<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, 2000
--------------
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, 2000, WAS 3,154,644.
<PAGE> 2
DOSKOCIL MANUFACTURING COMPANY, INC.
SEC FORM 10-Q
QUARTER ENDED MARCH 31, 2000
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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................... 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................ 18
SIGNATURES................................................................................. 19
</TABLE>
Page 2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .................................... $ 38,663 $ 41,964 $ 123,022 $ 129,381
Cost of goods sold ........................... 25,958 26,999 80,788 83,202
--------- --------- --------- ---------
GROSS PROFIT ............................ 12,705 14,965 42,234 46,179
Selling, general and administrative expense .. 11,447 13,261 36,041 38,702
Impairment of long-lived assets .............. 1,829 1,254 2,607 3,587
--------- --------- --------- ---------
OPERATING INCOME (LOSS) ................. (571) 450 3,586 3,890
Other (income) expense:
Net interest expense .................... 5,671 4,695 16,443 13,319
Other, net .............................. (125) 5 (558) 5
--------- --------- --------- ---------
NET LOSS ................................ (6,117) (4,250) (12,299) (9,434)
Preferred stock accretion .................... 41 -- 75 --
Preferred stock dividends .................... 379 229 967 687
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS ................................. $ (6,537) $ (4,479) $ (13,341) $ (10,121)
========= ========= ========= =========
NET LOSS PER COMMON SHARE (BASIC AND
DILUTED) ..................................... $ (2.07) $ (1.44) $ (4.24) $ (3.26)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ... 3,155 3,107 3,150 3,105
========= ========= ========= =========
</TABLE>
See accompanying notes.
Page 3
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DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30, March 31,
(DOLLARS IN THOUSANDS) 2000 1999 1999
--------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 1,815 $ 114 $ --
Accounts receivable, less allowance for doubtful accounts
of $441, $1,090 and $173 ........................................... 17,730 20,747 21,711
Inventories (Note 6) .................................................. 26,446 26,161 29,405
Other current assets .................................................. 1,602 1,684 1,383
--------- --------- ---------
Total current assets ............................................... 47,593 48,706 52,499
Property, plant and equipment, less accumulated depreciation of
$50,410, $43,667 and $42,432 ....................................... 50,289 53,602 52,907
Fixed assets held for sale .............................................. -- 3,259 4,075
Goodwill ................................................................ 50,538 51,920 58,131
Debt issuance costs ..................................................... 5,656 4,390 4,423
Other assets (includes $0.8 million from shareholders) .................. 1,913 1,825 1,880
--------- --------- ---------
Total assets ....................................................... $ 155,989 $ 163,702 $ 173,915
========= ========= =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable ...................................................... $ 5,808 $ 7,682 $ 9,355
Accrued liabilities (Includes $0.8 million at March 2000,
$0.9 million at June 1999 and $0.5 million at March 1999 to
shareholders) ...................................................... 4,357 4,308 7,235
Current portion of long-term debt ..................................... 9,897 8,514 7,375
Accrued interest ...................................................... 1,110 3,169 975
Accrued taxes ......................................................... 667 573 708
Payroll and benefits payable .......................................... 2,595 3,359 2,998
Additional credit facility ............................................ 7,000 -- --
--------- --------- ---------
Total current liabilities .......................................... 31,434 27,605 28,646
Revolving credit facility ............................................... 24,336 22,900 20,900
Long-term debt and capital leases ....................................... 61,342 70,381 72,063
Senior subordinated notes ............................................... 85,000 85,000 85,000
--------- --------- ---------
Total liabilities .................................................. 202,112 205,886 206,609
Shareholders' (deficit) equity:
Preferred stock, no par value: authorized 2,434,465, none
issued or outstanding ..............................................
Series B redeemable preferred stock, no par value:
authorized shares--10,224,255, none issued or outstanding .......... -- -- --
Series C redeemable preferred stock, no par value:
authorized shares--11,841,280, issued and outstanding--9,161,567 ... 9,161 9,161 9,161
Series D redeemable preferred stock, $100 liquidation preference,
no par value net of discount: authorized shares--500,000, issued
and outstanding--50,000 ............................................ 4,254 -- --
Warrants to purchase common stock ..................................... 4,180 -- --
Common stock, no par value: authorized shares--15,000,000,
issued and outstanding--3,154,644 at March 31, 2000; 3,104,644 at
June 30, 1999 and 3,107,144 at March 31, 1999 ...................... 34,288 34,283 34,322
Accumulated deficit ................................................... (98,006) (85,628) (76,177)
--------- --------- ---------
Total shareholders' deficit ........................................ (46,123) (42,184) (32,694)
--------- --------- ---------
Total liabilities and shareholders' (deficit) equity ............... $ 155,989 $ 163,702 $ 173,915
========= ========= =========
</TABLE>
See accompanying notes.
Page 4
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DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------
(DOLLARS IN THOUSANDS) 2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................... $ (12,299) $ (9,434)
Adjustments to reconcile net loss to net cash used in
operating activities ...............................
