<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: 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
DOSKOCIL MANUFACTURING COMPANY, INC.
SEC FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations....................................................................3
Balance Sheets..............................................................................4
Statements of Cash Flows....................................................................5
Notes to Financial Statements...............................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................................12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................................21
SIGNATURES...............................................................................................22
</TABLE>
2
<PAGE> 3
Part I - Financial Information
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------- --------
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ............................................................ $ 40,695 $ 34,775 $ 129,381 $ 114,281
Cost of goods sold ................................................... 29,661 25,004 89,871 75,899
---------- ---------- ---------- ----------
GROSS PROFIT .................................................... 11,034 9,771 39,510 38,382
Selling, general and administrative expense .......................... 11,736 8,374 32,033 22,882
Impairment of long-lived assets (Note 9) ............................. 1,254 -- 2,871 --
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) ......................................... (1,956) 1,397 4,606 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 ............................... (6,656) (2,710) (8,718) 2,486
Income tax (benefit) provision ....................................... -- (1,008) -- 2,586
---------- ---------- ---------- ----------
NET LOSS......................................................... (6,656) (1,702) (8,718) (100)
Preferred stock dividends ............................................ 229 229 687 955
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ......................... $ (6,885) $ (1,931) $ (9,405) $ (1,055)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE (BASIC AND DILUTED)......................... $ (2.22) $ (.63) $ (3.03) $ (.41)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................ 3,107 3,078 3,105 2,555
========== ========== ========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 4
DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30, March 31,
(Dollars in thousands) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
ASSETS
<S> <C> <C> <C>
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 ..................................................................... 53,623 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 ...................................................... $ 174,631 $ 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 2,635 509
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 ................................................. 206,609 187,421 181,714
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 31, 1998 ..................... 34,322 34,262 33,980
Accumulated deficit ....................................................... (75,461) (66,743) (63,923)
---------- ---------- ----------
Total shareholders' deficit ....................................... (31,978) (23,320) (20,782)
---------- ---------- ----------
Total liabilities and shareholders' (deficit) equity .............. $ 174,631 $ 164,101 $ 160,932
========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss......................................................................... $ (8,718) $ (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............................................. 2,871 --
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.
5
<PAGE> 6
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
required by generally accepted accounting principles for complete financial
statements. Included in the statements for the 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.
Credit memos issued during the third quarter that potentially relate to
prior quarter shipping and billing errors and customer promotional and rebate
activities exceeded estimated accruals established at December 31, 1998 by $3.5
million. Management is in the process of analyzing these costs to determine
whether any are related to errors in recording the original amounts. If any such
errors are material, the Company will adjust the quarterly results of operation
for the periods impacted. Management does not believe the impact of any such
adjustments will have a material impact on the year to date reporting results.
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.
NOTE 3. RECAPITALIZATION
Effective July 1, 1997, the Corporation was recapitalized through the
following transactions: (1) 100% of the Spectrum partnership interest was sold
to a group of investors for $11.0 million; (2) after retirement of approximately
$1.0 million of Spectrum debt by the investors, the partnership interests were
exchanged for 798,612 shares of the Corporation's common stock; (3) the
Corporation's Articles of Incorporation were amended to establish the
Corporation as a C Corporation and authorized 15,000,000 shares of preferred
stock and 15,000,000 shares of common stock, each with no par value per share;
(4) certain investors purchased 199,654 shares of common stock for $3.0 million
and 1,530,674 shares of Series A Preferred Stock for $23.0 million; (5) all
outstanding balances under then existing lines of credit and long-term debt,
along with related accrued interest and pre-payment penalties, were paid in
full; and (6) the Corporation redeemed 5,666,145 shares of common stock from the
majority stockholder for approximately $87.4 million. The acquisition of
Spectrum has been accounted for as a combination of entities under common
control and, accordingly, the assets acquired were recorded at their historical
cost.
6
<PAGE> 7
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 4. MERGER
On September 19, 1997, Doskocil consummated a merger with Dogloo, Inc.
(the "Merger"), wherein 1,400,603 of the Company's common shares were exchanged
for Dogloo equity in the approximate amount of $21.2 million and Dogloo was
merged with and into Doskocil. 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 Dogloo, for $4.0
million (including dividends accrued through September 19, 1997); (iii) 538,433
shares of Series C Preferred Stock held by Enterprise for $1.3 million
(including dividends accrued through September 19, 1997); and (iv) 2,141,260
shares of Series C Preferred Stock held by Mr. Barreto for $2.6 million
(including dividends accrued through September 19, 1997). Further, immediately
following the Merger, the Company paid approximately $1.5 million of accrued
dividends on the shares of Series C Preferred Stock which remained outstanding.
