<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
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: December 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 Boulevard
Arlington, Texas 76017
(Address of Principal Executive (Zip Code)
Offices)
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 [X] No [_]
The number of shares outstanding of the registrant's no par value Common
Stock at December 31, 1998, was 3,107,144.
- -------------------------------------------------------------------------------
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<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
SEC FORM 10-Q
Quarter Ended December 31, 1998
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <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........................ 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 20
SIGNATURES........................................................ 21
</TABLE>
2
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
(Dollars in thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Net sales............................ $ 48,711 $ 49,071 $ 88,686 $ 79,506
Cost of goods sold................... 35,861 30,829 60,210 50,895
--------- --------- -------- --------
Gross profit....................... 12,850 18,242 28,476 28,611
Selling, general and administrative
expense............................. 11,017 8,831 20,297 14,508
Impairment of long-lived assets (Note
9).................................. 1,617 -- 1,617 --
--------- --------- -------- --------
Operating income................... 216 9,411 6,562 14,103
Other (income) expense:
Net interest expense (six months
ended December 31, 1997 includes
amortization of bridge financing
costs of $2,514).................. 4,408 3,868 8,613 9,130
Other, net......................... 7 (236) 11 (223)
--------- --------- -------- --------
Income (loss) before income taxes.. (4,199) 5,779 (2,062) 5,196
Less (benefit) provision for income
taxes............................... (915) 2,140 -- 3,594
--------- --------- -------- --------
Net income (loss).................. (3,284) 3,639 (2,062) 1,602
Preferred stock dividends............ 229 229 229 726
--------- --------- -------- --------
Net income (loss) attributable to
common shareholders................. $ (3,513) $ 3,410 $ (2,291) $ 876
========= ========= ======== ========
Net income (loss) per common share
(basic)............................. $ (1.13) $ 1.12 $ (.74) $ .38
========= ========= ======== ========
Net income (loss) per common share
(diluted)........................... $ (1.13) $ 1.11 $ (.74) $ .38
========= ========= ======== ========
Weighted average common shares
outstanding (basic)................. 3,104 3,055 3,104 2,300
========= ========= ======== ========
Weighted average common shares
outstanding (diluted)............... 3,104 3,069 3,104 2,314
========= ========= ======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30, December 31,
1998 1998 1997
------------ -------- ------------
(Unaudited) (Unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 3,318 $ 1,910 $ 9,556
Accounts receivable, net................. 27,190 18,350 22,070
Inventories (Note 6)..................... 27,948 21,415 23,023
Other current assets..................... 1,301 1,029 1,284
Deferred taxes........................... -- -- 7,497
-------- -------- --------
Total current assets................... 59,757 42,704 63,430
Property, plant and equipment, net......... 52,998 51,628 52,683
Fixed assets held for sale................. 3,259 3,259 3,500
Goodwill................................... 58,643 59,725 49,197
Debt issuance costs........................ 4,667 5,158 5,246
Other assets............................... 1,854 1,627 1,635
Deferred taxes............................. -- -- 1,407
-------- -------- --------
Total assets........................... $181,178 $164,101 $177,098
======== ======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable......................... $ 6,473 $ 4,629 $ 7,600
Accrued liabilities...................... 8,273 9,197 8,490
Current portion of long-term debt........ 6,375 4,125 250
Accrued interest......................... 2,547 2,635 2,533
Accrued taxes............................ 593 422 3,493
Payroll and benefits payable............. 3,433 3,319 2,900
-------- -------- --------
Total current liabilities.............. 27,694 24,327 25,266
Line of credit............................. 19,400 -- --
Long-term debt............................. 74,406 78,094 82,250
Senior subordinated notes.................. 85,000 85,000 85,000
Deferred taxes............................. -- -- 4,062
-------- -------- --------
Total liabilities...................... 206,500 187,421 196,578
Shareholders' (deficit) equity:
Series C preferred stock, no par value:
authorized shares--25,000,000, issued
and outstanding--9,161,567.............. 9,161 9,161 9,161
Common stock, no par value: authorized
shares--15,000,000, issued and
outstanding--3,107,144 at December 31,
1998, 3,103,144 at June 30, 1998 and
3,053,640 at December 31, 1997.......... 34,322 34,262 33,580
Accumulated deficit...................... (68,805) (66,743) (62,221)
-------- -------- --------
Total shareholders' deficit............ (25,322) (23,320) (19,480)
-------- -------- --------
Total liabilities and shareholders'
(deficit) equity...................... $181,178 $164,101 $177,098
======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Operating activities:
Net income (loss)................................... $ (2,062) $ 1,602
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 5,349 5,020
Amortization of debt issuance costs................ 491 197
Deferred income taxes.............................. -- 1,670
Other.............................................. -- (224)
Impairment of long-lived assets.................... 1,617 --
Changes in:
Receivables....................................... (8,840) 148
Inventories....................................... (6,533) 2,150
Payables.......................................... 1,844 (210)
Accrued liabilities and other..................... (1,287) 3,149
---------- -----------
Net cash (used in) provided by operating
activities........................................ (9,421) 13,502
---------- -----------
Investing activities:
Repurchase of leased assets......................... -- (18,724)
Capital expenditures................................ (7,168) (3,743)
Increase in other assets............................ (25) (200)
Cash of acquired business........................... -- 1,335
Disposal of assets.................................. -- 825
Other............................................... -- 3
---------- -----------
Net cash used in investing activities.............. (7,193) (20,504)
---------- -----------
Financing activities:
Proceeds from long-term debt........................ -- 262,500
Payments of long-term debt.......................... (1,438) (102,319)
Payment of debt of acquired business................ -- (34,584)
Proceeds from revolving credit agreement............ 19,400 5,500
Payments of revolving credit agreement.............. -- (12,750)
Proceeds from sale of common stock.................. 60 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..... -- (87,922)
Debt issuance costs................................. -- (4,637)
Recapitalization costs.............................. -- (1,394)
Cash dividends...................................... -- (469)
---------- -----------
Net cash provided by financing activities.......... 18,022 14,492
---------- -----------
Net increase in cash and cash equivalents........... 1,408 7,490
Cash and cash equivalents at beginning of year...... 1,910 2,066
---------- -----------
Cash and cash equivalents at end of period.......... $ 3,318 $ 9,556
========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
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 six months ended
December 31, 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 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 presented
have been included. Interim results are not based on physical counts of
inventory and, therefore, include estimates to arrive at cost of goods sold
for the period. A physical inventory is planned for March, 1999. Operating
results for the six month period ended December 31, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview". Additional information is contained in the Company's Annual Report
on Form 10-K for the year ended June 30, 1998.
Note 2. Accounting Standards
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 and
second quarters of fiscal year 1999 and 1998, there were no differences
between comprehensive income and net income.
Note 3. Recapitalization
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. Merger
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.
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 5) 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.
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
7
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 Six months ended
December 31, 1997 December 31, 1997
------------------ -----------------
(Dollars in thousands except per
share amounts)
<S> <C> <C>
Net sales................................ $49,071 $92,498
Operating income......................... 9,411 14,881
Net income attributable to common
shareholders............................ 3,410 2,679
Income per common share
(basic and diluted)..................... $ 1.12 $ 0.88
</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 are being amortized over the term of the
Subordinated Notes and the Credit Facility.
Note 5. Long Term Debt
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 a
$27.5 million revolving credit facility (the "Revolving Credit Facility")
which includes a subfacility for swingline borrowings and a sublimit for
letters of credit and term loans (the "Term Loan Facility") in an initial
aggregate principle amount of $82.5 million of which $80.8 million in
aggregate principal amount was outstanding as of December 31, 1998. The Term
Loan facility includes a $45.0 million tranche A term loan subfacility of
which $43.8 million in principal amount was outstanding as of December 31,
1998 and a $37.5 million tranche B term loan subfacility of which $37.0
million was outstanding as of December 31, 1998. 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.
