PROSPECTUS SUPPLEMENT Filed Pursuant to Rule
(To Prospectus dated June 11, 2003) 424(b)(3)of the Rules and
Regulations Under the
Securities Act of 1933
Registration Statement Nos.
333-104767
333-104767-01
333-104767-02
DOANE PET CARE COMPANY
10 3/4% SENIOR NOTES DUE 2010
Recent Developments
We have attached to this prospectus supplement, and incorporated by
reference into it, the Quarterly Report on Form 10-Q of Doane Pet Care Company
for the quarterly period ended September 27, 2003, dated October 30, 2003.
This prospectus supplement is to be used by Credit Suisse First Boston
LLC, or CSFB, and J.P. Morgan Securities Inc., or JPMorgan, in connection with
offers and sales of the notes in market-making transactions. CSFB and JPMorgan
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of sale. The notes are
not listed on any securities exchange or admitted to trading in the National
Association of Securities Dealers Automated Quotation System and we do not
intend to apply for any such listing or admission to trading. We receive no
portion of the proceeds of sales of the notes and have paid certain expenses
incident to the registration of the notes.
October 30, 2003
CREDIT SUISSE FIRST BOSTON JPMORGAN
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 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 October 30, 2003, the registrant had outstanding 1,000 shares of
common stock, all of which were held by its parent, Doane Pet Care Enterprises,
Inc.
================================================================================
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<Table>
<Caption>
PAGE
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 27, 2003
and December 28, 2002............................................................................... 1
Unaudited Condensed Consolidated Statements of Operations for the three
months and nine months ended September 27, 2003 and September 28, 2002.............................. 2
Unaudited Condensed Consolidated Statement of Stockholder's Equity and
Comprehensive Income as of and for the nine months ended September 27, 2003......................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended September 27, 2003 and September 28, 2002......................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements...................................... 5
Independent Accountants' Review Report.............................................................. 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................... 26
Item 4. Controls and Procedures............................................................................. 28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................................... 28
Signatures................................................................................................... 31
</Table>
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 AMOUNT)
<Table>
<Caption>
SEPTEMBER 27, DECEMBER 28,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,053 $ 7,596
Accounts receivable, net 103,589 129,347
Inventories, net 64,856 63,631
Deferred tax assets 3,878 5,859
Prepaid expenses and other current assets 10,849 8,143
--------- ---------
Total current assets 187,225 214,576
Property, plant and equipment, net 263,131 260,092
Goodwill and trademarks, net 374,214 363,080
Other assets 33,196 32,919
--------- ---------
Total assets $ 857,766 $ 870,667
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,323 $ 5,720
Accounts payable 86,064 93,528
Accrued liabilities 55,561 56,113
--------- ---------
Total current liabilities 151,948 155,361
Long-term debt, excluding current maturities 545,207 548,300
Deferred tax liabilities 10,770 7,261
Other long-term liabilities 9,850 23,692
--------- ---------
Total liabilities 717,775 734,614
--------- ---------
Senior Preferred Stock (Redeemable), 3,000,000 shares authorized,
1,200,000 shares issued and outstanding 87,512 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 35,410 9,558
Accumulated deficit (98,605) (66,729)
--------- ---------
Total stockholder's equity 52,479 58,503
--------- ---------
Total liabilities and stockholder's equity $ 857,766 $ 870,667
========= =========
</Table>
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)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales $ 243,810 $ 216,334 $ 738,235 $ 640,738
Cost of goods sold 206,970 171,865 617,526 496,589
--------- --------- --------- ---------
Gross profit 36,840 44,469 120,709 144,149
Operating expenses:
Promotion and distribution 14,703 12,579 41,910 38,972
Selling, general and administrative 12,077 11,868 36,558 34,445
Amortization 1,171 1,161 3,488 3,352
Other operating expenses -- 775 -- 775
--------- --------- --------- ---------
Income from operations 8,889 18,086 38,753 66,605
Interest expense, net 14,671 16,426 43,543 46,251
Loss from debt extinguishments 1,030 -- 12,143 --
Other income, net (201) (355) (786) (990)
--------- --------- --------- ---------
Income (loss) before income taxes (6,611) 2,015 (16,147) 21,344
Income tax expense (benefit) 4,025 (745) 5,767 4,924
--------- --------- --------- ---------
Net income (loss) (10,636) 2,760 (21,914) 16,420
Preferred stock dividends and accretion (3,428) (3,015) (9,962) (8,765)
--------- --------- --------- ---------
Net income (loss) available to common shares $ (14,064) $ (255) $ (31,876) $ 7,655
========= ========= ========= =========
Basic and diluted net income (loss)
per common share $ (14,064) $ (255) $ (31,876) $ 7,655
========= ========= ========= =========
Basic and diluted weighted-average common
shares outstanding 1,000 1,000 1,000 1,000
========= ========= ========= =========
</Table>
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)
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL
-------- -------- ----------- ------------- ----------- --------
Balances at December 28, 2002 1,000 $ -- $115,674 $ 9,558 $(66,729) $ 58,503
--------
Comprehensive income:
Net loss -- -- -- -- (21,914) (21,914)
Foreign currency translation -- -- -- 24,881 -- 24,881
Unrealized gain on interest rate
swaps, net of deferred tax expense
of $619 -- -- -- 971 -- 971
--------
Total comprehensive income 3,938
--------
Preferred stock dividends -- -- -- -- (9,154) (9,154)
Preferred stock accretion -- -- -- -- (808) (808)
-------- -------- -------- -------- -------- --------
Balances at September 27, 2003 1,000 $ -- $115,674 $ 35,410 $(98,605) $ 52,479
======== ======== ======== ======== ======== ========
</Table>
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)
<Table>
<Caption>
NINE MONTHS ENDED
------------------------------------
September 27, September 28,
2003 2002
---------------- ------------------
Cash flows from operating activities:
Net income (loss) $ (21,914) $ 16,420
Items not requiring (providing) cash:
Depreciation 22,850 19,437
Amortization 4,233 4,098
Deferred income tax expense 4,630 3,749
Non-cash interest expense 3,904 10,663
Equity in joint ventures (414) (530)
Loss from debt extinguishments 12,143 -
Changes in current assets and liabilities 8,290 17,589
---------------- ------------------
Net cash provided by operating activities 33,722 71,426
---------------- ------------------
Cash flows from investing activities:
Capital expenditures (15,876) (13,442)
Proceeds from sale of assets 233 881
Other, net (2,817) (1,487)
---------------- ------------------
Net cash used in investing activities (18,460) (14,048)
---------------- ------------------
Cash flows from financing activities:
Net repayments under revolving credit agreements (15,000) (38,000)
Proceeds from issuance of long-term debt 210,444 9,738
Principal payments on long-term debt (207,045) (28,120)
Payments for debt issuance costs (7,761) (2,316)
---------------- ------------------
Net cash used in financing activities (19,362) (58,698)
Effect of exchange rate changes on cash and cash equivalents 557 336
---------------- ------------------
Decrease in cash and cash equivalents (3,543) (984)
$
Cash and cash equivalents, beginning of period 7,596 6,032
---------------- ------------------
Cash and cash equivalents, end of period $ 4,053 $ 5,048
================ ==================
</Table>
See accompanying notes to the unaudited condensed consolidated financial
statements and accompanying independent accountants' review report.
4
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Doane Pet Care Company, or the Company, and its consolidated subsidiaries do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying year
end condensed consolidated balance sheet data was derived from the Company's
audited consolidated financial statements. In the opinion of management, all
material adjustments, consisting of normal and recurring adjustments, have been
made which were considered necessary to present fairly the financial position
and the results of operations and cash flows at the dates and for the periods
presented. Certain reclassifications have been made to previously reported
consolidated financial statements to conform with the fiscal 2003 presentation.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes contained in the Company's 2002 Annual Report on Form 10-K for the
fiscal year ended December 28, 2002, or the 2002 10-K, including related
exhibits. Except as noted herein, the accounting policies used in preparing
these condensed consolidated financial statements are the same as those
summarized in the 2002 10-K.
The Company's fiscal year ends on the Saturday nearest to the end of
December. Each quarter also ends on a Saturday with the third quarters and first
nine months of fiscal 2002 and 2003 ending on September 28, 2002 and September
27, 2003, respectively.
