<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: DECEMBER 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 DECEMBER 31, 1999, WAS 3,154,644.
<PAGE> 2
DOSKOCIL MANUFACTURING COMPANY, INC.
SEC FORM 10-Q
QUARTER ENDED DECEMBER 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <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>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ................................. $ 47,159 $ 47,442 $ 84,359 $ 87,417
Cost of goods sold ........................ 29,110 33,599 54,830 56,203
-------- -------- -------- --------
GROSS PROFIT ......................... 18,049 13,843 29,529 31,214
Selling, general and administrative expense 11,909 14,416 24,594 25,441
Impairment of long-lived assets ........... 778 2,333 778 2,333
-------- -------- -------- --------
OPERATING INCOME(LOSS) ............... 5,362 (2,906) 4,157 3,440
Other (income) expense:
Net interest expense ................. 6,095 4,408 10,772 8,613
Other, net ........................... -- 7 (433) 11
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES ............. (733) (7,321) (6,182) (5,184)
Income tax provision ...................... -- (915) -- --
-------- -------- -------- --------
NET LOSS ............................. (733) (6,406) (6,182) (5,184)
Preferred stock accretion ................. 34 34
Preferred stock dividends ................. 359 229 588 458
-------- -------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS .............................. $ (1,126) $ (6,635) $ (6,804) $ (5,642)
======== ======== ======== ========
NET LOSS PER COMMON SHARE (BASIC AND
DILUTED) .................................. $ (0.36) $ (2.14) $ (2.16) $ (1.82)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING $ 3,155 $ 3,104 $ 3,147 $ 3,104
======== ======== ======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
DOSKOCIL MANUFACTURING COMPANY, INC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1999 1999 1998
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 5,623 $ 114 $ 3,318
Accounts receivable, less allowance for doubtful accounts
of $686, $1,090 and $313 .................................................. 21,778 20,747 25,921
Inventories (Note 6) ........................................................... 27,862 26,161 27,948
Other current assets ........................................................... 1,516 1,684 1,301
--------- --------- ---------
Total current assets ...................................................... $ 56,779 $ 48,706 $ 58,488
Property, plant and equipment, less accumulated depreciation of
$47,822, $43,667 and $43,958 .............................................. 53,341 53,602 52,282
Fixed assets held for sale .......................................................... -- 3,259 3,259
Goodwill ............................................................................ 50,999 51,920 58,643
Debt issuance costs ................................................................. 6,680 4,390 4,667
Other assets (December and June 1999 includes $0.8 million and December 1998
includes $0.7 million from shareholders) .................................. 1,949 1,825 1,854
--------- --------- ---------
Total assets .............................................................. $ 169,748 $ 163,702 $ 179,193
========= ========= =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable ............................................................... $ 6,207 $ 7,682 $ 6,473
Accrued liabilities (Includes $1.4 million at December 1999,
$0.9 million at June 1999 and $0.6 million at December 1998 to shareholders).. 6,248 4,308 9,410
Current portion of long-term debt .............................................. 9,455 8,514 6,375
Accrued interest ............................................................... 2,744 3,169 2,547
Accrued taxes .................................................................. 455 573 593
Payroll and benefits payable ................................................... 3,125 3,359 3,433
Additional credit facility ..................................................... 8,000 -- --
--------- --------- ---------
Total current liabilities ................................................. 36,234 27,605 28,831
Revolving credit facility ........................................................... 24,700 22,900 19,400
Long-term debt and capital leases ................................................... 63,817 70,381 74,406
Senior subordinated notes ........................................................... 85,000 85,000 85,000
--------- --------- ---------
Total liabilities ......................................................... $ 209,751 $ 205,886 $ 207,637
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
values, net of discount: authorized shares--500,000, issued and
outstanding--50,000 ....................................................... 4,213 -- --
Paid in capital ................................................................ 4,180 -- --
Common stock, no par value: authorized shares--15,000,000,
issued and outstanding--3,154,644 at December 31, 1999;
3,104,644 at June 30, 1999 and 3,107,144 at December 31, 1998 ............. 34,288 34,283 34,322
Accumulate deficit ........................................................... (91,845) (85,628) (71,927)
--------- --------- ---------
Total shareholders' deficit ............................................... (40,003) (42,184) (28,444)
--------- --------- ---------
Total liabilities and shareholders' (deficit) equity ...................... $ 169,748 163,702 $ 179,193
========= ========= =========
</TABLE>
See accompanying notes
4
<PAGE> 5
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
---------------------
(DOLLARS IN THOUSANDS 1999 1998
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss..................................................... $ (6,182) $ (5,184)
Adjustments to reconcile net loss to net cash used in
operating activities.....................................