The Credit Facility requires the Company to meet certain financial tests,
including a minimum fixed charge coverage ratio, minimum interest coverage
ratio and a maximum leverage ratio. The Credit Facility also contains
additional restrictions which, among other things, limit additional
indebtedness, liens, sales of assets and business combinations. As of December
31, 1998, the Company was not in compliance with the minimum interest coverage
ratio, the maximum leverage ratio, and the fixed charge coverage ratio under
the Credit Facility.
8
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The Company entered into an amendment to the Credit Facility as of February
10, 1999 (the "First Amendment") which provides, among other matters, for the
waiver of such covenant defaults, the revision of certain existing financial
covenants, including the addition of a minimum EBITDA requirement,and interest
rate increases of approximately .75% per annum as described below.
After giving effect to the First Amendment, 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 3.00% with respect to the tranche A term loan facility and the
Revolving Credit Facility or plus 3.50% with respect to the tranche B term
loan facility, or (ii) the Alternate Base Rate (as defined in the Credit
Facility) plus 1.50% with respect to the tranche A term loan facility and the
Revolving Credit Facility or plus 2.00% 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 30, 2004. The tranche
A term loan facility and the Revolving Credit Facility mature on September 30,
2003. The Term Loan Facility is subject to repayment according to quarterly
amortization of principal based upon the scheduled amortization set forth 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) up to 100% of the net cash proceeds
of certain indebtedness subject to certain exceptions and (d) 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.
There is no assurance that the Company will be able to comply with the
financial or other covenants set forth in the Credit Facility, as revised by
the First Amendment. 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. Based on its eighteen month forecast, management expects to meet all
covenants over that time period.
9
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 6. Inventory
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30, December 31,
1998 1998 1997
------------ -------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Finished Goods............................... $17,060 $11,794 $12,945
Work-in-Process.............................. 2,594 2,107 1,231
Raw Materials................................ 8,180 7,325 8,675
Supplies..................................... 114 189 172
------- ------- -------
$27,948 $21,415 $23,023
======= ======= =======
</TABLE>
Note 7. Income Taxes
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 effective tax rate for the six months ended December 31, 1998 was 0.0%
due to the net operating loss generated for the period, for which a valuation
allowance has been provided. 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 expense.
Note 8. Commitments and Contingencies
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.
Note 9. Impairment of Long-Lived Assets
During the second quarter of fiscal 1999, the Company experienced a failed
software system conversion (See Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000). Over the last
eighteen months, capital expenditures for this project were approximately $4.0
million, of which approximately one-half were implementation costs. As a
result of the failed conversion, management evaluated the costs related to the
system conversion and expensed those costs with minimal future benefit.
10
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 10. Net Income Per Share
Net income per share for the three months and the six months ended December
31, 1998 and December 31, 1997 are calculated as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
Dec. 31 Dec. 31 Dec. 31 Dec. 31
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss)........ $(3,513) $3,410 $(2,291) $ 876
======= ====== ======= ======
Average shares
outstanding during the
period:
Basic................... 3,104 3,055 3,104 2,300
Plus assumed exercise of
stock options.......... -- 14 -- 14
------- ------ ------- ------
Diluted................. 3,104 3,069 3,104 2,314
======= ====== ======= ======
Net income per share:
Basic................... $ (1.13) $ 1.12 $ (.74) $ .38
======= ====== ======= ======
Diluted................. $ (1.13) $ 1.11 $ (.74) $ .38
======= ====== ======= ======
</TABLE>
11
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
Doskocil Manufacturing Company, Inc. (the "Company") is among the leading
non-food pet products companies in the United States, manufacturing a broad
range of non-food 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 included in this report for the
quarter ended December 31, 1998.
This quarterly report of Form 10-Q contains certain forward-looking
statements and information relating to the Company that are based on the
opinion 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 qualified by cautionary language identifying important
factors, though not necessarily all such factors, which could cause future
outcome to differ materially from those set forward in the forward-looking
statements. For such qualifying statements and 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. The forward-looking statements contained herein include
the statements made under the caption "Planned Actions" and "Year 2000"
regarding steps being taken by the Company to improve its operations. There is
no assurance that the steps being taken will adequately address the
difficulties experienced or that delays will not occur in the implementation
of the Company's corrective actions.
Overview
As part of the merger of Dogloo and Doskocil, the Company identified
anticipated savings related to lower Selling, General and Administrative
expenses and lower manufacturing costs from the consolidation of Dogloo
facilities and lower resin costs for Dogloo products being made with Doskocil
manufactured resins. Most of these savings are being realized, with an
estimated benefit during the first six months of fiscal 1999 of $5.2 million.
Offsetting these savings was nearly $9.6 million in additional operating
costs for the same period. The Company spent approximately $4.0 million for
outside manufacturing, outside warehousing and inbound freight to meet
customer orders. In addition, the Company experienced $2.8 million in higher
costs for direct labor in manufacturing and $1.3 million in higher costs at
its distribution center in Arlington. The Company also incurred planned
spending of over $1.2 million for brand recognition advertising. The causes of
these increased costs include: difficulties in merging the combined product
lines of Doskocil and Dogloo; difficulties accurately forecasting customer
demand; inability to forecast surges in customer orders; production scheduling
difficulties; warehouse and shipping constraints; inability to meet planned
production rates; computer system problems; and the failure to build
sufficient inventory in the fourth quarter of fiscal year 1998.
Because of the operational problems described above, the Company was unable
to fulfill all customer orders on a timely basis, resulting in lost sales and
customers in some cases. To date, only one of the Company's top 20 customers
with approximately $1.7 million annual sales and several smaller accounts,
with total annual sales of approximately $3 million, ceased doing business with
the Company due to order fulfillment difficulties. The Company also believes it
lost additional opportunities for new product sales. Overall, customer demand
was up 8.1% for the first six months of fiscal 1999 compared to the same period
last year.
The first quarter of fiscal 1999 was negatively impacted by lost time due to a
physical inventory and computer problems. The second quarter of fiscal 1999 was
negatively impacted by a failed software system conversion that forced the
Company to re-implement its current computer system during its busiest time of
the year. Failure of this conversion increased costs and hampered the Company's
ability to manufacture, ship and invoice during a four-week period. (See--Year
2000).
12
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Company is continuing to take short and long-term corrective actions,
including those described below to address these matters. (See Planned
Actions). It has developed operational and financial plans for the next eighteen
months to reduce and ultimately eliminate the additional costs described above.
The Company's plans have been presented to its lenders and the all waivers and
amendments necessary to implement its plans have been approved. The Company
expects the effects of these difficulties and related increased short-term costs
(including increased labor and freight costs) to unfavorably impact results
until the corrective actions achieve satisfactory results.
Planned Actions
The Company has completed a comprehensive review of its operations and
developed an eighteen-month plan to eliminate the additional costs it has
recently experienced. Several of the key elements of this plan are described
below.
Management. The Company has strengthened several key positions by hiring new
managers in manufacturing, distribution and finance. Many of the problems
experienced came from functional departments taking actions without
understanding impacts on other functions. Management is building a culture
based on teamwork. The Company is improving and formalizing its sales and
operations planning and demand management functions.
Manufacturing. The Company is taking steps to increase machine and labor
efficiency and improve its ability to fulfill customer orders on a timely and
efficient basis. The Company has replaced certain key manufacturing personnel.
The new manufacturing team, including a new Senior Vice President of
Operations, is implementing "lean manufacturing" philosophy. Lean
manufacturing focuses on techniques that lower inventories and maximize
throughput, both of which are important to improvements in the Company's
operations. The Company is also moving from production planning based on
forecasts to planning that calculates requirements based on safety stocks less
customer orders received. This "pull" strategy minimizes dependence on
forecast accuracy, increases inventory turns and makes more capacity
available.