Depreciation and amortization .......................... 8,430 7,662
Amortization of debt issuance costs .................... 2,092 735
Gain on sale of assets ................................. (425) --
Impairment of long-lived assets ........................ 2,607 3,587
Changes in:
Receivables ........................................ 3,017 (3,361)
Inventories ........................................ (285) (7,990)
Payables ........................................... (1,874) 4,726
Accrued liabilities and other ...................... (2,781) (4,396)
---------- ----------
Net cash used in operating activities .............. (1,518) (8,471)
INVESTING ACTIVITIES:
Capital expenditures ................................... (5,113) (11,593)
Increase in other assets ............................... (33) (25)
Net proceeds from sale of assets ....................... 3,618 --
---------- ----------
Net cash used in investing activities .............. (1,528) (11,618)
FINANCING ACTIVITIES:
Payments on long-term debt ............................ (8,321) (2,781)
Net proceeds from revolving credit agreement .......... 1,436 20,900
Net proceeds from additional credit facility .......... 7,000 --
Proceeds from sale of preferred stock ................. 5,000 --
Other debt payments ................................... (373) --
Proceeds from sale of common stock .................... 5 60
---------- ----------
Net cash provided by financing activities .......... 4,747 18,179
---------- ----------
Net increase(decrease) in cash and cash equivalents ... 1,701 (1,910)
Cash and cash equivalents at beginning of period ...... 114 1,910
---------- ----------
Cash and cash equivalents at end of period ............ $ 1,815 $ --
========== ==========
</TABLE>
See accompanying notes.
Page 5
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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.
In the opinion of management, all normal recurring adjustments considered
necessary for a fair presentation of the results for the periods covered have
been included. Interim results are not based on physical counts of inventory
and, therefore, include estimates to arrive at cost of goods sold for the
period. Operating results for the nine month period ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ended June 30, 2000. Due to the increased number of pet shelters sold during
periods of inclement weather, the Company typically earns a majority of its
income from operations during the first and second fiscal quarters. Additional
information is contained in the Company's Annual Report on Form 10-K for the
year ended June 30, 1999.
Certain prior year amounts have been reclassified to conform to the fiscal
year 2000 presentation. The Company operates within a single reportable
segment, the manufacture and sale of molded consumer plastic products.
In September, 1997, the Company consummated a merger with Dogloo, Inc. (the
"Merger"). Since then, the Company has experienced difficulties related to the
integration of manufacturing and shipping operations along with management
turnover in key areas, low machine efficiency and the need to outsource certain
production, a failed information systems conversion and problems with the
subsequent implementation of a new system. These difficulties have caused
higher than expected operating costs, working capital requirements and capital
spending which resulted in net losses and a liquidity shortage. In July 1999,
the Company launched a new enterprise resource planning software system which
included a new warehouse system. The launch of certain elements of these
systems was not successful. Accordingly, the systems are being reconfigured and
will be re-launched in June 2000.
The Company is highly leveraged and has relied upon debt financing to
provide for working capital and certain capital expenditures. Furthermore, as a
result of the above difficulties, the Company was unable in December 1998,
March 1999, June 1999 and September 1999 to meet the debt covenants required by
the Credit Facility (as defined in Note 5). In October 1999, the Company
amended the Credit Facility and amended an additional revolving credit
agreement (the "Additional Credit Facility") which provides for borrowings up
to $15.0 million and matures on September 30, 2000. In connection with amending
the Credit Facility, certain shareholders purchased $5.0 million of Series D
Preferred Stock along with related warrants to acquire 1.0 million shares of
common stock. In addition, in order to induce the Westar Funds to guarantee the
Additional Credit Facility, 14.1 million warrants to acquire common stock of
the Company were issued, of which 4.1 million are exercisable immediately.
The Company's plan is to grow sales, reduce fixed costs and improve
manufacturing productivity. The Company has programs in place to lower costs
for insurance, consumer advertising, shipping and outside manufacturing. It
expects to lower production costs with the purchase of new equipment and molds.
In the quarter, construction was completed on a new warehouse that will reduce
costs for material handling and outside warehousing. The Company has also
negotiated price reductions in non-resin raw materials. The Company implemented
a project to streamline the Company, eliminating unprofitable customers and
products and reducing selling, general and administrative expense. Liquidity is
expected to improve from increased cash flow from operations, significantly
lower projected capital spending and efforts to reduce the Company's investment
in inventories.
The Credit Facility and the Additional Credit Facility, as amended, waived
all past covenant violations and established new covenants. In connection with
renegotiating its debt agreements, the Company, based on its operating plan and
the Additional Credit Facility, expects to be able to fund operations and
comply with the revised covenants through at least the first quarter of fiscal
2001. However, no assurance can be given that the Company will achieve its
operating plan and there can be no assurance that factors or events currently
known or unknown will not negatively impact the Company's ability to operate
within its plan. As is normally the case in credit relationships, a failure to
comply with the amended covenants contained in the Credit Facility, the
Additional 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-default provisions. The Fourth Amendment (as defined in Note 5) includes
a provision allowing (but not requiring) Westar and certain existing
shareholders the right to cure certain financial covenant defaults within not
more than 45 days after the end of the relevant quarter by providing additional
capital to the Company.
Page 6
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
NOTE 2. ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This new standard requires recognition of all new
derivatives as either assets or liabilities at fair value. The Company does not
anticipate the effect of the adoption to have a material impact on either
financial position or results of operations. The Company plans to adopt the
standard effective July 1, 2000 as required.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101) "Revenue Recognition in Financial
Statements." This Accounting bulletin provides guidance on revenue recognition.
The Company does not anticipate the effect of the adoption to have a material
impact on either financial position or results of operations. The Company plans
to adopt the standard effective with the Company's fourth fiscal quarter, as
required.
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 which was subsequently increased to 25,000,000 and 15,000,000 shares of
common stock, each with no par value per share; (4) certain investors purchased
199,654 shares of common stock for $3.0 million and 1,530,674 shares of Series
A Preferred Stock for $23.0 million; (5) all outstanding balances under then
existing lines of credit and long-term debt, along with related accrued
interest and pre-payment penalties, were paid in full; and (6) the Corporation
redeemed 5,666,145 shares of common stock from the majority stockholder for
approximately $87.4 million. The acquisition of Spectrum has been accounted for
as a combination of entities under common control and, accordingly, the assets
acquired were recorded at their historical cost.
