<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: MARCH 31, 1999
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 MARCH 31, 1999, WAS 3,107,144.
- --------------------------------------------------------------------------------
1
<PAGE> 2
Amended Filing of Form 10-Q for the Quarter Ended March 31, 1999
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 March
31, 1999. The Company has adjusted certain accruals at March 31, 1999 in the
following respects:
1) An accrual for open credit memos was reduced, which has the effect
of increasing sales by $1.3 million;
2) An accrual for advertising and rebate costs was reduced, which has
the effect of decreasing S, G & A by $1.1 million;
3) An additional charge of $.7 million was recorded for impairment of
long lived assets in the amended 10-Q/A for the quarter ended
December 31, 1998. This effects the nine months ended March 31, 1999
only.
2
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DOSKOCIL MANUFACTURING COMPANY, INC.
SEC FORM 10-Q/A
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
No.
----
<S> <C> <C>
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................................................... 22
SIGNATURES ...................................................................................... 23
</TABLE>
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
(In thousands, except per share amounts) 1999 1998 1999 1998
(RESTATED) (Restated)
<S> <C> <C> <C> <C>
Net sales ............................................................ $ 41,964 $ 34,775 $ 129,381 $ 114,281
Cost of goods sold ................................................... 29,661 25,004 89,871 75,899
--------- --------- --------- ---------
GROSS PROFIT .................................................... 12,303 9,771 39,510 38,382
Selling, general and administrative expense .......................... 10,599 8,374 32,033 22,882
Impairment of long-lived assets (Note 9) ............................. 1,254 -- 3,587 --
--------- --------- --------- ---------
Operating income ................................................ 450 1,397 3,890 15,500
Other (income) expense:
Net interest expense (nine months ended March 31, 1998
includes amortization of bridge financing costs of $2,514) ...... 4,693 4,112 13,306 13,242
Other, net ...................................................... 7 (5) 18 (228)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ............................... (4,250) (2,710) (9,434) 2,486
Income tax benefit provision ......................................... -- (1,008) -- 2,586
--------- --------- --------- ---------
NET LOSS ........................................................ (4,250) (1,702) (9,434) (100)
Preferred stock dividends ............................................ 229 229 687 955
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ......................... $ (4,479) $ (1,931) $ (10,121) $ (1,055)
========= ========= ========= =========
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) ........................ $ (1.44) $ (.63) $ (3.26) $ (.41)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(BASIC AND DILUTED) ............................................. 3,107 3,078 3,105 2,555
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30, March 31,
(Dollars in thousands) 1999 1998 1998
--------- --------- ---------
(Unaudited) (Unaudited)
(Restated)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ -- $ 1,910 $ 2,958
Accounts receivable, less allowance for doubtful accounts
of $173, $300 and $517 ................................... 21,711 18,350 21,338
Inventories (Note 6) ................................................. 29,405 21,415 21,275
Other current assets ................................................. 1,383 1,029 1,275
Deferred taxes .................................................... -- -- 2,517
--------- --------- ---------
Total current assets ............................................ 52,499 42,704 49,363
Property, plant and equipment, less accumulated depreciation
of $42,432, $44,156 and $48,404 ........................... 52,907 51,628 50,055
Fixed assets held for sale ................................................ 4,075 3,259 3,500
Goodwill .................................................................. 58,131 59,725 49,787
Debt issuance costs ....................................................... 4,423 5,158 5,125
Other assets .............................................................. 1,880 1,627 1,658
Deferred taxes ............................................................ -- -- 1,444
--------- --------- ---------
Total assets .................................................... $ 173,915 $ 164,101 $ 160,932
========= ========= =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable ..................................................... $ 9,355 $ 4,629 $ 4,357
Accrued liabilities .................................................. 7,235 9,197 6,029
Current portion of long-term debt .................................... 7,375 4,125 2,875
Accrued interest ..................................................... 975 509 2,635
Accrued taxes ........................................................ 708 422 990
Payroll and benefits payable ......................................... 2,998 3,319 2,517
--------- --------- ---------
Total current liabilities ....................................... 28,646 24,327 17,277
Line of credit ............................................................ 20,900 -- --
Long-term debt ............................................................ 72,063 78,094 79,437
Senior subordinated notes ................................................. 85,000 85,000 85,000
--------- --------- ---------
Total liabilities ............................................... 206,781 187,421 181,714
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 March 31, 1999,
3,103,144 at June 30, 1998 and 3,080,254 at March 1998 .... 34,262 34,262 33,980
Accumulated deficit .................................................. (76,177) (66,743) (63,923)
