<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 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)
<TABLE>
<S> <C>
TEXAS 75-1281683
(State of Incorporation) (I.R.S. Employer Identification No.)
4209 BARNETT BOULEVARD
ARLINGTON, TEXAS 76017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (817) 467-5116
</TABLE>
- --------------------------------------------------------------------------------
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 [ X ] No [ _ ]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S NO PAR VALUE COMMON STOCK
AT SEPTEMBER 30, 1998, WAS 3,103,144.
1
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DOSKOCIL MANUFACTURING COMPANY, INC.
------------------------------------
SEC FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
--------------------------------
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations.......................................................... 3
Balance Sheets.................................................................... 4
Statements of Cash Flows.......................................................... 5
Notes to Financial Statements..................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................. 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................. 15
SIGNATURES..................................................................................... 16
</TABLE>
2
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Part I - Financial Information
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
(In thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 39,975 $ 30,435
Cost of goods sold................................................................. 24,349 20,066
--------- --------
GROSS PROFIT.................................................................... 15,626 10,369
Selling, general and administrative expense........................................ 9,280 5,739
--------- --------
OPERATING INCOME................................................................ 6,346 4,630
Other (income) expense:
Net interest expense (three months ended September 30, 1997 includes
amortization of bridge financing costs of $2,514)............................... 4,205 5,262
Other, net...................................................................... 4 13
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES............................................... 2,137 (645)
Less provision for income taxes.................................................... 915 1,431
--------- --------
NET INCOME (LOSS)............................................................... 1,222 (2,076)
Preferred stock dividends.......................................................... 229 497
--------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS.............................. $ 993 $ (2,573)
========= ========
NET INCOME (LOSS) PER COMMON SHARE (BASIC AND DILUTED)............................. $ 0.32 $ (1.67)
========= ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING......................................... 3,104 1,544
========= ========
</TABLE>
See accompanying notes.
3
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DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
(Dollars in thousands) 1998 1998
- -----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.................................................... $ 20 $ 1,910
Accounts receivable, net..................................................... 24,734 18,350
Inventories (Note 7)......................................................... 30,306 21,415
Other current assets......................................................... 2,557 1,029
--------- ---------
Total current assets...................................................... 57,617 42,704
Property, plant and equipment, net............................................. 54,495 51,628
Fixed assets held for sale..................................................... 3,259 3,259
Goodwill....................................................................... 58,237 59,725
Debt issuance costs............................................................ 4,913 5,158
Other assets................................................................... 1,877 1,627
--------- ---------
Total assets.............................................................. $ 180,398 $ 164,101
========= =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
Current liabilities:
Accounts payable............................................................. $ 10,663 $ 4,629
Accrued liabilities.......................................................... 8,576 9,197
Current portion of long-term debt............................................ 5,375 4,125
Accrued interest............................................................. 334 2,635
Accrued taxes................................................................ 522 422
Payroll and benefits payable................................................. 3,376 3,319
--------- ---------
Total current liabilities................................................. 28,846 24,327
Line of credit................................................................. 11,900 --
Long-term debt................................................................. 76,750 78,094
Senior subordinated notes...................................................... 85,000 85,000
--------- ---------
Total liabilities......................................................... 202,496 187,421
Shareholders' (deficit) equity:
Series C preferred stock, no par value: authorized shares--25,000,000,
issued and outstanding---9,161,567 at September 30, 1998.................. 9,161 9,161
Common stock, no par value: authorized shares--15,000,000, issued and
outstanding--3,103,144 at September 30, 1998 and June 30, 1998............ 34,262 34,262
Accumulated deficit.......................................................... (65,521) (66,743)
--------- ---------
Total shareholders' deficit............................................... (22,098) (23,320)
--------- ---------
Total liabilities and shareholders' (deficit) equity...................... $ 180,398 $ 164,101
========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................................. $ 1,222 $ (2,076)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization................................................... 2,779 2,066
Amortization of debt issuance costs............................................. 245 32