NOTE 4. MERGER
On September 19, 1997, Doskocil consummated a merger with Dogloo, Inc. (the
"Merger"), wherein 1,400,603 of the Company's common shares were exchanged for
Dogloo equity in the approximate amount of $21.2 million and Dogloo was merged
with and into Doskocil. The Company is now controlled by an investor group (the
"Investor Group") consisting of various Westar Capital entities and certain of
their affiliates (collectively "Westar") and Enterprise entities ("Enterprise").
As of April 2000, Westar acquired the equity interest of Enterprise.
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 $57.3 million
which is being amortized on the straight line basis over 30 years.
Concurrent with the consummation of the Merger, the Company issued 10 1/8%
Senior Subordinated Notes (the "Notes") due September 15, 2007, in the
aggregate principal amount of $85.0 million. The Notes were exchanged for
registered Notes (the "Subordinated Notes") pursuant to the Offer to Exchange
dated February 23, 1998 effective as of March 30, 1998. Discounts and
commissions aggregated 3% of the face amount of the Subordinated Notes and net
proceeds to the Company were $82.5 million. Interest on the Notes was, and on
the Subordinated Notes is, payable semi-annually on March 15 and September 15
of each year commencing on March 15, 1998. The Subordinated Notes are a
general, unsecured obligation of the Company, subordinated in right of payment
to all senior debt of the Company. The Subordinated Notes are subject to
certain optional redemptions at declining premiums beginning in 2002 and
continuing through 2005. Until September 15, 2000, upon an initial public
equity offering of common stock for cash, up to 35% of the aggregate principal
amount of the Subordinated Notes originally outstanding may be redeemed at the
option of the Company at a redemption price stipulated in the indenture and
other restricted payments, as defined. The Subordinated Notes also contain
cross default provisions with the Company's senior indebtedness. Debt issuance
costs of $5.8 million will be amortized over the term of the Subordinated Notes
and the Credit Facility.
NOTE 5. LONG TERM DEBT
Concurrent with the consummation of the Merger, the Company entered a
Credit Facility with a syndicate of lending institutions party thereto (the
"Lenders"), which agreement provides for an aggregate principal amount of loans
of up to $110 million. Loans under the Credit Facility consist of $82.5 million
in aggregate principal amount of term loans (the "Term Loan Facility"), which
facility includes a $45.0 million tranche A term loan subfacility, a $37.5
million tranche B term loan subfacility, and a $27.5 million revolving credit
facility which has been reduced to $24.7 million (the "Revolving Credit
Facility") and includes a subfacility for swingline borrowings and a sublimit
for letters of credit. As of March 31, 2000, the principal amount outstanding
on tranche A was $35.5 million, on tranche B was $34.3 million and $24.3
million on the revolving credit facility. 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.
Page 7
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Indebtedness under the Term Loan Facility and the Revolving Credit Facility
initially bears interest at a rate based (at the Company's option) upon (i)
LIBOR for one, two, three or six months, plus 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 (defined below), the interest rate margins described above have been
increased by 0.50% per annum from the date of the Second Amendment.
The tranche B term loan facility matures on September 30, 2004. 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 (as defined in
the Credit Facility). The Credit Facility provides for mandatory prepayment of
the Term Loan Facility and the Revolving Credit Facility until certain
financial ratios are attained by the Company. Prepayments on the Term Loan
Facility are applied to reduce scheduled amortization payments as provided in
the Credit Facility. The mandatory prepayments defined in the Credit Facility
include: (a) 100% of the net cash proceeds received by the Company, or any
subsidiary from asset sales (subject to de minimus baskets, certain other
defined exceptions, and reinvestment provisions), net of selling expenses and
taxes to the extent such taxes are paid; (b) 50% of excess cash flow pursuant
to an annual cash sweep arrangement; (c) up to 100% of the net cash proceeds of
certain indebtedness subject to certain exceptions and (d) 100% of the net cash
proceeds from the issuance of equity by the Company or any subsidiary subject
to de minimus baskets and certain exceptions. In addition, the Company may
prepay the Credit Facility in whole or in part at any time without penalty,
subject to reimbursement of certain costs of the Lenders.
The Company is required to pay to the Lenders in the aggregate a commitment
fee equal to 1/2% per annum on the committed undrawn amount of the Revolving
Credit Facility during the preceding quarter, provided that this fee may be
subject to reduction in the event the Company meets certain performance
targets.
Amendments to the Credit Facility. 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 minimum EBITDA requirements in place of the maximum
leverage ratio and interest rate increases of approximately 0.75% per annum.
The Credit Facility, as amended in February, required the Company to meet
certain financial tests, including a minimum fixed charge coverage ratio,
minimum interest coverage ratio, a minimum EBITDA requirement and a maximum
leverage ratio. The Credit Facility also contains additional restrictions,
which, among other things, limit additional indebtedness, liens, sales of
assets and business combinations.
As of March 31, 1999 the Company was not in compliance with the interest
coverage ratio, the 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 provided, among
other things, for the waiver of the March 31, 1999 defaults and lowered 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.