The Company has accelerated the movement of certain manufacturing operations
to a newly completed facility located on its Arlington, Texas campus. The
facility is expected to lower variable costs and increase capacity. In addition,
a capital spending plan has been approved to add molds and machinery to
eliminate certain bottlenecks and increase capacity. The capital Plan was based
on requirements derived from the eighteen month capacity forecast of market
demand and designed to minimize outside manufacturing and in-bound freight. The
impact of building inventory prior to the heavy shipping season to meet cusomer
demand has been included in the operational and financial plan. The Company's
outsourcing policy has been changed to minimize total costs by keeping high
value and volume SKU production inside and outsourcing low volume items.
Distribution. New management has been put in place with experience in the
management techniques described above. The Company is exploring the
construction of additional storage facilities and the purchase of equipment to
reduce outside storage costs and improve efficiency. In addition, the Company
plans to undertake a "densification" program in late fiscal 2000 that is
expected to increase the capacity of existing warehouse facilities.
Sales and marketing. During the second quarter, the Company decided to
combine its two brands, PetMate and PetMate Pro, into one brand--PetMate. This
step and an analysis of the Company's product sales is expected to reduce the
Company's SKUs from 1,100 to approximately 400. The reduction in SKUs is
expected to simplify product production and increase manufacturing
efficiencies. The Company expects to realize these benefits late in the second
half of fiscal 1999.
13
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
During the second quarter, the Company reduced its consumer advertising plan
by approximately $2 million for the last half of fiscal 1999 and redirected
some of these funds for additional trade promotions. The Company nonetheless
has available and has assigned the financial and operational resources
necessary to support the planned launch of new products. Future consumer
advertising spending will be minimized until the Company has the capability to
meet existing product demand.
Product engineering. The Company is focusing on implementing major
engineering and mold modifications on its high volume SKUs that are expected
to have significant profit improvements. Specific opportunities have been
identified and are expected to lower raw material and manufacturing costs of
existing products.
Information technology. The Company has decided to pursue a lower risk
information technology strategy. Various options are under consideration, but
all scenarios require implementation by this summer, prior to the heavy
shipping season. The Company has taken a $1.6 million charge during the second
fiscal quarter due to the failed system conversion against the capitalized
implementation costs. (See Year 2000).
Finance and control. The Company has replaced certain key finance and
accounting personnel including the CFO and Controller. The Company will be
implementing activity-based costing for cost management and product pricing.
Comprehensive financial budgets and forecasting techniques for the next eighteen
months have been implemented. The profit drivers have been defined and are being
measured. The Company believes that the recently negotiated First Amendment to
the Credit Facility gives it the financial flexibility necessary to realize its
plans.
Results of Operations
Net sales for the second quarter were $48.7 million slightly below $49.1
million in the comparable period of the prior year or a decrease of $0.4
million. The decrease was primarily the result of lower sporting goods sales
of $1.6 million, partially offset by an increase in outside resin sales.
Sporting goods sales decreased due to the inability of the Company to fulfill
certain customer orders and strong promotions in the prior year. Pet sales
were flat despite very strong second quarter 1998 sales and this year's
fulfillment problems. Computer system problems during the month of October
negatively affected the Company's ability to ship and invoice, pushing some
sales into the third quarter of fiscal 1999. Unfilled orders, including
backorders and orders for future shipments at the end of the second quarter
was $11.7 million compared to $7.1 million in the comparable period of the prior
year. For the first six months of fiscal 1999, sales increased $9.2 million from
the same period of last year primarily due to the inclusion of Dogloo net sales
for the period of July through September 19.
Gross profit decreased to $12.9 million in the second quarter of fiscal 1999
from $18.2 million in the comparable period of the prior year, a decrease of
$5.3 million. As a percentage of net sales, gross margin decreased to 26.4% in
the second quarter of fiscal 1999 from 37.2% in the comparable period of the
prior year. The Company's gross profit as a percentage of net sales was
unfavorably affected by, among other things, inefficiencies in manufacturing
and distribution and problems associated with the failed computer systems
conversion. Spending levels for overhead and labor were higher than expected
while throughput and machine efficiency were lower. These problems arose from
the inability to move into new efficient manufacturing facilities before the
high season and the Company's inability to reach targeted capacity levels.
Failure to manufacture sufficient inventory ahead of the high season and the
failure to accurately forecast demand compounded operational problems. Late in
the first quarter, the Company decided to use outside manufacturing to meet
certain customer demand. Margins in the second quarter reflect the higher
associated costs
14
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
including expenses for outside molders, inbound freight and outside storage.
For the first six months of fiscal 1999, gross profit was down $0.1 million
from the same period of last year. As a percentage of net sales, gross margins
decreased to 32.1% in the first six months of fiscal 1999, down from 36.0% in
the same period of fiscal year 1998.
Selling, general and administrative expenses increased to $11.0 million in
the second quarter of fiscal 1999 from $8.8 million in the comparable period
of the prior year, an increase of $2.2 million or 24.8%. The increase was the
result of several factors including $0.1 million increase in amortization of
goodwill associated with the Merger and higher advertising and promotions of
approximately $2.0 million. The Company expects advertising costs to be lower
over the next several quarters due to lower seasonal spending and the
completion of the fall television advertising program. As a percentage of net
sales, SG&A spending increased to 22.6% in the second fiscal quarter of fiscal
1999 from 18.0% in the comparable period of the prior year. For the first six
months ended December 1998, SG&A expenses increased $5.8 million or 39.9% from
the same period of the prior year. The increase during the six month period
was the result of several factors, including higher expenses as a result of
the merger, higher freight, amortization of goodwill and advertising and
promotion expenses.
Impairment of long-lived assets during the second quarter of fiscal 1999,
includes a $1.6 million charge as a result of the failed software conversion.
(See Year 2000) During the second quarter of fiscal 1999, the attempted
implementation of a new software system failed. This charge resulted from
management's assessment that the implementation costs have minimal future
benefit.
Interest expense increased to $4.4 million in the second fiscal quarter of
1999 from $3.9 million in the comparable period of the prior year. Interest
expense for the six months ended December 31, 1998 decreased $0.5 million from
the same period of the prior year. Interest expense in the six months period
ending December 31, 1997 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 that was completed
concurrent with the Merger on September 19, 1997.
Provision for income taxes of $3.6 million for the six months ended December
31, 1997 was composed of a charge of $1.67 million for the change to a C
corporation status and $1.9 million tax on income for the period at an effective
rate of 37%. The income tax provision for the six months ended December 31, 1998
was 0.0% due to the net operating loss generated during the period for which a
valuation allowance has been provided. June 30, 1998 and December 31, 1998
included a valuation allowance of approximately $5.4 million and $6.1 million,
respectively, for deferred tax assets which were included in the calculation of
goodwill due to deferred tax assets as of the purchase date and also includes
deferred tax assets included in the provision for income taxes.
Net loss for the second quarter ended December 31, 1998, was $3.3 million
compared to net income of $3.6 million for the comparable period of the prior
year, a decrease of $6.9 million. Net loss for the six months ended December
31, 1998 was $2.1 million, $3.7 million lower than net income in the same
period of the prior year. The change in net income primarily reflects the
factors discussed above.
Liquidity and Capital Resources
Total debt outstanding on December 31, 1998 increased by $18.0 million from
June 30, 1998, due primarily to additional borrowings against the Company's
revolving credit agreement, offset by a payment on the term notes in December.
