 ended March 30, 2002 and March 29,
2003 would have been adjusted as follows (in thousands, except per share
amounts):
THREE MONTHS ENDED
-------------------------
MARCH 29, MARCH 30,
2003 2002
---------- ----------
Net income (loss) available to common shares,
as reported $ (11,089) $ 5,643
Less: Total stock-based employee
compensation expense determined based on
the fair value method for all awards,
net of income tax benefit (2) (32)
---------- ----------
Pro forma net income (loss) available to
common shares $ (11,091) $ 5,611
========== ==========
Earnings per share:
Basic and diluted net income (loss) per
common share, as reported $ (11,089) $ 5,643
========== ==========
Basic and diluted net income (loss) per
common share, pro forma $ (11,091) $ 5,611
========== ==========
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
8
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
value method of SFAS 123 under the assumptions of a risk free rate of return of
3.60% for the three months ended March 30, 2002 and March 29, 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
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
December 28, 2002 and March 29, 2003 and for the three months ended March 30,
2002 and March 29, 2003 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
MARCH 29,2003
---------------------------------------------------------
NON- INTERCOMPANY
GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 58 $ 6,745 $ - $ 6,803
Accounts receivable, net 88,408 44,847 - 133,255
Inventories, net 40,262 25,352 - 65,614
Deferred tax assets 5,072 - - 5,072
Prepaid expenses and other current assets 7,093 1,896 - 8,989
------------ ------------ ------------ ------------
Total current assets 140,893 78,840 - 219,733
Property, plant and equipment, net 159,315 101,159 - 260,474
Goodwill and trademarks, net 267,376 99,420 - 366,796
Other assets 237,665 11,024 (212,705) 35,984
------------ ------------ ------------ ------------
Total assets $ 805,249 $ 290,443 $ (212,705) 882,987
============ ============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 385 $ 4,117 $ - $ 4,502
Accounts payable 53,304 38,466 - 91,770
Accrued liabilities 47,019 13,196 - 60,215
------------ ------------ ------------ ------------
Total current liabilities 100,708 55,779 - 156,487
Long-term debt, excluding current maturities 558,755 169,795 (157,915) 570,635
Other long-term liabilities 9,374 - - 9,374
Deferred tax liabilities 4,971 1,664 - 6,635
------------ ------------ ------------ ------------
Total liabilities 673,808 227,238 (157,915) 743,131
------------ ------------ ------------ ------------
Senior Preferred Stock (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding 80,765 - - 80,765
------------ ------------ ------------ ------------
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 54,687 (54,687) 115,674
Accumulated other comprehensive income (loss) (12,873) 34,211 (103) 21,235
Accumulated deficit (52,125) (25,693) - (77,818)
------------ ------------ ------------ ------------
Total stockholder's equity 50,676 63,205 (54,790) 59,091
------------ ------------ ------------ ------------
Total liabilities and stockholder's equity $ 805,249 $ 290,443 $ (212,705) $ 882,987
============ ============ ============ ============
10
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
Other long-term liabilities 23,692 - - 23,692
Deferred tax liabilities 5,571 1,690 - 7,261
------------ ------------ ------------ ------------
Total liabilities 669,308 225,711 (160,405) 734,614
------------ ------------ ------------ ------------
Senior Preferred Stock (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding 77,550 - - 77,550
------------ ------------ ------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 per share; 1,000 shares
authorized, issued and outstanding - - - -
Additional paid-in-capital 115,674 47,690 (47,690) 115,674
Accumulated other comprehensive income (loss) (16,868) 26,291 135 9,558
Accumulated deficit (45,334) (21,395) - (66,729)
------------ ------------ ------------ ------------
Total stockholder's equity 53,472 52,586 (47,555) 58,503
------------ ------------ ------------ ------------
Total liabilities and stockholder's equity $ 800,330 $ 278,297 $ (207,960) $ 870,667
============ ============ ============ ============
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 MARCH 29,2003
------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
------------ ------------ ------------
Net sales $ 201,845 $ 58,104 $ 259,949
Cost of goods sold 171,250 43,339 214,589
------------ ------------ ------------
Gross profit 30,595 14,765 45,360
Operating expenses:
Promotion and distribution 8,036 6,374 14,410