Page 8
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
On August 12, 1999, the Company entered into an amendment to the Credit
Facility (the "Third Amendment") to permit, among other things, the Company to
enter into an additional credit facility (the "Additional Credit Facility")
with BankAmerica, N.A. (the "Additional Lender"). The Additional Credit
Facility is a senior revolving credit facility which the Company entered into
on August 12, 1999. Amounts outstanding under the Additional Credit Facility
are secured by liens on certain equipment and other property of the Company
that are junior in lien priority to the lien securing the Company's existing
Credit Facility. Pursuant to an amendment to the Additional Credit Facility
executed on October 12, 1999, the maturity of such facility was extended to
September 30, 2000 and the maximum amount of borrowings thereunder was
increased from $10.0 million to $15.0 million. Advances under the Additional
Credit Facility may be made at the option of the Company as a base rate advance
or a LIBOR Advance. Base rate advances bear interest at a per annum interest
rate equal to the higher of (a) the sum of (i) 0.50% plus (ii) the federal
funds rate on the applicable day plus (iii) an applicable base rate margin or
(b) the sum of (i) the prime rate on such date plus (ii) an applicable base
rate margin. A LIBOR advance bears interest at a rate based upon LIBOR plus
3.50 percent. The financial covenants in the Company's existing Credit
Facility, after giving effect to the Fourth Amendment, are incorporated by
reference into the Additional Credit Facility.
In order to induce the Additional Lender to provide the Additional Credit
Facility, Westar Capital LP and Westar Capital II LLC (together, the "Westar
Funds") have entered into a Continuing Guaranty dated as of August 12, 1999
(the "Guaranty") and a Pledge Agreement dated as of August 12, 1999 (the
"Pledge Agreement") pursuant to which, from time to time in the discretion of
the Westar Funds, the Westar Funds may guarantee loans made by the Additional
Lender under the Additional Credit Facility and pursuant to which Westar
Capital II LLC has pledged $5 million to secure its obligations under the
Guaranty. In addition, Twelve D Limited, a limited partnership controlled by
Benjamin L Doskocil, Sr. ("TDL"), has entered into a Reimbursement Agreement
dated as of August 12, 1999 (the "Reimbursement Agreement") with the Westar
Funds pursuant to which TDL has agreed to reimburse the Westar Funds for
payments made pursuant to the Guaranty and the related pledge arrangements
under the Pledge Agreement in an amount proportional to its equity interests in
the Company.
In order to induce the Westar Funds to continue the Guaranty and the Pledge
Agreement and, in the case of TDL, to continue its obligations under the
Reimbursement Agreement, the Company issued to Westar LP and an affiliate and
TDL collectively (the "Investors"), who directly or indirectly through the
Reimbursement Agreement guaranteed the Additional Credit Facility, 14.1 million
warrants to acquire common stock of the Company (the "Guaranty Warrants"). The
Guaranty Warrants were issued to each such Investor ratably based on the amount
of such Investor's liability under the Guaranty and Reimbursement Agreement and
are exercisable at an initial exercise price of $.01 per share. Of the Guaranty
Warrants, 4.1 million, are exercisable immediately and, 10.0 million are only
exercisable in the event of, and in proportion to, payments made by such
Investor under the Guaranty. The 4.1 million Guaranty Warrants were assigned a
value of $3.4 million to be amortized as interest over one year. No value was
assigned to the remaining warrants. The Guaranty Warrants expire on September
30, 2007.
The Company was not in compliance with certain financial covenants at June
30, 1999, including the interest coverage ratio, fixed charge coverage ratio,
and the minimum EBITDA requirements of the existing Credit Facility. On October
12, 1999, the Company entered into a fourth amendment to the Credit Facility
(the "Fourth Amendment"). The Fourth Amendment provides, among other things,
for the waiver of all financial covenant ratios for September 30, 1999 and all
fiscal quarters prior thereto, and, commencing with the fiscal quarter ending
on December 31, 1999, raises the maximum leverage ratio and lowers each of (i)
the minimum fixed charge coverage ratio, (ii) the interest coverage ratio and
(iii) the minimum EBITDA. Additionally, the Fourth Amendment (i) adds a
covenant for senior leverage commencing with the fiscal quarter ending on
September 30, 2000, (ii) adds a covenant prohibiting the principal amount of
all loans outstanding under the existing Credit Facility from exceeding (a)
$96,000,000 as of the last day of each fiscal quarter through June 30, 2000,
and (b) thereafter, the lesser of (x) $96,000,000 and (y) the Company's EBITDA
for the four consecutive fiscal quarters immediately preceding the date of
calculation, times 3.0, and (iii) reduces the maximum amount of the "Revolving
Credit Commitment" to $24.7 million.
The Fourth Amendment also includes a provision allowing (but not requiring)
Westar and certain existing shareholders the right to commit to cure certain
financial covenant defaults within not more than 45 days after the end of the
relevant fiscal quarter by providing additional capital to the Company within 15
days thereafter. Pursuant to this provision, any such timely capital investment
will be deemed under such financial covenants to increase on a dollar-for-dollar
basis the EBITDA (and related definitions) of the Company as of the last day of
such fiscal quarter and, to the extent that the proceeds thereof are used to
repay Credit Facility loans, to reduce total debt and senior debt for purposes
of such financial covenants. Except for the $1.3 million planned equity infusion
in May 2000, there is no commitment or obligation present in the Fourth
Amendment on the part of Westar, TDL or any other shareholder to provide
additional capital to the Company.
Page 9
<PAGE> 10
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
In connection with certain amendments to the Additional Credit Facility on
October 12, 1999, the Guaranty and Reimbursement Agreement was increased to
$15.0 million and was extended to September 30, 2000 and the Pledge Agreement
was revised to, among other things, require Westar LLC to pledge additional
collateral to the Additional Lender in the event that loans under the
Additional Credit Facility exceed $10.0 million.