In connection with the conversion and redemption of shares of Series A
Preferred Stock, the Company borrowed $0.5 million under the Credit Facility to
pay cumulative dividends on such shares of Series A Preferred Stock as of the
date of the Merger.
7
<PAGE> 8
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The Merger was accounted for as a purchase transaction under generally
accepted accounting principles and, accordingly, the purchase price was
allocated on the basis of the estimated fair value of the assets acquired. This
purchase price allocation resulted in goodwill of approximately $61.2 million
which is being amortized on the straight-line basis over 30 years. The pro forma
financial results of operations below assume that the transaction was completed
on July 1, 1997, and reflect the increased interest costs, preferred stock
dividends and the amortization of the intangibles associated with the
transaction and related income tax effect:
<TABLE>
<CAPTION>
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
Net income per common share (basic and diluted) $ .24
- -------------------------------------------------------------------------------------------------------------
</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.
NOTE 5. LONG TERM DEBT
Concurrent with the consummation of the Merger, the Company entered a
credit facility (the "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 $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.
8
<PAGE> 9
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 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 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 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, 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.
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.
9
<PAGE> 10
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 $.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.
The nine months ended March 31, 1999 also includes, as a result of a
failed software system conversion, a $1.6 million impairment charge for
implementation costs with minimal future benefit.
10
<PAGE> 11
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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,
------------------ -----------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss attributable to common shareholders $ (6,885) $ (1,931) $ (9,405) $ (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 $ (2.22) $ (.63) $ (3.03) $ (.41)
========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
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 thereto included in this
report for the quarter ended March 31, 1999.
This quarterly report on Form 10-Q contains certain forward-looking
statements and information relating to the Company that are based on the opinion
of management as well as assumptions made by and information currently available
to management. Such forward-looking statements typically contain words such as
"anticipates," "believes," "estimates," "expects" or similar words indicating
that future outcomes are uncertain. In accordance with "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995, these statements are
qualified by cautionary language identifying important factors, though not
necessarily all such factors, which could cause future outcome to differ
materially from those set forward in the forward-looking statements. 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 $5.9 million or 17.0% over last year.
Certain operating costs and expenses, some of which relate to prior quarters,
were not reduced as quickly as planned and their impact more than offset the
contribution of the higher sales. Credit memos issued during the third quarter
that potentially relate to prior quarter shipping and billing errors and
customer promotional and rebate activities exceeded estimated accruals
established at December 31, 1998 by $3.5 million. Management is in the process
of analyzing these costs to determine whether any are related to errors in
recording the original amounts. If any such errors are material, the Company
will adjust the quarterly results of operation for the periods impacted.
Management does not believe the impact of any such adjustments will have a
material impact on the year to date reporting results. These costs were largely
responsible for the Company reporting $1.8 million EBITDA for the current
quarter instead of achieving the minimum EBITDA target of $4.5 million agreed to
with its Credit Facility Lenders in January.
Net sales were higher than expected for the third quarter in all product
segments. Pet products were particularly strong, and increased 20.3% 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.
Gross profit for the third quarter increased from $9.8 million last year
to $11.0 million this year. The gross profit increase from net sales was
partially offset by higher costs. Gross profit margin declined from 28.1% in the
third quarter last year to 27.1% 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. Expenses as a percent of net sales
this quarter were higher than expected due to the higher than normal level of
net sales deductions relating to prior quarters (see below).
12
<PAGE> 13
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Selling, general and administrative expense increased for the quarter
from $8.4 million last year to $11.7 million, or as a percent of net sales, from
24.1% to 28.8% 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 $1.6 million due to increased annual sales promotion and rebate
programs partially attributable to the shipping problems encountered in the
first and second fiscal quarters (see below).
The Company's practice is to record sales deductions for billing
errors, shipping errors, defective and damaged goods and certain rebate programs
as deductions from gross sales. The Company maintains an accrual to cover open
deductions and an estimate for incurred but not yet received deductions. These
deductions increased significantly in the latter part of the second quarter and
averaged more than $1.0 million per month in the third quarter. Historically the
Company has experienced monthly sales deductions in the $0.3 million to $0.4
million range and has accrued its outstanding exposure accordingly. The level of
deductions experienced in the third quarter has exceeded the accrual at December
31, 1998 and was insufficient to properly record the Company's exposure to sales
deductions related to the second quarter. The increased level of deductions has
been recorded in the third quarter. The Company has identified $1.9 million of
sales deductions in the third quarter that were tied to specific invoices billed
in prior quarters, principally in the second quarter. Many of these increased
deductions are tied to the shipping and systems problems the Company experienced
in the failed conversion of its computer systems in October. The Company has put
into place shipping and billing controls that it believes has substantially
reduced the source of these deductions. The Company believes there are
sufficient accruals at March 31, 1999 to cover all sales deductions.