--------- --------- ---------
Total shareholders' deficit ..................................... (32,694) (23,320) (20,782)
--------- --------- ---------
Total liabilities and shareholders' (deficit) equity ............ $ 173,915 $ 164,101 $ 160,932
========= ========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------
(Dollars in thousands) 1999 1998
--------- ---------
(RESTATED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................................... $ (9,434) $ (100)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ......................................... 7,662 7,810
Amortization of debt issuance costs ................................... 735 --
Deferred income taxes ................................................. -- 1,670
Other ................................................................. -- (225)
Impairment of long-lived assets ....................................... 3,587 --
Changes in:
Receivables ..................................................... (3,361) 1,243
Inventories ..................................................... (7,990) 3,791
Payables ........................................................ 4,726 (4,255)
Accrued liabilities and other ................................... (4,396) (1,666)
--------- ---------
Net cash (used in) provided by operating activities ................... (8,471) 8,268
--------- ---------
INVESTING ACTIVITIES:
Repurchase of leased assets ................................................ -- (18,724)
Capital expenditures ....................................................... (11,593) (6,409)
Increase in other assets ................................................... (25) --
Cash of acquired business .................................................. -- 1,335
Disposal of assets ......................................................... -- 2,579
--------- ---------
Net cash used in investing activities ................................. (11,618) (21,219)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................................... -- 262,500
Payments of long-term debt ................................................. (2,781) (102,507)
Payment of debt of acquired business ....................................... -- (34,584)
Proceeds from revolving credit agreement ................................... 20,900 5,500
Payments of revolving credit agreement ..................................... -- (12,750)
Proceeds from sale of common stock ......................................... 60 3,400
Redemption of common stock ................................................. -- (11,000)
Proceeds from sale of preferred stock ...................................... -- 23,000
Redemption of preferred stock and accumulated dividends .................... -- (24,433)
Cash paid to stockholders from recapitalization ............................ -- (87,922)
Debt issuance costs ........................................................ -- (5,499)
Recapitalization costs ..................................................... -- (1,393)
Cash dividends ............................................................. -- (469)
--------- ---------
Net cash provided by financing activities ............................. 18,179 13,843
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ....................... (1,910) 892
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................. 1,910 2,066
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ -- $ 2,958
========= =========
</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 nine months ended March
31, 1998 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. A physical inventory was taken in March 1999.
Operating results for the nine month period ended March 31, 1999 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 and advertising and rebates. The effect of this adjustment on
previously reported financial statements is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands, except per share amounts) March 31, 1999 March 31, 1999
- ------------------------------------------------ ----------------------- -----------------------
Statement of Operations: As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Sales $ 40,695 $ 41,964 $129,381 $129,381
Selling, general and administrative expenses 11,736 10,599 32,033 32,033
Impairment of long-lived assets 1,254 1,254 2,871 3,587
Operating loss (1,956) (450) 4,606 3,890
Net loss (6,656) (4,250) (8,718) (9,434)
Net loss per share (basic and diluted) (2.22) (1.44) (3.03) (3.26)
Balance Sheets:
Property, Plant & Equipment, net 53,623 52,907
Retained Earnings (75,461) (76,177)
</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 nine months 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.
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
8
<PAGE> 9
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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>
Nine Months Ended
(Dollars in thousands except per share amounts) March 31, 1998
----------------------------------------------- -----------------
<S> <C>
Net sales $ 127,273
Operating income 16,278
Net income attributable to common shareholders 748
Income per common share (basic and diluted) $ 0.24
----------
</TABLE>
Concurrent with the consummation of the Merger, the Company issued 10 1/8%
Senior Subordinated Notes (the "Notes") due September 15, 2007, in the aggregate
principal amount of $85.0 million. The Notes were exchanged for registered Notes
(the "Subordinated Notes") pursuant to the Offer to Exchange dated February 23,
1998, effective as of March 30, 1998. Discounts and commissions aggregated 3% of
the face amount of the Subordinated Notes and net proceeds to the Company were
$82.5 million. Interest on the Notes was, and on the Subordinated Notes is,
payable semi-annually on March 15 and September 15 of each year commencing on
March 15, 1998. The Subordinated Notes are a general, unsecured obligation of
the Company, subordinated in right of payment to all senior debt of the Company.
