<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 1998
--------------
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 No. 333-37081
DOSKOCIL MANUFACTURING COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 75-1281683
(State of Incorporation) (I.R.S. Employer Identification No.)
4209 Barnett
Arlington, Texas 76017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (817) 467-5116
Indicate by check mark whether 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 [_] No [X]
The number of shares outstanding of the registrant's no par value Common Stock
at May 8, 1998, was 3,103,144.
1
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets March 31, 1998
(unaudited) and June 30, 1997.......................................... 3
Statements of Operations
Three months and Nine months
ended March 31, 1998 and 1997 (unaudited).............................. 4
Statement of Changes in Preferred Stock and
Shareholders' Equity (Deficit)......................................... 5
Statements of Cash Flows Nine months
ended March 31, 1998 and 1997 (unaudited).............................. 6
Notes to Consolidated Financial Statements............................... 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition.................... 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 15
(a) Exhibits
27 - Financial Data Schedule
SIGNATURES............................................................... 16
</TABLE>
2
<PAGE>
Part I Financial Information
DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------------------------------
(Unaudited)
Assets (Dollars in thousands)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 2,958 $ 2,066
Accounts receivable, net...................................................... 21,338 14,585
Inventories (Note 6).......................................................... 21,275 16,484
Deferred income taxes......................................................... 2,517 --
Other current assets.......................................................... 1,275 223
-------- -------
Total current assets....................................................... 49,363 33,358
Property, plant and equipment, net............................................. 50,055 16,904
Fixed assets held for sale..................................................... 3,500 --
Goodwill....................................................................... 49,787 --
Debt issuance costs............................................................ 5,125 --
Deferred taxes................................................................. 1,658 --
Other assets................................................................... 1,444 417
-------- -------
Total assets............................................................... $160,932 $50,679
======== =======
Liabilities and (Deficit) Equity
--------------------------------
Current liabilities:
Accounts payable.............................................................. $ 4,483 $ 3,235
Accrued liabilities........................................................... 6,029 2,733
Current portion of long-term debt............................................. 2,875 1,712
Lines of credit............................................................... -- 7,250
Other current liabilities..................................................... 3,390 6
-------- -------
Total current liabilities.................................................. 16,777 14,936
Long-term debt................................................................. 79,437 6,590
Senior subordinated notes...................................................... 85,000 --
Deferred taxes and other....................................................... 500 63
-------- -------
Total liabilities.......................................................... 181,714 21,589
-------- -------
(Deficit) equity:
Series C Preferred Stock, no par value: Authorized shares--15,000,000,
issued and outstanding--9,161,567 at March 31, 1998......................... 9,161
Common stock, no par value: Authorized shares--15,000,000, issued and
outstanding--3,080,254 at March 31, 1998;
Authorized shares--12,500,000, issued and outstanding--at June 30, 1997...... 33,980 24
(Deficit) retained earnings................................................... (63,923) 25,258
-------- -------
Total shareholder's (deficit) equity....................................... (20,782) 25,282
Partners' equity.............................................................. -- 3,808
-------- -------
Total shareholder's (deficit) equity....................................... (20,782) 29,090
-------- -------
Total liabilities and shareholder's (deficit) equity....................... $160,932 $50,679
======== =======
</TABLE>
See accompanying notes.