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 period.
(See - "Year 2000"). The third quarter continued to be impacted by higher
additional operating costs and a significant increase in sales deductions from
customers.
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.
PLANNED ACTIONS
The Company implemented during the third quarter a number of the steps
described in the "Planned Actions" in the Form 10-Q 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.
13
<PAGE> 14
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
RESULTS OF OPERATIONS
NET SALES for the third quarter were $40.7 million, well above the $34.8
million in the comparable period of the prior year, an increase of $5.9 million.
The increase was primarily the result of higher pet product sales of $5.7
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.
14
<PAGE> 15
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GROSS PROFIT increased to $11.0 million in the third quarter of fiscal
1999, up from $9.8 million in the comparable period of the prior year, an
increase of $1.2 million. As a percentage of net sales, gross margin decreased
to 27.1% 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 $11.7 million
in the third quarter of fiscal 1999 from $8.4 million in the comparable period
of the prior year, an increase of $3.3 million or 40.1%. The increase was the
result of several factors, including $2.2 million increase in advertising and
promotions, higher freight costs of approximately $0.6 million and an increase
in goodwill amortization of $.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 28.8% 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 $1.6
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.
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.
15
<PAGE> 16
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
NET LOSS for the third quarter ended March 31, 1999 was $6.7 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 $8.7 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.
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.
16
<PAGE> 17
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
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.
17
<PAGE> 18
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
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.
18
<PAGE> 19
DOSKOCIL MANUFACTURING COMPANY, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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) (unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Pet products $ 33,542 $ 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 40,695 34,775 129,381 126,222
Cost of goods sold 29,661 25,004 89,871 83,382
---------- ---------- ---------- ----------
Gross profit 11,034 9,771 39,510 42,840
Selling, general and administrative expense 11,736 8,374 32,033 25,919
Impairment of long-lived assets 1,254 -- 2,871 --
---------- ---------- ---------- ----------
Operating income(loss) (1,956) 1,397 4,606 16,921
Adjustments:
Depreciation, amortization and impairment 3,710 2,825 10,676 8,585
---------- ---------- ---------- ----------
EBITDA (1) $ 1,754 $ 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.
19
<PAGE> 20
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
(Dollars in thousands) September 30, December 31, March 31, March 31,
1998 1998 1999 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pet Products $ 32,378 $ 41,670 $ 33,542 $ 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 48,711 40,695 129,381
Cost of goods sold 24,349 35,861 29,661 89,871
------------ ------------ ------------ ------------
Gross profit 15,626 12,850 $ 11,034 $ 39,510
Selling, general and administrative
expense 9,280 11,017 11,736 32,033
Impairment of long-lived assets -- 1,617 1,254 2,871
------------ ------------ ------------ ------------
Operating income 6,346 216 (1,956) 4,606
Adjustments:
Depreciation, amortization and
impairment 2,779 4,187 3,710 10,676
------------ ------------ ------------ ------------
EBITDA(1) $ 9,125 $ 4,403 $ 1,754 $ 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.
20
<PAGE> 21
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 - Financial Data Schedule (for electronic filing only)
27a - Financial Data Schedule (amended for second quarter) (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.
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: May 17, 1999 /s/ GARY E KLEINJAN
----------------------------------------
Gary E. Kleinjan
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 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 Second Amendment to Credit Agreement, dated May 14, 1999
27 Financial Data Schedule (for electronic filing only)
27a Financial Data Schedule (amended for second quarter)
(for electronic filing only)
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment"),
dated as of May 14, 1999, is entered into among DOSKOCIL MANUFACTURING COMPANY,
a Texas corporation (the "Borrower"), the lenders listed on the signature pages
hereof (collectively, the "Lenders"), and NATIONSBANK, N.A. (successor by
merger to NationsBank of Texas, N.A.), as the Administrative Agent (in said
capacity, the "Administrative Agent").
A. The Borrower, the Lenders and the Administrative Agent are parties
to that certain Credit Agreement, dated as of September 19, 1997, as amended by
that certain First Amendment to Credit Agreement, dated as of February 10, 1999
(the "Credit Agreement;" the terms defined in the Credit Agreement and not
otherwise defined herein shall be used herein as defined in the Credit
Agreement).