The Subordinated Notes are subject to certain optional redemptions at declining
premiums beginning in 2002 and continuing through 2005. Until September 15,
2000, upon an initial public equity offering of common stock for cash, up to 35%
of the aggregate principal amount of the Subordinated Notes originally
outstanding may be redeemed at the option of the Company at a redemption price
stipulated in the Subordinated Notes. The Subordinated Notes limit, among other
things, dividends, incurrence of additional indebtedness and other restricted
payments, as defined, and 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.
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
9
<PAGE> 10
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
and term loans (the "Term Loan Facility") in an initial aggregate principle
amount of $82.5 million of which $79.4 million in aggregate principal amount was
outstanding as of March 31, 1999. The Term Loan facility includes a $45.0
million tranche A term loan subfacility of which $42.5 million in principal
amount was outstanding as of March 31, 1999 and a $37.5 million tranche B term
loan subfacility of which $36.9 million was outstanding as of March 31, 1999.
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.
At December 31, 1998 the Company was not in compliance with certain
financial covenants. 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 in place of the maximum leverage ratio and interest rate increases
of approximately 0.75% per annum as described below.
The Credit Facility, as amended in February, requires the Company to meet
certain financial tests, including a minimum fixed charge coverage ratio,
minimum interest coverage ratio and a minimum EBITDA requirement. The Credit
Facility also contains additional restrictions, which, among other things, limit
additional indebtedness, liens, sales of assets and business combinations. As of
March 31, 1999 the Company was not in compliance with the interest coverage
ratio, fixed charge coverage ratio and the minimum EBITDA requirement. The
Company entered into a second amendment to the Credit Facility in May 1999 (the
"Second Amendment"). The Second Amendment provides, among other things, for the
waiver of the March 31, 1999 defaults and lower June 30 and September 30
interest coverage ratios, fixed charge coverage ratios, and minimum EBITDA
requirements and also provides for a 0.50% interest rate increase on all loans
outstanding under the Credit Facility from the date of the Second Amendment
through and including December 31, 1999. The Credit Facility, as amended by the
First Amendment and the Second Amendment, is referred to herein and in the text
of this Report on Form 10-Q as the "Credit Facility."
Indebtedness under the Term Loan Facility and the Revolving Credit Facility
initially bears interest at a rated 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, that, pursuant to the Second
Amendment, the interest rate margins described above have been increased by
0.50% per annum from the date of the Second Amendment through and including
December 31, 1999; provided, however, the interest rates for the Revolving
Credit Facility and Tranche A Term Loan 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.
10
<PAGE> 11
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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.
There is no assurance that the Company will be able to comply with the
financial or other covenants set forth in the Credit Facility. 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. While management expects to meet
all covenants in the future, there is no assurance the Company will do so.
NOTE 6. INVENTORY
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, June 30, March 31,
(Dollars in thousands) 1999 1998 1998
--------- -------- ---------
<S> <C> <C> <C>
Finished Goods $18,310 $11,794 $10,822
Work-in-Process 2,239 2,107 1,893
Raw Materials 8,799 7,325 8,349
Supplies 57 189 211
------- ------- -------
Net Inventories $29,405 $21,415 $21,275
======= ======= =======
</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 nine months ended March 31, 1999 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.
In the current period, the Company entered into operating lease agreements
with commitments of $0.8 million over a period of three to five years.
NOTE 9. IMPAIRMENT OF LONG-LIVED ASSETS
During the third quarter of fiscal 1999, management implemented a plan to
divest the Company of certain non-core business assets. Related to this
decision, certain fixed assets included in the caption assets held for sale were
written down to current market value. These assets were sold subsequent to the
end of the quarter with no additional impairment necessary.
