<PAGE> 1
FORM 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: 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 Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (817) 467-5116
- --------------------------------------------------------------------------------
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S NO PAR VALUE COMMON STOCK
AT DECEMBER 31, 1998, WAS 3,107,144.
- --------------------------------------------------------------------------------
<PAGE> 2
AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
Doskocil Manufacturing Company, Inc. (the "Company") is amending, pursuant to
this amendment, its Quarterly Report on Form 10-Q, for the quarter ended
December 31, 1998. The Company has adjusted certain accruals at December 31,
1998 in the following respects:
1) An additional accrual was made for unrecorded credit memos which
has the effect of reducing sales by $1.3 million;
2) An additional accrual was made for unrecorded advertising and rebate
costs which has the effect of increasing S, G & A by $1.1 million;
3) An additional charge of $.7 million was made for impairment of
long-lived assets.
2
<PAGE> 3
DOSKOCIL MANUFACTURING COMPANY, INC.
SEC FORM 10-Q/A
QUARTER ENDED DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations........................................................... 4
Balance Sheets..................................................................... 5
Statements of Cash Flows........................................................... 6
Notes to Financial Statements...................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 21
SIGNATURES....................................................................................... 22
</TABLE>
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
---------- ---------- ---------- ----------
(RESTATED) (Restated)
<S> <C> <C> <C> <C>
Net sales ............................................................ $ 47,442 $ 49,071 $ 87,417 $ 79,506
Cost of goods sold ................................................... 35,861 30,829 60,210 50,895
---------- ---------- ---------- ----------
GROSS PROFIT .................................................... 11,581 18,242 27,207 28,611
Selling, general and administrative expense .......................... 12,154 8,831 21,434 14,508
Impairment of long-lived assets (Note 9) ............................. 2,333 -- 2,333 --
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) ......................................... (2,906) 9,411 3,440 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 ............................... (7,321) 5,779 (5,184) 5,196
Less (benefit) provision for income taxes ............................ (915) 2,140 -- 3,594
---------- ---------- ---------- ----------
NET INCOME (LOSS) ............................................... (6,406) 3,639 (5,184) 1,602
Preferred stock dividends ............................................ 229 229 458 726
---------- ---------- ---------- ----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS ................ $ (6,635) $ 3,410 $ (5,642) $ 876
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE (BASIC) ........................... $ (2.14) $ 1.12 $ (1.82) $ .38
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE (DILUTED) ......................... $ (2.14) $ 1.11 $ (1.82) $ .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.
4
<PAGE> 5
DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, June 30, December 31,
(Dollars in thousands) 1998 1998 1997
------------ ------------ ------------
(UNAUDITED) (unaudited)
ASSETS (RESTATED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 3,318 $ 1,910 $ 9,556
Accounts receivable, net .................................................. 25,921 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 ................................................. 58,488 42,704 63,430
Property, plant and equipment, net ............................................. 52,282 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 ......................................................... $ 179,193 $ 164,101 $ 177,098
============ ============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable .......................................................... $ 6,473 $ 4,629 $ 7,600
Accrued liabilities ....................................................... 9,410 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 ............................................ 28,831 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 .................................................... 207,637 187,421 196,578
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 ....................................................... (71,927) (66,743) (62,221)
------------ ------------ ------------
Total shareholders' deficit ....................................... (28,444) (23,320) (19,480)
------------ ------------ ------------
Total liabilities and shareholders' (deficit) equity .............. $ 179,193 $ 164,101 $ 177,098
============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------
(Dollars in thousands) 1998 1997
- ---------------------- --------- ---------
(RESTATED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................................................................... $ (5,184) $ 1,602
Adjustments to reconcile net income (loss) to net cash (used in) provided by
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 ................................................. 2,333 --
Changes in:
Receivables ................................................................... (7,571) 148
Inventories ................................................................... (6,533) 2,150
Payables ...................................................................... 1,844 (210)
Accrued liabilities and other ................................................. (150) 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.