B. The Borrower, the Lenders and the Administrative Agent desire to
(i) amend the Credit Agreement and (ii) waive certain Events of Default under
the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Borrower,
the Lenders and the Administrative Agent covenant and agree as follows:
1. AMENDMENTS TO CREDIT AGREEMENT.
(a) Section 7.12 of the Credit Agreement is hereby amended to read as
follows:
"Section 7.12 Minimum Fixed Charge Coverage Ratio. The Borrower
shall not permit the Fixed Charge Coverage Ratio to be less than (a)
1.00 to 1 for the fiscal quarters ending June 30, 1999 and September
30, 1999 and (b) 1.25 to 1 at the end of any fiscal quarter
thereafter."
(b) Section 7.13 of the Credit Agreement is hereby amended to read as
follows:
"Section 7.13 Interest Coverage Ratio. At the end of each fiscal
quarter occurring below or at the end of each fiscal quarter occurring
during the periods indicated below, the Borrower shall not permit the
Interest Coverage Ratio to be less than the ratio set forth below
opposite such fiscal quarter or the period in which such fiscal
quarter occurs:
<TABLE>
<CAPTION>
Fiscal Quarter or Period Ratio
------------------------ -----
<S> <C>
At June 30, 1999 and September 30, 1999 1.20 to 1
From and including December 31, 1999 and thereafter 1.75 to 1"
</TABLE>
<PAGE> 2
(c) Article 7 of the Credit Agreement is hereby amended by adding a
new Section 7.19 thereto to read as follows:
"Section 7.19 Minimum EBITDA. The Borrower shall not permit EBITDA
to be less than (a) $5,000,000 for the fiscal quarter ending June 30,
1999, (b) $9,500,000 for the fiscal quarter ending September 30, 1999
and (c) $12,000,000 for the fiscal quarter ending December 31, 1999."
(d) Section 8.1 of the Credit Agreement is hereby amended by (i)
deleting "or" after the end of clause (m) thereof, (ii) deleting "." at the end
of clause (n) thereof and inserting "; or" in lieu thereof, and (iii) adding a
new clause (o) thereto to read as follows:
"(o) The Borrower shall fail to deliver to the Lenders by August
15, 1999 a certificate signed by the chief financial officer of the
Borrower certifying that (i) the Borrower will be able to perform
computer accounting functions necessary to successfully close the
month of July, 1999 for accounting purposes in order to meet the
requirements of Section 6.1 of the Credit Agreement for the month of
July, 1999 and (ii) the chief financial officer is not aware of any
matters related to the Borrower's computer accounting systems
conversion that could reasonably be expected to delay the production
of accounting information of the Borrower and its Subsidiaries in
order to comply with the requirements of the Credit Agreement or
otherwise have a Material Adverse Effect."
(e) Exhibit F to the Credit Agreement is hereby amended to be in the
form of Exhibit F to this Second Amendment.
2. WAIVER. The Lenders hereby waive the Event of Default that
occurred under the Credit Agreement as a result of the failure of the Borrower
to comply with Sections 7.12, 7.13 and 7.19 of the Credit Agreement at the
fiscal quarter ending March 31, 1999. The waiver provided herein does not (a)
affect any other covenants or provisions of the Credit Agreement and (b) relate
to any fiscal quarter-end other than March 31, 1999.
3. COOPERATION BY BORROWER. The Borrower (a) acknowledges that the
Administrative Agent shall engage a management consultant firm or group
("Management Consultant Firm") to conduct a review of management, sales and
marketing, systems, financial projections and liquidity of the Borrower and its
Subsidiaries and (b) agrees to fully cooperate at all times with the Management
Consultant Firm, the Administrative Agent and each Lender in connection with
such review. Notwithstanding anything in Section 5.7 of the Credit Agreement to
the contrary and the waiver of the Events of Default provided herein, the
Borrower agrees to pay all reasonable out-of-pocket expenses of the
Administrative Agent (including the fees and expenses of the Management
Consultant Firm) and each Lender in connection with such review or any other
visits and inspections related thereto conducted by the Administrative Agent
and each Lender. The
-2-
<PAGE> 3
Borrower acknowledges that the breach by the Borrower of its covenants and
agreements set forth in this Section 3 shall constitute an Event of Default
under the Credit Agreement.
4. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
execution and delivery hereof, the Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendments contemplated by the
foregoing Section 1 and the waiver contemplated by the foregoing Section 2:
(a) the representations and warranties contained in the Credit
Agreement are true and correct on and as of the date hereof as if made on and
as of such date;
(b) no event has occurred and is continuing which constitutes a
Default or an Event of Default;
(c) the Borrower has full power and authority to execute and deliver
this Second Amendment, and this Second Amendment and the Credit Agreement, as
amended hereby, constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in accordance with their respective
terms, except as enforceability may be limited by applicable debtor relief laws
and by general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law) and except as rights to indemnity
may be limited by federal or state securities laws; and
(d) no authorization, approval, consent, or other action by, notice
to, or filing with, any governmental authority or other Person (including the
Board of Directors of the Borrower), is required that has not been obtained for
the execution, delivery or performance by the Borrower of this Second
Amendment.