Total outstanding debt is comprised of bank borrowings of $100.2 million and
Subordinated Notes of $85.0 million. The bank borrowings are comprised of a
Term Loan Facility of $80.8 million and a Revolving Credit Facility of $27.5
million, of which $19.4 was outstanding at December 31, 1998. Note 4 to the
Financial Statements outlines the terms and conditions of the Subordinated
Notes. At December 31, 1998 the Company had $8.1 million of availability on
the Revolving Credit Facility and $3.3 million in cash. Cash and marketable
securities were down $6.2 million from December 31, 1997 primarily due to
increases in inventories and accounts receivable (as described below), lower
accounts payable, higher capital expenditures and lower operating income
somewhat offset by increased short-term borrowings.
Because the Term Loan Facility and 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
December 31, 1998, was 7.6%.
15
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Management anticipates incurring capital expenditures for the fiscal year
ending June 30, 1999, of approximately $19.0 million relating to improving
machinery efficiency and capacity, tooling for new products and additional
mold capacity, warehousing improvements and upgrading information systems.
Management plans to fund these capital expenditures through cash flow from
operations and, if necessary, borrowings under the Revolving Credit Facility.
The cash required to fund the capital requirements for fiscal 1999 may be
partially offset in the event the Company sells the Indianapolis facility or
certain other assets related to non-core businesses.
Working Capital, defined here as accounts receivable plus inventories less
accounts payable, was $13.6 million higher at December, 1998 from June, 1998.
Working capital at December, 1998 was $11.2 million higher than December a year
ago. The primary increases are reflected in inventories and accounts receivable.
Accounts Receivable increased due to higher December sales and the invoicing
problems relating to the failed computer conversion in October. Inventories
increased due to inaccurate forecasting, combined with a production philosophy
of making the forecast, and not having a computer in October to use for
production planning and purchasing. By working more closely with customers to
develop better demand forecasts and utilizing a "pull" manufacturing philosophy,
the Company expects to reduce inventories while maintaining service levels.
Reducing working capital is an important objective for management.
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 requires the
Company to meet certain financial tests, including a minimum fixed charge
coverage ratio, minimum interest coverage ratio and a maximum leverage ratio.
The Credit Facility also contains additional restrictions that, among other
things, limit additional indebtedness, liens, sale of assets and business
combinations. At December 31, 1998, the Company was not in compliance with its
the minimum interest coverage ratio, the maximum leverage ratio and the fixed
charge coverage ratio under the Credit Facility. The Company entered into an
amendment to the Credit Facility on February 10, 1999 (the "First Amendment")
which provides, among other matters, for the waiver of such covenant defaults,
the revision of certain existing financial covenants, including the addition
of a minimum EBITDA requirement and interest rate increases of approximately
0.75% per annum.
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.
Year 2000
In the next twelve months, most 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. A detailed discussion of Y2K issues is
presented below.
State of Readiness. In 1997, the Company began a project to upgrade
virtually all of its computer systems, including changes to address the Year
2000 problem. The systems 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. To date, the Company has
16
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
replaced significant aspects of its information systems infrastructure,
including computer room facilities such a air conditioning and alarm systems,
communications network facilities (including data switches and telephone
switches), desktop computers and ancillary business systems, and the process
of scheduling systems for the injection molding machines. The Company is still
in the process of completing a comprehensive review of possible Year 2000
impacts on production and operational support areas of the Company.
In October 1998, the Company attempted to implement a new manufacturing,
distribution and financial hardware and software system to replace the
Company's current mainframe system, which is not Year 2000 compliant. This
attempted implementation encountered complications and the decision was made
to pursue other alternatives. At this point, the Company is currently in the
process of obtaining proposals for the outsourcing of mainframe processing and
is also researching other software products.
All of the Company's new equipment and software should be Year 2000
compliant, and the Company is obtaining certifications from the manufacturers
and suppliers of such software and equipment. 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.
Year 2000 Costs. The Company originally estimated the cost of its entire
information systems upgrade, including Year 2000 compliance, to be
approximately $3.6 million. Due to the complications encountered with the
implementation, the Company has increased its budget for the entire project to
approximately $5.0 million. Most of the costs of the Company's information
systems upgrade will be capitalized and amortized over a period not to exceed
five years. Over the last eighteen months, capital expenditures for this
project were approximately $4.0 million, of which $1.6 million of these costs
had minimal future benefit and were charged to expense in the second quarter
of fiscal 1999 as the result of a failed system conversion.
Year 2000 Risks. 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.
Contingency Plans. Based on the Company's expectation to implement new
software, the Company fully expects to be Year 2000 compliant. The Company's
contingency plan in the event it fails to complete its Year 2000 projects
would be to hire outside programmers to modify and make its current computer
programs Year 2000 compliant. The Company will continue to monitor internal
and external progress.
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
17
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
"management approach" for identifying reportable industry segments of an
enterprise. The Company plans to adopt this 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.
Summary Combined (Doskocil and Dogloo) Historical Financial Information
The following table sets forth the summary historical financial information
on a combined basis, for the three and six months beginning July 1, 1998 and
1997, which is being shown, for comparison purposes only:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -----------------
(unaudited) (unaudited)
1998 1997 1998 1997
--------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Pet products............................ $ 41,670 $ 41,885 $ 74,048 $ 76,689
Sporting goods and other................ 4,387 5,978 9,606 13,002
Furniture and custom molding............ -- -- -- 156
Outside resin sales..................... 2,654 1,208 5,032 1,600
--------- --------- -------- --------
Combined net sales...................... 48,711 49,071 88,686 91,447
Cost of goods sold...................... 35,861 30,829 60,210 58,378
--------- --------- -------- --------
Gross profit............................ 12,850 18,242 28,476 33,069
Selling, general and administrative
expense................................ 11,017 8,831 20,297 17,545
Impairment of long-lived assets......... 1,617 -- 1,617 --
--------- --------- -------- --------
Operating income........................ 216 9,411 6,562 15,524
Adjustments:
Depreciation, amortization and
impairment............................. 4,187 2,992 6,966 5,760
--------- --------- -------- --------
EBITDA(1)............................... $ 4,403 $ 12,403 $ 13,528 $ 21,284
========= ========= ======== ========
</TABLE>
- --------
(1) The term EBITDA as used above means operating income plus depreciation,
amortization and asset impairments. 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.
18
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of Second Quarter to First Quarter:
The following table summarizes the first two fiscal quarters of 1999
(unaudited):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------ Six Months Ended
September 30, 1998 December 31, 1998 December 31, 1998
------------------ ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Pet Products............ $32,378 $41,670 $74,048
Sporting goods.......... 5,219 4,387 9,606
Outside resin sales..... 2,378 2,654 5,032
------- ------- -------
Net sales............... 39,975 48,711 88,686
Cost of goods sold...... 24,349 35,861 60,210
------- ------- -------
Gross profit............ 15,626 12,850 28,476
Selling, general and
administrative
expense................ 9,280 11,017 20,297
Impairment of long-lived
assets................. -- 1,617 1,617
------- ------- -------
Operating income........ 6,346 216 6,562
Adjustments:
Depreciation,
amortization and
impairment............. 2,779 4,187 6,966
------- ------- -------
EBITDA(1)............... $ 9,125 $ 4,403 $13,528
======= ======= =======
</TABLE>
- --------
(1) The term EBITDA as used above means operating income plus depreciation,
and amortization and asset impairments. 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.
While net sales increased $8.7 million from the first quarter to the second
quarter, EBITDA declined $4.7 million. This decrease is due to several factors:
higher cost of goods sold, higher advertising and promotion costs along with
higher other general and administrative expenses. These increases were somewhat
offset by profit from higher sales volumes, lower freight and lower variable
costs of goods sold as a percent of sales. Higher costs of inventory
manufactured by outside vendors in the first quarter had the effect of reducing
gross margin in the second quarter as the inventory was sold. In addition,
certain in-house manufacturing and distribution inefficiencies also decreased
second quarter margins.