Deferred income taxes .......................................................... 915 1,670
Other........................................................................... -- 1
Changes in:
Receivables................................................................... (6,384) (446)
Inventories................................................................... (8,891) 338
Payables...................................................................... 6,034 (537)
Accrued liabilities and other................................................. (4,530) 283
--------- ---------
Net cash (used in) provided by operating activities (8,610) 1,331
--------- ---------
INVESTING ACTIVITIES:
Repurchase of leased assets....................................................... -- (18,724)
Capital expenditures.............................................................. (5,061) (1,421)
Increase in other assets.......................................................... (25) (36)
Cash of acquired business......................................................... -- 1,335
Disposal of assets................................................................ -- 3
--------- ---------
Net cash used in investing activities........................................... (5,086) (18,843)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term debt...................................................... -- 262,500
Payments of long-term debt........................................................ (94) (102,319)
Payment of debt of acquired business.............................................. -- (34,584)
Proceeds from revolving credit agreement.......................................... 11,900 5,500
Payments of revolving credit agreement............................................ -- (10,250)
Proceeds from sale of common stock................................................ -- 3,000
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................................... -- (86,135)
Debt issuance costs............................................................... -- (4,227)
Recapitalization costs............................................................ -- (1,316)
Cash dividends.................................................................... -- (469)
--------- ---------
Net cash provided by financing activities....................................... 11,806 19,267
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (1,890) 1,755
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...................................... 1,910 2,066
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 20 $ 3,821
========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 three months ended September 30,
1997 are operations for Dogloo, Inc., from and after September 19, 1997, the
date it merged with and into Doskocil Manufacturing Company, Inc. (the
"Corporation"). The financial data prior to September 19, 1997, reflect the
combined historical financial position, results of operations and cash flows for
Doskocil Manufacturing Company, Inc., and Spectrum Polymers, Ltd., ("Spectrum"),
as they were under common control. The term "Doskocil" refers to Doskocil
Manufacturing and Spectrum prior to giving effect to the merger, the term
"Dogloo" refers to Dogloo, Inc., prior to giving effect to the merger and the
term "Company" refers to the combined entity comprised of Doskocil and Dogloo.
In the opinion of management, all normal recurring adjustments considered
necessary for a fair presentation of the results for the periods covered have
been included. Operating results for the three month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended June 30, 1999. Due to the increased number of pet shelters sold
during periods of inclement weather, the Company typically earns a majority of
its income from operations during the first and second fiscal quarters.
Additional information is contained in the Company's Annual Report on Form 10-K
for the year ended June 30, 1998.
NOTE 2
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130).
This statement establishes standards for reporting and display of comprehensive
income and its components in the financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by and
distribution to owners. For the first quarter of fiscal year 1999 and 1998 there
were no differences between comprehensive income and net income.
NOTE 3
Effective July 1, 1997, the Corporation 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 Corporation's common stock; (3) the
Corporation's Articles of Incorporation were amended to establish the
Corporation 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 Corporation 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.
6
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
NOTE 4
On September 19, 1997, Doskocil 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 Doskocil. 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") and Enterprise entities ("Enterprise).
Pursuant to the Merger Agreement, each issued and outstanding share of Dogloo
Series A Preferred Stock was converted into one share the Company's Series B
Preferred Stock and each issued and outstanding share of Dogloo Series B
Preferred Stock was converted into one share of the Company's 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
the Company and thereby became options to purchase shares of the Company's
Common Stock, with adjustments to such options to reflect the ratio into which
shares of Dogloo Common Stock were converted into shares of the Company's Common
Stock.
NOTE 5
In connection with the Merger, Doskocil purchased an aggregate of 249,703
shares of Dogloo Common Stock for an aggregate price of approximately $0.4
million 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, the Company 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 the
Company's 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 the Company's Series A
Preferred Stock were converted into 1,064,816 shares of the Company's Common
Stock.
Concurrent with the closing of the Merger, the Company used proceeds of the
Credit Facility (see Note 6) to redeem for $14.9 million (including dividends
accrued through September 19, 1997) 598,959 shares of the Company's Common Stock
and 359,376 shares of the Company's Series A Preferred Stock owned by
Enterprise, and to redeem for $3.6 million, 133,102 shares of the Company's
Common Stock and 106,482 shares of the Company's Series A Preferred Stock from
various Enterprise entities.