11
<PAGE> 12
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The nine months ended March 31, 1999 also includes, as a result of a failed
software system conversion, a $2.3 million impairment charge for implementation
costs with minimal future benefit.
NOTE 10. NET LOSS PER SHARE
Net loss per share for the three months and the nine months ended March
31, 1999 and 1998 are calculated as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
---------------------- -----------------------
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
-------- -------- -------- ---------
(RESTATED) (Restated)
<S> <C> <C> <C> <C>
Net loss attributable to common shareholders $ (4,479) $ (1,931) $(10,121) $ (1,055)
======== ======== ======== =========
Average shares outstanding during the period:
Basic and diluted 3,107 3,078 3,105 2,555
======== ======== ======== =========
Net loss per common share:
Basic and diluted $ (1.44) $ (0.63) $ (3.26) $ (0.41)
======== ======== ======== =========
</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 March 31, 1999.
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. In addition
to the factors that may be described in this report, the following factors,
among others, could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements: (i) the Company incurred
substantial indebtedness in connection with the consummation of the Merger and
has remained highly leveraged, (ii) the Credit Facility and the Subordinated
Notes contain numerous restrictive covenants which limit the discretion of the
Company's management with respect to certain business matters, (iii) the Company
may encounter continued difficulties or delays in completing the integration of
Doskocil's and Dogloo's product offerings, systems and manufacturing; (iv) the
prices for the Company's principal raw material, plastic resin, may fluctuate as
a result of worldwide changes in natural gas and crude oil prices; (v) a
relatively small number of customers account for a significant percentage of the
Company's business; (vi) the Company relies heavily on trademarks, patents and
licenses to protect the proprietary nature of its products; (vii) the Company
has experienced difficulty fulfilling customer orders on a timely basis and may
continue to experience such difficulties; (viii) consumer preferences may change
and the Company may fail to adequately anticipate such changes; (ix) the
Company's results of operations have historically been seasonal; (x) the Company
is highly susceptible to the effect of changes in general economic and business
conditions; (xi) the Company's competitors may be more successful in introducing
new product offerings, and (xii) claims or lawsuits may be brought against the
Company, including claims of product liability. The potential adverse impact on
the Company of these and other risks is discussed in more detail in the
Company's 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 captions "Planned Actions" and "Year 2000" regarding steps being taken
by the Company to improve its operations, as well as statements in "Liquidity
and Capital Resources." 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 - THIRD QUARTER
During the third fiscal quarter, the Company experienced strong demand for
its products with total net sales up $7.2 million and 20.7% over last year.
Certain operating costs and expenses were not reduced as quickly as planned and
their impact more than offset the contribution of the higher sales.
Net Sales were higher for the third quarter in all product segments. Pet
products were particularly strong, and increased 24.9% from the same quarter of
the prior year. Customer order fulfillment has improved to over 90% case fill
for the top 100 customers who account for over 91% of total sales. Customer
backlog dropped in the third quarter from $11.7 million in December to $8.5
million in March. Past due orders for all customers dropped to approximately $3
million in March.
13
<PAGE> 14
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Gross Profit for the third quarter increased from $9.8 million last year to
$12.3 million this year. The gross profit increase from net sales was partially
offset by higher costs. Gross profit margin increased slightly from 28.1% in the
third quarter last year to 29.3% this quarter. Cost increases, when compared to
last year, as a percent of sales, were primarily in raw materials, distribution
and labor, offset by lower overhead spending.
Selling, general and administrative expense increased for the quarter from
$8.4 million last year to $10.6 million, or as a percent of net sales, from
24.1% to 25.3% this year. This increase is primarily due to increased freight
and selling expenses. The increase in freight was the result of higher less than
truckload shipments, but recent changes have reduced freight costs and these
costs are running below last year in March and April. Selling expenses were
higher by $1.4 million due to increased annual sales promotion and rebate
programs.
OVERVIEW - NINE MONTHS
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 nine months of fiscal 1999 of $8.0 million.