3
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
(Unaudited)
(Dollars in thousands except per share amounts)
Net sales........................................................... $34,775 $26,632 $114,281 $78,348
Cost of goods sold.................................................. 25,004 18,921 75,899 54,899
------- ------- -------- -------
Gross profit........................................................ 9,771 7,711 38,382 23,449
Selling, general and administrative expense......................... 8,374 5,368 22,882 15,842
Officer's bonus..................................................... -- -- -- 1,255
------- ------- -------- -------
Operating income.................................................... 1,397 2,343 15,500 6,352
Other (income) expense:
Interest expense, net (the nine months ended March 31, 1998,
includes amortization of bridge financing costs of $2,514).. 4,112 300 13,242 1,330
Other, net........................................................ (5) (59) (228) 423
------- ------- -------- -------
Total other (income) expense................................... 4,107 241 13,014 1,753
------- ------- -------- -------
(Loss) income before income taxes................................... (2,710) 2,102 2,486 4,599
Less provision for income taxes..................................... (1,008) -- 2,586 --
------- ------- -------- -------
Net (loss) income................................................... (1,702) 2,102 (100) 4,599
Preferred stock dividends........................................... 229 -- 955 --
------- ------- -------- -------
Net (loss) income attributable to common shareholders............... $(1,931) $ 2,102 $ (1,055) $ 4,599
======= ======= ======== =======
Net (loss) per common share (basic)................................. $ (0.63) $ (0.41)
======= ========
Net (loss) per common share (diluted)............................... $ (0.63) $ (0.41)
------- ========
Weighted average common shares outstanding.......................... 3,078 2,555
======= ========
Pro forma provision for income tax (Note 8)......................... 799 1,748
------- -------
Pro forma net income................................................ $ 1,303 $ 2,851
======= =======
Pro forma net income per common share (basic and diluted)........... $ 0.98 $ 2.14
======= =======
Pro forma weighted average common shares outstanding................ 1,331 1,331
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENT OF CHANGES IN PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Preferred Stock
Series A Series B Series C Common Stock Retained Shareholders'
---------------- ---------------- --------------- --------------- Earnings Equity
Shares Amount Shares Amount Shares Amount Shares Amount (Deficit) (Deficit)
------ -------- ------- -------- ------ ------- ------ ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1997............... 5,999 $ 24 $ 25,258 $ 25,282
Stock issued in exchange for the
partnership interest of Spectrum
Polymers........................... 798 4,804 4,804
Common and Series A preferred stock
issued for cash.................... 1,531 $ 23,000 227 3,400 26,400
Redemption of common stock.......... (5,677) (458) (87,377) (87,835)
Recapitalization costs--investor
direct acquisition costs........... (1,392) (1,392)
Stock issued in merger with Dogloo.. 10,224 $ 10,224 11,841 $11,841 1,400 21,210 43,275
Redemption of Series A preferred
stock, common stock and payment
of dividends on preferred stock.... (466) (7,000) (732) (11,000) (469) (18,469)
Conversion of Series A preferred
stock to common stock.............. (1,065) (16,000) 1,065 16,000
Redemption of Series B and Series C
preferred stock.................... (10,224) (10,224) (2,680) (2,680) (12,904)
Fair value of options assumed in
connection with the merger......... 157 157
Net loss............................ (100) (100)
------ -------- ------- -------- ------ ------- ------ ------- --------- ------------
Balance at March 31, 1998........... -- -- -- -- 9,161 $ 9,161 3,080 $33,980 $(63,923) $ (20,782)
====== ======== ======= ======== ====== ======= ====== ======= ========= ============
</TABLE>
See accompanying notes.
5
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
(Unaudited)
(Dollars in thousands)
Operating activities:
Net (loss) income................................................................. $ (100) $ 4,599
Adjustments to reconcile net (loss) income to net cash from operating activities
Depreciation and amortization.................................................... 7,810 4,618
Deferred income taxes from tax status change..................................... 1,670 --
Other............................................................................ (225) --
Changes in:
Receivables..................................................................... 1,243 (2,084)
Inventories..................................................................... 3,791 4,247
Other assets.................................................................... (23) 43
Payables........................................................................ (4,255) 3,721
Accrued and other liabilities................................................... (1,215) (1,048)
All other non-current assets and liabilities.................................... ( 428) --
--------- --------
Net cash from operating activities............................................... 8,268 14,096
Investing activities:
Repurchase of leased assets....................................................... (18,724) --
Capital expenditures.............................................................. (6,409) (1,919)
Increase in other assets.......................................................... -- (107)
Cash of acquired business......................................................... 1,335 --
Disposal of assets................................................................ 2,579 4,116
--------- --------
Net cash (used in) provided by investing activities.............................. (21,219) 2,090
--------- --------
Financing activities:
Proceeds from long-term debt...................................................... 262,500 --
Payments of long-term debt........................................................ (102,507) (1,180)
Payment of debt of acquired business.............................................. (34,584) --
Proceeds from revolving credit agreement.......................................... 5,500 --
Payments of revolving credit agreement............................................ (12,750) (16,111)
Proceeds from sale of common stock................................................ 3,400 --
Redemption of common stock........................................................ (11,000) --
Proceeds from sale of preferred stock............................................. 23,000 --
Redemption of preferred stock and accumulated dividends........................... (24,433) --
Cash paid to stockholders from recapitalization................................... (87,922) --
Debt issuance costs............................................................... (5,499) --
Recapitalization costs............................................................ (1,393) --
Cash dividends.................................................................... (469) (100)
--------- --------
Net cash provided by (used in) financing activities.............................. 13,843 (17,391)
--------- --------
Net increase (decrease) in cash and cash equivalents................................ 892 (1,205)
Cash and cash equivalents at beginning of year...................................... 2,066 3,609
--------- --------
Cash and cash equivalents at end of period.......................................... $ 2,958 $ 2,404
========= ========
</TABLE>
See accompanying notes.