6
<PAGE> 7
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/A 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 and 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.
The Company, in this amended 10-Q/A, has adjusted certain accruals for
credit memos, advertising and rebates and impairment of long-lived assets. The
effect of this adjustment on previously reported financial statements is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in thousands except per share amounts) December 31, 1998 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------
Statement of Operations: As Reported Restated As Reported Restated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 48,711 $ 47,442 $ 88,686 $ 87,417
Selling, general and administrative expenses 11,017 12,154 20,297 21,434
Impairment of long-lived assets 1,617 2,333 1,617 2,333
Operating income (loss) 216 (2,906) 6,562 3,440
Net loss (3,284) (6,406) (2,062) (5,184)
Net loss per share (basic and diluted) (1.13) (2.14) (0.81) (1.82)
Balance Sheets:
Accounts Receivable 27,190 25,921
Property, Plant & Equipment, Net 52,998 52,282
Accrued Liabilities 8,273 9,410
Retained Earnings (68,805) (71,927)
</TABLE>
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.
7
<PAGE> 8
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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.
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. An investor group (the Investor Group") consisting of
various Westar Capital entities and certain of their affiliates (collectively
Westar") and Enterprise entities ("Enterprise) now controls the Company.
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.
8
<PAGE> 9
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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
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
(Dollars in thousands except per share amounts) December 31, 1997 December 31, 1997
- -------------------------------------------------------------------------------------------
<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 101/8%
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 contain 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.
9
<PAGE> 10
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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.
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 0.75% 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 the Company attains
certain financial ratios. 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. This fee is subject to reduction
in the event the Company meets certain performance targets.
10
<PAGE> 11
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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.
NOTE 6. INVENTORY
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, June 30, December 31,
(Dollars in thousands) 1998 1998 1997
- ---------------------- ------------ ------------ ------------
<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.
11
<PAGE> 12
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 Ended Six Months Ended
December 31, December 31,
----------------------------- -----------------------------
(Dollars in thousands, except per share amounts) 1998 1997 1998 1997
------------- ------------- ------------- -------------
(RESTATED) (Restated)
<S> <C> <C> <C> <C>
Net income (loss) $ (6,635) $ 3,410 $ (5,642) $ 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 (loss) per share:
Basic $ (2.14) $ 1.12 $ (1.82) $ 0.38
============= ============= ============= =============
Diluted $ (2.14) $ 1.11 $ (1.82) $ 0.38
============= ============= ============= =============
</TABLE>
12
<PAGE> 13
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Doskocil Manufacturing Company, Inc. (the "Company" or "Doskocil") 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/A 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 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 also 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 were nearly $12.0 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 and $1.1 million in
additional rebate and advertising programs. 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).
13
<PAGE> 14
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 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 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 customer 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.
14
<PAGE> 15
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 $2.3 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 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 $47.4 million, below the $49.1
million in the comparable period of the prior year or a decrease of $1.7
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 down
3.5% despite strong second quarter sales in the same period of last year 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 $7.9 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 $11.6 million in the second quarter of fiscal
1999 from $18.2 million in the comparable period of the prior year, a decrease
of $6.6 million. As a percentage of net sales, gross margin decreased to 24.4%
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 including expenses for outside molders, inbound freight and
outside storage. For the first six months of fiscal 1999, gross profit was down
$1.4 million from the same period of last year. As a percentage of net sales,
gross margins decreased to 31.1% in the first six months of fiscal 1999, down
from 36.0% in the same period of fiscal year 1998.
15
<PAGE> 16
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to $12.2 million in
the second quarter of fiscal 1999 from $8.8 million in the comparable period of
the prior year, an increase of $3.4 million or 38.6%. 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 $3.1 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 25.6% 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 $6.9 million or 47.7% 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 $2.3 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 $6.4 million
compared to net income of $3.6 million for the comparable period of the prior
year, a decrease of $10.0 million. Net loss for the six months ended December
31, 1998 was $5.2 million, $6.8 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 $6.8 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.