(2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective December 29, 2002, the Company adopted Financial Accounting
Standards Board's, or FASB's, Statement of Financial Accounting Standards No.
145, Rescission of FASB Statement Nos. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, or SFAS 145, which amends existing
authoritative pronouncements to make various technical corrections, clarify
meanings and describe their applicability under the changed conditions. SFAS 145
requires gains and losses from the extinguishment of debt to be classified as
extraordinary items only if they meet the criteria of unusual or infrequent or
they meet the criteria for classification as an extraordinary item. In
accordance with SFAS 145, the Company recognized a charge to net income in the
first and third quarters of fiscal 2003 associated with its debt 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 SFAS 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 were currently accounted for pursuant to
the guidance that the Emerging Issues Task Force, or EITF, has set forth in EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). SFAS 146 requires companies to recognize costs associated with
exit or disposal activities when these costs are incurred rather than at the
date of a commitment to an exit or disposal plan. The scope of SFAS 146 also
includes costs related to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS 146 applies to
exit or disposal activities initiated after December 31, 2002. The Company has
not had any such exit or disposal activities since the effective date.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, or FIN 46. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 will be effective for the first interim or annual period ending after
December 15, 2003 for all variable interest entities created or acquired prior
to January 31, 2003, provided that certain conditions are met. For variable
interest entities created or acquired after February 1, 2003, the requirements
of FIN 46 were effective for the first interim or annual period ending after
June
5
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15, 2003. The Company does not expect this new interpretation to have a material
effect on its results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity, or
SFAS 150. SFAS 150 requires issuers to classify as liabilities, or assets in
some circumstances, three classes of free-standing financial instruments that
embody obligations of the issuer. Generally, SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective for interim periods beginning after June 15, 2003. For mandatorily
redeemable financial instruments of a nonpublic entity, as defined by SFAS 150,
the statement is effective for fiscal periods beginning after December 15, 2003.
In the opinion of management, the Company meets the nonpublic entity criteria of
SFAS 150. As a result, beginning in the first quarter of fiscal 2004, the
Company will reflect its Senior Preferred Stock (Redeemable) as a liability on
its consolidated balance sheets, and the related dividends and accretion as
interest expense in its consolidated statements of operations.
(3) INVENTORIES
A summary of inventories, net of allowances, follows (in thousands):
<Table>
<Caption>
SEPTEMBER 27, DECEMBER 28,
2003 2002
------------- ------------
Raw materials $14,306 $14,957
Packaging materials 19,874 19,002
Finished goods 30,676 29,672
------- -------
Total $64,856 $63,631
======= =======
</Table>
(4) LONG-TERM DEBT AND LIQUIDITY
A summary of long-term debt follows (in thousands):
<Table>
<Caption>
SEPTEMBER 27, DECEMBER 28,
2003 2002
------------- ------------
Revolving credit facility $ -- $ 15,000
Term loan facilities 166,784 340,924
Sponsor facility -- 17,245
Senior notes 210,687 --
Senior subordinated notes 148,699 148,430
Industrial development revenue bonds 14,479 14,471
Debt of foreign subsidiaries 14,881 17,950
--------- ---------
555,530 554,020
Less: Current maturities (10,323) (5,720)
--------- ---------
Total $ 545,207 $ 548,300
========= =========
</Table>
In February 2003, the Company issued $213.0 million in aggregate
principal amount of 10 3/4% senior notes due March 1, 2010 at a price of 98.8%
of par, with interest payable semi-annually in arrears on March 1 and September
1 of each year, commencing on September 1, 2003. The net proceeds from the 10
3/4% senior notes were used to repay $169.3 million of the Company's senior
credit facility and $33.3 million was used to repay the Sponsor Facility in
full. The senior notes are unconditionally guaranteed on a senior unsecured
basis by the Company's domestic subsidiaries.
6
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In conjunction with the issuance of the 10 3/4% senior notes, the
Company amended its senior credit facility. This amendment provided for, among
other things: (1) the issuance of the 10 3/4% senior notes and repayment of the
Sponsor Facility; (2) the repayment of a portion of the Term Loan Facilities and
Revolving Credit Facility under the Company's senior credit facility in order of
forward maturity; (3) less restrictive covenants on capital expenditures,
investments and other activities; (4) the elimination of certain financial
covenants and 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 of the Revolving Credit Facility
from $75.0 million to $60.0 million.
As of September 27, 2003, the Company's senior credit facility provided
for total commitments of a Euro 30.1 million Euro Term Loan Facility ($35.1
million assuming a Euro to USD exchange rate of 1.1652) and $191.7 million,
consisting of a $131.7 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 senior credit facility bear interest at the higher
of the Euro dollar rate plus 4.75%, or the prime rate of the administrative
agent plus 3.75%, until maturity. As of September 27, 2003, our Euro term
facility bore interest at 6.87%, our USD term facility bore interest at 7.65%
and our revolving credit facility bore interest at 7.75%.
In connection with the repayments made by the Company on its senior
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 in the first quarter of fiscal 2003 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 senior 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.
In the third quarter of fiscal 2003, the Company made a $15.0 million
optional prepayment on its senior credit facility. The prepayment was applied
ratably to the Euro Term Loan Facility and the USD Term Loan Facility and has
been reflected in the maturities schedule below. In connection with the
prepayment, the Company recorded a loss on debt extinguishment of $1.0 million
consisting of (1) $0.7 million realized foreign currency translation loss as a
result of retiring a portion of the Euro Term Loan Facility and (2) $0.3 million
write-off of a pro-rata percentage of deferred financing costs associated with
the senior credit facility.
As of September 27, 2003, the principal amounts due under the Company's
senior credit facility and the final maturity dates, unless terminated sooner
upon an event of default, were as follows (in thousands):
<Table>
<Caption>
MATURITIES BY FISCAL YEAR
--------------------------------------------------------
FINAL MATURITY 2004 2005 2006 TOTAL
--------------------- ----------- ----------- ------------ -----------
Revolving Credit Facility March 31, 2005 $ - $ - $ - $ -
Euro Term Loan Facility December 30, 2005 - 35,075 - 35,075
USD Term Loan Facility:
Tranche A March 31, 2005 8,952 4,587 - 13,539
Tranche B December 31, 2005 - 79,102 - 79,102
Tranche C December 31, 2006 - - 39,068 39,068
----------- ----------- ------------ -----------
Total $ 8,952 $ 118,764 $ 39,068 $ 166,784
=========== =========== ============ ===========
</Table>
As of September 27, 2003, the Company had no outstanding borrowings
under its Revolving Credit Facility and $4.1 million of letters of credit
outstanding, resulting in $55.9 million of availability under its Revolving
Credit Facility. Availability of funds under the senior credit facility is
subject to certain customary terms and conditions.
7
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company is highly leveraged and has significant cash requirements
for debt service relating to its senior credit facility, senior notes, senior
subordinated notes, industrial development revenue bonds and foreign debt. The
Company's ability to borrow is limited by its senior credit facility, including
compliance with the financial covenants therein, and the limitations on the
incurrence of additional indebtedness in the indentures governing the Company's
senior notes and senior subordinated notes.
The Company has experienced difficulty in the past satisfying financial
covenants in its senior credit facility and obtained waivers in fiscal 2001 and
2002. The senior credit facility, including the financial covenants, was amended
effective February 28, 2003 concurrently with the sale of senior notes. The
Company's ability to satisfy these covenants is determined based on the
Company's cash flows, outstanding total debt and senior secured debt, interest
expense, capital expenditures, lease expense and fixed charges. The Company may
experience difficulty satisfying these amended covenants in the future. It is
possible that current commodity prices may affect the Company's operating
results and cash flows to an extent that the Company may not be able to comply
with these financial covenants. If the Company is unable to secure a waiver from
its lenders for any potential default, it could result in an event of default
under its senior credit facility and permit a majority of the lenders to
accelerate outstanding debt under its senior credit facility and permit a
majority of its lenders under its revolving credit facility to terminate the
Company's revolving credit commitment (without acceleration of such debt). Such
acceleration would result in a cross-default under the Company's senior notes
and senior subordinated notes.