6
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
required by generally accepted accounting principles for complete financial
statements. Included in the statements for the nine months ended March 31, 1998,
are operations for Dogloo, Inc. since September 19, 1997, the date it merged
with and into Doskocil Manufacturing Company, Inc. (the "Company"). The combined
balance sheet at June 30, 1997, has been derived from the audited combined
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The three month and the nine month periods ended March 31, 1997, and the
balance sheet at June 30, 1997, represent combined results of the Company and
Spectrum Polymers, Ltd. ("Spectrum"), as they were under common ownership.
In the opinion of management, all normal recurring adjustments considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended March 31, 1998, are not necessarily indicative of the
results that may be expected for the year ended June 30, 1998. Due to the
increased number of pet shelters sold during periods of inclement weather, the
Company typically earns a majority of its operating income during the first and
second fiscal quarters. For further information, refer to the financial
statements for the six month period ended December 31, 1997, and footnotes
thereto included in the Company's Offer to Exchange dated February 23, 1998.
Note 2
Effective July 1, 1997, the Company was recapitalized through the following
transactions: (1) 100% of the Spectrum partnership interest was sold to a group
of investors for $11.0 million; (2) after retirement of approximately $1.0
million of Spectrum debt by the investors, the partnership interests were
exchanged for 798,612 shares of the Company's common stock; (3) the Company's
Articles of Incorporation were amended to establish the Company as a C
Corporation and authorized 15,000,000 shares of preferred stock and 15,000,000
shares of common stock, each with no par value per share; (4) certain investors
purchased 199,654 shares of common stock for $3.0 million and 1,530,674 shares
of Series A Preferred Stock for $23.0 million; (5) all outstanding balances
under then existing lines of credit and long-term debt, along with related
accrued interest and pre-payment penalties, were paid in full; and (6) the
Company redeemed 5,666,145 shares of common stock from the majority stockholder
for approximately $87.4 million. The acquisition of Spectrum has been accounted
for as a combination of entities under common control and accordingly, the
assets acquired were recorded at their historical cost.
Note 3
On September 19, 1997, the Company consummated a merger with Dogloo, Inc. (the
"Merger"), wherein 1,400,603 of the Company's common shares were exchanged for
Dogloo equity in the approximate amount of $21.2 million and Dogloo was merged
with and into the Company. The Company is now controlled by an investor group
(the "Investor Group") consisting of various Westar Capital entities and certain
of their affiliates (collectively "Westar"). Pursuant to the Merger Agreement,
each issued and outstanding share of Dogloo Series A Preferred Stock was
converted into one share of Doskocil Series B Preferred Stock and each issued
and outstanding share of Dogloo Series B Preferred Stock was converted into one
share of Doskocil Series C Preferred Stock. In connection with the Merger,
except as described below, all of the outstanding options to purchase shares of
Dogloo Common Stock were assumed by Doskocil and thereby became options to
purchase shares of Doskocil Common
7
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock, with adjustments to such options to reflect the ratio into which shares
of Dogloo Common Stock were converted into shares of Doskocil Common Stock.