16
<PAGE> 17
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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%.
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 $12.3 million higher at December 1998 from June 1998.
Working capital at December 1998 was $9.9 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 would 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.
17
<PAGE> 18
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 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 $2.3 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.
18
<PAGE> 19
DOSKOCIL MANUFACTURING COMPANY, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" which introduces a "management approach" for
identifying reportable industry segments of an enterprise. The Company plans to
adopt 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,
(Dollars in thousands) 1998 1997 1998 1997
- ---------------------- -------- -------- -------- --------
(unaudited) (unaudited)
(Restated) (Restated)
<S> <C> <C> <C> <C>
Pet products $ 40,401 $ 41,885 $ 72,779 $ 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 47,442 49,071 87,417 91,447
Cost of goods sold 35,861 30,829 60,210 58,378
-------- -------- -------- --------
Gross profit 11,581 18,242 27,207 33,069
Selling, general and administrative expense 12,154 8,831 21,434 17,545
Impairment of long-lived assets 2,333 -- 2,333 --
-------- -------- -------- --------
Operating income (loss) (2,906) 9,411 3,440 15,524
Adjustments:
Depreciation, amortization and impairment 4,903 2,992 7,682 5,760
-------- -------- -------- --------
EBITDA (1) $ 1,997 $ 12,403 $ 11,122 $ 11,284
-------- -------- -------- --------
</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.
19
<PAGE> 20
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
------------------ ----------------
(Dollars in thousands) September 30, 1998 December 31, 1998 December 31, 1998
- ---------------------- ------------------ ----------------- -----------------
(Restated) (Restated)
<S> <C> <C> <C>
Pet Products $ 32,378 $ 40,401 $ 72,779
Sporting goods 5,219 4,387 9,606
Outside resin sales 2,378 2,654 5,032
--------------- --------------- ---------------
Net sales 39,975 47,442 87,417
Cost of goods sold 24,349 35,861 60,210
--------------- --------------- ---------------
Gross profit 15,626 11,581 27,207
Selling, general and administrative expense 9,280 12,154 21,434
Impairment of long-lived assets -- 2,333 2,333
--------------- --------------- ---------------
Operating income (loss) 6,346 (2,906) 3,440
Adjustments:
Depreciation, amortization and impairment 2,779 4,903 7,682
--------------- --------------- ---------------
EBITDA(1) $ 9,125 $ 1,997 $ 11,122
--------------- --------------- ---------------
</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.
While net sales increased $7.5 million from the first quarter to the second
quarter, EBITDA declined $7.1 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.
20
<PAGE> 21
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 - Amended 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.
* Previously filed with original Form 10-Q for December 31, 1998.
21
<PAGE> 22
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: October 13, 1999 /s/ Larry E. Rembold
----------------------------------------
Larry E. Rembold
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 13, 1999 /s/ John J. Casey
----------------------------------------
John J. Casey
Chief Financial Officer
(Principal Accounting Officer)
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
* 10.1 - First Amendment to Credit Agreement, dated February 10, 1999
27 - Amended Financial Data schedule (for electronic filing only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,318
<SECURITIES> 0
<RECEIVABLES> 26,234
<ALLOWANCES> 313
<INVENTORY> 27,948
<CURRENT-ASSETS> 58,488
<PP&E> 99,499
<DEPRECIATION> (43,958)
<TOTAL-ASSETS> 179,193
<CURRENT-LIABILITIES> 28,831
<BONDS> 178,806
0
9,161
<COMMON> 34,322
<OTHER-SE> (71,927)
<TOTAL-LIABILITY-AND-EQUITY> 179,193
<SALES> 87,417
<TOTAL-REVENUES> 87,417
<CGS> 60,210
<TOTAL-COSTS> 60,210
<OTHER-EXPENSES> 23,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,613
<INCOME-PRETAX> (5,184)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,184)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,184)
<EPS-BASIC> (1.82)
<EPS-DILUTED> (1.82)
</TABLE>