Depreciation and amortization................................ 5,346 5,349
Amortization of debt issuance costs.......................... 1,068 491
Gain on sale of assets....................................... (423) --
Impairment of long-lived assets.............................. 778 2,333
Changes in:
Receivables.............................................. (1,031) (7,571)
Inventories.............................................. (1,701) (6,533)
Payables................................................. (1,475) 1,844
Accrued liabilities and other............................ 1,186 (150)
-------- --------
Net cash used in operating activities.................... (2,434) (9,421)
--------- --------
INVESTING ACTIVITIES:
Capital expenditures......................................... (3,785) (7,168)
Increase in other assets..................................... (33) (25)
Net proceeds from sale of assets............................. 3,617 --
-------- --------
Net cash used in investing activities.................... (201) (7,193)
--------- --------
FINANCING ACTIVITIES:
Payments on long-term debt.................................. (6,432) (1,438)
Net proceeds from revolving credit agreement................ 1,800 19,400
Net proceeds from additional credit facility................ 8,000 --
Proceeds from sale of preferred stock....................... 5,000 --
Other debt payments......................................... (229) --
Proceeds from sale of common stock.......................... 5 60
-------- --------
Net cash provided by financing activities................ 8,144 18,022
Net increase in cash and cash equivalents................... 5,509 1,408
Cash and cash equivalents at beginning of period............ 114 1,910
-------- --------
Cash and cash equivalents at end of period.................. $ 5,623 $ 3,318
======== ========
</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.
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. December 1999 inventory was based on a physical inventory taken
in January 2000. Operating results for the six month period ended December 31,
1999 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 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
began an implementation of a new enterprise resource planning system to assist
in alleviating some of these difficulties.
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 entered into 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 certain investors 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 (see Note 5).
The Company's plan is to reduce fixed costs and improve manufacturing
productivity to return to profitability. 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. Construction has begun on a new warehouse that will cut
costs for material handling and outside warehousing. The Company has also
negotiated price cuts in non-resin raw materials. There is in progress 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 working capital.
The Credit Facility, as amended, waived all past covenant violations and
established new covenants. In connection with renegotiating its debt agreement,
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.
6
<PAGE> 7
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.
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.,
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).
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
7
<PAGE> 8
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
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 December 31, 1999, the principal
amount outstanding on tranche A was $37.3 million, on tranche B was $34.4
million and $24.7 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.
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 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. 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 through and including December 31, 1999.
8
<PAGE> 9
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.
9
<PAGE> 10
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
The Fourth Amendment also 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
fiscal quarter by providing additional capital to the Company. 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. There is no commitment or obligation on the part of Westar, TDL or
any other shareholder to provide additional capital to the Company.
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 fair value of the 4.1 million currently exercisable
Guaranty Warrants has been recorded as deferred financing costs and is being
amortized to interest expense over the twelve month period of the Additional
Credit Facility.