5. CONDITIONS OF EFFECTIVENESS. This Second Amendment shall be
effective as of May 14, 1999, subject to the following:
(a) the Administrative Agent shall have received a counterpart of this
Second Amendment executed by Lenders comprising the Determining Lenders;
(b) the Administrative Agent shall have received counterparts of this
Second Amendment executed by the Borrower;
(c) the representations and warranties set forth in Section 4 of this
Second Amendment shall be true and correct; and
(d) the Administrative Agent and the Lenders shall have received in
form and substance satisfactory to the Administrative Agent and the Lenders,
such other documents and certificates as the Administrative Agent shall
require.
-3-
<PAGE> 4
6. AMENDMENT FEE. The Borrower covenants and agrees to pay an
amendment fee to the Lenders which execute and deliver this Second Amendment to
the Administrative Lender (or its counsel) not later than 5:00 p.m., Dallas
time, May 14, 1999 in an amount equal to the product of (a) 0.05% multiplied by
(b)(i) with respect to each Lender having a portion of the Revolving Credit
Commitment, an amount equal to such Lender's portion of the Revolving Credit
Commitment and (ii) with respect to each Lender which is owed Facility A Term
Loan Advances or Facility B Term Loan Advances, the aggregate principal amount
of Facility A Term Loan Advances and Facility B Term Loan Advances owed to such
Lender. Such amendment fee shall be paid in immediately available funds and
shall be due and payable to each Lender eligible for payment pursuant to the
preceding sentence no later than one Business Day after the date which this
Second Amendment becomes effective. The Borrower agrees that the failure to pay
the amendment fee provided in this Section 6 shall be an Event of Default under
Section 8.1(b)(ii) of the Credit Agreement.
7. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this Second Amendment, each reference in
the Credit Agreement to "this Agreement," "hereunder," or words of like import
shall mean and be a reference to the Credit Agreement, as affected and amended
by this Second Amendment.
(b) The Credit Agreement, as amended by this Second Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
8. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
reasonable costs and expenses of the Administrative Agent in connection with
the preparation, reproduction, execution and delivery of this Second Amendment,
and the other instruments and documents to be delivered hereunder (including
the reasonable fees and out-of-pocket expenses of counsel for the
Administrative Agent with respect thereto and with respect to advising the
Administrative Agent as to its rights and responsibilities under the Credit
Agreement, as amended by this Second Amendment).
9. EXECUTION IN COUNTERPARTS. This Second Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which when taken together shall constitute but one
and the same instrument.
10. GOVERNING LAW; BINDING EFFECT. This Second Amendment shall be
governed by and construed in accordance with the laws of the State of Texas and
shall be binding upon the Borrower and each Lender and their respective
successors and assigns.
11. HEADINGS. Section headings in this Second Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Second Amendment for any other purpose.
-4-
<PAGE> 5
12. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS SECOND
AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AS TO THE SUBJECT MATTER THEREIN AND HEREIN AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS BETWEEN THE PARTIES.
- -------------------------------------------------------------------------------
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
- -------------------------------------------------------------------------------
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as of the date first above written.
BORROWER: DOSKOCIL MANUFACTURING COMPANY
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-6-
<PAGE> 7
ADMINISTRATIVE AGENT: NATIONSBANK, N.A. as the Administrative Agent
By:
-----------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
LENDERS: NATIONSBANK, N.A., as a Lender, Swing Line
Bank and Issuing Bank
By:
-----------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
-7-
<PAGE> 8
ARCHIMEDES FUNDING, LLC
By: ING Capital Advisors, LLC
As Collateral Manager
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-8-
<PAGE> 9
COMERICA BANK-TEXAS
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-9-
<PAGE> 10
MARINE MIDLAND BANK
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-10-
<PAGE> 11
IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-11-
<PAGE> 12
CREDITANSTALT CORPORATE FINANCE, INC.
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-12-
<PAGE> 13
FLEET CAPITAL CORPORATION
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-13-
<PAGE> 14
PRIME INCOME TRUST
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-14-
<PAGE> 15
KZH-SOLEIL CORPORATION
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-15-
<PAGE> 16
ML CLO XII PILGRIM AMERICA (CAYMAN)
LTD.
By: Pilgrim Investments, Inc., as its
Investment Manager
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-16-
<PAGE> 17
ML CBO IV (CAYMAN) LTD.