Offsetting these savings was nearly $13.8 million in additional operating
costs for the same period. The Company spent approximately $6.2 million for
outside manufacturing, outside warehousing and inbound freight to meet customer
orders. In addition, the Company experienced $4.0 million in higher costs for
direct labor in manufacturing and $2.3 million in higher costs at its
distribution center in Arlington. The Company also incurred planned spending of
over $1.4 million for brand recognition advertising. The causes of these
increased costs include: difficulties in merging the combined product lines of
Doskocil and Dogloo; difficulties in accurately forecasting customer demand and
surges in customer orders; production scheduling difficulties; warehouse and
shipping constraints; inability to meet planned production rates; computer
system problems; high rates of sales deductions; 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. Due to the operational problems described above, the
Company incurred additional costs for outside warehousing, outside manufacturing
and inbound freight to continue to serve customers. 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 $3.0 million,
ceased doing business with the Company due to order fulfillment difficulties.
The Company also believes it lost additional opportunities for new product
sales.
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 and a significant
period. (See - "Year 2000"). The third quarter continued to be impacted by
higher additional operating costs.
The Company has been and is continuing to take corrective steps to address
the higher operating costs and other difficulties it has experienced. The
Company expects to continue to experience higher operating costs until the
corrective steps are fully implemented and working satisfactorily. Until then,
the Company's results will be unfavorably impacted. It is not certain that the
Company will be able to comply with the financial and other covenants set forth
in the Credit Facility.
14
<PAGE> 15
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PLANNED ACTIONS
The Company implemented during the third quarter a number of the steps
described in the "Planned Actions" in the Form 10-Q/A for the quarter ending
December 31, 1998. These actions are designed to solidify the Company's position
in the marketplace with its core products while reducing its costs.
MARKETING. The Company reached sales agreements with all of its major
customers, with the exception of Target, for the coming year. Reduced consumer
advertising expenditures and focused spending on volume building programs with
key accounts should reduce total marketing expenses. The SKU reduction program,
aimed at reducing SKU levels from 1,100 to 500 has been implemented. This
decrease was accomplished by the switch from two brands to a one brand marketing
strategy and multiple pack configurations of similar products. Management does
not expect this decrease to materially affect sales and anticipates the program
will lead to more efficient production and lower inventories in the fall.
FREIGHT AND DISTRIBUTION. The Company has lowered freight costs from 8.0%
of sales to 5.0% of sales, during the third quarter, by bidding routes out to
carriers and combining less than truckload orders into truckload shipments. The
Company has purchased a Warehouse Management Software package that is expected
to reduce shipping errors, insure inventory accuracy and increase productivity.
The Company has doubled its shipping capacity from last fall to 120 trucks per
day. The Company expects to lease an additional 300,000 square foot concrete pad
that is expected to be built for outdoor storage of doghouses adjacent to its
warehouse and a 162,000 square foot addition to its existing warehouse
facilities. These new additions to the Company's campus will allow the Company
to exit current outside warehousing space in the late fall. During the current
quarter, off-campus warehousing was secured at lower rates than current
facilities. Nevertheless, total off-campus warehousing expense is higher than
expected and the Company does not foresee exiting all of these facilities until
the planned additions to its campus are completed.
MANUFACTURING. The Company is now operating 16 of its heavy tonnage
injection molding and structural foam machines in its new manufacturing
facility. During the current quarter, the Company purchased one new structural
foam machine and related molds and expects to purchase two more machines in the
next two quarters. Better maintenance and new equipment has increased overall
machine efficiency. The Company is executing its in-sourcing strategy, bringing
the high volume, core SKUs back into its facility for the coming season. Direct
labor efficiency has increased from levels experienced in the second quarter but
remain below expected levels. The Company has implemented a continuous
operations (7 day/24 hour) schedule to meet forecasted product needs and to
improve its ability to staff the production schedule in the coming months. This,
coupled with the new machines, should address the bottlenecks experienced during
the second fiscal quarter.
INFORMATION TECHNOLOGY. The Company has contracted with Oracle to replace
its Legacy enterprise resource planning software with Oracle's software that
will be operated on servers bought for the earlier software implementation. The
Company is using Oracle's Rapid Implementation Program and a team of their
systems analysts to assist in the implementation project with a target date of
early July 1999. The Company decided not to outsource its information processing
and expects lower costs with the purchase of the Oracle software.