Selling, general and administrative 8,039 4,069 12,108
Amortization 960 194 1,154
------------ ------------ ------------
Income from operations 13,560 4,128 17,688
Interest expense, net 6,341 7,674 14,015
Loss from debt extinguishment 11,113 - 11,113
Other expense (income), net (318) 147 (171)
------------ ------------ ------------
Loss before income taxes (3,576) (3,693) (7,269)
Income tax expense - 605 605
------------ ------------ ------------
Net loss (3,576) (4,298) (7,874)
Preferred stock dividends and accretion (3,215) - (3,215)
------------ ------------ ------------
Net loss available to common shares $ (6,791) $ (4,298) $ (11,089)
============ ============ ============
THREE MONTHS ENDED MARCH 30,2002
------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
------------ ------------ ------------
Net sales $ 175,900 $ 44,206 $ 220,106
Cost of goods sold 135,616 33,576 169,192
------------ ------------ ------------
Gross profit 40,284 10,630 50,914
Operating expenses:
Promotion and distribution 8,843 4,476 13,319
Selling, general and administrative 8,149 2,925 11,074
Amortization 938 160 1,098
------------ ------------ ------------
Income from operations 22,354 3,069 25,423
Interest expense, net 7,825 5,482 13,307
Other expense (income), net (594) 426 (168)
------------ ------------ ------------
Income (loss) before income taxes 15,123 (2,839) 12,284
Income tax expense (benefit) 4,081 (270) 3,811
------------ ------------ ------------
Net income (loss) 11,042 (2,569) 8,473
Preferred stock dividends and accretion (2,830) - (2,830)
------------ ------------ ------------
Net income (loss) available to common shares $ 8,212 $ (2,569) $ 5,643
============ ============ ============
12
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
THREE MONTHS ENDED MARCH 29, 2003
------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
----------- ------------ ------------
Cash flows from operating activities:
Net loss $ (3,576) $ (4,298) $ (7,874)
Items not requiring (providing) cash:
Depreciation and amortization 5,166 3,357 8,523
Deferred income tax benefit - (91) (91)
Loss from debt extinguishment 11,113 - 11,113
Other non-cash charges (income), net 1,877 - 1,877
Changes in current assets and liabilities (18,246) 4,843 (13,403)
----------- ------------ -----------
Net cash provided by (used in) operating activities (3,666) 3,811 145
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures (2,590) (1,709) (4,299)
Proceeds from sale of assets 19 33 52
Other, net 1,357 (2,252) (895)
----------- ------------ -----------
Net cash used in investing activities (1,214) (3,928) (5,142)
----------- ------------ -----------
Cash flows from financing activities:
Net repayments under revolving credit agreements (8,700) - (8,700)
Proceeds from issuance of long-term debt 210,444 - 210,444
Principal payments on long-term debt (189,092) (810) (189,902)
Payments for debt issuance costs (7,771) - (7,771)
----------- ------------ -----------
Net cash provided by (used in) financing activities 4,881 (810) 4,071
Effect of exchange rate changes on cash and cash equivalents - 133 133
----------- ------------ -----------
Increase (decrease) in cash and cash equivalents 1 (794) (793)
Cash and cash equivalents, beginning of period 57 7,539 7,596
----------- ------------ -----------
Cash and cash equivalents, end of period $ 58 $ 6,745 $ 6,803
=========== ============ ===========
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
THREE MONTHS ENDED MARCH 30, 2002
------------------------------------------
NON-
GUARANTOR GUARANTOR CONSOLIDATED
----------- ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 11,042 $ (2,569) $ 8,473
Items not requiring (providing) cash:
Depreciation and amortization 4,952 2,722 7,674
Deferred income tax expense (benefit) 4,081 (372) 3,709
Other non-cash charges, net 1,396 319 1,715
Changes in current assets and liabilities 12,437 4,483 16,920
----------- ------------ -----------
Net cash provided by operating activities 33,908 4,583 38,491
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures (1,269) (859) (2,128)
Proceeds from sale of assets 3 389 392
Other, net 2,216 (2,701) (485)
----------- ------------ -----------
Net cash provided by (used in) investing activities 950 (3,171) (2,221)
----------- ------------ -----------
Cash flows from financing activities:
Net borrowings under revolving credit agreements (29,000) - (29,000)
Proceeds from issuance of long-term debt - 9,738 9,738
Principal payments on long-term debt (5,663) (9,277) (14,940)
Payments for debt issuance costs (2,034) - (2,034)
----------- ------------ -----------
Net cash provided by (used in) financing activities (36,697) 461 (36,236)