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>
DECEMBER 31, JUNE 30, DECEMBER 31,
(IN THOUSANDS) 1999 1999 1998
------------- -------- ---------
<S> <C> <C> <C>
Finished Goods $ 18,920 $ 15,503 $ 17,060
Work-in-Process 1,341 1,291 2,594
Raw Materials 7,601 9,367 8,180
Supplies -- -- 114
-------- -------- --------
Net inventories $ 27,862 $ 26,161 $ 27,948
======== ======== ========
</TABLE>
10
<PAGE> 11
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
NOTE 7. INCOME TAXES
The effective tax rate for the three months and six months ended December
31, 1999 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 six months ended December 31, 1998. 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 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 six months ended December 31,
1999 and 1998 are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders .... $(1,126) $(6,635) $ 6,804) $ (5,642)
Average shares outstanding during the period .... 3,155 3,104 3,147 3,104
Net loss per share (basic and diluted) .......... $ (0.36) $ (2.14) $ (2.16) $ (1.82)
</TABLE>
NOTE 10. COMPREHENSIVE INCOME
For the first and second quarter of fiscal 2000 and 1999, there were no
differences between comprehensive income and net income.
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 distribution network of more
than 2,000 retailers. The following discussion should be read in conjunction
with the financial statements and notes for the quarter ended December 31, 1999
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 by an 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 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 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, 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 - SECOND QUARTER
The Company maintained its market position, meeting the requirements of its
large customers in the high season. Sales of pet products increased 4.8% over
last year in spite of the warm weather, which adversely impacted sales of
shelters, and systems difficulties experienced in processing orders and
scheduling production. Sporting goods sales dropped 15.7% over the same period
last year due to systems issues, increased competition and the disposition of
related non-core assets. Customer service improved partially due to last year's
SKU reduction and the elimination of dual branding. The systems impact on sales
was less than on first quarter sales and less than second quarter sales last
year when an enterprise resource planning system implementation failed in
October 1998.
Management completed planning and execution of a program to simplify its
operations and reduce costs. Marketing implemented another round of SKU
consolidation and redirected small customers to distributors. The new operations
management team implemented a flatter organization designed to be more efficient
and responsive to customers' requirements. Construction commenced on an addition
to the existing warehouse.
Because of systems issues, manufacturing focused on servicing the customer
and not always on containing costs. Nonetheless, manufacturing performance in
the second quarter improved from last year because of the purchase of new
presses and the move into new production facilities. Shipping performance
improved from last year although systems issues proved cumbersome and lessened
distribution efficiency. Systems issues also impacted production planning and
led to higher inventory levels. Outside manufacturing and inbound freight costs
continued to impact costs but less than last year. Direct labor costs continued
at high levels primarily due to the existing seven day, around the clock
manufacturing operation. Manufacturing operations reverted
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
to a five-day schedule in the third quarter of fiscal year 2000 and, as a
result, payroll costs are expected to be lower with no effect on to customer
service. December inventory is based on a physical inventory which was taken in
early January 2000 with a significant favorable adjustment to inventory booked
in December. A restructuring of operations and manufacturing has been initiated
to eliminate two levels of management, to align support functions under line
management and to eliminate organizational redundancy.
Operating expenses in the second quarter were down $2.5 million due to lower
advertising costs and a general reduction in departmental spending. Impairment
costs were lower by $1.5 million.
The systems conversion continues to impact the Company and consume
management attention. Outside consultants are on-site and implementing a
full-scale project to refine and streamline the systems with a focus on reducing
the Company's order-to-cash cycle. A new Information Technology management team
started in the third quarter of fiscal 2000. The Company corrected its computer
records to reflect the physical inventory taken in January. The Company used the
physical inventory for financial statement purposes and to provide more accurate
information for planning, purchasing and order processing.
Cash flow improved because of higher earnings, lower capital spending and a
reduction in working capital when compared to the same period of the prior year.
The Company reduced working capital (trade receivables, inventories and trade
payables) by $4.0 million compared to December 1998. Funds available, including
cash and available credit, increased to $12.6 million, compared with $11.4
million at the same time last year.
RESULTS OF OPERATIONS
NET SALES decreased to $47.2 million in the second quarter of fiscal 2000
from $47.4 million in the comparable period of the prior year, a decrease of
$0.2 million. The decrease was primarily the result of lower sport sales of $0.7
million and lower outside resin sales, somewhat offset by higher pet product
sales of $1.9 million. The higher pet sales resulted from an increase in the
sale of dog houses. The decline in sport sales was primarily due to the loss of
two customers and lower sales due to the disposition of non-core assets in the
last half of fiscal 1999. For the first six months of fiscal 2000, sales
decreased $3.1 million from the same period last year primarily due to lower
sport sales and lower outside resin sales.