Sale of Series D Preferred Stock and Related Warrants. In connection with,
and as a condition of, the Fourth Amendment, the Company issued and sold to
certain of its current stockholders shares of a new series of Series D
Redeemable Preferred Stock, $100 stated value (the "Series D Preferred Stock")
in an aggregate amount of $5.0 million, along with related warrants to acquire
1.0 million shares of common stock of the Company (the "Related Warrants"). The
Related Warrants were valued at $.8 million to be amortized over five years as
preferred stock accretion. These warrants expire on September 30, 2007.
Proceeds from the sale of Series D Preferred Stock was applied against the
Credit Facility. Holders of the Series D Preferred Stock are entitled to
receive quarterly dividends at the Company's option either in cash or in
additional shares of Series D Preferred Stock at the annual dividend rate of
12% per annum. The Series D Preferred Stock is senior to all other classes of
equity securities of the Company with respect to dividend rights and rights on
bankruptcy, liquidation, dissolution and winding-up. In the event of the
liquidation, dissolution or winding-up of the Company, the holders of the
Series D Preferred Stock are entitled to receive $100 per share plus any
accrued and unpaid dividends, before the distribution of any assets of the
Company to holders of any class or series of capital stock ranking junior to
the Series D Preferred Stock. The Series D Preferred Stock is, at the Company's
election, subject to optional redemption but has no right to convert into any
other equity security of the Company. The Related Warrants are exercisable into
common shares at any time at an initial price equal to $.01 per share. The
Related and Guaranty Warrants, to the extent exercisable and dilutive, may
affect future earnings per share calculations.
The Company did not achieve the cumulative minimum EBITDA financial
covenants for the six months ended March 2000 by approximately $1.3 million. As
permitted by the Credit Facility, as amended, this shortfall can be satisfied if
one or more existing shareholders, including Westar Capital II, LLC, make an
equity infusion in the amount of the EBITDA shortfall in May 2000. Westar
Capital II, LLC, has advised the Company and the bank group of its intention to
make the required infusion within the time period required by the Credit
Agreement.
The Credit Facility also contains additional restrictions which, among
other things, limit additional indebtedness, liens, sales of assets and
business combinations. 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, the
Additional Credit Facility or the Subordinated Notes, if not cured or waived,
could permit acceleration of the related indebtedness and acceleration of
indebtedness under other instruments that contain cross-acceleration or
cross-defaults. While management expects to meet all covenants in the future,
there is no assurance the Company will do so.
NOTE 6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30, March 31,
(DOLLARS IN THOUSANDS) 2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Finished Goods $ 19,919 $ 15,503 $ 18,310
Work-in-Process 526 1,291 2,239
Raw Materials 6,001 9,367 8,799
Supplies -- -- 57
Net inventories -- -- --
------------ ------------ ------------
$ 26,446 $ 26,161 $ 29,405
============ ============ ============
</TABLE>
NOTE 7. INCOME TAXES
The effective tax rate for the three months and nine months ended March 31,
2000 was 0.0% due to the net operating loss generated for the period, for which
a valuation allowance has been provided. The estimated effective tax rate was
also 0% for the nine months ended March 31, 1999. 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.
Page 10
<PAGE> 11
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
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 a party to several purchase commitments for certain
inventory requirements.
The Company is self-insured for medical and dental benefits up to a maximum
of $0.1 million per covered individual for its employees and their covered
dependents. Medical claims exceeding $0.1 million per covered individual are
covered through a private insurance carrier.
NOTE 9. NET LOSS PER SHARE
Net loss per share for the three months and nine months ended March 31,
2000 and 1999 are calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
(IN THOUSANDS EXCEPT PER SHARE DATA) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders... $ (6,537) $ (4,479) $(13,341) $(10,121)
Average shares outstanding during the period... 3,155 3,107 3,150 3,105
Net loss per share (basic and diluted)......... $ (2.07) $ (1.44) $ (4.24) $ (3.26)
</TABLE>
NOTE 10. COMPREHENSIVE INCOME
For the first nine months of fiscal 2000 and 1999, there were no
differences between comprehensive income and net income.
Page 11
<PAGE> 12
DOSKOCIL MANUFACTURING COMPANY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Doskocil Manufacturing Company, Inc. (the "Company") is among the leading
plastic pet products companies in the United States, manufacturing a broad
range of plastic and other pet products sold through a broad distribution
network of retailers. The following discussion should be read in conjunction
with the financial statements and notes for the quarter ended March 31, 2000,
included in this report. Additional information is contained in the Company's
Annual Report on Form 10-K for the year ended June 30, 1999.
This quarterly report on Form 10-Q contains certain forward-looking
statements and information relating to the Company that are based on opinion of
management as well as assumptions made from 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 and similar
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 as
amended, the Additional 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 has and
may continue to 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 world wide 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 experience such difficulties in the future;
(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, 1999 and the risk factors described there are
incorporated herein by reference. The forward-looking statements contained
herein also include the statements made under the captions "Outlook" 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 implementation of the Company's corrective
actions.
OVERVIEW - THIRD QUARTER
For the quarter, the Company continued to improve operating performance,
meeting forecasted sales and manufacturing spending requirements. The Company
did not, however, achieve its EBITDA forecast for the third quarter for two
reasons. The Company experienced unfavorable inventory adjustments along with
lower than forecast plant utilization. The Company entered the third quarter
with higher than planned inventory which required lower plant utilization to
meet inventory requirements during the quarter. This lower utilization caused a
larger amount of fixed costs to be charged to cost of sales when compared to the
forecast. The Company also incurred an impairment charge of $1.8 million related
to the July 1999 systems conversion.