Effect of exchange rate changes on cash and cash equivalents - (29) (29)
----------- ------------ -----------
Increase (decrease) in cash and cash equivalents (1,839) 1,844 5
Cash and cash equivalents, beginning of period 1,950 4,082 6,032
----------- ------------ -----------
Cash and cash equivalents, end of period $ 111 $ 5,926 $ 6,037
=========== ============ ===========
14
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Doane Pet Care Company:
We have reviewed the condensed consolidated balance sheet of Doane Pet Care
Company and subsidiaries as of March 29, 2003, the related condensed
consolidated statements of operations for the three-month periods ended March
29, 2003 and March 30, 2002, the condensed consolidated statement of
stockholder's equity and comprehensive income as of and for the three-month
period ended March 29, 2003 and the condensed consolidated statements of cash
flows for the three-month periods ended March 29, 2003 and March 30, 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
April 25, 2003
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The reader is encouraged to refer to the accompanying unaudited
condensed consolidated financial statements and related notes included elsewhere
in this Quarterly Report on Form 10-Q and our audited consolidated financial
statements and related notes in our 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 relating to our senior credit facility;
- our future financial condition or results of operations;
- our business strategies and other plans and objectives for future
operations;
- general economic and business conditions;
- business opportunities that may be presented to and pursued by us
from time to time;
- our exposure to, and our ability to manage, our market risks;
- the impact of existing or new accounting pronouncements; and
- risks related to our international operations.
These forward-looking statements are based on our assumptions and
analyses and are not guarantees of our future performance. These statements are
subject to risks, many of which are beyond our control, that could cause our
actual results to differ materially from those contained in our forward-looking
statements. Factors that could cause results to differ materially include
without limitation: decreases or changes in demand for our products, changes in
market trends, general competitive pressures from existing and new competitors,
price volatility of commodities, natural gas, other raw materials and packaging,
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.
16
All forward-looking statements attributable to us are expressly
qualified in their entirety by this cautionary statement.
CRITICAL ACCOUNTING POLICIES
Accounts receivable allowance. As of March 29, 2003, our gross accounts
receivable were $137.8 million. We had a valuation allowance of $4.5 million as
of March 29, 2003, primarily for outstanding deductions with customers. Our
policy is to estimate our allowance by applying a recovery percentage based on
historical collection experience and performing a specific identification review
of customer account balances. We may revise our allowances against accounts
receivable as we receive more information on this matter or as we assess other
factors impacting the realizability of our accounts receivable.
Inventories valuation allowance. As of March 29, 2003, our gross
inventories were $70.6 million. We had a valuation allowance for obsolescence of
$5.0 million as of March 29, 2003, primarily related to packaging inventories.
Our policy is to estimate our allowance based on specific identification of
obsolete SKUs or probable SKUs to be rationalized. We may revise our allowance
against inventories as we receive more information on this matter or as we
assess other factors impacting the realizability of our inventories.
Deferred tax assets. As of March 29, 2003, our federal net operating
loss, or NOL, carryforwards were approximately $92.0 million and our foreign NOL
carryforwards totaled approximately $5.6 million. Our deferred tax assets,
including federal, foreign, state and local NOL carryforwards, totaled
approximately $45.1 million as of March 29, 2003 and our deferred tax
liabilities totaled approximately $40.9 million. The realization of our deferred
tax assets depends upon the future reversal of our net deferred tax liabilities
and upon our ability to generate sufficient taxable income during the periods in
which our deferred tax assets may be utilized. As of March 29, 2003, we had
valuation allowances of $4.1 million against U.S. federal and state deferred tax
assets and $1.6 million against foreign deferred tax assets.