Immediately following the Merger, the Company also used proceeds from the
Offering and the Credit Facility to redeem the following additional shares of
Series B Preferred Stock and Series C Preferred Stock (i) 6,890,000 shares of
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 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 Series C Preferred Stock held by Enterprise for $1.3 million
(including dividends accrued through September 19, 1997); and (iv) 2,141,260
shares of 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 Series C Preferred Stock which remained outstanding.
In connection with the conversion and redemption of shares of Series A
Preferred Stock, the Company borrowed $0.5 million under the Credit Facility to
pay cumulative dividends on such shares of Series A Preferred Stock as of the
date of the Merger.
7
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
The Merger was accounted for as a purchase transaction under generally
accepted accounting principles and, accordingly, the purchase price was
allocated on the basis of the estimated fair value of the assets acquired. This
purchase price allocation resulted in goodwill of approximately $61.2 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, 1997, and reflect the increased interest costs, preferred
stock dividends and the amortization of the intangibles associated with the
transaction and related income tax effect:
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
(Dollars in thousands except per share amounts) 1997
- ------------------------------------------------------------------------------
<S> <C>
Net sales $ 43,726
Operating income 5,470
Net loss attributable to common shareholders (731)
Loss per share (basic and diluted) $ (0.24)
- ------------------------------------------------------------------------------
</TABLE>
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 "Subordinated Notes") pursuant to the Offer to Exchange dated
February 23, 1998, effective as of March 30, 1998. Discounts and commissions
aggregated 3% of the face amount of the Subordinated Notes and net proceeds to
the Company were $82.5 million. Interest on the Notes was, and on the
Subordinated Notes is, payable semi-annually on March 15 and September 15 of
each year commencing on March 15, 1998. The Subordinated Notes are a general,
unsecured obligation of the Company, subordinated in right of payment to all
senior debt of the Company. The Subordinated 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
Subordinated Notes originally outstanding may be redeemed at the option of the
Company at a redemption price stipulated in the Subordinated Notes. The
Subordinated Notes limit, 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 $5.8 million will be amortized over the term of the Subordinated Notes
and the Credit Facility.
NOTE 6
Concurrent with the consummation of the Merger, the Company entered a
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 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"), and 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.
8
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
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 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 September 19, 2004. The tranche
A term loan facility and the Revolving Credit Facility mature on September 19,
2003. The Term Loan Facility shall be subject to repayment according to
quarterly amortization of principal based upon the Scheduled Amortization (as
defined in the Credit Facility). The 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 Credit Facility. The mandatory prepayments defined in the 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 Credit
Facility in whole or in part at any time without penalty, subject to
reimbursement of certain costs of the Lenders.
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 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 Credit Facility also contains additional
restrictions which, among other things, limit additional indebtedness, liens,
sales of assets and business combinations.
A failure to comply with the obligations contained in the Credit Facility
or the Subordinated Notes, if not cured or waived, could permit acceleration of
the related indebtedness and acceleration of indebtedness under other
instruments that contain cross-acceleration or cross-defaults.
NOTE 7
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
(Dollars in thousands) 1998 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Finished Goods $ 15,579 $ 11,794
Work-in-Process 2,170 2,107
Raw Materials 12,385 7,325
Supplies 172 189
-------- --------
$ 30,306 $ 21,415
- ----------------------------------------------------------------------------------
</TABLE>
9
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
NOTE 8
As a result of the Corporation's termination as an S Corporation on July 1,
1997, the Corporation became a C corporation and its taxable income is subject
to a corporate level income tax. Accordingly, deferred tax assets and
liabilities were established with a net charge to earnings on July 1, 1997 of
$1.67 million:
The estimated effective tax rate was 43% for the three months ended
September 30, 1998, which includes an adjustment for the amortization of Dogloo
goodwill that is not deductible for tax purposes. As the net operating loss
carry forward and net deductible temporary differences which existed at the date
of the Dogloo merger are realized, the associated tax benefit will reduce
goodwill. Realization of net operating losses and deductible temporary
differences generated subsequent to the date of the Dogloo merger will be
recognized as a reduction of income tax expenses.