(5) ACCRUALS FOR RESTRUCTURING COSTS
A roll-forward of the Company's accrued restructuring costs for fiscal
2003 through September 27, 2003 follows (in thousands):
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 27,
2003
-----------------
Balance at December 28, 2002 $ 2,752
Cash payments (854)
-------
Balance at September 27, 2003 $ 1,898
=======
</Table>
The future expected payout of the Company's accrued restructuring costs
as of September 27, 2003 follows (in thousands):
<Table>
<Caption>
FISCAL YEAR PAYOUT
----------- ------
2003 $1,642
2004 256
------
Total $1,898
======
</Table>
(6) COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) were as follows (in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss) $ (10,636) $ 2,760 $ (21,914) $ 16,420
Comprehensive income (loss):
Foreign currency translation 4,470 (655) 24,881 14,188
Unrealized gain (loss), net of deferred
tax expense (benefit) of $223, $(47),
$619 and $489, respectively 350 (544) 971 413
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (5,816) $ 1,561 $ 3,938 $ 31,021
============ ============ ============ ============
</Table>
(7) STOCK OPTION PLAN OF PARENT
The Company and its Parent have elected to continue to follow the
Accounting Principle Board's, or APB, Opinion No. 25, Accounting for Stock
Issued to Employees, or APB 25, to account for fixed stock awards granted to
employees; however, if the Company adopted SFAS 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 and nine months ended September 27,
2003 and September 28, 2002 would have been adjusted as follows (in thousands,
except per share amounts):
8
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income (loss) available to common shares,
as reported $ (14,064) $ (255) $ (31,876) $ 7,655
Less: Total stock-based employee
compensation expense determined based on
the fair value method for all awards,
net of income tax benefit (2) (32) (6) (96)
------------ ------------ ------------ ------------
Pro forma net income (loss) available to
common shares $ (14,066) (287) $ (31,882) $ 7,559
============ ============ ============ ============
Earnings per share:
Basic and diluted net income (loss) per
common share, as reported $ (14,064) $ (255) $ (31,876) $ 7,655
============ ============ ============ ============
Basic and diluted net income (loss) per
common share, pro forma $ (14,066) $ (287) $ (31,882) $ 7,559
============ ============ ============ ============
</Table>
Pro forma information regarding net income (loss) and basic and diluted
net income (loss) per common share has been determined as if the Company had
accounted for its employee stock options under the minimum value method of SFAS
123 under the assumptions of a risk free rate of return of 3.6% for the three
months and nine months ended September 27, 2003 and September 28, 2002, 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.
(8) 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.
(9) 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
September 27, 2003 and December 28, 2002 and for the three months and nine
months ended September 27, 2003 and September 28, 2002 is disclosed to comply
with the reporting requirements of the Company's guarantor subsidiaries. The
guarantor subsidiaries are wholly-owned domestic subsidiaries of the Company
which have fully and unconditionally guaranteed the Company's 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:
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
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNT)
<Table>
<Caption>
SEPTEMBER 27, 2003
----------------------------------------------------------
INTERCOMPANY
GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 75 $ 3,978 $ -- $ 4,053
Accounts receivable, net 52,389 51,200 -- 103,589
Inventories, net 41,152 23,704 -- 64,856
Deferred tax assets 3,878 -- -- 3,878
Prepaid expenses and other current assets 7,296 3,553 -- 10,849
--------- --------- --------- ---------
Total current assets 104,790 82,435 -- 187,225
Property, plant and equipment, net 156,514 106,617 -- 263,131
Goodwill and trademarks, net 267,730 106,484 -- 374,214
Other assets 241,468 11,535 (219,807) 33,196
--------- --------- --------- ---------
Total assets $ 770,502 $ 307,071 $(219,807) $ 857,766
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 6,086 $ 4,237 $ -- $ 10,323
Accounts payable 44,155 41,909 -- 86,064
Accrued liabilities 41,393 14,168 -- 55,561
--------- --------- --------- ---------
Total current liabilities 91,634 60,314 -- 151,948
Long-term debt, excluding current maturities 534,563 164,451 (153,807) 545,207
Deferred tax liabilities 9,000 1,770 -- 10,770
Other long-term liabilities 9,850 -- -- 9,850
--------- --------- --------- ---------
Total liabilities 645,047 226,535 (153,807) 717,775
--------- --------- --------- ---------
Senior Preferred Stock (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding 87,512 -- -- 87,512
--------- --------- --------- ---------
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 66,433 (66,433) 115,674
Accumulated other comprehensive income (loss) (13,954) 48,931 433 35,410
Accumulated deficit (63,777) (34,828) -- (98,605)
--------- --------- --------- ---------
Total stockholder's equity 37,943 80,536 (66,000) 52,479
--------- --------- --------- ---------
Total liabilities and stockholder's equity $ 770,502 $ 307,071 $(219,807) $ 857,766
========= ========= ========= =========
</Table>
10
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEETS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNT)
<Table>
<Caption>
DECEMBER 28, 2002
-----------------------------------------------------------
INTERCOMPANY
GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 57 $ 7,539 $ -- $ 7,596
Accounts receivable, net 86,190 43,157 -- 129,347
Inventories, net 43,068 20,563 -- 63,631
Deferred tax assets 5,859 -- -- 5,859
Prepaid expenses and other current assets 6,853 1,290 -- 8,143
--------- --------- --------- ---------
Total current assets 142,027 72,549 -- 214,576
Property, plant and equipment, net 160,757 99,335 -- 260,092
Goodwill and trademarks, net 267,376 95,704 -- 363,080
Other assets 230,170 10,709 (207,960) 32,919
--------- --------- --------- ---------
Total assets $ 800,330 $ 278,297 $(207,960) $ 870,667
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 5,720 $ -- $ 5,720
Accounts payable 59,218 34,310 -- 93,528
Accrued liabilities 44,758 11,355 -- 56,113
--------- --------- --------- ---------
Total current liabilities 103,976 51,385 -- 155,361
Long-term debt, excluding current maturities 536,069 172,636 (160,405) 548,300
Deferred tax liabilities 5,571 1,690 -- 7,261
Other long-term liabilities 23,692 -- -- 23,692
--------- --------- --------- ---------
Total liabilities 669,308 225,711 (160,405) 734,614
--------- --------- --------- ---------
Senior Preferred Stock (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding 77,550 -- -- 77,550
--------- --------- --------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock, $0.01 par value, 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
========= ========= ========= =========
</Table>
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
(IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 27, 2003
-------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales $ 178,052 $ 65,758 $ 243,810
Cost of goods sold 155,661 51,309 206,970
--------- --------- ---------
Gross profit 22,391 14,449 36,840
Operating expenses:
Promotion and distribution 7,136 7,567 14,703
Selling, general and administrative 8,284 3,793 12,077
Amortization 984 187 1,171
--------- --------- ---------
Income from operations 5,987 2,902 8,889
Interest expense, net 8,299 6,372 14,671
Loss from debt extinguishments 1,030 -- 1,030
Other expense (income), net (309) 108 (201)
--------- --------- ---------
Loss before income taxes (3,033) (3,578) (6,611)
Income tax expense 3,891 134 4,025
--------- --------- ---------
Net loss (6,924) (3,712) (10,636)
Preferred stock dividends and accretion (3,428) -- (3,428)
--------- --------- ---------
Net loss available to common shares $ (10,352) $ (3,712) $ (14,064)
========= ========= =========
</Table>
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 28, 2002
------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales $ 165,516 $ 50,818 $ 216,334
Cost of goods sold 134,533 37,332 171,865
--------- --------- ---------
Gross profit 30,983 13,486 44,469
Operating expenses:
Promotion and distribution 7,251 5,328 12,579
Selling, general and administrative 8,492 3,376 11,868
Amortization 985 176 1,161
Other operating expenses 775 -- 775
--------- --------- ---------
Income from operations 13,480 4,606 18,086
Interest expense, net 11,756 4,670 16,426
Other expense (income), net (582) 227 (355)
--------- --------- ---------
Income (loss) before income taxes 2,306 (291) 2,015
Income tax benefit (606) (139) (745)
--------- --------- ---------
Net income (loss) 2,912 (152) 2,760
Preferred stock dividends and accretion (3,015) -- (3,015)
--------- --------- ---------
Net loss available to common shares $ (103) $ (152) $ (255)
========= ========= =========
</Table>
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
(IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 27, 2003
-------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales $ 555,779 $ 182,456 $ 738,235
Cost of goods sold 476,400 141,126 617,526
--------- --------- ---------
Gross profit 79,379 41,330 120,709
Operating expenses:
Promotion and distribution 21,642 20,268 41,910
Selling, general and administrative 24,387 12,171 36,558
Amortization 2,926 562 3,488
--------- --------- ---------
Income from operations 30,424 8,329 38,753
Interest expense, net 23,003 20,540 43,543
Loss from debt extinguishments 12,143 -- 12,143
Other expense (income), net (1,032) 246 (786)
--------- --------- ---------
Loss before income taxes (3,690) (12,457) (16,147)
Income tax expense 4,791 976 5,767
--------- --------- ---------
Net loss (8,481) (13,433) (21,914)
Preferred stock dividends and accretion (9,962) -- (9,962)
--------- --------- ---------
Net loss available to common shares $ (18,443) $ (13,433) $ (31,876)
========= ========= =========
</Table>
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 28, 2002
------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Net sales $ 503,010 $ 137,728 $ 640,738
Cost of goods sold 394,102 102,487 496,589
--------- --------- ---------
Gross profit 108,908 35,241 144,149
Operating expenses:
Promotion and distribution 24,055 14,917 38,972
Selling, general and administrative 24,603 9,842 34,445
Amortization 2,852 500 3,352
Other operating expenses 775 -- 775
--------- --------- ---------
Income from operations 56,623 9,982 66,605
Interest expense, net 31,287 14,964 46,251
Other expense (income), net (1,398) 408 (990)
--------- --------- ---------
Income (loss) before income taxes 26,734 (5,390) 21,344
Income tax expense (benefit) 5,503 (579) 4,924
--------- --------- ---------
Net income (loss) 21,231 (4,811) 16,420
Preferred stock dividends and accretion (8,765) -- (8,765)
--------- --------- ---------
Net income (loss) available to common shares $ 12,466 $ (4,811) $ 7,655
========= ========= =========
</Table>
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
(IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 27, 2003
------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Cash flows from operating activities:
Net loss $ (8,481) $ (13,433) $ (21,914)
Items not requiring (providing) cash:
Depreciation and amortization 16,068 11,015 27,083
Deferred income tax expense (benefit) 4,791 (161) 4,630
Loss from debt extinguishments 12,143 -- 12,143
Other non-cash charges (income), net 3,666 (176) 3,490
Changes in current assets and liabilities (7,744) 16,034 8,290
--------- --------- ---------
Net cash provided by operating activities 20,443 13,279 33,722
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (8,297) (7,579) (15,876)
Proceeds from sale of assets 52 181 233
Other, net 4,229 (7,046) (2,817)
--------- --------- ---------
Net cash used in investing activities (4,016) (14,444) (18,460)
--------- --------- ---------
Cash flows from financing activities:
Net repayments under revolving credit agreements (15,000) -- (15,000)
Proceeds from issuance of long-term debt 210,444 -- 210,444
Principal payments on long-term debt (204,092) (2,953) (207,045)
Payments for debt issuance costs (7,761) -- (7,761)
--------- --------- ---------
Net cash used in financing activities (16,409) (2,953) (19,362)
Effect of exchange rate changes on cash and cash equivalents -- 557 557
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 18 (3,561) (3,543)
Cash and cash equivalents, beginning of period 57 7,539 7,596
--------- --------- ---------
Cash and cash equivalents, end of period $ 75 $ 3,978 $ 4,053
========= ========= =========
</Table>
14
DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
(IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 28, 2002
------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
--------- ------------- ------------
Cash flows from operating activities:
Net income (loss) $ 21,231 $ (4,811) $ 16,420
Items not requiring (providing) cash:
Depreciation and amortization 14,944 8,591 23,535
Deferred income tax expense (benefit) 5,503 (1,754) 3,749
Other non-cash charges, net 10,105 28 10,133
Changes in current assets and liabilities 7,836 9,753 17,589
-------- -------- --------
Net cash provided by operating activities 59,619 11,807 71,426
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (8,897) (4,545) (13,442)
Proceeds from sale of assets 289 592 881
Other, net 4,929 (6,416) (1,487)
-------- -------- --------
Net cash used in investing activities (3,679) (10,369) (14,048)
-------- -------- --------
Cash flows from financing activities:
Net repayments under revolving credit agreements (38,000) -- (38,000)
Proceeds from issuance of long-term debt -- 9,738 9,738
Principal payments on long-term debt (17,451) (10,669) (28,120)
Payments for debt issuance costs (2,316) -- (2,316)
-------- -------- --------
Net cash used in financing activities (57,767) (931) (58,698)
Effect of exchange rate changes on cash and cash equivalents -- 336 336
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,827) 843 (984)
Cash and cash equivalents, beginning of period 1,950 4,082 6,032
-------- -------- --------
Cash and cash equivalents, end of period $ 123 $ 4,925 $ 5,048
======== ======== ========
</Table>
15
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Doane Pet Care Company:
We have reviewed the condensed consolidated balance sheet of Doane Pet Care
Company and subsidiaries as of September 27, 2003, the related condensed
consolidated statements of operations for the three-month and nine-month periods
ended September 27, 2003 and September 28, 2002, the condensed consolidated
statement of stockholder's equity and comprehensive income as of and for the
nine-month period ended September 27, 2003 and the condensed consolidated
statements of cash flows for the nine-month periods ended September 27, 2003 and
September 28, 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
October 24, 2003
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The reader is encouraged to refer to the accompanying unaudited
condensed consolidated financial statements and related notes included elsewhere
in this quarterly report on Form 10-Q and our audited consolidated financial
statements and related notes in our 2002 annual report on Form 10-K for the
fiscal year ended December 28, 2002, or the 2002 10-K.
FORWARD-LOOKING STATEMENTS
Certain of the statements in this quarterly report on Form 10-Q are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Some of these statements can be identified by terms and phrases such
as "anticipate," "believe," "assume," "intend," "estimate," "expect,"
"continue," "could," "may," "plan," "project," "predict," "will" and similar
expressions. These statements appear in a number of places and include
statements regarding our plans, beliefs or current expectations, including those
plans, beliefs and expectations of our officers and directors, with respect to,
among other things:
o reliance on a few customers for a large portion of our sales
and our ability to maintain our relationships with these
customers;
o future capital expenditures and our ability to finance these
capital expenditures;
o our ability to finance our debt service requirements under our
senior credit facility and our other debt and to comply with
the financial covenants under our debt agreements;
o our future financial condition or results of operations;
o our business strategies and other plans and objectives for
future operations;
o general economic and business conditions;
o business opportunities that may be presented to and pursued by
us from time to time;
o our exposure to, and our ability to manage, our market risks
relating to commodity prices, interest rates and foreign
currency exchange rates;
o the impact of existing or new accounting pronouncements;
o risks related to our international operations; and
o the outcome of any legal proceedings to which we or our
subsidiaries may be a party.
These forward-looking statements are based on our assumptions and
analyses and are not guarantees of our future performance. These statements are
subject to risks, many of which are beyond our control, that could cause our
actual results to differ materially from those contained in our forward-looking
statements. Factors that could cause results to differ materially include
without limitation: decreases or changes in demand for our products, changes in
market trends, general competitive pressures from existing and new competitors,
price volatility of commodities, natural gas, other raw materials and packaging,
foreign currency exchange rate fluctuations, future investment returns on our
pension plans, changes in laws and regulations, adverse changes in operating
performance, adverse economic conditions and other factors described under Item
1, "Business -- Risk Factors" in our 2002 10-K.
17
We undertake no obligation to revise the forward-looking statements to
reflect any future events or circumstances. All forward-looking statements
attributable to us are expressly qualified in their entirety by this cautionary
statement.