The Company did not achieve the required cumulative minimum EBITDA financial
covenants for the six months ended March 2000 by approximately $1.3 million. As
permitted by the Credit Facility as amended, this shortfall can be satisfied if
one or more existing shareholders, including Westar Capital II, LLC, make an
equity infusion in the amount of the EBITDA shortfall in May 2000. Westar
Capital II, LLC, has advised the Company and the bank group of its intention to
make the required infusion within the time period required by the Credit
Agreement.
Compared with last year, net sales for the third quarter were down $3.3
million or 7.8%. A mild winter and high sales deductions negatively impacted
sales this year. Sales last year were strong with a delayed selling season for
shelters resulting in higher than expected shelter sales in the third quarter.
Page 12
<PAGE> 13
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Cash requirements for working capital (receivables plus inventories less
trade payables and accrued liabilities) were $34.0 million, down slightly from
last year. For the nine months ended March 2000, capital expenditures, which
were primarily limited to the implementation cost of the ERP software and
spending for manufacturing, were $5.1 million, down $6.5 million from the same
period of last year.
The Company engaged outside consultants in the third quarter to help
streamline its ERP and warehousing management systems. Based on the
consultants' recommendations, the decision was made to reconfigure the ERP
system and also use the imbedded warehouse management functions, dropping the
acquired warehouse system. The $1.8 million impairment charge in the third
quarter of fiscal 2000 includes writing off those costs relating to the
warehouse system and to the first ERP implementation that were incurred in the
last quarter of fiscal 1999 and the first quarter of the current fiscal year.
The launch of the reconfiguration is planned for late in the fourth fiscal
quarter.
The Company hired a new team of manufacturing executives late in the second
quarter and adopted a new operations strategy. Production performance is now
measured on a daily basis with an emphasis on material yields, cycle
efficiencies and daily throughput. Customer satisfaction, labor efficiency and
inventory levels are also measured on a daily basis. Production scheduling is
now tied more closely to firm demand rather than building strictly to forecast.
This strategy should result in improved customer satisfaction, lower outside
manufacturing costs and lower inventories. The short-term impact will be lower
plant utilization needed and an increase in fixed costs charged to costs of
sales as inventories are reduced to meet customer demand.
RESULTS OF OPERATIONS
NET SALES decreased to $38.7 million in the third quarter of fiscal 2000
from $42.0 million in the comparable period of the prior year, a decrease of
$3.3 million. The decrease was primarily the result of lower pet sales of $2.0
million, lower sport sales of $0.9 million and lower outside resin sales. The
decline in pet sales is primarily due to the extended selling season for pet
shelters in fiscal 1999, which resulted in higher than expected shelter sales,
and the mild weather this year, which reduced demand for shelters. Pet sales
also declined due to the SKU reduction and customer consolidation programs. The
decline in sport sales was primarily due to the disposition of a non-core
product line in the last half of fiscal 1999. For the first nine months of
fiscal 2000, sales decreased $6.4 million from the same period last year
primarily due to lower sports sales caused by the disposition of a non-core
product line and lower outside resin sales. Pet sales declined 1.2% to $106.3
million.
GROSS PROFIT decreased to $12.7 million in the third quarter of fiscal 2000
from $15.0 million in the comparable period of the prior year, a decrease of
$2.3 million. As a percentage of net sales, gross margin decreased to 32.9% in
the third quarter of fiscal 2000 from 35.7% in the comparable period of the
prior year. The Company's gross profit as a percentage of net sales was
negatively affected by lower sales and lower plant utilization which caused a
higher amount of fixed costs charged to cost of sales. For the first nine months
of fiscal 2000, gross profit was down $4.0 million from the same period of last
year primarily due to lower sales of sporting goods and higher costs, primarily
labor, outside warehousing and raw materials. As a percentage of net sales,
gross margin decreased to 34.3% in the first nine months of fiscal 2000, down
from 35.7% in the same period of fiscal year 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased to $11.4 million in
the third quarter of fiscal 2000 from $13.3 million in the comparable period of
the prior year. As a percentage of net sales, SG&A spending decreased to 29.6%
in the third quarter of fiscal 2000 from 31.6% in the comparable period of the
prior year. The decrease was the result of several factors including lower
consumer advertising, lower management fees and lower freight and outside
warehousing costs. For the first nine months ended March 31, 2000, SG&A
expenses decreased to $36.0 million, down 6.9% from the same period of the
prior year. As a percentage of net sales, SG&A spending decreased to 29.3% for
the first nine months of fiscal 2000 from 29.9% for the first nine months of
fiscal 1999.
IMPAIRMENT OF LONG LIVED ASSETS during the third quarter of fiscal 2000
includes $1.8 million of costs related to the fast-forward ERP and warehousing
systems implementation in July 1999 which management believes has minimal
future benefit. Included in these costs is $0.8 million related to the
abandoned warehouse management system and $1.0 million of costs incurred for
the ERP system with no future benefit due to the reconfiguration. During the
quarter, certain elements of the original implementation were deemed to not
function and the launch of the reconfigured elements is scheduled for June
2000. The nine months ended March 2000 also includes a $0.8 million charge to
write off certain molds due to an SKU reduction. During the third quarter of
fiscal 1999, there was a $1.3 million charge due to the decision to divest the
Company of certain non-core business assets. The nine months ended March 1999
also includes a charge of $2.3 million as a result of the failed system
conversion in the second fiscal 1999 quarter.
OTHER INCOME for the first nine months of fiscal 2000 includes a $0.4
million gain on the sale of the Indianapolis facility.
Page 13
<PAGE> 14
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
INTEREST EXPENSE increased to $5.7 million in the third quarter of fiscal
2000 from $4.7 million in the comparable period of the prior year. The increase
is primarily due to higher interest rates and an additional $0.8 million in
amortization of deferred financing costs related to the 4.1 million of guaranty
warrants. Interest expense in the nine month period ending March 31, 2000
increased $3.1 million from the same period of the prior year primarily due to
increased debt balances, higher interest rates, higher amortization of deferred
financing costs and $0.3 million in fees related to the new credit agreement.