NOTE 9
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 $0.1 million
per covered individual are covered through a private insurance carrier.
10
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DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Doskocil Manufacturing Company, Inc. (the "Company") is among the leading
plastic pet products companies in the United States, manufacturing a broad range
of plastic and other pet products sold through a distribution network of more
than 2,000 retailers. The following discussion should be read in conjunction
with the financial statements and notes for the quarter ended September 30, 1998
included in this report.
This quarterly report of Form 10-Q contains certain forward-looking
statements and information relating to the Company that are based on belief of
management as well as assumptions made by and information currently available to
management. Such forward-looking statements typically contain words such as
"anticipates" "believes" "estimates" "expects" or similar words indicating that
future outcomes are uncertain. In accordance with "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important factors, though not
necessarily all such factors, that could cause future outcome to differ
materially from those set forward in the forward-looking statements. For
additional risk factors affecting the Company, see "Introduction and Note on
Presentation--Forward-Looking Statements" and "Business--Risks Related to the
Business" in the Doskocil Manufacturing Company, Inc. Annual Report on Form 10-K
for the year ended June 30, 1998.
RESULTS OF OPERATIONS
NET SALES increased to $40.0 million in the first quarter of fiscal 1999
from $30.4 million in the comparable period of the prior year, an increase of
$9.6 million. The increase was primarily the result of the inclusion of $9.9
million of Dogloo net sales offset by slightly lower Doskocil sales of $0.3
million. This decrease of $0.3 million was the result of several factors,
including lower sporting goods and other sales which were partially offset by
higher pet products and outside resin sales. Sporting goods sales decreased $1.8
million primarily due to the inability of the Company to fulfill certain
customer orders (see "Outlook"). Pet product sales increased by $0.5 million due
primarily to increased sales of kennels and outside resin sales generated by the
Spectrum facility which increased by $1.0 million.
GROSS PROFIT increased to $15.6 million in the first quarter of fiscal 1999
from $10.4 million in the comparable period of the prior year, an increase of
$5.2 million. As a percentage of net sales, gross margin increased to 39.1% in
the first quarter of fiscal 1999 from 34.1% in the comparable period of the
prior year. The Company's gross profit as a percentage of net sales was
favorably affected by, among other things, a decrease in the cost of its
principal raw material, plastic resin, offset by slightly higher labor costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to $9.3 million in
the first quarter of fiscal 1999 from $5.7 million in the comparable period of
the prior year, an increase of $3.6 million or 61.7%. The increase was the
result of several factors including higher expenses as a result of the merger
with Dogloo (the "Merger"), including higher freight of approximately $1.0
million, the amortization of goodwill associated with the Merger of $0.5
million, and an increase in other expenses such as advertising and promotions of
approximately $1.0 million. The Company expects these costs, including in
particular the higher level of freight costs, to continue for at least the next
several quarters and is implementing a 3% price increase to somewhat offset
these increased costs. (See "Outlook"). As a percentage of net sales, S,G&A
spending increased to 23.2% in the first fiscal quarter of fiscal 1999 from
18.9% in the comparable period of the prior year.
INTEREST EXPENSE decreased to $4.2 million in the first fiscal quarter of
1999 from $5.3 million in the comparable period of the prior year. Interest
expense in the prior period included fees and expenses associated with the
related bridge financing of $2.5 million and $0.4 million related to the Credit
Facility and the Notes. These bridge financing fees and expenses were charged to
expense as a result of the refinancing which was completed concurrent with the
Merger on September 19, 1997.
11
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PROVISION FOR INCOME TAXES of $1.4 million for the first quarter ended
September 30, 1997, was composed of a charge of $1.67 million for the change to
a C corporation status and a benefit of $0.2 million on the loss for the quarter
at an effective rate of 37%. The income tax provision for the first quarter
ended September 30, 1998, was $.9 million. The effective tax rate increased 6%,
to 43%, primarily due to the amortization of Dogloo goodwill which is not
deductible for tax purposes.