Goodwill and trademarks. As of March 29, 2003, our net goodwill and
other intangible assets totaled $366.8 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):
17
THREE MONTHS ENDED
------------------------------------------------------
MARCH 29, 2003 MARCH 30, 2002
----------------------- -----------------------
Net sales $ 259,949 100.0% $ 220,106 100.0%
Cost of goods sold 214,589 82.6 169,192 76.9
------------ ----- ------------ -----
Gross profit 45,360 17.4 50,914 23.1
Operating expenses:
Promotion and distribution 14,410 5.5 13,319 6.0
Selling, general and administrative 12,108 4.7 11,074 5.0
Amortization 1,154 0.4 1,098 0.5
------------ ----- ------------ -----
Income from operations 17,688 6.8 25,423 11.6
Interest expense, net 14,015 5.4 13,307 6.1
Loss from debt extinguishment 11,113 4.3 - -
Other income, net (171) (0.1) (168) (0.1)
------------ ----- ------------ -----
Income (loss) before income taxes (7,269) (2.8) 12,284 5.6
Income tax expense 605 0.2 3,811 1.8
------------ ----- ------------ -----
Net income (loss) $ (7,874) (3.0)% $ 8,473 3.8%
============ ===== ============ =====
THREE MONTHS ENDED MARCH 29, 2003 COMPARED TO THREE MONTHS ENDED MARCH 30, 2002
Net sales. Net sales for the first quarter of fiscal 2003 increased
18.1% to $259.9 million from $220.1 million in the 2002 first quarter. Excluding
the impact of foreign currency exchange fluctuations, net sales increased 13.3%
for the 2003 first quarter primarily due to the increase in our sales volume
from new business awards.
Gross profit. Gross profit for the first quarter of fiscal 2003
decreased 10.9%, or $5.5 million, to $45.4 million from $50.9 million in the
2002 first quarter. This decrease was primarily due to the unfavorable impact
caused by the volatility of commodity prices under SFAS 133 fair value
accounting of our commodity derivative instruments which resulted in a $0.5
million reduction in our cost of goods sold in the 2003 first quarter compared
to a $6.8 million reduction in our cost of goods sold in the 2002 first quarter,
or a $6.3 million decrease in our gross profit. Excluding the impact of SFAS
133, gross profit for the 2003 first quarter increased $0.8 million from the
2002 first quarter primarily due to the increase in sales volume and the
favorable impact of foreign currency exchange fluctuations, partially offset by
the increase in our commodity costs.
Promotion and distribution. Promotion and distribution expenses for the
first quarter of fiscal 2003 increased 8.2% to $14.4 million from $13.3 million
in the 2002 first quarter primarily due to the increase in net sales. As a
percentage of net sales, promotion and distribution expenses decreased 0.5%
resulting from the mix of business in the 2003 first quarter requiring less
promotions than the 2002 first quarter, partially offset by higher fuel costs.
Selling, general and administrative. Selling, general and
administrative expenses for the first quarter of fiscal 2003 increased 9.3% to
$12.1 million from $11.1 million in the 2002 first quarter primarily due to
foreign currency exchange fluctuations and wage inflation.
Amortization. Amortization expense, which relates to intangible assets
with estimable useful lives, for the first quarter of fiscal 2003 was $1.2
million compared to $1.1 million in the 2002 first quarter.
Interest expense, net. Interest expense, net of interest income, for
the first quarter of fiscal 2003 increased 5.3% to $14.0 million from $13.3
million in the 2002 first quarter. Excluding the impact of foreign currency
exchange fluctuations, interest expense, net of interest income, increased 2.7%
for the 2003 first quarter. This increase was primarily due to the higher
interest rate on the portion of our long-term debt refinanced in February 2003
with a portion of the proceeds from our senior notes, partially
18
offset by a decrease in interest rates associated with floating rate debt in the
2003 first quarter compared to the 2002 first quarter. See "-- Liquidity and
Capital Resources -- Debt."
Loss from debt extinguishment. The Company incurred a loss from debt
extinguishment of $11.1 million in the 2003 first quarter. 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 $0.6 million
for the first quarter of fiscal 2003 compared to $3.8 million in the 2002 first
quarter. In the 2003 first quarter, we recorded a valuation allowance of $4.1
million against the deferred tax assets that resulted from the pre-tax loss that
occurred for the quarter. We had $0.6 million of current income tax expense that
relates to certain of our European subsidiaries. Our effective tax rate was
different from the combined U.S. federal and state statutory rate of 38.9% in
both periods due to the difference between U.S. and foreign effective tax rates,
which results primarily from certain items being deductible in the United States
and also in certain foreign jurisdictions. In addition, our effective tax rate
in the 2003 first quarter was negative as a result of the valuation allowance
described above. We may not recognize additional deferred tax assets in 2003 and
beyond unless we generate significant future taxable income and therefore may
continue to record valuation allowances against any additional deferred tax
assets.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and
working capital requirements with cash flows from operations, bank borrowings
and industrial development revenue bonds. At March 29, 2003, we had working
capital of $63.2 million.
Cash Flows.