Cost of goods sold includes raw materials, manufacturing and distribution
costs. Key increases in these areas include costs for outside manufacturing, in-
bound freight and outside warehousing, along with higher in-house manufacturing
and distribution center costs. The move to a seven day, 24-hour a day operation
increased costs significantly without a proportional increase in production.
Management believes that the inability to achieve the plant designed throughput
and engineering cost standards were key cost issues facing the Company in the
second quarter. These areas contributed to critical customer service problems
and caused manufacturing and distribution costs to be much higher than projected
in absolute dollars and as a percent of sales.
19
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Part II -- Other Information
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 First Amendment to Credit Agreement, dated February 10, 1999
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.
20
<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)
Date: February 16, 1999
_____________________________________
Gary E. Kleinjan
President and Chief Executive
Officer
(Principal Executive Officer)
Date: February 16, 1999
_____________________________________
John J. Casey
Chief Financial Officer
(Principal Accounting Officer)
21
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment"), dated as
---------------
of February 10, 1999, is entered into among DOSKOCIL MANUFACTURING COMPANY, a
Texas corporation (the "Borrower"), the lenders listed on the signature pages
--------
hereof (collectively, the "Lenders"), and NATIONSBANK, N.A. (successor by merger
-------
to NationsBank of Texas, N.A.), as the Administrative Agent (in said capacity,
the "Administrative Agent").
--------------------
A. The Borrower, the Lenders and the Administrative Agent are parties to
that certain Credit Agreement, dated as of September 19, 1997 (the "Credit
------
Agreement"; the terms defined in the Credit Agreement and not otherwise defined
- ---------
herein shall be used herein as defined in the Credit Agreement).
B. The Borrower, the Lenders and the Administrative Agent desire to (i)
amend the Credit Agreement and (ii) waive certain Events of Default under the
Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Borrower, the
Lenders and the Administrative Agent covenant and agree as follows:
1. AMENDMENTS TO CREDIT AGREEMENT.
------------------------------
(a) The definition of "Applicable Base Rate Margin" set forth in Section
--------------------------- -------
1.1 of the Credit Agreement is hereby amended to read as follows:
- ---
"'Applicable Base Rate Margin' means the following per annum
---------------------------
percentages, applicable in the following situations:
Facility A Term Loan Facility B
Advances and Term Loan
Applicability Revolving Advances Advances
------------- ------------------ --------
(a) Initial Pricing Period 0.750% 1.250%
----------------------
(b) Subsequent Pricing Period
-------------------------
(1) The Leverage Ratio is greater 1.500% 2.000%
than or equal to 4.50 to 1
(2) The Leverage Ratio is less 1.000% 1.500%
than 4.50 to 1 but greater than
or equal to 3.50 to 1
<PAGE>
(3) The Leverage Ratio is less than 0.250% 0.750%
3.50 to 1
During the Subsequent Pricing Period, the Applicable Base Rate Margin
payable by the Borrower on the Base Rate Advances outstanding hereunder
shall be subject to reduction or increase, as applicable and as set forth
in the table above, on a quarterly basis according to the performance of
the Borrower as tested by using the Leverage Ratio calculated as of the end
of each fiscal quarter; provided, that each adjustment in the Base Rate
--------
Basis as a result of a change in the Applicable Base Rate Margin shall be
effective with respect to Base Rate Advances (i) made following receipt by
the Administrative Agent of the financial statements required to be
delivered pursuant to Section 6.2 or 6.3 hereof, as applicable, for each
----------- ---
such fiscal quarter, and the corresponding Compliance Certificate required
pursuant to Section 6.4 hereof, on the date of making such Base Rate
-----------
Advance and (ii) outstanding on the date of receipt of such financial
statements and Compliance Certificate referred to in clause (i) immediately
preceding, on the date which is two Business Days following the date of
receipt of such financial statements and Compliance Certificate. If such
financial statements and Compliance Certificate are not received by the
Administrative Agent by the date required, the Applicable Base Rate Margin
shall be determined as if the Leverage Ratio is greater than 4.50 to 1
until such time as such financial statements and Compliance Certificate are
received."
(b) The definition of "Applicable LIBOR Rate Margin" set forth in Section
---------------------------- -------
1.1 of the Credit Agreement is hereby amended to read as follows:
- ---
"'Applicable LIBOR Rate Margin' means the following per annum
----------------------------
percentages, applicable in the following situations:
Facility A Term Loan Facility B
Advances and Term Loan
Applicability Revolving Advances Advances
------------- ------------------ --------
(a) Initial Pricing Period 2.250% 2.750%
----------------------
(b) Subsequent Pricing Period
-------------------------
(1) The Leverage Ratio is 3.000% 3.500%
greater than or equal
to 4.50 to 1
(2) The Leverage Ratio is 2.500% 3.000%
less than 4.50 to 1
but greater than or
equal to 3.50 to 1
(3) The Leverage Ratio is 1.750% 2.250%
less than 3.50 to 1
-2-
<PAGE>
During the Subsequent Pricing Period, the Applicable LIBOR Rate Margin
payable by the Borrower on the LIBOR Advances outstanding hereunder shall
be subject to reduction or increase, as applicable and as set forth in the
table above, on a quarterly basis according to the performance of the
Borrower as tested by using the Leverage Ratio calculated as of the end of
each fiscal quarter; provided, that each adjustment in the LIBOR Basis as a
--------
result of a change in the Applicable LIBOR Rate Margin shall be effective
with respect to LIBOR Advances (i) made following receipt by the
Administrative Agent of the financial statements required to be delivered
pursuant to Section 6.2 or 6.3 hereof, as applicable, for each such fiscal
----------- ---
quarter, and the corresponding Compliance Certificate required pursuant to
Section 6.4 hereof, on the date of making such LIBOR Advance and (ii)
-----------
outstanding on the date of receipt of such financial statements and
Compliance Certificate referred to in clause (i) immediately preceding, on
the date which is two Business Days following the date of receipt of such
financial statements and Compliance Certificate. If such financial
statements and Compliance Certificate are not received by the
Administrative Agent by the date required, the Applicable LIBOR Rate Margin
shall be determined as if the Leverage Ratio is greater than 4.50 to 1
until such time as such financial statements and Compliance Certificate are
received."
(c) Section 1.1 of the Credit Agreement is hereby amended by adding the
-----------
defined term "Cash Flow" thereto in proper alphabetical order to read as
---------
follows:
"'Cash Flow' means, for any date of calculation, calculated for the
---------
Borrower and its Subsidiaries, on a consolidated basis, an amount equal to
the sum of (a) EBITDAR, minus (b) cash income tax paid."
(d) Section 1.1 of the Credit Agreement is hereby further amended by
------------
adding the defined term "EBITDAR" thereto in proper alphabetical order to read
-------
as follows:
"'EBITDAR' means, for any period, determined in accordance with GAAP
-------
on a consolidated basis for the Borrower and its Subsidiaries, the sum of
(a) EBITDA, plus (b) lease expense pursuant to Operating Leases."
(e) The definition of "Fixed Charges" set forth in Section 1.1 of the
------------- -----------
Credit Agreement is hereby amended to read as follows:
"'Fixed Charges' means, for any date of calculation, calculated for
-------------
Borrower and its Subsidiaries on a consolidated basis, the sum of, without
duplication, (a) scheduled principal payments in respect of Indebtedness,
plus (b) cash interest expense (including interest expense pursuant to
Capitalized Lease Obligations), plus (c) lease expense pursuant to
Operating Leases."
(f) The definition of "Fixed Charge Coverage Ratio" set forth in Section
--------------------------- -------
1.1 of the Credit Agreement is hereby amended to read as follows:
- ----
-3-
<PAGE>
"'Fixed Charge Coverage Ratio' means the ratio of Cash Flow to Fixed
---------------------------
Charges, calculated for the four consecutive fiscal quarters ending on the
date of calculation."