NET INCOME for the quarter ended September 30, 1998, was $1.2 million
compared to net loss of $2.1 million for the comparable period of the prior
year, an increase of $3.3 million. The change in net income primarily reflects
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Total debt outstanding on September 30, 1998 increased by $11.8 million
from June 30, 1998 due primarily to additional borrowings against the Company's
revolving credit agreement. Total outstanding debt is comprised of bank
borrowings of $94.0 million and Subordinated Notes of $85.0 million. The bank
borrowings are comprised of a Term Loan Facility of $82.1 million and a
Revolving Credit Facility of $27.5 million, of which $11.9 was outstanding at
September 30, 1998. Note 5 to the Financial Statements outlines the terms and
conditions of the Subordinated Notes. At September 30, 1998 the Company had
$15.6 million of availability on the Revolving Credit Facility.
Because 50% of the Company's outstanding borrowing at September 30, 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 September 30, 1998, was 7.9%.
Management anticipates incurring capital expenditures for the fiscal year
ending June 30, 1999, of approximately $13.0 million relating to upgraded
machinery, tooling and information systems. Management plans to fund these
capital expenditures through cash flow from operations and, if necessary,
borrowings under the Revolving Credit Facility. The capital requirements for
fiscal 1999 may be partially offset by cash proceeds from the sale of the
Indianapolis facility.
The Company believes cash provided by operations, equipment leases and cash
available under existing credit facilities will be sufficient to fund working
capital and capital expenditure requirements during the next twelve months.
The Company's Term Loan Facility and Revolving Credit Facility contain a
number of financial covenants that require the Company to meet certain financial
ratios and tests, including a minimum fixed charge coverage ratio, minimum
interest coverage ratio and maximum leverage ratio. The Company was in
compliance with its financial and other loan covenants at September 30, 1998.
The Company's continued ability to satisfy its loan covenants depends, in part,
on the amount of time required to successfully address the difficulties
described below. (See "Outlook"). Until corrected, the impact of these
difficulties on the Company's financial performance will adversely affect the
Company's ability to satisfy its financial covenants. In the event the Company
is temporarily unable to meet certain of its financial covenants, the Company
anticipates requesting waivers and/or amendments to its Term Loan Facility and
Revolving Credit Facility.
The Company is subject to a number of risks and uncertainties which are set
forth under the caption "Business--Risks Related to the Business" in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
OUTLOOK
During the first quarter of 1999, the Company continued to experience
difficulties, similar to last quarter, in fulfilling certain customer orders on
a timely basis. This difficulty is attributable to a number of factors,
including problems experienced in managing the combined product lines of
Doskocil and Dogloo, accurately forecasting customer demand, a surge in customer
orders, production scheduling, logistic constraints and achieving planned
production rates from certain equipment. The Company is continuing to take short
and long-term corrective actions, but expects these difficulties to continue
into the next several quarters. The Company will continue to incur increased
short-term costs (including increased labor and freight costs), which will
unfavorably impact results until the corrective actions achieve satisfactory
results. The Company also encountered software complications during
12
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
the first phase of the implementation of its new information system, which may
delay this process until after the first of the year. The Company determined
that it was necessary to return to it's current computer systems to insure the
ability to meet customer demand during its busiest time of the year.
YEAR 2000
In the next fifteen months, most large companies will face a potentially
serious information systems problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the year 2000. This problem could force information systems
to either shut down or provide incorrect data or information. The Company began
the process of identifying the necessary changes to its computer programs and
hardware as well as assessing the progress of its significant vendors in their
remediation efforts in 1997. The discussion below details the Company's efforts
to ensure Year 2000 compliance.