FINANCIAL CONTROLS. The Company successfully completed a physical inventory
in March 1999 and established the accuracy of its computerized inventory records
for order processing and shipping.
SALE OF TACKLE/HARDWARE BUSINESS. In April the Company received $1.3
million in proceeds from the sale of inventory and molds used to support sales
of our tackle and hardware lines that management considered to be a non-core
business.
15
<PAGE> 16
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
NET SALES for the third quarter were $42.0 million, well above the $34.8
million in the comparable period of the prior year, an increase of $7.2 million.
The increase was primarily the result of higher pet product sales of $6.9
million and higher outside resin sales, partially offset by lower sporting goods
sales of $0.4 million. Sporting goods sales decreased primarily due to the loss
of two customers. Pet product sales increased on strong customer demand. For the
first nine months of fiscal 1999, sales increased $15.1 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, and increased pet product sales in the
current quarter.
GROSS PROFIT increased to $12.3 million in the third quarter of fiscal
1999, up from $9.8 million in the comparable period of the prior year, an
increase of $2.5 million. As a percentage of net sales, gross margin decreased
to 29.3% in the third quarter of fiscal 1999 from 28.1% 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. Spending levels for raw materials, outside warehousing and labor
were higher than the comparable period of the prior year, while production and
machine efficiency improved to expected levels.
Failure to manufacture sufficient inventory in fiscal year 1998 and the
inability to accurately forecast demand in the first quarter compounded
operational problems. Late in the first quarter, the Company decided to use
outside manufacturing to meet certain customer demand. Margins in the second and
third quarters reflect the higher associated costs including expenses for
outside molders, inbound freight and outside storage. For the first nine months
of fiscal 1999, gross profit was $1.1 million higher than the same period of
last year. As a percentage of net sales, gross margins decreased to 30.5% in the
first nine months of fiscal 1999, down from 33.6% in the same period of the
prior year. As mentioned earlier, gross margin was negatively impacted by higher
costs incurred due to operational problems experienced primarily in the second
fiscal quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to $10.6 million in
the third quarter of fiscal 1999 from $8.4 million in the comparable period of
the prior year, an increase of $2.2 million or 26.2%. The increase was the
result of several factors, including $1.4 million increase in advertising and
promotions, higher freight costs of approximately $0.6 million and an increase
in goodwill amortization of $0.1 million.
The Company expects advertising costs to be lower over the next several
quarters due primarily to lower consumer advertising programs. As a percentage
of net sales, SG&A spending increased to 25.3% in the third fiscal quarter of
fiscal 1999 from 24.1% in the comparable period of the prior year. For the first
nine months ended March 31, 1999 SG&A expenses increased $9.2 million or 40.0%
from the same period of the prior year. The increase during the nine 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 third quarter of fiscal 1999
includes a $1.4 million charge due to the decision to divest the Company of
certain non-core business assets. This resulted in the write-down of molds ($1.3
million) and inventory ($0.1 million charged directly to cost of sales). For the
nine months ended March 1999, impairment expense also includes a charge of $2.3
million as a result of the failed system conversion in the second fiscal quarter
and management's assessment that the implementation costs have minimal future
benefit.
INTEREST EXPENSE increased to $4.7 million in the third fiscal quarter of
1999 from $4.1 million in the comparable period of the prior year. Interest
expense includes a $0.2 million fee related to the First Amendment to the Credit
Facility.