CRITICAL ACCOUNTING POLICIES
Accounts receivable allowance. As of September 27, 2003, our gross
accounts receivable were $107.9 million. We had an allowance of $4.3 million as
of September 27, 2003, primarily for doubtful accounts and outstanding
deductions with customers. Our policy is to estimate our allowance by applying a
recovery percentage based on historical collection experience and performing a
specific identification review of customer account balances. We may revise our
allowance 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 allowance. As of September 27, 2003, our gross inventories
were $69.6 million. We had an allowance for obsolescence of $4.7 million as of
September 27, 2003, primarily related to packaging inventories. Our policy is to
estimate our allowance based on specific identification of obsolete stock
keeping units, or SKUs, or probable SKUs to be rationalized. We may revise our
allowance against inventories as we receive more information on this matter or
as we assess other factors impacting the realizability of our inventories.
Deferred tax assets. As of September 27, 2003, our federal net
operating loss, or NOL, carryforwards were approximately $108.1 million and our
foreign NOL carryforwards were approximately $5.3 million. Our gross deferred
tax assets, including federal, foreign, state and local NOL carryforwards, were
approximately $59.0 million as of September 27, 2003 and our gross deferred tax
liabilities were approximately $50.3 million. The realization of our deferred
tax assets depends upon our ability to generate sufficient taxable income during
the periods in which our deferred tax assets may be utilized. As of September
27, 2003, we had valuation allowances of $13.5 million against U.S. federal and
state deferred tax assets and $2.1 million against foreign deferred tax assets
that take into consideration tax planning strategies, historical and projected
earnings, and the future reversal of taxable temporary differences. Management
will continue to assess in future periods whether it is more likely than not
that we will realize the benefit of our existing deferred tax assets. We
currently expect to record valuation allowances against deferred tax assets that
we generate in the near future and we may record additional valuation allowances
against currently recognized deferred tax assets subject to our continued
assessment of the probability of realization of such assets.
Goodwill and trademarks. As of September 27, 2003, our net goodwill and
other intangible assets totaled $374.2 million. Our policy is to test the fair
value of goodwill and other intangible assets for impairment in accordance with
the FASB's SFAS No. 142, Goodwill and Other Intangible Assets. This test is
performed annually in the fourth quarter and includes quantitative analyses of
discounted future cash flows, market multiples of earnings and comparable
transactions. If the estimated fair value of goodwill or an other intangible
asset of either the domestic or international reporting unit is less than its
carrying value, an impairment loss will be recognized.
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.
18
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):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------- ----------------------------------------
SEPTEMBER 27, 2003 SEPTEMBER 28, 2002 SEPTEMBER 27, 2003 SEPTEMBER 28, 2002
------------------ ------------------ ------------------ ------------------
Net sales $ 243,810 100.0% $ 216,334 100.0% $ 738,235 100.0% $ 640,738 100.0%
Cost of goods sold 206,970 84.9 171,865 79.4 617,526 83.6 496,589 77.5
--------- ----- --------- ----- --------- ----- --------- -----
Gross profit 36,840 15.1 44,469 20.6 120,709 16.4 144,149 22.5
Operating expenses:
Promotion and distribution 14,703 6.0 12,579 5.8 41,910 5.7 38,972 6.1
Selling, general and administrative 12,077 5.0 11,868 5.5 36,558 5.0 34,445 5.4
Amortization 1,171 0.5 1,161 0.5 3,488 0.5 3,352 0.5
Other operating expenses -- -- 775 0.4 -- -- 775 0.1
--------- ----- --------- ----- --------- ----- --------- -----
Income from operations 8,889 3.6 18,086 8.4 38,753 5.2 66,605 10.4
Interest expense, net 14,671 6.0 16,426 7.6 43,543 5.9 46,251 7.2
Loss from debt extinguishments 1,030 0.4 -- -- 12,143 1.6 -- --
Other income, net (201) (0.1) (355) (0.2) (786) (0.1) (990) (0.2)
--------- ----- --------- ----- --------- ----- --------- -----
Income (loss) before income taxes (6,611) (2.7) 2,015 1.0 (16,147) (2.2) 21,344 3.4
Income tax expense (benefit) 4,025 1.7 (745) (0.3) 5,767 0.8 4,924 0.8
--------- ----- --------- ----- --------- ----- --------- -----
Net income (loss) $ (10,636) (4.4)% $ 2,760 1.3% $ (21,914) (3.0)% $ 16,420 2.6%
========= ===== ========= ===== ========= ===== ========= =====
</Table>
THREE MONTHS ENDED SEPTEMBER 27, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
28, 2002
Net sales. Net sales for the third quarter of fiscal 2003 increased
12.7% to $243.8 million from $216.3 million in the 2002 third quarter. Excluding
the impact of foreign currency exchange fluctuations, net sales increased 8.9%
for the 2003 third quarter primarily due to sales volume growth.
Gross profit. Gross profit for the third quarter of fiscal 2003
decreased 17.2%, or $7.7 million, to $36.8 million from $44.5 million in the
2002 third quarter. This decrease was primarily due to higher commodities and
natural gas costs and wage inflation, partially offset by the increase in our
sales volume and the favorable impact of foreign currency exchange fluctuations.
In addition, we had a $1.1 million decrease in our gross profit due to the
volatility of commodity prices under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, or SFAS 133, fair value accounting of our
commodity derivative instruments which resulted from a $1.9 million increase in
our cost of goods sold in the 2003 third quarter compared to a $0.8 million
increase in our cost of goods sold in the 2002 third quarter.
Promotion and distribution. Promotion and distribution expenses for the
third quarter of fiscal 2003 increased 16.9% to $14.7 million from $12.6 million
in the 2002 third quarter. As a percentage of net sales, promotion and
distribution expenses increased 0.2% resulting from the mix of business in the
2003 third quarter requiring higher distribution expenses than the 2002 third
quarter.
Selling, general and administrative. Selling, general and
administrative expenses for the third quarter of fiscal 2003 increased 1.8% to
$12.1 million from $11.9 million in the 2002 third quarter primarily due to the
impact of foreign currency exchange fluctuations.
Other operating expenses. Other operating expenses for the third
quarter of fiscal 2002 consisted of $0.8 million related to the write-off of
transaction costs associated with our bond offering after the postponement of
the transaction exceeded 90 days.
Interest expense, net. Interest expense, net of interest income, for
the third quarter of fiscal 2003 decreased 10.7% to $14.7 million from $16.4
million in the 2002 third quarter. This decrease was primarily due to the
elimination of the excess leverage fee accrual under our senior credit facility
and a decrease in interest rates associated with our floating rate debt,
partially offset by a higher interest rate on
19
the portion of our long-term debt refinanced in February 2003. See "-- Liquidity
and Capital Resources -- Debt."
Loss from debt extinguishments. Loss from debt extinguishments of $1.0
million for the third quarter of fiscal 2003 related to a $15.0 million optional
prepayment on our senior credit facility. This pre-tax charge consisted of (1)
$0.7 million of 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 (2) $0.3 million for the write-off of
a pro-rata percentage of our deferred financing costs associated with our senior
credit facility.
Income tax expense (benefit). We recognized income tax expense of $4.0
million for the third quarter of fiscal 2003 compared to $0.7 million of income
tax benefit for the 2002 third quarter. We recorded a valuation allowance
against deferred tax assets during the 2003 third quarter of $6.2 million. The
overall effective tax rate for both periods differs from the expected combined
federal and state rate of 38.9% due to the valuation allowances described above
and the tax benefit arising from certain items being deductible in the U.S. and
also in certain foreign jurisdictions.
NINE MONTHS ENDED SEPTEMBER 27, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 28,
2002
Net sales. Net sales for the first nine months of fiscal 2003 increased
15.2% to $738.2 million from $640.7 million in the first nine months of 2002.
Excluding the impact of foreign currency exchange fluctuations, net sales
increased 10.4% for the 2003 period primarily due to sales volume growth.
Gross profit. Gross profit for the first nine months of fiscal 2003
decreased 16.3%, or $23.4 million, to $120.7 million from $144.1 million in the
first nine months of 2002. This decrease was primarily due to higher commodities
and natural gas costs and wage inflation, partially offset by the increase in
our sales volume and the favorable impact of foreign currency exchange
fluctuations. In addition, we had an $11.4 million decrease in our gross profit
due to the volatility of commodity prices under SFAS 133 fair value accounting
of our commodity derivative instruments which resulted from a $1.6 million
reduction in our cost of goods sold in the 2003 period compared to a $13.0
million reduction in our cost of goods sold in the 2002 period.