By: Highland Capital Management, L.P., as
Collateral Manager
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-17-
<PAGE> 18
EXHIBIT F
COMPLIANCE CERTIFICATE
NationsBank, N.A., ________, _____
as Administrative Agent
901 Main Street, 14th Floor
Dallas, Texas 75202
Attention: Marie T. Lancaster
This Compliance Certificate is made as of _______________, ______. The
undersigned certifies that the calculations set forth herein are true,
accurate, and complete, and are made in accordance with the provisions of the
Credit Agreement among Doskocil Manufacturing Company, Inc., NationsBank, N.A.,
as Administrative Agent, and Lenders, dated as of September 19, 1997 (as
amended, modified or supplemented, "Credit Agreement"). All defined terms used
herein but not specifically defined shall have the meanings set forth in the
Credit Agreement.
1. Borrowing Base. [to be completed monthly]
Borrower hereby represents and warrants that the following Borrowing
Base Report is true and correct in all respects as of ___________,
_____ (the "Reporting Date"). The Borrowing Base is determined as
follows:
<TABLE>
<CAPTION>
A. ELIGIBLE ASSETS ($000s)
<S> <C>
1. All Accounts $__________
2. Less ineligible Accounts (without duplication)
a. Accounts to which Borrower or a Subsidiary does not $_________
have lawful and absolute title
b. Accounts which are not the valid, legally enforceable $_________
obligation of the account debtor for goods or services
delivered or rendered to such Person
c. Accounts owed by a creditor of Borrower or a $_________
Subsidiary to the extent that such Account equals the
amount owed to such creditor
d. Portion of Accounts subject to any asserted dispute, $_________
offset, discount, counterclaim, or other claim or
defense of account debtor or to any asserted claim on
the part of the account debtor denying liability under
such Account
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
e. Accounts which Borrower or any Subsidiary may not $_________
assign or grant a security interest to Administrative
Agent
f. Accounts not evidenced by an invoice rendered to the $_________
account debtor
g. Accounts evidenced by chattel paper, promissory $_________
notes, or other instruments or the result of a
conditional sales agreement
h. Accounts subject to a Lien in favor of any Person $_________
other than Administrative Agent other than Permitted
Collateral Liens
i. Accounts due and payable for more than 90 days from $_________
the invoice date
j. Accounts of account debtors primarily conducting $_________
business in and organized under a jurisdiction outside
the United States (other than Canada) and which are
not insured or supported by an irrevocable letter of
credit
k. Accounts where the account debtor is a Tribunal $_________
l. Accounts where the account debtor is the subject of a $_________
proceeding under a Debtor Relief Law
m. Accounts of account debtors (excluding Kmart $_________
Receivable) who have more than 15% of accounts due
and payable for more than 90 days and which are not
insured from the invoice date
n. Accounts not subject to a fully perfected first
priority $ security interest in favor of
Administrative Agent
o. Accounts where the account debtor is an Affiliate or $_________
employee
Ineligible Accounts $_________
3. Eligible Accounts [(1) - (2)] $_________
4. Eligible Accounts includible in Borrowing Base [80% x $_________
(3)]