16
<PAGE> 17
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense for the nine months ended March 31, 1999 increased $0.1
million from the same period of the prior year. Interest expense in the nine
month period ending March 31, 1998 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 $2.6 million for the nine months ended March
31, 1998 was composed of a charge of $1.67 million for the change to a C
corporation status and $0.9 million tax on income for the period at an effective
rate of 37%. No income tax provision was made for the nine months ended March
31, 1999 due to the net operating loss generated during the period for which a
valuation allowance has been provided. June 30, 1998 and March 31, 1999 included
a valuation allowance of approximately $5.4 million and $7.7 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 third quarter ended March 31, 1999 was $4.3 million,
compared to net loss of $1.7 million for the comparable period of the prior
year. Net loss for the nine months ended March 31, 1999 was $9.4 million,
compared to a net loss of $0.1 million for the comparable period of the prior
year. The change in net income primarily reflects the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Total debt outstanding on March 31, 1999 increased $18.1 million from June
30, 1998 but did not change significantly from December 31, 1998 due to the
additional borrowings against the Company's revolving credit agreement offset by
a March term note payment. Total outstanding debt is comprised of bank
borrowings of $100.3 million and Subordinated Notes of $85.0 million. The bank
borrowings are comprised of a Term Loan Facility of $79.4 million and a
Revolving Credit Facility of $27.5 million, of which $20.9 was outstanding at
March 31, 1999. Note 4 to the Financial Statements outlines the terms and
conditions of the Subordinated Notes. At March 31, 1999 the Company had $6.6
million of availability on the Revolving Credit Facility.
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 March 31,
1999, was 8.1%.
Management anticipates incurring capital expenditures for the fiscal year
ending June 30, 1999 of approximately $15.0 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
operating leases, proceeds from the sale of non-core business assets and, if
necessary, borrowings under the Revolving Credit Facility. During the current
quarter, the Company entered into operating lease agreements with commitments of
$0.8 million over a three to five year period. 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 current assets less current liabilities
excluding current portion of long-term debt, was $8.7 million higher than June
1998 and down $7.2 million from December 1998. Working capital at March 1999 was
$3.7 million lower than March 1998. The primary increases from June are
reflected in inventories and accounts receivable offset by higher accounts
payable. Accounts receivable increased from June 1998 primarily due to higher
net sales in March 1999. Inventories increased due to planned inventory build.
By working more closely with customers to develop better demand forecasts and
utilizing a "pull" manufacturing philosophy, the Company is working to reduce
inventories while maintaining service levels. Reducing working capital continues
to be an important objective for management.
17
<PAGE> 18
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company believes cash provided by operations, equipment leases and cash
available under existing credit facilities should 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. The Company was not in compliance with certain financial covenants
at December 31, 1998. The Company entered into to the First Amendment on
February 10, 1999 which provided, 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 of March 31, 1999 the Company was
not in compliance with the interest coverage ratio, fixed charge coverage ratios
and the minimum EBITDA requirement. The Company entered into the Second
Amendment in May 1999. The Second Amendment provides, among other things, for
the waiver of the March 31, 1999 defaults and lower June 30 and September 30
interest coverage ratios, fixed charge coverage ratios and minimum EBITDA
requirements and also provides for a 0.50% interest rate increase on all loans
outstanding under the Credit Facility from the date of the Second Amendment
through and including December 31, 1999. The Company agreed to reimburse its
Lenders for the cost of an outside management consultant to review, among other
matters, the Company's financial projections.
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. It is not
certain that the Company will be able to comply with the financial and other
covenants set forth in the amended Credit Facility.
YEAR 2000
In the next nine 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 interchange,
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,
ancillary business systems and the computerized 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 and expects to complete this review
by June 1999. To date, this review of all non-information technology systems and
equipment has revealed no material non-compliance problems.
18
<PAGE> 19
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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. The Company is currently in the process of implementing
Oracle financial, manufacturing and distribution modules, which are deemed Y2K
compliant. This implementation is expected to be completed in the first quarter
of fiscal year 2000. The Second Amendment to the Credit Facility added a
requirement that the Company's Chief Financial Officer must certify to the
Lenders by August 15, 1999 that the Company will be able to perform computer
accounting functions necessary to successfully close the month of July 1999 to
meet the financial reporting requirements of the Credit Facility and that the
officer is not aware of any matters related to the computer system conversion
that could be expected to delay the production of accounting information
required to comply with the Credit Agreement or that would have a material
adverse effect on the Company. Failure to comply with this requirement would be
a breach of the Credit Agreement.
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 $6.0
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 $4.9
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
the 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. If there are infrastructure
failures, such as disruptions in the supply of electricity, water or
communications services, or major institutions such as the government, or
banking systems are unable to provide their services or support resulting in a
disruption in services or support to the Company, the Company may be unable to
operate for the duration of the disruption.
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 "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.