Note 4
In connection with the Merger, Doskocil purchased an aggregate of 249,703
shares of Dogloo Common Stock for an aggregate price of approximately $436,980
from shareholders of Dogloo other than the Investor Group and Mr. Aurelio F.
Barreto, III, the co-founder and former Chief Executive Officer of Dogloo. In
addition, Doskocil cashed out for $0.41 per option 211,000 options held by
Dogloo employees who did not continue with the Company after the Merger. All
Dogloo employees who continued with the Company had their options assumed by the
Company and therefore converted into options to purchase Doskocil Common Stock.
Immediately prior to the Merger, Dogloo had 736,000 outstanding options to
purchase shares of Dogloo Common Stock. Immediately after the closing of the
Merger, 1,064,816 shares of Doskocil Series A Preferred Stock were converted
into 1,064,816 shares of Doskocil Common Stock.
Concurrent with the closing of the Merger, the Company used proceeds of a New
Credit Facility (see Note 5) to redeem for $14.9 million (including dividends
accrued through September 19, 1997) 598,959 shares of Doskocil Common Stock and
359,376 shares of Doskocil Series A Preferred Stock owned by Enterprise, and to
redeem for $3.6 million, 133,102 shares of Doskocil Common Stock and 106,482
shares of Doskocil Series A Preferred Stock from various Enterprise entities.
Immediately following the Merger, the Company also used proceeds from the
Offering and the New Credit Facility to redeem the following additional shares
of Doskocil Series B Preferred Stock and Doskocil Series C Preferred Stock (i)
6,890,000 shares of Doskocil Series B Preferred Stock held by Mr. Barreto for
$8.4 million (including dividends accrued through September 19, 1997); (ii)
3,334,255 shares of Doskocil Series B Preferred Stock held by Darrell R. Paxman,
co-founder of Dogloo, for $4.0 million (including dividends accrued through
September 19, 1997); (iii) 538,433 shares of Doskocil Series C Preferred Stock
held by Enterprise for $1,321,725 (including dividends accrued through September
19, 1997); and (iv) 2,141,260 shares of Doskocil Series C Preferred Stock held
by Mr. Barreto for $2.6 million (including dividends accrued through September
19, 1997). Further, immediately following the Merger, the Company paid
approximately $1.5 million of accrued dividends on the shares of Doskocil Series
C Preferred Stock which remained outstanding.
In connection with the conversion and redemption of shares of Doskocil Series
A Preferred Stock, the Company borrowed $469,000 under the New Credit Facility
to pay cumulative dividends on such shares of Doskocil Series A Preferred Stock
as of the date of the Merger.
The Merger has been accounted as a purchase transaction under generally
accepted accounting principles, and, accordingly, the purchase price has been
allocated on the basis of the estimated fair value of the assets acquired. This
preliminary purchase price allocation resulted in goodwill of approximately
$50.6 million which is being amortized on the straight line basis over 30 years.
The pro forma financial results of operations below assume that the transaction
was completed on July 1, 1996, and reflect the increased interest costs,
preferred stock dividends and the amortization of the intangibles associated
with the transaction and related income tax effect (dollars in thousands except
per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------- ----------------------
1998 1997 1998 1997
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Net sales............................................... $34,775 $36,821 $127,273 $125,224
Operating income........................................ 1,397 1,920 16,278 13,103
Net (loss) income attributable to common stockholders... (1,931) (1,038) 748 75
Earnings per share (basic and diluted).................. $ (0.63) $ (0.34) $ 0.24 $ 0.02
</TABLE>
8
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concurrent with the consummation of the Merger, the Company issued 10-1/8%
Senior Subordinated Notes (the "Notes") due September 15, 2007, in the aggregate
principal amount of $85.0 million. The Notes were exchanged for registered
Notes (the "New Notes") pursuant to the Offer to Exchange dated February 23,
1998. The Notes were exchanged for the New Notes effective as of March 30,
1998. Discounts and commissions aggregated 3% of the face amount of the Notes
and net proceeds to the Company were $82,450,000. Interest on the Notes was, and
on the New Notes is, payable semi-annually on March 15 and September 15 of each
year commencing on March 15, 1998. The New Notes are general, unsecured
obligations of the Company, subordinated in right of payment to all Senior Debt
of the Company. The New Notes are subject to certain optional redemptions at
declining premiums beginning in 2002 and continuing through 2005. Until
September 15, 2000, upon an initial public equity offering of common stock for
cash, up to 35% of the aggregate principal amount of the New Notes originally
outstanding may be redeemed at the option of the Company at a redemption price
stipulated in the Indenture. The Indenture limits, among other things,
dividends, incurrence of additional indebtedness and other restricted payments
as defined and contains cross default provisions with the Company's Senior
Indebtedness. Debt issuance costs of $5.5 million will be amortized over the
term of the New Notes.