Net cash provided by our operating activities was $0.1 million for the
first quarter of fiscal 2003 compared to $38.5 million in the 2002 first
quarter. This decrease was primarily due to an unusually favorable change in
working capital in the 2002 first quarter as well as an $8.3 million interest
payment in the 2003 first quarter on the sponsor facility that was repaid in
full with proceeds from the senior note offering.
Net cash used in our investing activities was $5.1 million for the
first quarter of fiscal 2003 compared to net cash used in our investing
activities of $2.2 million in the 2002 first quarter. Capital expenditures for
the first quarter of fiscal 2003 were $4.3 million compared to $2.1 million in
the 2002 first quarter.
Net cash provided by financing activities was $4.1 million for the
first quarter of fiscal 2003 compared to net cash used in financing activities
of $36.2 million in the 2002 first quarter. In the 2003 first quarter, 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 first quarter in connection with the
issuance of our senior notes and amendments to our senior credit facility. In
the 2002 first quarter, 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
19
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 provide for, among other things: (1) the
concurrent issuance of our senior notes and repayment of our sponsor facility;
(2) the repayment of a portion of the term loans 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.
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 March 29, 2003, our senior credit facility
provided for total commitments as follows:
- a Euro 32.8 million Euro term loan facility ($35.7 million
assuming a USD to Euro exchange rate of 1.0896); 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.
20
Amortization of outstanding indebtedness. As of March 29, 2003, the
principal amount due under the Euro term loan facility was approximately Euro
32.8 million in 2005 and the principal amounts due under the USD term loan
facility were approximately (i) $9.8 million in 2004, (ii) $91.2 million in
2005; and (iii) $42.6 million in 2006. As of March 29, 2003, we had $6.3 million
outstanding under our revolving credit facility and $2.5 million of letters of
credit outstanding, resulting in $51.2 million of availability under our
revolving credit facility.
Maturity. The Euro term loan facility has a final maturity of December
30, 2005. The USD term loan facility consists of three tranches with final
maturities of March 31, 2005, December 31, 2005 and December 31, 2006,
respectively, unless terminated sooner upon an event of default. The revolving
credit facility has a final maturity of March 31, 2005.
Prepayments. The loans may be prepaid and commitments may be reduced in
certain specified minimum amounts. Optional prepayments of the term loans are
generally applied pro rata to the four tranches and ratably to the respective
installments thereof. Optional prepayments of the term loans may not be
reborrowed.
Our senior credit facility also provides for mandatory prepayments of
the borrowings upon certain specified events and in certain specified
percentages, including:
- 100% of the net cash proceeds received by our parent, us or any of
our restricted subsidiaries from the issuance of indebtedness not
currently expressly permitted by our senior credit facility;
- 100% of the net cash proceeds of any sale or other disposition of
any assets, subject to certain exceptions;
- 50% of excess cash flow; and
- 100% of the net proceeds of any sale or issuance of equity,
subject to certain exceptions.
Guarantees; collateral. We, our parent company and our restricted
domestic subsidiaries are required to guarantee amounts outstanding under our
senior credit facility. In order to secure the indebtedness and obligations
under our senior credit facility, we, our parent company and our restricted
domestic subsidiaries have pledged the following U.S. assets:
- substantially all of our personal property assets, subject to
certain exceptions;
- substantially all of our real property assets and any subsequently
acquired real property having a fair market value in excess of
$0.5 million, subject to certain exceptions;
- substantially all of our intellectual property assets; and
- 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:
21
- incur indebtedness or issue guarantees;
- grant liens;
- make investments;
- make certain capital expenditures;
- make certain restricted payments; and
- enter into certain lines of business.
Our senior credit facility also contains the following financial
covenant requirements:
- our consolidated leverage ratio as of certain specified periods
must not exceed ratios ranging from 6.30:1.00 at the end of the
first quarter of 2003 to 5.50:1.00 at the end of the first quarter
of 2006 and thereafter until maturity;
- our consolidated senior secured debt ratio as of certain specified
periods must not exceed ratios ranging from 2.25:1.00 at the end
of the first quarter of 2003 to 2.00:1.00 at the end of the first
quarter of 2004 and thereafter until maturity;
- our consolidated interest coverage ratio as of certain specified
periods must meet or exceed ratios ranging from 1.50:1.00 at the
end of the first quarter of 2003 to 1.55:1.00 at the end of the
third quarter of 2003 and thereafter until maturity; and
- our consolidated fixed charge coverage ratio as of the last day of
any period of four consecutive fiscal quarters must meet or exceed
1.00:1.00.