B. ELIGIBLE INVENTORY
1. All Inventory $_________
</TABLE>
-2-
<PAGE> 20
<TABLE>
<S> <C>
2. Less ineligible Inventory (without duplication)
a. 50% Work-in-Progress $_________
b. Obsolete Inventory $_________
c. Consignment Inventory $_________
d. Demonstration and display Inventory $_________
e. Inventory to which Borrower or any Subsidiary does $_________
not have lawful and absolute title
f. Inventory subject to a Lien in favor of any Person $_________
other than Administrative Agent, other than Permitted
Collateral Liens
g. Defective or unmerchantable Inventory $_________
h. Inventory located outside the United States $_________
i. Inventory located in leased facilities for which a $_________
Landlord's Waiver has not been delivered to
Administrative Agent
j. Inventory not subject to a fully perfected first priority $_________
security interest in favor of Administrative Agent
k. The sale of such Inventory, upon an Event of Default, $_________
is subject to a Necessary Authorization restriction or
limitation
Ineligible Inventory (sum of a. through k.) $_________
3. Eligible Inventory [(1) - (2)] $_________
4. Eligible Inventory includible in Borrowing Base [50% x (3)] $_________
C. BORROWING BASE
1. Eligible Accounts includible in Borrowing Base (A.4.) $_________
2. Eligible Inventory includible in Borrowing Base (B.4.) $_________
Borrowing Base [(1) + (2)] $_________
</TABLE>
-3-
<PAGE> 21
<TABLE>
<S> <C>
2. Covenant Calculations.. [To be completed quarterly except M.]
A. Leverage Ratio.
1. Total Debt
a. Indebtedness for borrowed money $_________
b. Capitalized Lease Obligations $_________
c. Obligations evidenced by bonds, debentures, notes or $_________
other similar instruments
d. Obligations to pay the deferred purchase price of $_________
property or services other than trade payables incurred
in the ordinary course of business
e. Total Debt [(a) + (b) + (c) + (d)] $_________
2. EBITDA
a. Pretax Net Income (excluding therefrom, to the extent $_________
included in determining Pretax Net Income, any item
of extraordinary gain, including net gains on the sale
of assets other than asset sales in the ordinary course
of business, and adding thereto, to the extent included
in determining Pretax Net Income, any items of
extraordinary loss, including net losses on the sale of
assets other than asset sales in the ordinary course of
business)
b. Interest expense (including in respect of Capitalized $_________
Lease Obligations)
c. EBIT Special Adjustments
(1) Management fees in favor of Westar Capital $_________
not to exceed $450,000
(2) Relocation costs related to integration of $_________
Borrower and Dogloo not to exceed $825,000
(3) Transaction fees and expenses related to $_________
Dogloo and Doskocil Transaction
(4) Schedule 9 Items $_________
(5) Excess of Westar Capital management fees $_________
accrued over such fees paid
</TABLE>
-4-
<PAGE> 22
<TABLE>
<S> <C>
(6) Excess of Westar Capital management fees $_________
paid over such fees accrued
(7) [(1) + (2) + (3) + (4) + (5) - (6)] $_________
d. Depreciation $_________
e. Amortization $_________
f. Other non-cash charges $_________
g. EBITDA [(a) + (b) + (c) + (d) + (e) + (f)] $_________
3 Leverage Ratio [(1) : (2)] _____ to 1
B. Section 7.1(c). Capitalized Lease Obligations and Indebtedness to
purchase property, plant and equipment
1. Maximum ($10,000,000 minus Indebtedness pursuant to $_________
Section 7.1(h) and 7.1(m))
2. Actual $_________
3. Difference [(1) - (2)] $_________
C. Section 7.1(h). Indebtedness incurred or assumed in respect of
Acquisitions
1. Maximum ($10,000,000 minus Indebtedness pursuant to $_________
Section 7.1(c) and 7.1(m))
2. Actual $_________
3. Difference [(1) - (2)] $_________
D. Section 7.1(m). Other Indebtedness
1. Maximum ($10,000,000 minus Indebtedness pursuant to $_________
Section 7.1(c) and 7.1(h))
2. Actual $_________
3. Difference [(1) - (2)] $_________
E. Section 7.3(f). Investments and expenditures in respect of
Acquisitions of non-Domestic Subsidiaries
1. Maximum $10,000,000
2. Actual $_________
3. Difference [(1) - (2)] $_________
</TABLE>
-5-
<PAGE> 23
<TABLE>
<S> <C>
F. Section 7.3(h). Investments of non-cash consideration in sales
1. Maximum 5,000,000
2. Actual $__________
3. Difference [(1) - (2)] $__________
G. Section 7.3(j). Other Investments
1. Maximum $2,500,000
2. Actual $__________
3. Difference [(1) - (2)] $__________
H. Section 7.7. Capital Expenditures (From September 19, 1997)
1. Maximum ($25,000,000 + Net cumulative revenues $__________
multiplied by .05)
2. Actual $__________
3. Difference [(1) - (2)] $__________
I. Section 7.8. Restricted Payments
1. Purchases and redemptions of officers, directors and
employees stock
a. Maximum $2,500,000
b. Actual $__________
2. Redemptions and repurchases required under Second
Securityholders Agreement
a. Maximum $250,000
b. Actual $__________
3. Dogloo Transaction Restricted Payments
a. Maximum (Base Amount, exclusive of accrued $36,882,000
dividends)
b. Actual $__________
4. Additional redemptions of capital stock
a. Maximum $2,400,000
b. Actual $__________
</TABLE>
-6-
<PAGE> 24
<TABLE>
<S> <C>
5. Advisory Fees to Specified Investors
a. Maximum per fiscal year $600,000
b. Actual $__________
J. Section 7.11. Leverage Ratio
1. Maximum
a. At December 31, 1999 and March 31. 2000 5.50 to 1
b. At June 30, 2000 5.00 to 1
c. From and including September 30, 2000 and 4.50 to 1
thereafter
2. Actual (2.A.3. above) _____ to 1
K. Section 7.12. Fixed Charge Coverage Ratio
1. Minimum
a. At June 30, 1999 and September 30, 1999 1.00 to 1
b. For each fiscal quarter thereafter 1.25 to 1
2. Actual
a. Cash Flow
(1) EBITDA (2.A.2.g. above) $__________
(2) Lease expense $__________
(3) Cash income tax paid $__________
(4) Total Cash Flow [(1) + (2) - (3)] $__________
b. Fixed Charges
(1) Scheduled principal payments in respect of $__________
Indebtedness
(2) Interest expense (including interest expense $__________
pursuant to Capitalized Lease Obligations)
(3) Operating Lease Expense $__________
(4) Fixed Charges [(1) + (2) + (3)] $__________
c. Fixed Charge Coverage Ratio [K.2.a.(4) to k.2.b.(4)] _____ to 1
</TABLE>
-7-
<PAGE> 25
<TABLE>
<S> <C>
L. Section 7.13. Interest Coverage Ratio
1. Minimum
a. At June 30, 1999 and September 30, 1999 1.20 to 1
b. From and including December 31, 1999 and thereafter 1.75 to 1
2. Actual
a. EBITDA (2.A.2.g. above) $__________
b. Interest expense (including interest expense pursuant $__________
to Capitalized Lease Obligations)