Note 5
Concurrent with the consummation of the Merger, the Company entered into the
New Credit Facility with a syndicate of lending institutions party thereto (the
"Lenders"), which agreement provides for an aggregate principal amount of loans
of up to $110 million. Loans under the New Credit Facility consist of $82.5
million in aggregate principal amount of term loans (the "Term Loan Facility"),
which facility includes a $45.0 million tranche A term loan subfacility, a $37.5
million tranche B term loan subfacility, and a $27.5 million revolving credit
facility (the "Revolving Credit Facility"), which facility includes a
subfacility for swingline borrowings and a sublimit for letters of credit. The
Company used the Term Loan Facility and a portion of the Revolving Credit
Facility to provide a portion of the funding necessary to consummate the Merger.
Indebtedness under the Term Loan Facility and the Revolving Credit Facility
initially bears interest at a rate based (at the Company's option) upon (i)
LIBOR for one, two, three or six months, plus 2.25% with respect to the Tranche
A Term Loan Facility and the Revolving Credit Facility or plus 2.75% with
respect to the Tranche B Term Loan Facility, or (ii) the Alternate Base Rate (as
defined in the New Credit Facility) plus .75% with respect to the Tranche A Term
Loan Facility and the Revolving Credit Facility or plus 1.25% with respect to
the Tranche B Term Loan Facility; provided, however, the interest rates are
subject to several quarter point reductions in the event the Company meets
certain performance targets.
The Tranche B Term Loan Facility matures on the seventh anniversary of the
closing under the New Credit Facility. The Tranche A Term Loan Facility and the
Revolving Credit Facility mature on the sixth anniversary of the closing under
the New Credit Facility. The Term Loan shall be subject to repayment according
to quarterly amortization of principal based upon the Scheduled Amortization (as
defined in the New Credit Facility).
The New Credit Facility provides for mandatory prepayment of the Term Loan
Facility and the Revolving Credit Facility until certain financial ratios are
attained by the Company. Prepayments on the Term Loan Facility are applied to
reduce scheduled amortization payments as provided in the New Credit Facility.
The mandatory prepayments defined in the New Credit Facility include: (a) 100%
of the net cash proceeds received by the Company, or any subsidiary from asset
sales (subject to de minimus baskets, certain other defined exceptions, and
reinvestment provisions), net of selling expenses and taxes to the extent such
taxes are paid; (b) 50% of Excess Cash Flow pursuant to an annual cash sweep
arrangement; (c) 100% of the net cash proceeds from the issuance of equity by
the Company or any subsidiary subject to de minimus baskets and certain
exceptions. In addition, the Company may prepay the New Credit Facility in
whole or in part at any time without penalty, subject to reimbursement of
certain costs of the Lenders.
9
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company is required to pay to the Lenders in the aggregate a commitment
fee equal to 1/2% per annum on the committed undrawn amount of the Revolving
Credit Facility during the preceding quarter, provided that this fee may be
subject to reduction in the event the Company meets certain performance targets.
The New Credit Facility requires the Company to meet certain financial tests,
including a minimum fixed charge coverage ratio, minimum interest coverage ratio
and maximum leverage ratio. The New Credit Facility also contains additional
restrictions which, among other things, limit additional indebtedness, liens,
sales of assets and business combinations. The Company is in compliance with
all financial covenants.