We have experienced difficulty in the past satisfying financial
covenants in our senior credit facility and sought waivers in fiscal 2001 and
2002. Our senior credit facility, including 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;
22
- 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 March 29, 2003, we had $51.2 million of remaining availability
under the revolving credit facility portion of our senior credit facility out of
a total availability of $60.0 million. We believe that cash flows generated from
our business, together with future borrowings, will be sufficient for the
foreseeable future to enable us to make interest payments on our debt and to
provide us with the necessary liquidity for operational and capital requirements
in the current operating environment. We may be required, however, to refinance
all or a portion of the principal amount of our outstanding debt on or prior to
maturity or a mandatory redemption date. We also believe the capital
expenditures permitted under our senior credit facility are sufficient to
provide us with the necessary flexibility to spend required maintenance capital
and at the same time fund the planned expansion and customer requirements for
fiscal 2003.
As of March 29, 2003, the expected future payout of our accrued
restructuring cost is $1.9 million in the last three quarters 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, we cannot
provide assurance these requirements will not change in the future or we will
not incur material costs in the future to comply with these requirements or in
connection with the effect of these matters on our business.
In 1996 and 1997, we entered into partial guarantees of certain
third-party loans made to 11 employees in connection with their purchase of our
parent's common stock under our parent's 1996 and 1997 Management Stock Purchase
Plans. We guaranteed to cover up to a maximum of $0.3 million of such loans in
the event one or more of the employees default in the loan repayment. None of
the individuals who received such loans currently serve as one of our executive
officers.
INFLATION AND CHANGES IN PRICES
Our financial results depend to a large extent on the costs of raw
materials and packaging and our ability to pass along increased costs to our
customers. Historically, market prices for commodity grains and food stocks have
fluctuated in response to a number of factors, including changes in U.S.
government farm support programs, changes in international agricultural trading
policies, impacts of disease 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. We cannot
assure you that our results of operations will not be exposed to volatility in
the commodity and natural gas markets.
23
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective December 29, 2002, we adopted FASB's Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement Obligations, or
SFAS 143, which requires companies to record the fair value of an asset
retirement obligation as a liability in the period in which they incur a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal use of the
assets. SFAS 143 also requires companies to record a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
an asset retirement obligation, SFAS 143 requires the obligation to be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The adoption of SFAS 143
had no material impact on our financial position or results of operations.
Effective December 29, 2002, we adopted FASB's Statement of Financial
Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, or SFAS 145,
which amends existing authoritative pronouncements to make various technical
corrections, clarify meanings and describe their applicability under changed
conditions. SFAS 145 requires gains and losses from the extinguishment of debt
to be classified as extraordinary items only if they meet the criteria of for
classification as an extraordinary item. In accordance with SFAS 145, we
recognized a charge to net income in the first quarter of fiscal 2003 associated
with the issuance of our senior notes that does not meet the criteria for
classification as an extraordinary item. See Note 4 -- "Long-Term Debt and
Liquidity" in the accompanying unaudited condensed consolidated financial
statements.
Effective December 29, 2002, we 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. The adoption of SFAS 146 had no material impact on our
financial position or results of operations.
Effective December 29, 2002, we 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
24
both annual and interim financial statements. See Note 6 -- "Stock Option Plan
of Parent" in the accompanying unaudited condensed consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, or FIN 45, which elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
had no material impact on our financial position or results of operations.
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 March 29, 2003, we had open commodity
contracts with a fair value loss of $3.4 million.
Based upon an analysis we completed as of March 29, 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 $3.8
million, or $2.3 million net of deferred tax benefit.
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 $185.7 million at March 29, 2003. Of that
amount, $60.0 million of our floating rate debt was hedged by interest rate swap
contracts and $50.0 million was hedged by an interest rate cap contract. Changes
in market values of these financial instruments are highly correlated with
changes in market values of the hedged item both at inception and over the life
of the
25
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 March 29, 2003, we had a cumulative unrealized loss on our
interest rate swap contracts of $1.7 million, or $1.0 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 approximately $0.2 million, or $0.1 million net of income tax
benefit, for the first quarter of fiscal 2003. In addition, such a change would
result in a decrease of approximately $16.8 million in the fair value of our
fixed rate debt at March 29, 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.