In 1997, the Company began a $3.6 million project to upgrade virtually all
of its computer systems. Most of the costs of this project will be capitalized
and amortized over a period not to exceed five years. Over the last fifteen
months, capital expenditures include approximately $3.3 million related to this
project. The upgrade program covers a wide array of computing applications,
including financial, manufacturing and distribution systems, as well as
ancillary systems such as factory control, electronic data information, e-mail,
and desktop computers. All of the new equipment and software should be Year 2000
compliant, and the Company is obtaining certifications from the manufacturers
and suppliers. The upgrade process is underway, and even with the above
mentioned delay, is scheduled to be complete by the first part of calendar 1999.
The Company anticipates having time to test the system, in order to verify that
its critical systems are Year 2000 compliant, prior to December 31, 1999.
The Company is contacting certain of its material suppliers and vendors to
determine whether they are taking reasonable precautions against potential Year
2000 problems and seeking to determine whether any material delays or
disruptions in their ability to supply goods and services to the Company are
likely to occur. Despite these efforts, the Company cannot guarantee that it
will not experience any problems in the year 2000. Business operations depend
largely upon daily interaction with numerous third parties over which the
Company exercises no control. The Company believes third party compliance is its
greatest risk in term of magnitude. The situation presents a very large
challenge for all businesses. Management believes the Company is acting
reasonably to meet that challenge.
At this time, the Company fully expects to be Year 2000 compliant. The
Company has not developed any specific contingency plan in the event it fails to
complete its Year 2000 projects. The Company will continue to monitor internal
and external progress and, if it appears necessary, contingency plans will be
made.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" which introduces a "management approach" for
identifying reportable industry segments of an enterprise. The Company plans to
adopt the standard, effective with its fiscal year 1999 annual financial
statements. The Company is currently evaluating the effects of this change on
its financial statement disclosures.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP-98-1"). SOP 98-1 provides
guidelines for companies to capitalize or expense costs incurred to develop or
obtain internal-use software. The Company will adopt SOP 98-1 effective July 1,
1999. The incremental impact on results of operations is not expected to be
material.
13
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SUMMARY COMBINED HISTORICAL FINANCIAL INFORMATION
The following table sets forth summary historical financial information on
a combined basis for the three months beginning July 1, 1998 and 1997, which is
being shown for comparison purposes only:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
(Unaudited)
--------------------------
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pet Products $ 32,378 $ 34,804
Sporting goods and other 5,219 7,024
Furniture and custom molding -- 156
Outside resin sales 2,378 392
-------- --------
Combined net sales 39,975 42,376
Cost of sales 24,349 27,549
-------- --------
Gross profit 15,626 14,827
Selling, general and administrative expense 9,280 8,714
-------- --------
Operating income 6,346 6,113
Adjustments:
Depreciation and amortization 2,779 2,768
-------- --------
EBITDA/(1)/ $ 9,125 $ 8,881
- ----------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ The term EBITDA as used above means operating income plus depreciation
and amortization. EBITDA should not be construed as a substitute for
income from operations or be considered a better indicator of liquidity
or cash flow from operating activities which is determined in accordance
with generally accepted accounting principles. EBITDA is included herein
to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditures and working
capital requirements. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs.
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: NOVEMBER 13, 1998 ________________________________________
GARY E. KLEINJAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/s/ JOHN J. CASEY
DATE: NOVEMBER 13, 1998 ________________________________________
JOHN J. CASEY
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 20
<SECURITIES> 0
<RECEIVABLES> 25,034
<ALLOWANCES> 300
<INVENTORY> 30,306
<CURRENT-ASSETS> 57,617
<PP&E> 104,065
<DEPRECIATION> (46,311)
<TOTAL-ASSETS> 180,398
<CURRENT-LIABILITIES> 28,846
<BONDS> 173,650
0
9,161
<COMMON> 34,262
<OTHER-SE> (65,521)
<TOTAL-LIABILITY-AND-EQUITY> 180,398
<SALES> 39,975
<TOTAL-REVENUES> 39,975
<CGS> 24,349
<TOTAL-COSTS> 24,349
<OTHER-EXPENSES> 9,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,205
<INCOME-PRETAX> 2,137
<INCOME-TAX> 915
<INCOME-CONTINUING> 1,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,222
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