Note 6
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- -------
<S> <C> <C>
Finished Goods............................... $10,822 $ 8,853
Work-in-Process.............................. 1,893 876
Raw Materials................................ 8,349 6,615
Supplies..................................... 211 140
------- -------
$21,275 $16,484
======= =======
</TABLE>
Note 7
Effective January 1, 1988, the Company elected to be taxed as a Subchapter S
Corporation under the provisions of the Internal Revenue Code. Under these
provisions, the Company did not pay a corporate level tax on its taxable income.
Rather, the Company's taxable income or loss was passed through to the
shareholders and included on their individual income tax returns. No provision
for income taxes has been made in the accompanying combined financial statements
for the three months or nine months ended March 31, 1997; however, a pro forma
income tax provision is presented in the statement of operations.
As a result of the Company's termination as an S Corporation on July 1, 1997,
the Company became a C Corporation effective July 1, 1997. For tax years
subsequent to July 1, 1997, the Company's taxable income will be subject to a
corporate level income tax. Accordingly, the following deferred tax assets and
liabilities were established with a net charge to earnings on July 1, 1997 (in
thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Reserve for equipment to be disposed............. $ 1,423
Accrued expenses................................. 359
Reserve for inventory............................ 298
Allowance for co-op advertising.................. 153
Allowance for doubtful accounts.................. 92
Other............................................ 67
-------
Total deferred tax assets........................... $ 2,392
Deferred tax liability:
Tax depreciation in excess of book............... (4,062)
-------
Net deferred tax liability.......................... $(1,670)
=======
</TABLE>
10
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The estimated effective income tax rate was 37% for the nine months ended
March 31, 1998. The Company has recorded income tax expense of $2.6 million
which represents the charge of $1.67 million for the change to a C Corporation
status and a charge of $0.9 million on the income for the nine months ended
March 31, 1998.
Note 8
Pro forma net income (loss) per common share (both basic and diluted) and pro
forma weighted average common shares outstanding are based on the common shares
outstanding after the recapitalization and the termination of the Company's S
Corporation status discussed above. Earnings have been reduced by pro forma
income tax expense of $799,000 and $1,748,000 for the three months ended and
nine months ended March 31, 1997, respectively.
Note 9
In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 establishes simplified standards for computing and presenting earnings
per share ("EPS"). Under SFAS 128 the presentation of primary EPS was replaced
with a presentation of basic EPS. Basic EPS is computed excluding dilution
caused by common stock equivalents such as stock options, and therefore, tends
to be slightly higher than primary EPS. The presentation of fully diluted EPS
was replaced with a presentation of diluted EPS. Diluted EPS is computed in a
similar fashion to how fully diluted EPS was computed. The Company adopted this
pronouncement to report results of operations for the three months and the six
months ended December 31, 1997. Previously reported EPS were required to be
restated to conform to SFAS 128. There was no impact on previously reported
EPS.
Note 10
In 1997, the Company commenced a computer system conversion project in order
to facilitate the Merger. This conversion requires the purchase of new computer
hardware and software which will also incorporate year 2000 solutions. Most of
the costs of this project will be capitalized and amortized for a period not to
exceed five years. The Company expects to complete this conversion by early
1999.
Note 11
Various claims and lawsuits are pending against the Company. In the opinion
of the Company's management, the potential loss on all claims will not be
significant to the Company's financial position or results of operations.
The Company is self-insured for medical and dental benefits for its employees
and their covered dependents. Medical claims exceeding $60,000 per covered
individual are covered through a private insurance carrier.
11
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Net Sales. Net sales increased to $34.8 million in the third quarter of fiscal
1998 from $26.6 million in the comparable period of the prior year, an increase
of $8.2 million. The increase was the result of the inclusion of Dogloo net
sales of $8.4 million and a decrease in the net sales of the Company of $0.2
million. This decrease of $0.2 million was the result of several factors,
including lower sporting goods and other sales which was partially offset by
higher pet product sales. Sporting goods sales decreased $0.8 million due to
lower sales of tackle boxes and a large customer's overstocked position in golf
cases, which reduced shipments in the current quarter. Sales also decreased
$1.3 million due to the decision to discontinue the resin furniture business,
which historically carried low gross profit margins. These decreases were
offset by higher pet product sales of $1.5 million due primarily to increased
sales of kennels and an increase of $0.4 million in outside resin sales
generated by the Spectrum facility. For the first nine months of fiscal 1998,
sales increased $35.9 million from the comparable prior year, primarily as a
result of the inclusion of Dogloo net sales of $34.5 million and $1.4 million
increase in Company sales.