(g) Section 1.1 of the Credit Agreement is hereby further amended by
-----------
deleting the defined term "Pretax Cash Flow" therefrom.
----------------
(h) Section 4.1 of the Credit Agreement is hereby amended by adding the
-----------
following new subsection (x) thereto to read as follows:
"(x) Year 2000 Compliance. The Borrower (i) initiated a review and
--------------------
assessment of all areas within its and each of its Subsidiaries' business
and operations (including those affected by suppliers and vendors) that
could be adversely affected by the "Year 2000 Problem" (that is, the risk
that computer applications used by the Borrower or any of its Subsidiaries
(or its suppliers and vendors) may be unable to recognize and perform
properly date-sensitive involving certain dates prior to and any date after
December 31, 1999), (ii) developed a plan, as amended, and timeline for
addressing the Year 2000 Problem on a timely basis, and (iii) to date,
implemented that plan, as amended, in accordance with that timetable,
except to the extent that a failure to do so could not reasonably be
expected to have a Material Adverse Effect. The Borrower reasonably
believes that all computer applications (including those of its suppliers
and vendors) that are material to its or any of its Subsidiaries' business
and operations will on a timely basis be able to perform properly date-
sensitive functions for all dates before and after January 1, 2000 (that
is, be "Year 2000 Compliant"), except to the extent that a failure to do so
could not reasonably be expected to have a Material Adverse Effect."
(i) Article 5 of the Credit Agreement is hereby amended by adding a new
---------
Section 5.13 thereto to read as follows:
- ------------
"Section 5.13 Year 2000 Compliance. The Borrower will promptly
--------------------
notify the Administrative Lender in the event the Borrower discovers or
determines that any computer application (including those of its suppliers
and vendors) that is material to its or any of its Subsidiaries' business
and operations will not be Year 2000 Compliant on a timely basis, except to
the extent that such failure could not reasonably be expected to have a
Material Adverse Effect."
(j) Section 7.7 of the Credit Agreement is hereby amended to read as
-----------
follows:
"Section 7.7 Capital Expenditures. The Borrower shall not, and shall
--------------------
not permit any Subsidiary of the Borrower to, make or commit to make any
Capital Expenditures after the Agreement Date in an aggregate amount in
excess of an amount equal to the sum of (a) $25,000,000 plus (b) 5% of
cumulative net revenues of the Borrower and its Subsidiaries from and after
the Agreement Date."
-4-
<PAGE>
(k) Section 7.11 of the Credit Agreement is hereby amended to read as
------------
follows:
"Section 7.11 Maximum Leverage Ratio. At the end of each fiscal
----------------------
quarter occurring below or at the end of each fiscal quarter occurring
during the periods indicated below, the Borrower shall not permit the
Leverage Ratio to be greater than the ratio set forth below opposite such
fiscal quarter or the period in which such fiscal quarter occurs:
Fiscal Quarter or Period Ratio
------------------------ -----
At December 31, 1999 and March 31, 2000 5.50 to 1
At June 30, 2000 5.00 to 1
From and including September 30, 2000 and thereafter 4.50 to 1"
(l) Section 7.12 of the Credit Agreement is hereby amended to read as
------------
follows:
"Section 7.12 Minimum Fixed Charge Coverage Ratio. At the end of each
-----------------------------------
fiscal quarter occurring during this Agreement commencing with March 31,
1999, the Borrower shall not permit the Fixed Charge Coverage Ratio to be
less than 1.25 to 1."
(m) Section 7.13 of the Credit Agreement is hereby amended to read as
------------
follows:
"Section 7.13 Interest Coverage Ratio. At the end of each fiscal
-----------------------
quarter occurring below or at the end of each fiscal quarter occurring
during the periods indicated below, the Borrower shall not permit the
Interest Coverage Ratio to be less than the ratio set forth below opposite
such fiscal quarter or the period in which such fiscal quarter occurs:
Fiscal Quarter or Period Ratio
------------------------ -----
At March 31, 1999 1.25 to 1
At June 30, 1999 and September 30, 1999 1.50 to 1
From and including December 31, 1999 and thereafter 1.75 to 1"
(n) Article 7 of the Credit Agreement is hereby amended by adding a new
---------
Section 7.19 thereto to read as follows:
"Section 7.19 Minimum EBITDA. The Borrower shall not permit EBITDA to
--------------
be less than (a) $4,500,000 for the fiscal quarter ending March 31, 1999,
(b) $6,500,000 for the fiscal quarter ending June 30, 1999, (c) $10,000,000
for the fiscal quarter ending September 30, 1999 and (d) $12,000,000 for
the fiscal quarter ending December 31, 1999."
-5-
<PAGE>
(o) Exhibit F to the Credit Agreement is hereby amended to be in the form
---------
of Exhibit F to this First Amendment.
---------
2. WAIVER. The Lenders hereby waive the Event of Default that occurred
------
under the Credit Agreement as a result of the failure of the Borrower to comply
with Sections 7.11 and 7.13 of the Credit Agreement at the fiscal quarter ending
------------- ----
December 31, 1998. The waiver provided herein does not (a) affect any other
covenants or provisions of the Credit Agreement and (b) relate to any fiscal
quarter-end other than December 31, 1998.
3. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
--------------------------------------------------------
execution and delivery hereof, the Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendments contemplated by the
foregoing Section 1 and the waiver contemplated by the foregoing Section 2:
(a) the representations and warranties contained in the Credit Agreement
are true and correct on and as of the date hereof as if made on and as of such
date;
(b) no event has occurred and is continuing which constitutes a Default or
an Event of Default;
(c) the Borrower has full power and authority to execute and deliver this
First Amendment, and this First Amendment and the Credit Agreement, as amended
hereby, constitute the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms,
except as enforceability may be limited by applicable debtor relief laws and by
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law) and except as rights to indemnity may be limited
by federal or state securities laws; and
(d) no authorization, approval, consent, or other action by, notice to, or
filing with, any governmental authority or other Person (including the Board of
Directors of the Borrower), is required that has not been obtained for the
execution, delivery or performance by the Borrower of this First Amendment.
4. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be effective
---------------------------
as of February 10, 1999 (including the revisions to the Applicable Base Rate
Margin and the Applicable LIBOR Rate Margin provided herein, it being understood
that all interest accrued under the Credit Agreement prior to such date at the
rates set forth therein prior to giving effect to this First Amendment), subject
to the following:
(a) the Administrative Agent shall have received a counterpart of this
First Amendment executed by Lenders comprising the Determining Lenders;
-6-
<PAGE>
(b) the Administrative Agent shall have received counterparts of this
First Amendment executed by the Borrower;
(c) the representations and warranties set forth in Section 3 of this
First Amendment shall be true and correct; and
(d) the Administrative Agent and the Lenders shall have received in form
and substance satisfactory to the Administrative Agent and the Lenders, such
other documents and certificates as the Administrative Agent shall require.
5. AMENDMENT FEE. The Borrower covenants and agrees to pay an amendment
-------------
fee to the Lenders which execute and deliver this First Amendment to the
Administrative Lender (or its counsel) not later than 5:00 p.m., Dallas time,
February 10, 1999 in an amount equal to the product of (a) 0.20% (or 25% with
respect to each Lender whose executed First Amendment is received prior to
satisfaction of the conditions of effectiveness set forth in Section 4(a) of
this First Amendment or with respect to the Lender whose execution and delivery
of this First Amendment causes such condition of effectiveness to be satisfied)
multiplied by (b)(i) with respect to each Lender having a portion of the
Revolving Credit Commitment, an amount equal to such Lender's portion of the
Revolving Credit Commitment and (ii) with respect to each Lender which is owed
Facility A Term Loan Advances or Facility B Term Loan Advances, the aggregate
principal amount of Facility A Term Loan Advances and Facility B Term Loan
Advances owed to such lender. Such amendment fee shall be paid in immediately
available funds and shall be due and payable to each Lender eligible for payment
pursuant to the preceding sentence no later than one Business Day after the date
which this First Amendment becomes effective. The Borrower agrees that the
failure to pay the amendment fee provided in this Section 5 shall be an Event of
Default under Section 8.1(b)(ii) of the Credit Agreement.