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 March 29, 2003, we had a
cumulative translation gain of $27.9 million, which included an unrealized
cumulative loss of $6.2 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. 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 March 29, 2003, the
Company had an open foreign currency forward contract that matures within the
next 12 months with a notional value of $3.2 million and a fair value loss of
$0.1 million that has been recognized in the accompanying unaudited condensed
consolidated statements of operations.
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.
26
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 1. LEGAL PROCEEDINGS
See Note 7 -- "Commitments and Contingencies" to the accompanying unaudited
condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q, which is incorporated by reference in
this Part II, Item 1.
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 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)
28
Exhibit
Number Description
- ------- -----------
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)
10.1 Amendment No. 3 to Amended and Restated Credit Agreement dated
as of February 10, 2003 among Doane Pet Care Enterprises,
Inc., Doane Pet Care Company, as borrower, Doane/Windy Hill
Joint Venture, L.L.C., DPC Investment Corp., and JPMorgan
Chase Bank, as administrative agent, and lenders party thereto
(incorporated by reference to Exhibit 10.16 to the 2002 Form
10-K)
10.2 Amendment No. 4 to Amended and Restated Credit Agreement dated
as of February 26, 2003 among Doane Pet Care Enterprises,
Inc., Doane Pet Care Company, as borrower, Doane/Windy Hill
Joint Venture, L.L.C., DPC Investment Corp., and JPMorgan
Chase Bank, as administrative agent, and lenders party thereto
(incorporated by reference to Exhibit 10.17 to the 2002 Form
10-K)
15.1* Letter from KPMG LLP dated April 25, 2003 regarding unaudited
interim financial information
99.1* Accompanying Section 906 Certification of Chief Executive
Officer
99.2* 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 reports on Form 8-K were furnished during the first
quarter of fiscal 2003:
1. Report on Form 8-K dated February 7, 2003, was furnished
pursuant to Item 9 of Form 8-K in connection with our issuance
of a press release announcing our updated fiscal 2002 earnings
guidance, providing fiscal 2003 earnings guidance and outlook
and discussing other matters set forth therein.
2. Report on Form 8-K dated February 7, 2003, was furnished
pursuant to Item 9 of Form 8-K in connection with our issuance
of a press release announcing our intention to issue $200
million in aggregate principal amount of senior notes due
2010.
3. Report on Form 8-K dated February 21, 2003, was furnished
pursuant to Item 9 of Form 8-K in connection with our issuance
of a press release announcing the pricing of our previously
announced senior note offering.
29
4. Report on Form 8-K dated February 28, 2003, was furnished
pursuant to Item 9 of Form 8-K in connection with our issuance
of a press release announcing our fourth quarter and fiscal
2002 earnings and providing fiscal 2003 earnings guidance. We
also announced that we had provided the Securities and
Exchange Commission with certifications of our chief executive
officer and chief financial officer on February 28, 2003 in
accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
30
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: May 8, 2003
31
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: May 8, 2003
/s/ DOUGLAS J. CAHILL
---------------------
Douglas J. Cahill
President and Chief Executive Officer
Doane Pet Care Company
32
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: May 8, 2003
/s/ PHILIP K. WOODLIEF
--------------------------------
Philip K. Woodlief
Vice President, Finance and Chief Financial Officer
Doane Pet Care Company
33
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 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
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10.1 Amendment No. 3 to Amended and Restated Credit Agreement dated
as of February 10, 2003 among Doane Pet Care Enterprises,
Inc., Doane Pet Care Company, as borrower, Doane/Windy Hill
Joint Venture, L.L.C., DPC Investment Corp., and JPMorgan
Chase Bank, as administrative agent, and lenders party thereto
(incorporated by reference to Exhibit 10.16 to the 2002 Form
10-K)
10.2 Amendment No. 4 to Amended and Restated Credit Agreement dated
as of February 26, 2003 among Doane Pet Care Enterprises,
Inc., Doane Pet Care Company, as borrower, Doane/Windy Hill
Joint Venture, L.L.C., DPC Investment Corp., and JPMorgan
Chase Bank, as administrative agent, and lenders party thereto
(incorporated by reference to Exhibit 10.17 to the 2002 Form
10-K)
15.1* Letter from KPMG LLP dated April 25, 2003 regarding unaudited
interim financial information
99.1* Accompanying Section 906 Certification of Chief Executive
Officer
99.2* Accompanying Section 906 Certification of Chief Financial
Officer
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* Filed or furnished herewith, as the case may be