c. Interest Coverage Ratio [L.2.a to L.2.b.] _____ to 1
M. Section 7.19. Minimum EBITDA
1. Minimum
a. At June 30, 1999 $5,000,000
b. At September 30, 1999 $9,500,000
c. At December 31, 1999 $12,000,000
2. Actual EBITDA (2.A.2.g. above) $__________
N. Excess Cash Flow. [To be completed annually.]
1. Net Operating Cash Flow
a. Net Income $__________
b. Depreciation, amortization and other non-cash $__________
charges
c. Net losses on asset sales and non-cash asset write $__________
downs
d. Capital Expenditures $__________
e. Scheduled principal payments on Indebtedness $__________
f. Net gain on asset sales $__________
g. Net Operating Cash Flow [(a) + (b) + (c) - (d) - (e) - $__________
(f)]
2. Cash Acquisition Consideration $__________
3. Voluntary prepayments of Indebtedness which cannot be $__________
reborrowed
</TABLE>
-8-
<PAGE> 26
<TABLE>
<S> <C>
4. Restricted Payments $__________
5. Excess Cash Flow [1. - 2. - 3. - 4.] $__________
</TABLE>
The undersigned hereby further certifies to the following as of the
date of this Certificate:
The undersigned has reviewed the relevant terms of this Certificate
and has made, or caused to be made, under his/her supervision, a review of the
transactions and condition of the Borrower from the beginning of the accounting
period covered by the financial statements being delivered herewith to the date
of this Certificate and that such review has not disclosed the existence during
such period of any condition or event which constitutes a Default or Event of
Default.
The Borrower is in compliance in all material respects with all of the
terms and conditions of the Credit Agreement and other Loan Documents.
The financial statements delivered to Administrative Agent have been
prepared according to GAAP applied on a consistent basis in all material
respects with those previously delivered.
DOSKOCIL MANUFACTURING
COMPANY, INC.
By:
-------------------------------------
Name:
-------------------------------
Title:
------------------------------
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 21,884
<ALLOWANCES> 173
<INVENTORY> 29,405
<CURRENT-ASSETS> 52,499
<PP&E> 96,055
<DEPRECIATION> (42,432)
<TOTAL-ASSETS> 174,631
<CURRENT-LIABILITIES> 28,646
<BONDS> 177,963
0
9,161
<COMMON> 34,322
<OTHER-SE> (75,461)
<TOTAL-LIABILITY-AND-EQUITY> 174,631
<SALES> 129,381
<TOTAL-REVENUES> 129,381
<CGS> 89,871
<TOTAL-COSTS> 89,871
<OTHER-EXPENSES> 34,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,306
<INCOME-PRETAX> (8,718)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,718)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,718)
<EPS-PRIMARY> (3.03)
<EPS-DILUTED> (3.03)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,318
<SECURITIES> 0
<RECEIVABLES> 27,503
<ALLOWANCES> 313
<INVENTORY> 27,948
<CURRENT-ASSETS> 59,757
<PP&E> 100,215
<DEPRECIATION> (43,958)
<TOTAL-ASSETS> 181,178
<CURRENT-LIABILITIES> 27,694
<BONDS> 178,806
0
9,161
<COMMON> 34,322
<OTHER-SE> (68,805)
<TOTAL-LIABILITY-AND-EQUITY> 181,178
<SALES> 88,686
<TOTAL-REVENUES> 88,686
<CGS> 60,210
<TOTAL-COSTS> 60,210
<OTHER-EXPENSES> 21,914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,613
<INCOME-PRETAX> (2,062)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,062)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,062)
<EPS-PRIMARY> (0.81)
<EPS-DILUTED> (0.81)
</TABLE>