PROVISION FOR INCOME TAXES for the three months and nine months ended March
31, 2000 and 1999 was $0.0 million, due to a net operating loss generated
during the period for which a valuation allowance has been provided. The tax
benefit associated with the net operating loss has been offset by a valuation
allowance. The balance sheet dated June 30, 1999 and March 31, 2000 included a
valuation allowance of approximately $9.0 million and $13.2 million,
respectively, for deferred tax assets as of the purchase date and also includes
deferred tax assets included in the provision for income taxes.
NET LOSS for the quarter ended March 31, 2000 was $6.1 million compared to
a net loss of $4.3 million for the comparable period of the prior year. Net
loss for the nine months ended March 2000 was $12.3 million compared to $9.4
million in the same period of the prior year. The change in net loss primarily
reflects the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Total debt outstanding on March 31, 2000 increased by $0.8 million from
June 30, 1999, with additional borrowings against the Company's revolving credit
agreements and additional capital leases offset by debt payments. Total
outstanding debt is comprised of bank borrowings of $101.1 million, Subordinated
Notes of $85.0 million and capital leases of $1.5 million. At March 31, 2000,
the bank borrowings were comprised of a Term Loan Facility of $69.8 million, a
Revolving Credit Facility of $24.7 million and an Additional Credit Facility of
$15.0 million, of which $23.4 million was outstanding under the Revolving Credit
Facility and $7.0 million was outstanding under the Additional Credit Facility.
The Additional Credit Facility is guaranteed by certain shareholders. Note 4 to
the Financial Statements contained herein outlines the terms and conditions of
the Subordinated Notes. At March 31, 2000, the Company had $8.0 million of
availability on the Additional Credit Facility, $1.8 million in cash and
marketable securities and $.4 million of availability on the Revolving Credit
Facility.
Because half of the Company's outstanding borrowings at March 31, 2000 and
the additional availability from the Revolving Credit Facility and the
Additional 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, 2000, was 9.6%.
Management anticipates incurring capital expenditures for the fiscal year
ending June 30, 2000 of approximately $8.0 million relating to machinery, molds
and information systems. Management plans to fund these capital expenditures
through cash flow from operations and, if necessary, borrowings under the
Revolving Credit Facilities.
The Company believes cash provided by operations, equipment leases, the
planned equity infusion in May 2000 and cash available under existing credit
facilities will be sufficient to fund working capital and capital expenditure
requirements during the next twelve months.
The Company's Term Loan Facility and Revolving Credit Facilities, as
amended, contain a number of financial covenants that require the Company to
meet certain financial ratios and tests, including a minimum fixed charge
coverage ratio, minimum interest coverage ratio, minimum EBITDA and maximum
senior debt and total debt leverage ratios. On October 12, 1999 the Company
entered into a fourth amendment to the Credit Facility (the "Fourth Amendment")
(See Note 5 to the Financial Statements contained herein for terms and
conditions of the Credit Facility). The Company, based on the commitment from
Westar Capital to make a capital contribution of approximately $1.3 million in
May 2000, was in compliance with all applicable covenants as of March 31, 2000.
The Company's continued ability to satisfy its loan covenants depends, in
part, on the amount of time required to successfully address the difficulties
described above and below. (See also "Outlook") Until corrected, the impact of
these difficulties on the Company's financial performance will adversely affect
the Company's ability to satisfy its financial covenants. In the event the
Company is unable to meet certain of its financial covenants, the Company
anticipates requesting waivers and/or amendments to its Term Loan Facility,
Revolving Credit Facility and Additional Credit Facility and if necessary,
seeking additional equity. There is no certainty that waivers and/or amendments
to its loan agreements could be obtained or that the Company can raise
additional equity. Except for the $1.3 million described above, there is no
commitment or obligation on the part of any shareholder of the Company to
provide additional equity or debt financing to the Company.
Page 14
<PAGE> 15
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
The Company and certain of its shareholders, including Westar Capital and
HBI Financial Inc., and partners, officers and affiliates of such shareholders
and the Company, may from time to time make open market and privately
negotiated purchases of the Subordinated Notes. The timing and amount of such
purchases, if any, will depend upon a variety of matters including, but not
limited to, the trading price of the Subordinated Notes and restrictions
contained in the Company's debt agreements.
OUTLOOK
Sales have been flat this year and sales growth is a key component of
achieving the Company's financial objectives. As mentioned above, the SKU
reduction, customer consolidation, systems issues and mild weather have all
played a part in this year's sales performance. The Company is monitoring the
impact of consumer traffic at specialty retailers after a new broad distribution
strategy of a premium dog food that could effect specialty retail foot traffic
and the sale of the Company's products. The Company is addressing the need for
sales growth by introducing new products and accelerating growth of
international sales to Europe and the Far East. Relationships with the customer
base are strong. Competition is not expected to have a long term impact but may
cause higher promotional spending and price pressure during the balance of this
fiscal year and in the next fiscal year.
The Company continues to focus on restoring its profit margins and has
taken a number of steps that should improve margins in the future. Sales and
Marketing personnel continue to reduce slow moving and low margin SKUs, which
will increase the ability of the Company to meet customer requirements while
reducing inventory levels and warehousing costs. A customer consolidation plan
was implemented to direct small customers to distributors, which should reduce
freight, shipping costs and inventories. The warehouse extension is complete
and will reduce the costs of outside warehousing and material movement.