Gross Profit. Gross profit increased to $9.8 million in the third quarter of
fiscal 1998 from $7.7 million in the comparable period of the prior year, an
increase of $2.1 million. As a percentage of net sales, gross margin decreased
slightly to 28.1% in the third quarter of fiscal 1998 from 29.0% in the
comparable period of the prior year. The Company's gross profit as a percentage
of net sales was unfavorably affected by lower factory utilization due to the
merging of the two companies' facilities during the quarter. For the first nine
months of fiscal 1998, gross profit increased to $38.4 million compared to $23.4
million in the same period of the previous year. As a percentage of net sales,
gross margin increased to 33.6% from 30.0% in the same period of last year. The
increase was the result of several factors, including the inclusion of Dogloo's
results and the improvement of the Company's gross margin on a stand-alone
basis. During the quarter ended September 30, 1996, the Company discontinued
custom molding, which historically carried a low gross margin. The Company's
gross profit as a percentage of net sales was also favorably affected by a
decrease in the cost of the principal raw material, plastic resin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $8.4 million in the third quarter of fiscal
1998 from $5.4 million in the comparable period of the prior year, an increase
of $3.0 million or 55.6%. The increase was the result of several factors
including higher expenses due to Dogloo expenses being included after the
merger, the amortization of goodwill associated with the merger of $0.4 million,
and an increase in other expenses of $1.1 million for higher freight and
advertising. As a percentage of net sales, S,G&A spending increased to 24.1% in
the third fiscal quarter of fiscal 1998 from 20.2% in the comparable period of
the prior year. S,G&A expenses for the first nine months of fiscal 1998
increased to $22.9 million, up from $15.8 million in the same period of the
prior year primarily due to the inclusion of expenses related to the Dogloo
merger, the amortization of goodwill associated with the Dogloo merger, higher
freight and management fees.
Interest expense. Interest expense increased to $4.1 million in the third
fiscal quarter of 1998 from $0.3 million in the comparable period of the prior
year, primarily due to additional debt incurred in conjunction with the
recapitalization and merger in the first quarter of fiscal 1998. Interest
expense in the first nine months also consists of fees and expenses associated
with the related bridge financing of $2.5 million and $0.4 million related to
the New Credit Facility and the Notes. These bridge financing fees and expenses
were charged to expense as a result of the refinancing of the Company which was
completed concurrent with the merger of the Company with Dogloo on September 19,
1997.
Provision for income taxes. The provision for income taxes of $2.6 million for
the first nine months ended March 31, 1998, is composed of a charge of $1.67
million for the change to a C Corporation status and a charge of
12
<PAGE>
$0.9 million on income for the first nine months at an effective rate of 37%. No
provision was recorded for the three month or the nine month periods ended March
31, 1997, due to the Company's S Corporation status.
Net (loss) income. The net loss for the quarter ended March 31, 1998, was
$1.7 million compared to net income of $2.1 million for the comparable period of
the prior year, a decrease of $3.8 million. Net loss for the first nine months
of fiscal 1998 was $0.1 million compared to net income of $4.6 million in the
same period of the previous year. The change in net income primarily reflects
the factors discussed above.
Liquidity and Capital Resources
Total debt outstanding increased $151.8 million to $167.3 million at March 31,
1998, as compared to the amount outstanding at June 30, 1997. This increase is
due to the recapitalization of the Company completed July 1, 1997, and the
merger with Dogloo completed September 19, 1997.
The outstanding debt is comprised of bank borrowings of $82.3 million and
Notes of $85.0 million. The bank borrowings are comprised of a Term Loan
Facility of $82.3 million and a Revolving Credit Facility of $27.5 million, of
which none was outstanding at March 31, 1998. Note 5 to the Financial
Statements outlines the terms and conditions of the Term Loan Facility and the
Revolving Credit Facility. Note 4 to the Financial Statements outlines the
terms and conditions of the New Notes.