Promotion and distribution. Promotion and distribution expenses for the
first nine months of fiscal 2003 increased 7.5% to $41.9 million from $39.0
million in the first nine months of 2002 primarily due to the increase in net
sales. As a percentage of net sales, promotion and distribution expenses
decreased 0.4% resulting from the mix of business in the 2003 period requiring
less promotions than the 2002 period.
Selling, general and administrative. Selling, general and
administrative expenses for the first nine months of fiscal 2003 increased 6.1%
to $36.6 million from $34.4 million in the first nine months of 2002 primarily
due to the impact of foreign currency exchange fluctuations.
Other operating expenses. Other operating expenses for the first nine
months of fiscal 2002 consisted of $0.8 million related to the write-off of
transaction costs associated with our bond offering after the postponement of
the transaction exceeded 90 days.
Interest expense, net. Interest expense, net of interest income, for
the first nine months of fiscal 2003 decreased 5.9% to $43.5 million from $46.3
million in the first nine months of 2002. This decrease was primarily due to the
elimination of the excess leverage fee accrual under our senior credit facility
and a decrease in interest rates associated with our floating rate debt,
partially offset by a higher interest rate on the portion of our long-term debt
refinanced in February 2003. See "-- Liquidity and Capital Resources -- Debt."
Loss from debt extinguishments. Loss from debt extinguishments of $12.1
million in the first nine months of fiscal 2003 consisted of $11.1 million
related to our refinancing in February 2003 and $1.0 million related to the
optional prepayment on our senior credit facility in the third quarter of fiscal
2003, as
20
described in the third quarter results above. The $11.1 million related to the
refinancing in February 2003 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 (benefit). We recognized income tax expense of $5.8
million for the first nine months of fiscal 2003 compared to $4.9 million for
the first nine months of 2002. We recorded valuation allowances against deferred
tax assets during these periods of $14.9 million in the 2003 period and $0.6
million in the 2002 period. The overall effective tax rate for both periods
differs from the expected combined federal and state rate of 38.9% due to the
valuation allowances described above and the tax benefit arising from certain
items being deductible in the U.S. and also in certain foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, capital expenditures and
working capital requirements with cash flows from operations, bank borrowings
and issuance of other term indebtedness. At September 27, 2003, we had working
capital of $35.3 million.
Cash Flows
Net cash provided by our operating activities was $33.7 million for the
first nine months of fiscal 2003 compared to $71.4 million in the first nine
months of 2002. This decrease was primarily due to the impact of higher
commodity and natural gas costs on net income (loss) and an unfavorable change
in working capital. The unfavorable change in working capital was primarily due
to an $8.3 million interest payment in the 2003 period on the sponsor facility
and an unusually favorable change in working capital in the 2002 period,
partially offset by reaching more favorable payment terms with certain customers
in the 2003 third quarter.
Net cash used in our investing activities was $18.5 million for the
first nine months of fiscal 2003 compared to $14.0 million in the first nine
months of 2002. Capital expenditures for the first nine months of fiscal 2003
were $15.9 million compared to $13.4 million in the 2002 period.
Net cash used in financing activities was $19.4 million for the first
nine months of fiscal 2003 compared to $58.7 million in the first nine months of
2002. In the 2003 period, we received $210.4 million of gross proceeds from the
issuance of our senior notes that was used to repay a portion of the outstanding
debt under our senior credit facility and repay our sponsor facility in full. In
addition, we paid transaction fees and expenses of $7.8 million in the 2003
period in connection with the issuance of our senior notes and amendments to our
senior credit facility. In the 2002 period, we paid transaction fees and
expenses of $2.3 million for an amendment to our senior credit facility. We used
cash provided by operating activities to pay down $15.0 million of our revolving
credit facility in the 2003 period compared to $38.0 million in the 2002 period.
Refinancing
Senior note offering. On February 28, 2003, we issued $213.0 million
aggregate principal amount of 10 3/4% senior notes due March 1, 2010 at a price
of 98.8% of par, with interest payable semiannually in arrears on March 1 and
September 1 of each year, commencing on September 1, 2003. The notes are our
general unsecured senior obligations, are effectively subordinated to all of our
secured debt, including debt under our senior credit facility, and are senior to
all of our existing and future subordinated debt, including debt under our
senior subordinated notes. The senior notes are effectively subordinated to all
liabilities, including trade payables, of each of our subsidiaries that is not a
guarantor of the senior notes. Our senior notes are unconditionally guaranteed
on a senior unsecured basis by DPC Investment Corp. and
21
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. This amendment provided for, among other things: (1) the
concurrent issuance of our senior notes and repayment of our sponsor facility;
(2) the repayment of a portion of the term loans and revolving credit facility
under our senior credit facility in order of forward maturity; (3) less
restrictive covenants on capital expenditures, investments and certain other
activities; (4) the elimination of certain financial covenants and the revision
of other financial covenants; (5) the elimination of the excess leverage fee;
(6) the elimination of the fixed rate debt percentage requirement; and (7) the
permanent reduction in our revolving credit facility from $75.0 million to $60.0
million.
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, including compliance
with the financial covenants therein, 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 September 27, 2003, our senior credit facility
provided for total commitments as follows:
o a Euro 30.1 million Euro term loan facility ($35.1 million
assuming a Euro to USD exchange rate of 1.1652); and
o $191.7 million, consisting of
-- a $131.7 million USD term loan facility; and
-- a $60.0 million revolving credit facility, with a $20.0
million sub-limit for issuance of letters of credit.
Availability of funds under our senior credit facility is subject to
certain customary terms and conditions.
Interest rates. All loans under our senior credit facility bear
interest at the higher of the Euro dollar rate plus 4.75%, or the prime rate of
the administrative agent plus 3.75%, until maturity. As of September 27, 2003,
our Euro term facility bore interest at 6.87%, our USD term facility bore
interest at 7.65% and our revolving credit facility bore interest at 7.75%.
Amortization of outstanding indebtedness. As of September 27, 2003, the
principal amounts due under our senior credit facility and the final maturity
dates, unless terminated sooner upon an event of default, were as follows (in
thousands):
22
<Table>
<Caption>
MATURITIES BY FISCAL YEAR
-------------------------------------------------------------------
Final maturity 2004 2005 2006 Total
---------------------------- -------------- -------------- --------------- --------------
Revolving credit facility March 31, 2005 $ -- $ -- $ -- $ --
Euro term loan facility December 30, 2005 -- 35,075 -- 35,075
USD term loan facility:
Tranche A March 31, 2005 8,952 4,587 -- 13,539
Tranche B December 31, 2005 -- 79,102 -- 79,102
Tranche C December 31, 2006 -- -- 39,068 39,068
-------------- -------------- --------------- --------------
Total $ 8,952 $ 118,764 $ 39,068 $ 166,784
============== ============== =============== ==============
</Table>
As of September 27, 2003, we had no borrowings outstanding under our
revolving credit facility and $4.1 million of letters of credit outstanding,
resulting in $55.9 million of availability under our revolving credit facility.
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. The Company made a $15.0 million optional prepayment in the third
quarter of fiscal 2003. The above schedule of maturities reflects this
prepayment.
Our senior credit facility also provides for mandatory prepayments of
the borrowings upon certain specified events and in certain specified
percentages, including:
o 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;
o 100% of the net cash proceeds of any sale or other disposition
of any assets, subject to certain exceptions;
o 50% of excess cash flow; and
o 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 have guaranteed 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:
o substantially all of our personal property assets, subject to
certain exceptions;
o 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;
o substantially all of our intellectual property assets; and
o 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.
23
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 customary for a secured credit agreement,
including covenants that limit our and our restricted subsidiaries' abilities
to, among other things:
o incur indebtedness or issue guarantees;
o grant liens;
o make investments;
o make certain capital expenditures;
o make certain restricted payments; and
o enter into certain lines of business.