19
<PAGE> 20
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
investment securities and other contracts, and for hedging activities. The
Company is currently evaluating this standard, which is effective January 1,
2000.
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 nine months beginning July 1, 1998 and
1997, which is being shown for comparison purposes only:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31
--------------------- ---------------------
(Dollars in thousands) 1999 1998 1999 1998
-------- -------- -------- --------
(RESTATED) (Restated)
<S> <C> <C> <C> <C>
Pet products $ 34,811 $ 27,879 $107,590 $104,568
Sporting goods and other 4,459 4,868 14,065 17,870
Furniture and custom molding -- 235 -- 391
Outside resin sales 2,694 1,793 7,726 3,393
-------- -------- -------- --------
Combined net sales 41,964 34,775 129,381 126,222
Cost of goods sold 29,661 25,004 89,871 83,382
-------- -------- -------- --------
Gross profit 12,303 9,771 39,510 42,840
Selling, general and administrative expense 10,599 8,374 32,033 25,919
Impairment of long-lived assets 1,254 -- 3,587 --
-------- -------- -------- --------
Operating income 450 1,397 3,890 16,921
Adjustments:
Depreciation, amortization and impairment 3,710 2,825 11,392 8,585
-------- -------- -------- --------
EBITDA (1) $ 4,160 $ 4,222 $ 15,282 $ 25,506
-------- -------- -------- --------
</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. See also
Footnote 1 in the Notes to Financial Statements.
20
<PAGE> 21
DOSKOCIL MANUFACTURING COMPANY, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FIRST THREE FISCAL QUARTERS:
The following table summarizes the first three fiscal quarters of 1999
(unaudited):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------- Nine Months Ended
September 30, December 31, MARCH 31, March 31,
(Dollars in thousands) 1998 1998 1999 1999
------------ ----------- -------- --------
(RESTATED)
<S> <C> <C> <C> <C>
Pet Products $ 32,378 $ 40,401 $ 34,811 $107,590
Sporting goods 5,219 4,387 4,459 14,065
Outside resin sales 2,378 2,654 2,694 7,726
-------- -------- -------- --------
Net sales 39,975 47,442 41,964 129,381
Cost of goods sold 24,349 35,861 29,661 89,871
-------- -------- -------- --------
Gross profit $ 15,626 $ 11,581 $ 12,303 $ 39,510
Selling, general and
administrative expense 9,280 12,154 10,599 32,033
Impairment of long-lived assets -- 2,333 1,254 3,587
-------- -------- -------- --------
Operating income (loss) 6,346 (2,906) 450 3,890
Adjustments:
Depreciation, amortization and
impairment 2,779 4,903 3,710 11,392
-------- -------- -------- --------
EBITDA(1) $ 9,125 $ 1,997 $ 4,160 $ 15,282
-------- -------- -------- --------
</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. See also
Footnote 1 in the Notes to Financial Statements.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1* Second Amendment to Credit Agreement, dated May 14, 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 March 31, 1999.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOSKOCIL MANUFACTURING COMPANY, INC. (Registrant)
/s/ Larry e. Rembold
---------------------------------------
Date: October 13, 1999 Larry E. Rembold
President and Chief Executive Officer
(Principal Executive Officer)
/s/ John J. Casey
Date: October 13, 1999 ---------------------------------------
John J. Casey
Chief Financial Officer
(Principal Accounting Officer)
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule (for electronic filing only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 21,884
<ALLOWANCES> 173
<INVENTORY> 29,405
<CURRENT-ASSETS> 52,499
<PP&E> 95,339
<DEPRECIATION> (42,432)
<TOTAL-ASSETS> 173,915
<CURRENT-LIABILITIES> 28,646
<BONDS> 177,963
0
9,161
<COMMON> 34,322
<OTHER-SE> (76,177)
<TOTAL-LIABILITY-AND-EQUITY> 173,915
<SALES> 129,381
<TOTAL-REVENUES> 129,381
<CGS> 89,871
<TOTAL-COSTS> 89,871
<OTHER-EXPENSES> 35,620
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,306
<INCOME-PRETAX> (9,434)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,434)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,434)
<EPS-BASIC> (3.26)
<EPS-DILUTED> (3.26)
</TABLE>