------------------
6. REFERENCE TO THE CREDIT AGREEMENT.
---------------------------------
(a) Upon the effectiveness of this First Amendment, each reference in the
Credit Agreement to "this Agreement", "hereunder", or words of like import shall
mean and be a reference to the Credit Agreement, as affected and amended by this
First Amendment.
(b) The Credit Agreement, as amended by this First Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
7. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
-------------------------
reasonable costs and expenses of the Administrative Agent in connection with the
preparation, reproduction, execution and delivery of this First Amendment, and
the other instruments and documents to be delivered hereunder (including the
reasonable fees and out-of-pocket expenses of counsel for the Administrative
Agent with respect thereto and with respect to advising the Administrative Agent
as to its rights and responsibilities under the Credit Agreement, as amended by
this First Amendment).
-7-
<PAGE>
8. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in
-------------------------
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which when taken together shall constitute but one and
the same instrument.
9. GOVERNING LAW; BINDING EFFECT. This First Amendment shall be governed
-----------------------------
by and construed in accordance with the laws of the State of Texas and shall be
binding upon the Borrower and each Lender and their respective successors and
assigns.
10. HEADINGS. Section headings in this First Amendment are included
--------
herein for convenience of reference only and shall not constitute a part of this
First Amendment for any other purpose.
11. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FIRST
----------------
AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AS TO THE SUBJECT MATTER THEREIN AND HEREIN AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS BETWEEN THE PARTIES.
================================================================================
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
================================================================================
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as of the date first above written.
BORROWER: DOSKOCIL MANUFACTURING COMPANY
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-9-
<PAGE>
ADMINISTRATIVE AGENT: NATIONSBANK, N.A. as the Administrative Agent
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
LENDERS: NATIONSBANK, N.A., as a Lender, Swing Line Bank
and Issuing Bank
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-10-
<PAGE>
DLJ CAPITAL FUNDING, INC.
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-11-
<PAGE>
COMERICA BANK-TEXAS
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-12-
<PAGE>
MARINE MIDLAND BANK
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-13-
<PAGE>
IMPERIAL BANK, A CALIFORNIA BANKING CORPORATION
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-14-
<PAGE>
CREDITANSTALT CORPORATE FINANCE, INC.
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-15-
<PAGE>
FLEET CAPITAL CORPORATION
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-16-
<PAGE>
PRIME INCOME TRUST
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-17-
<PAGE>
KZH-SOLEIL CORPORATION
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-18-
<PAGE>
ML CLO XII PILGRIM AMERICA (CAYMAN) LTD.
By: Pilgrim Investments, Inc., as its Investment
Manager
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-19-
<PAGE>
ML CBO IV (CAYMAN) LTD.
By: Highland Capital Management, L.P., as
Collateral Manager
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-20-
<PAGE>
EXHIBIT F
COMPLIANCE CERTIFICATE
NationsBank, N.A., ________, _____
as Administrative Agent
901 Main Street, 14th Floor
Dallas, Texas 75202
Attention: Marie T. Lancaster
This Compliance Certificate is made as of _____________, _____. The
undersigned certifies that the calculations set forth herein are true, accurate,
and complete, and are made in accordance with the provisions of the Credit
Agreement among Doskocil Manufacturing Company, Inc., NationsBank, N.A., as
Administrative Agent, and Lenders, dated as of September 19, 1997 (as amended,
modified or supplemented, "Credit Agreement"). All defined terms used herein
but not specifically defined shall have the meanings set forth in the Credit
Agreement.
1. Borrowing Base. [to be completed monthly]
--------------
Borrower hereby represents and warrants that the following Borrowing Base
Report is true and correct in all respects as of ___________, _____ (the
"Reporting Date"). The Borrowing Base is determined as follows:
A. ELIGIBLE ASSETS ($000s)
1. All Accounts $_________
2. Less ineligible Accounts (without duplication)
a. Accounts to which Borrower or a Subsidiary $_________
does not have lawful and absolute title
b. Accounts which are not the valid, legally $_________
enforceable obligation of the account
debtor for goods or services delivered or
rendered to such Person
c. Accounts owed by a creditor of Borrower $_________
or a Subsidiary to the extent that such
Account equals the amount owed to such
creditor
d. Portion of Accounts subject to any $_________
asserted dispute, offset, discount,
counterclaim, or other claim or defense of
account debtor or to any asserted claim on
the part of the account debtor denying
liability under such Account
<PAGE>
e. Accounts which Borrower or any Subsidiary $_________
may not assign or grant a security interest
to Administrative Agent
f. Accounts not evidenced by an invoice $_________
rendered to the account debtor
g. Accounts evidenced by chattel paper, $_________
promissory notes, or other instruments or
the result of a conditional sales agreement
h. Accounts subject to a Lien in favor of any $_________
Person other than Administrative Agent other
than Permitted Collateral Liens
i. Accounts due and payable for more than 90 $_________
days from the invoice date
j. Accounts of account debtors primarily $_________
conducting business in and organized under
a jurisdiction outside the United States
(other than Canada) and which are not
insured or supported by an irrevocable
letter of credit
k. Accounts where the account debtor is a $_________
Tribunal
l. Accounts where the account debtor is the $_________
subject of a proceeding under a Debtor
Relief Law
m. Accounts of account debtors (excluding $_________
Kmart Receivable) who have more than 15%
of accounts due and payable for more
than 90 days and which are not insured
from the invoice date
n. Accounts not subject to a fully perfected $_________
first priority security interest in favor
of Administrative Agent
o. Accounts where the account debtor is an $_________
Affiliate or employee
Ineligible Accounts $_________
3. Eligible Accounts [(1) - (2)] $_________
4. Eligible Accounts includible in Borrowing Base $_________
[80% x (3)]
B. ELIGIBLE INVENTORY
1. All Inventory $_________
-2-
<PAGE>
2. Less ineligible Inventory (without duplication)
a. 50% Work-in-Progress $_________
b. Obsolete Inventory $_________
c. Consignment Inventory $_________
d. Demonstration and display Inventory $_________
e. Inventory to which Borrower or any $_________
Subsidiary does not have lawful and
absolute title
f. Inventory subject to a Lien in favor of $_________
any Person other than Administrative
Agent, other than Permitted Collateral
Liens
g. Defective or unmerchantable Inventory $_________
h. Inventory located outside the United States $_________
i. Inventory located in leased facilities for $_________
which a Landlord's Waiver has not been
delivered to Administrative Agent
j. Inventory not subject to a fully perfected $_________
first priority security interest in favor
of Administrative Agent
k. The sale of such Inventory, upon an Event $_________
of Default, is subject to a Necessary
Authorization restriction or limitation
Ineligible Inventory (sum of a. through k.) $_________
3. Eligible Inventory [(1) - (2)] $_________
4. Eligible Inventory includible in Borrowing Base $_________
[50% x (3)]