Our senior credit facility also contains the following financial
covenant requirements:
o our consolidated leverage ratio as of certain specified
periods must not exceed ratios ranging from 6.25:1.00 at the
end of the third quarter of 2003 to 5.50:1.00 at the end of
the first quarter of 2006 and thereafter until maturity;
o our consolidated senior secured debt ratio as of certain
specified periods must not exceed ratios ranging from
2.15:1.00 at the end of the third quarter of 2003 to 2.00:1.00
at the end of the first quarter of 2004 and thereafter until
maturity;
o our consolidated interest coverage ratio as of certain
specified periods must meet or exceed a ratio of 1.55:1.00 at
the end of the third quarter of 2003 and thereafter until
maturity; and
o 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 obtained 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. Our
ability to satisfy these covenants is determined based on our cash flows,
outstanding total debt and senior secured debt, interest expense, capital
expenditures, lease expense and fixed charges. We may experience difficulty
satisfying these amended covenants in the future. It is possible that current
commodity prices may affect our operating results and cash flows to an extent
that we may not be able to comply with these covenants. If we are unable to
secure a waiver from our lenders for any potential default, it 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
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:
24
o 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;
o representations or warranties being inaccurate in any material
respect when made;
o cross-default to certain other indebtedness and agreements
including our senior notes and senior subordinated notes;
o bankruptcy or insolvency;
o actual invalidity, or invalidity asserted by us, of any
security document;
o material judgments;
o certain ERISA events; and
o change of control or ownership.
Liquidity
As of September 27, 2003, we had $55.9 million of remaining
availability under the revolving credit facility portion of our senior credit
facility out of a total availability of $60.0 million. Availability of funds
under the revolving credit facility is subject to our satisfaction of certain
terms and conditions, including our ability to satisfy the financial covenants
in our senior credit facility. See "--Covenants" above. 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 any planned expansion
and customer requirements for the remainder of fiscal year 2003.
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. In addition, our business may not generate
sufficient operating results and cash flows to allow us to comply with the
financial covenants in our senior credit facility. In the event of a default
under our senior credit facility, absent a waiver from our lenders, we would not
be able to borrow under the revolving credit facility portion of our senior
credit facility to fund our liquidity needs.
COMMITMENTS AND CONTINGENCIES
We believe our operations are in compliance in all material respects
with environmental, safety and other regulatory requirements; however, these
requirements may change in the future and we may incur material costs in the
future to comply with these requirements or in connection with the effect of
these matters on our business.
In fiscal 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 serves as one of our executive
officers.
25
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, changes in international demand, as well as weather
conditions during the growing and harvesting seasons. Fluctuations in paper
prices, which affect our costs for packaging materials, have resulted from
changes in supply and demand, general economic conditions and other factors. In
addition, we have exposure to changes in pricing of natural gas, which affects
our manufacturing costs. Our results of operations have been exposed to
volatility in the commodity and natural gas markets in the past and may be
exposed to such volatility in the future.
In the event of any increases in raw materials, packaging and natural
gas costs, we may be required to seek increased 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
See Note 2 -- "Recently Issued Accounting Pronouncements" in the
accompanying unaudited condensed consolidated financial statements for a
discussion of the impact, if any, to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which may give rise to losses from
adverse changes in market prices and rates. Our market risks could arise from
changes in commodity prices, interest rates and foreign currency exchange rates.
Commodity price risk. We seek to manage our commodity price risk
associated with market fluctuations by using derivative instruments for portions
of our corn, soybean meal, alternative proteins and natural gas purchases,
principally through exchange traded futures and options contracts. The terms of
such contracts are generally less than one year. During the term of a contract,
we balance positions daily with cash payments to or from the exchanges. At the
termination of a contract, we have the ability to settle financially or by
exchange for the physical commodity, in which case, we would deliver the
contract against the acquisition of the physical commodity. Our policy does not
permit speculative commodity trading. At September 27, 2003, we had open
commodity contracts with a fair value loss of $2.7 million.
Based upon an analysis we completed as of September 27, 2003 in which
we utilized our actual derivative contractual volumes and assumed a 5.0% adverse
movement in commodity prices, we determined the potential decrease in the fair
value of our commodity derivative instruments would be approximately $1.3
million.
Although we seek to manage the price risk of market fluctuations by
hedging portions of our primary commodity product purchases, our results of
operations have been adversely affected in the past by these fluctuations and
may in the future. It is possible that current commodity prices may adversely
affect our operating results and cash flows to an extent that we may not be able
to comply with the financial covenants in our senior credit facility. See
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources - Debt - Covenants." Moreover,
the use of futures contracts reduces our ability to take
26
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 $166.8 million at September 27, 2003. Of that
amount, $60.0 million of our domestic floating rate debt was hedged by interest
rate swap contracts. Changes in market values of these financial instruments are
highly correlated with changes in market values of the hedged item both at
inception and over the life of the contract. Amounts received or paid under
interest rate swap contracts and interest rate cap contracts are recorded as
interest income (expense) in our accompanying unaudited condensed consolidated
statements of operations. Changes in fair value of interest rate swap contracts
that qualify for hedge accounting are recorded in accumulated other
comprehensive income (loss), net of deferred taxes, in our accompanying
unaudited condensed consolidated financial statements until they are realized,
at which point, they are recognized in interest expense, net, in the
accompanying unaudited condensed consolidated statements of operations. As of
September 27, 2003, we had a cumulative unrealized loss on our interest rate
swap contracts of $0.6 million, or $0.4 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 (loss) 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
(loss) would decrease by $0.3 million and $0.8 million for the third quarter and
first nine months of fiscal year 2003, respectively. In addition, such a change
would result in a decrease of approximately $15.8 million in the fair value of
our fixed rate debt at September 27, 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 September 27, 2003, we had a
cumulative translation gain of $41.3 million, which included an unrealized
cumulative loss of $8.0 million for the translation of our Euro-denominated debt
to U.S. dollars, that has been recognized in our accompanying unaudited
condensed consolidated financial statements.
We are exposed to foreign currency exchange risk arising from
transactions in the normal course of business in Europe. From time to time, to
mitigate the risk from foreign currency exchange rate fluctuations in those
transactions, we enter into foreign currency forward contracts for the purchase
or sale of a currency. Accordingly, changes in market values of these financial
instruments are highly correlated with changes in the market values of the
hedged items both at inception and over the life of the contracts. Changes in
fair value of foreign currency forward contracts that qualify for hedge
accounting are recorded in accumulated other comprehensive income (loss), net of
deferred taxes, in our accompanying unaudited
27
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 September 27, 2003, we had no open foreign currency
forward contracts.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our disclosure
controls and procedures are designed to ensure that information required to be
disclosed in the reports that we file or submit under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Based on an evaluation of our disclosure controls and procedures as of
the end of the period covered by this report conducted by our management, with
the participation of our Chief Executive Officer and Chief Financial Officer,
the Chief Executive Officer and Chief Financial Officer believe that these
controls and procedures are effective to ensure that we are able to collect,
process and disclose the information we are required to disclose in the reports
we file with the Securities and Exchange Commission within the required time
periods.
Changes in internal control over financial reporting. During the period
covered by this report, there have been no changes in our internal control over
financial reporting that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of Doane Pet Care Company
(incorporated by reference to Exhibit 3.1 to Doane Pet Care
Company's Registration Statement on Form S-1, Reg. No.