The Company is monitoring resin prices that continue to rise in the
marketplace. The Company has mitigated the higher costs by using a more
efficient formulation and by higher utilization of its resin compounding
facility.
The Company's manufacturing philosophy relies on maintaining excess
production capacity rather than high levels of finished goods inventories to
meet customer demand. In the short term, as the Company slows down production
to draw down its inventories, it will continue to experience an increase in
fixed costs charged to cost of sales. This will negatively impact reported
earnings but lower working capital, freeing up cash. Manufacturing spending
continues to decline and is expected to be lower over the next fiscal year.
Spending for outside manufacturing, in-bound freight and direct labor should be
lower because of the higher efficiency levels currently being achieved. The new
warehouse on campus will reduce costs for outside warehouses and inventory
transfers. Direct labor is lower and that trend is expected to continue.
Cash requirements for working capital and capital spending are expected to
be lower in the next fiscal year. Cash requirements for inventories will decline
with accounts receivable and accounts payable as a factor of sales turnover.
Capital spending is expected to be focused on molds for new products and
maintenance for manufacturing. Interest costs have risen and are expected to
continue at high levels.
The reconfiguration of the Company's ERP software and the removal of the
warehouse system should lower costs while increasing the accuracy and
timeliness of information. Most of the cost of the reconfiguration will be
capitalized while the capitalized cost of the earlier implementation is charged
to impairment expense.
The Company's Bank Agreements as modified provide for minimum EBITDA and
other financial ratios and it is not certain the Company will meet these
covenants going forward. The Agreements also allow the owners to make up any
EBITDA deficiency with injections of equity but there is no commitment or
obligation on the part of any shareholder of the Company to provide additional
equity or debt financing to the Company.
YEAR 2000
The Company's internal business systems have experienced no material Year
2000 compliance related problems. In addition, the Company is not aware of any
Year 2000 related issues with any of its customers, suppliers or other third
parties with whom it has business relationships. The Company does not expect, at
the time, any significant financial or operational impact due to Year 2000
related issues. Capital expenditures for this project were approximately $7.3
million, of which $2.3 million of these costs had minimal future benefit and
were charged to expense in fiscal 1999 as a result of the failed system
conversion. $1.8 million of these costs were charged to expense in fiscal 2000
due to the launch of the reconfigured system.
Page 15
<PAGE> 16
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This new standard requires recognition of all new
derivatives as either assets or liabilities at fair value. The Company does not
anticipate the effect of the adoption to have a material impact on either
financial position or results of operations.
COMPARISON OF THE THIRD QUARTER AND THE NINE MONTHS ENDED MARCH 31, 2000 AND
1999 EBITDA.
The following table summarizes the three months and the nine months ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
(DOLLARS IN THOUSANDS) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Pet products .................................... $ 32,764 $ 34,811 $106,342 $107,590
Sporting goods .................................. 3,546 4,459 11,372 14,065
Outside resin sales ............................. 2,353 2,694 5,308 7,726
-------- -------- -------- --------
Net sales .................................. 38,663 41,964 123,022 129,381
Cost of goods sold .............................. 25,958 26,999 80,788 83,202
-------- -------- -------- --------
Gross profit ............................... 12,705 14,965 42,234 46,179
Selling, general and administrative
expense ........................................ 11,447 13,261 36,041 38,702
Impairment of long-lived assets ................. 1,829 1,254 2,607 3,587
-------- -------- -------- --------
Operating (loss) income .................... (571) 450 3,586 3,890
Adjustments:
Depreciation, amortization and impairment........ 4,914 3,710 11,037 11,392
-------- -------- -------- --------
EBITDA ..................................... $ 4,343 $ 4,160 $ 14,623 $ 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.
Page 16
<PAGE> 17
DOSKOCIL MANUFACTURING COMPANY, INC.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Based on quoted market prices at the date of this filing, the Company's
Subordinated Notes were trading in a range of 40-45% of face value.
Page 17
<PAGE> 18
DOSKOCIL MANUFACTURING COMPANY, INC.
PART II OTHER INFORMATION
ITEM 5. - OTHER INFORMATION
In April 2000, Westar and its affiliates acquired all of the equity interest
of the Enterprise Funds in the Company. As a result, Westar and its affiliates
now own 86% of the outstanding common stock of the Company.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule (for electronic filing only)
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter for which this report
is filed.
Page 18
<PAGE> 19
DOSKOCIL MANUFACTURING COMPANY, INC.
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 15, 2000 /s/ Larry E. Rembold
-----------------------------------
Larry E. Rembold
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2000 /s/ John J. Casey
-----------------------------------
John J. Casey
Chief Financial Officer
(Principal Accounting Officer)
Page 19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,815
<SECURITIES> 0
<RECEIVABLES> 18,171
<ALLOWANCES> 441
<INVENTORY> 26,446
<CURRENT-ASSETS> 47,593
<PP&E> 100,699
<DEPRECIATION> (50,410)
<TOTAL-ASSETS> 155,989
<CURRENT-LIABILITIES> 31,434
<BONDS> 170,678
0
13,415
<COMMON> 38,468
<OTHER-SE> (98,006)
<TOTAL-LIABILITY-AND-EQUITY> 155,989
<SALES> 123,022
<TOTAL-REVENUES> 123,022
<CGS> 80,788
<TOTAL-COSTS> 80,788
<OTHER-EXPENSES> 38,337
<LOSS-PROVISION> (247)
<INTEREST-EXPENSE> 16,443
<INCOME-PRETAX> (12,299)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,299)
<EPS-BASIC> (4.24)
<EPS-DILUTED> (4.24)
</TABLE>