Because 50% of the Company's outstanding borrowing at March 31, 1998, and the
additional availability of $27.5 million from the Revolving Credit Facility are
at floating interest rates, the Company is subject to interest rate volatility.
The weighted average interest rate on all floating rate borrowings at March 31,
1998, was 8.2%.
Management anticipates incurring capital expenditures for the fiscal year
ending June 30, 1998, of approximately $9.0 million relating to upgraded
machinery and tooling. The Company anticipates that it will incur certain non-
recurring expenditures related to the integration of the operations of Doskocil
and Dogloo. The estimated total cash requirements of these expenditures this
fiscal year is approximately $8.0 million. Such charges include costs related to
consolidation of manufacturing and distribution facilities, severance
obligations, and integration of management information systems. Management
expects these non-recurring costs to be initially funded through cash flows and
borrowings under the Revolving Credit Facility.
The Company believes cash provided by operations and available under existing
credit facilities will be sufficient to fund working capital and capital
expenditure requirements during the next twelve months.
Year 2000 Risks: The "Year 2000" issue concerns the potential exposures
relating to the automated generation of business and financial misinformation
resulting from the application of computer programs which have been written
using two digits, rather than four, to define the applicable year of business
transactions. In 1997, the Company commenced a computer system conversion
project in order to facilitate its merger with Dogloo. This project addresses
Year 2000 issues and is expected to be completed in early 1999. A failure by
the Company to successfully address its Year 2000 issues on a timely basis could
have a material adverse effect on the Company's business or results of
operations. Additionally, many of the Company's suppliers, customers and
creditors also face similar Year 2000 issues which, if not adequately addressed
by those companies, could also have a material adverse effect on the Company's
business or results of operations.
Forward Looking Statements
This quarterly report on Form 10Q contains certain forward-looking statements
made in good faith by the Company pursuant to the "safe harbor" provisions of
Section 21E of the Securities and Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended. These statements are qualified
by certain factors which may cause variances between actual and projected
results, including, but not limited to, (i) the Company's substantial leverage
and debt service obligations, (ii) the restrictive covenants and asset
encumbrances under the Company's Senior Credit facility and Indenture, (iii) the
success of the integration effort of the Company with Dogloo, including systems
integration and Year 2000 matters, (iv) the seasonality and quarterly
fluctuations
13
<PAGE>
in the Company's business, (v) the Company's dependence on raw material pricing
and availability, (vi) the concentration of Company's main customers, (vii) the
company's reliance on trademark, patent and proprietary information, (viii)
intense competition in the Company/s industry, and (ix) limited market data and
the susceptibility to changing economic conditions. For further information,
refer to the Risk Factors section included in the Company's Offer to Exchange
dated February 23, 1998.
14
<PAGE>
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule (for electronic filing only)
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter for which this report
is filed.
15
<PAGE>
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.
Doskocil Manufacturing Company, Inc.
(Registrant)
/s/ GARY E. KLEINJAN
Date: May 8, 1998 ____________________________________________
Gary E. Kleinjan
President and Chief Executive Officer
(Principal Executive Officer)
/s/ DONALD J. FRITSCHEN
Date: May 8, 1998 ____________________________________________
Donald J. Fritschen
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,958
<SECURITIES> 0
<RECEIVABLES> 21,855
<ALLOWANCES> 517
<INVENTORY> 21,275
<CURRENT-ASSETS> 54,837
<PP&E> 101,959
<DEPRECIATION> 48,404
<TOTAL-ASSETS> 165,939
<CURRENT-LIABILITIES> 17,722
<BONDS> 164,437
0
9,161
<COMMON> 33,980
<OTHER-SE> (20,782)
<TOTAL-LIABILITY-AND-EQUITY> 165,939
<SALES> 114,281
<TOTAL-REVENUES> 114,281
<CGS> 75,899
<TOTAL-COSTS> 75,899
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 191
<INTEREST-EXPENSE> 13,424
<INCOME-PRETAX> 2,486
<INCOME-TAX> 2,586
<INCOME-CONTINUING> (100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (100)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