C. BORROWING BASE
1. Eligible Accounts includible in Borrowing Base (A.4.) $_________
2. Eligible Inventory includible in Borrowing Base (B.4.) $_________
Borrowing Base [(1) + (2)] $_________
-3-
<PAGE>
2. Covenant Calculations. [To be completed quarterly except M.]
---------------------
A. Leverage Ratio.
--------------
1. Total Debt
a. Indebtedness for borrowed money $_________
b. Capitalized Lease Obligations $_________
c. Obligations evidenced by bonds, debentures, $_________
notes or other similar instruments
d. Obligations to pay the deferred purchase $_________
price of property or services other than
trade payables incurred in the ordinary
course of business
e. Total Debt [(a) + (b) + (c) + (d)] $_________
2. EBITDA
a. Pretax Net Income (excluding therefrom, $_________
to the extent included in determining
Pretax Net Income, any item of
extraordinary gain, including net gains
on the sale of assets other than asset
sales in the ordinary course of business,
and adding thereto, to the extent included
in determining Pretax Net Income, any items
of extraordinary loss, including net losses
on the sale of assets other than asset sales
in the ordinary course of business)
b. Interest expense (including in respect of $_________
Capitalized Lease Obligations)
c. EBIT Special Adjustments
(1) Management fees in favor of Westar $_________
Capital not to exceed $450,000
(2) Relocation costs related to $_________
integration of Borrower and Dogloo
not to exceed $825,000
(3) Transaction fees and expenses $_________
related to Dogloo and Doskocil
Transaction
(4) Schedule 9 Items $_________
----------
(5) Excess of Westar Capital management $_________
fees accrued over such fees paid
-4-
<PAGE>
(6) Excess of Westar Capital management $_________
fees paid over such fees accrued
(7) [(1) + (2) + (3) + (4) + (5) - (6)] $_________
d. Depreciation $_________
e. Amortization $_________
f. Other non-cash charges $_________
g. EBITDA [(a) + (b) + (c) + (d) + (e) + (f)] $_________
3 Leverage Ratio [(1) : (2)] _____ to 1
B. Section 7.1(c). Capitalized Lease Obligations and
--------------
Indebtedness to purchase property, plant and equipment
1. Maximum ($10,000,000 minus Indebtedness pursuant $_________
to Section 7.1(h) and 7.1(m))
2. Actual $_________
3. Difference [(1) - (2)] $_________
C. Section 7.1(h). Indebtedness incurred or assumed in
--------------
respect of Acquisitions
1. Maximum ($10,000,000 minus Indebtedness pursuant $_________
to Section 7.1(c) and 7.1(m))
2. Actual $_________
3. Difference [(1) - (2)] $_________
D. Section 7.1(m). Other Indebtedness
--------------
1. Maximum ($10,000,000 minus Indebtedness pursuant
to Section 7.1(c) and 7.1(h)) $_________
2. Actual $_________
3. Difference [(1) - (2)] $_________
E. Section 7.3(f). Investments and expenditures in $_________
--------------
respect of Acquisitions of non-Domestic Subsidiaries
1. Maximum $10,000,000
2. Actual $_________
3. Difference [(1) - (2)] $_________
-5-
<PAGE>
F. Section 7.3(h). Investments of non-cash consideration
--------------
in sales
1. Maximum 5,000,000
2. Actual $_________
3. Difference [(1) - (2)] $_________
G. Section 7.3(j). Other Investments
--------------
1. Maximum $2,500,000
2. Actual $_________
3. Difference [(1) - (2)] $_________
H. Section 7.7. Capital Expenditures (From September 19, 1997)
-----------
1. Maximum ($25,000,000 + Net cumulative revenues $_________
multiplied by .05)
2. Actual $_________
3. Difference [(1) - (2)] $_________
I. Section 7.8. Restricted Payments
-----------
1. Purchases and redemptions of officers, directors
and employees stock
a. Maximum $2,500,000
b. Actual $_________
2. Redemptions and repurchases required under
Second Securityholders Agreement
a. Maximum $2,500,000
b. Actual $_________
3. Dogloo Transaction Restricted Payments
a. Maximum (Base Amount, exclusive of accrued $36,000,000
dividends)
b. Actual $_________
4. Additional redemptions of capital stock
a. Maximum $2,400,000
b. Actual $_________
-6-
<PAGE>
5. Advisory Fees to Specified Investors
a. Maximum per fiscal year $600,000
b. Actual $_________
J. Section 7.11. Leverage Ratio
------------
1. Maximum
a. At December 31, 1999 and March 31. 2000 5.50 to 1
b. At June 30, 2000 5.00 to 1
c. From and including September 30, 2000 and 4.50 to 1
thereafter
2. Actual (2.A.3. above) _____ to 1
K. Section 7.12. Fixed Charge Coverage Ratio
------------
1. Minimum 1.25 to 1
2. Actual
a. Cash Flow
(1) EBITDA (2.A.2.g. above) $_________
(2) Lease expense $_________
(3) Cash income tax paid $_________
(4) Total Cash Flow [(1) + (2) - (3)] $_________
b. Fixed Charges
(1) Scheduled principal payments in $_________
respect of Indebtedness
(2) Interest expense (including $_________
interest expense pursuant to
Capitalized Lease Obligations)
(3) Operating Lease Expense $_________
(4) Fixed Charges [(1) + (2) + (3)] $_________
c. Fixed Charge Coverage Ratio [K.2.a.(4) _____ to 1
to k.2.b.(4)]
-7-
<PAGE>
L. Section 7.13. Interest Coverage Ratio
------------
1. Minimum
a. At March 31, 1999 1.25 to 1
b. At June 30, 1999 and September 30, 1999 1.50 to 1
c. From and including December 31, 1999 and thereafter 1.75 to 1
2. Actual
a. EBITDA (2.A.2.g. above) $_________
b. Interest expense (including interest expense $_________
pursuant to Capitalized Lease Obligations)
c. Interest Coverage Ratio [L.2.a to L.2.b.] _____ to 1
M. Excess Cash Flow. [To be completed annually.]
----------------
1. Net Operating Cash Flow
a. Net Income $_________
b. Depreciation, amortization and other non-cash $_________
charges
c. Net losses on asset sales and non-cash asset $_________
write downs
d. Capital Expenditures $_________
e. Scheduled principal payments on Indebtedness $_________
f. Net gain on asset sales $_________
g. Net Operating Cash Flow [(a) + (b) + (c) - $_________
(d) - (e) - (f)]
2. Cash Acquisition Consideration $_________
3. Voluntary prepayments of Indebtedness which cannot $_________
be reborrowed
4. Restricted Payments $_________
5. Excess Cash Flow [1. - 2. - 3. - 4.] $_________
The undersigned hereby further certifies to the following as of the date of
this Certificate:
-8-
<PAGE>
The undersigned has reviewed the relevant terms of this Certificate and has
made, or caused to be made, under his/her supervision, a review of the
transactions and condition of the Borrower from the beginning of the accounting
period covered by the financial statements being delivered herewith to the date
of this Certificate and that such review has not disclosed the existence during
such period of any condition or event which constitutes a Default or Event of
Default.
The Borrower is in compliance in all material respects with all of the
terms and conditions of the Credit Agreement and other Loan Documents.
The financial statements delivered to Administrative Agent have been
prepared according to GAAP applied on a consistent basis in all material
respects with those previously delivered.
DOSKOCIL MANUFACTURING COMPANY, INC.
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
-9-
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,318
<SECURITIES> 0
<RECEIVABLES> 27,503
<ALLOWANCES> 313
<INVENTORY> 27,948
<CURRENT-ASSETS> 59,757
<PP&E> 100,215
<DEPRECIATION> (43,958)
<TOTAL-ASSETS> 181,178
<CURRENT-LIABILITIES> 27,694
<BONDS> 178,806
0
9,161
<COMMON> 34,322
<OTHER-SE> (68,805)
<TOTAL-LIABILITY-AND-EQUITY> 181,178
<SALES> 88,686
<TOTAL-REVENUES> 88,686
<CGS> 60,210
<TOTAL-COSTS> 60,210
<OTHER-EXPENSES> 21,914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,613
<INCOME-PRETAX> (2,062)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,062)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,062)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
</TABLE>