33-98110)
3.2 Certificate of Designations, Preferences and Rights of 14.25%
Senior Exchangeable Preferred Stock due 2007, dated October 4,
1995 (incorporated by reference to Exhibit 3.2 to Doane Pet
Care Company's Annual Report on Form 10-K for the year ended
December 29, 2001 (the "2001 Form 10-K"))
3.3 Certificate of Amendment to Certificate of Incorporation of
Doane Pet Care Company dated February 4, 1998 (incorporated by
reference to Exhibit 3.2 to Doane Pet Care Company's Annual
Report on Form 10-K for the year ended December 31, 1997)
3.4 Certificate of Amendment of Certificate of Incorporation of
Doane Pet Care Company dated November 10, 1998 (incorporated
by reference to Exhibit 3.4 to the 2001 Form 10-K)
28
Exhibit
Number Description
------ -----------
3.5 Certificate of Amendment of Certificate of Designations,
Preferences and Rights of 14.25% Senior Exchangeable Preferred
Stock due 2007 dated November 11, 1998 (incorporated by
reference to Exhibit 3.6 to the 2001 Form 10-K)
3.6 Amended and Restated Bylaws of Doane Pet Care Company
(incorporated by reference to Exhibit 3.5 to the 2001 Form
10-K)
4.1 Indenture dated November 12, 1998 between Doane Pet Care
Company and Wilmington Trust Company (incorporated by
reference to Exhibit 10.12 of Doane Pet Care Enterprises,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-61027)
4.2 Registration Rights Agreement among Doane Pet Care Company,
Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc. dated November 12, 1998 (incorporated by
reference to Exhibit 4.2 to Doane Pet Care Company's
Registration Statement on Form S-4, Reg. No. 333-70759)
4.3 Indenture dated February 28, 2003 among Doane Pet Care
Company, DPC Investment Corp., Doane/Windy Hill Joint Venture,
L.L.C. and Wilmington Trust Company (incorporated by reference
to Exhibit 4.3 to Doane Pet Care Company's Annual Report on
Form 10-K for the year ended December 28, 2002 (the "2002 Form
10-K"))
4.4 Registration Rights Agreement dated as of February 28, 2003
among Doane Pet Care Company, DPC Investment Corp.,
Doane/Windy Hill Joint Venture, L.L.C., Credit Suisse First
Boston LLP and J.P. Morgan Securities Inc. (incorporated by
reference to Exhibit 4.4 to the 2002 Form 10-K)
15.1* Letter from KPMG LLP dated October 24, 2003, regarding
unaudited interim financial information
31.1* Chief Executive Officer Certification of Periodic Financial
Report pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2* Chief Financial Officer Certification of Periodic Financial
Report pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1* Accompanying Chief Executive Officer Certification of Periodic
Financial Report pursuant to 18 U.S.C. Section 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Accompanying Chief Financial Officer Certification of Periodic
Financial Report pursuant to 18 U.S.C. Section 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed or furnished herewith, as the case may be
(b) Reports on Form 8-K
The following report on Form 8-K was furnished during the third quarter
of fiscal 2003:
29
Report on Form 8-K, dated July 30, 2003, was furnished pursuant to Item
9 and Item 12 of Form 8-K in connection with our issuance of a press
release announcing our 2003 second quarter and six months results and
updating our fiscal 2003 outlook and discussing other matters set forth
therein.
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: October 30, 2003
31
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of Doane Pet Care Company
(incorporated by reference to Exhibit 3.1 to Doane Pet Care
Company's Registration Statement on Form S-1, Reg. No.
33-98110)
3.2 Certificate of Designations, Preferences and Rights of 14.25%
Senior Exchangeable Preferred Stock due 2007, dated October 4,
1995 (incorporated by reference to Exhibit 3.2 to Doane Pet
Care Company's Annual Report on Form 10-K for the year ended
December 29, 2001 (the "2001 Form 10-K"))
3.3 Certificate of Amendment to Certificate of Incorporation of
Doane Pet Care Company dated February 4, 1998 (incorporated by
reference to Exhibit 3.2 to Doane Pet Care Company's Annual
Report on Form 10-K for the year ended December 31, 1997)
3.4 Certificate of Amendment of Certificate of Incorporation of
Doane Pet Care Company dated November 10, 1998 (incorporated
by reference to Exhibit 3.4 to the 2001 Form 10-K)
3.5 Certificate of Amendment of Certificate of Designations,
Preferences and Rights of 14.25% Senior Exchangeable Preferred
Stock due 2007 dated November 11, 1998 (incorporated by
reference to Exhibit 3.6 to the 2001 Form 10-K)
3.6 Amended and Restated Bylaws of Doane Pet Care Company
(incorporated by reference to Exhibit 3.5 to the 2001 Form
10-K)
4.1 Indenture dated November 12, 1998 between Doane Pet Care
Company and Wilmington Trust Company (incorporated by
reference to Exhibit 10.12 of Doane Pet Care Enterprises,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-61027)
4.2 Registration Rights Agreement among Doane Pet Care Company,
Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc. dated November 12, 1998 (incorporated by
reference to Exhibit 4.2 to Doane Pet Care Company's
Registration Statement on Form S-4, Reg. No. 333-70759)
4.3 Indenture dated February 28, 2003 among Doane Pet Care
Company, DPC Investment Corp., Doane/Windy Hill Joint Venture,
L.L.C. and Wilmington Trust Company (incorporated by reference
to Exhibit 4.3 to Doane Pet Care Company's Annual Report on
Form 10-K for the year ended December 28, 2002 (the "2002 Form
10-K"))
4.4 Registration Rights Agreement dated as of February 28, 2003
among Doane Pet Care Company, DPC Investment Corp.,
Doane/Windy Hill Joint Venture, L.L.C., Credit Suisse First
Boston LLP and J.P. Morgan Securities Inc. (incorporated by
reference to Exhibit 4.4 to the 2002 Form 10-K)
Exhibit
Number Description
------ -----------
15.1* Letter from KPMG LLP dated October 24, 2003, regarding
unaudited interim financial information
31.1* Chief Executive Officer Certification of Periodic Financial
Report pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2* Chief Financial Officer Certification of Periodic Financial
Report pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1* Accompanying Chief Executive Officer Certification of Periodic
Financial Report pursuant to 18 U.S.C. Section 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Accompanying Chief Financial Officer Certification of Periodic
Financial Report pursuant to 18 U.S.C. Section 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------
* Filed or furnished herewith, as the case may be
EXHIBIT 15.1
October 24, 2003
Doane Pet Care Company
Brentwood, Tennessee
Re: Registration Statement Nos. 333-43643 and 333-70759 on Form S-3 and
Registration Statement Nos. 333-104676, 333-104676-01 and 333-104676-02 on Form
S-2
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated October 24, 2003 related to our
reviews of interim financial information.
Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is
not considered part of a registration statement prepared or certified by an
accountant, or a report prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Act.
/s/ KPMG LLP
Nashville, Tennessee
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Douglas J. Cahill, certify that:
1. I have reviewed this Form 10-Q for the quarterly period ended September
27, 2003 of Doane Pet Care Company;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)), for the
registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared;
b) [omitted pursuant to SEC Release 34-47986];
c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: October 30, 2003
/s/ DOUGLAS J. CAHILL
-------------------------------------
Douglas J. Cahill
President and Chief Executive Officer
Doane Pet Care Company
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Philip K. Woodlief, certify that:
1. I have reviewed this Form 10-Q for the quarterly period ended September
27, 2003 of Doane Pet Care Company;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)), for the
registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared;
b) [omitted pursuant to SEC Release 34-47986];
c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: October 30, 2003
/s/ PHILIP K. WOODLIEF
------------------------------------------
Philip K. Woodlief
Vice President, Finance and Chief Financial
Officer
Doane Pet Care Company
EXHIBIT 32.1
SECTION 906 -- CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF PERIODIC FINANCIAL REPORT
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, and in connection with the accompanying Quarterly Report on Form
10-Q of Doane Pet Care Company for the quarter ended September 27, 2003 (the
"Report"), the undersigned officer of Doane Pet Care Company hereby certifies
that:
1. The Report fully complies with the requirements of Section 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of the operations of
Doane Pet Care Company.
Date: October 30, 2003
/s/ Douglas J. Cahill
-----------------------------------
Douglas J. Cahill
President and Chief Executive Officer
Doane Pet Care Company
EXHIBIT 32.2
SECTION 906 -- CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF PERIODIC FINANCIAL REPORT
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, and in connection with the accompanying Quarterly Report on Form
10-Q of Doane Pet Care Company for the quarter ended September 27, 2003 (the
"Report"), the undersigned officer of Doane Pet Care Company hereby certifies
that:
1. The Report fully complies with the requirements of Section 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of the operations of
Doane Pet Care Company.
Date: October 30, 2003
/s/ Philip K. Woodlief
---------------------------------------
Philip K. Woodlief
Vice President, Finance and Chief
Financial Officer
Doane Pet Care Company