GROSS PROFIT increased to $18.0 million in the second quarter of fiscal 2000
from $13.8 million in the comparable period of the prior year, an increase of
$4.2 million. As a percentage of net sales, gross margin increased to 38.3% in
the second quarter of fiscal 2000 from 29.2% in the comparable period of the
prior year. The Company's gross profit as a percentage of net sales was
positively affected by higher sales of pet products and lower outside resin
sales which are lower margin, significantly lower costs for outside processing
and outside warehousing, higher throughput due to new equipment and facilities
and a favorable adjustment to inventory from the physical inventory taken in
January 2000. These improvements were partially offset by some lagging first
quarter costs and higher labor costs associated with the seven-day workweek. The
same period last year was negatively affected by the failed systems
implementation and lagging first quarter costs. For the first six months of
fiscal 2000, gross profit was down $1.7 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 material costs. As a percentage of net sales,
gross margins decreased to 35.0% in the first six months of fiscal 2000, down
from 35.7% in the same period of fiscal year 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased to $11.9 million in
the second quarter of fiscal 2000 from $14.4 million in the comparable period of
the prior year. As a percentage of net sales, SG&A spending decreased to 25.3%
in the second fiscal quarter of fiscal 2000 from 30.4% in the comparable period
of the prior year. The decrease was the result of several factors including
lower consumer advertising and lower legal and accounting costs. For the first
six months ended December 31, 1999, SG&A expenses decreased to $24.6 million,
down 3.3% from the same period of the prior year. As a percentage of net sales,
SG&A spending increased to 29.2% for the first six months of fiscal 2000 from
29.1% for the first six months of fiscal 1999.
IMPAIRMENT OF LONG LIVED ASSETS during the second quarter of fiscal 2000
includes $0.8 million charge to write off certain molds due to the SKU
reduction. During the second quarter of fiscal 1999, there was a $2.3 million
charge due to a failed software conversion.
OTHER INCOME for the first six months of fiscal 2000 includes a $0.4 million
gain on the sale of the Indianapolis facility.
13
<PAGE> 14
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
INTEREST EXPENSE increased to $6.1 million in the second quarter of fiscal
2000 from $4.4 million in the comparable period of the prior year. The increase
is primarily due to increased debt balance on both the Revolving Credit Facility
and the Additional Credit Facility, a $0.3 million fee related to the new credit
agreement and an additional $0.7 million related to the amortization of deferred
financing costs related to the 4.1 million of guaranty warrants. Interest
expense in the six month period ending December 31, 1999 increased $2.2 million
from the same period of the prior year primarily due to increased debt balances
and higher amortization of deferred financing costs.
PROVISION FOR INCOME TAXES for the three months and six months ended
December 31, 1999 and the six months ended December 31, 1998 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 December 31, 1999 included a valuation allowance of approximately $9.0
million and $11.0 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 December 31, 1999, was $0.7 million compared
to a net loss of $6.4 million for the comparable period of the prior year. Net
loss for the six months ended December 1999 was $6.2 million compared to $5.2
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 December 31, 1999 increased by $4.2 million from
June 30, 1999, due primarily to additional borrowings against the Company's
revolving credit agreements. Total outstanding debt is comprised of bank
borrowings of $104.4 million and Subordinated Notes of $85.0 million. At
December 31, 1999, the bank borrowings were comprised of a Term Loan Facility of
$71.7 million, a Revolving Credit Facility of $24.7 million (the maximum amount
allowable under the fourth amendment to the credit agreement) and an Additional
Credit Facility of $15.0 million, of which $8.0 million was outstanding. The
Additional Credit Facility is guaranteed by certain shareholders. Note 4 to the
Financial Statements outlines the terms and conditions of the Subordinated
Notes. At December 31, 1999 the Company had $7.0 million of availability on the
Additional Credit Facility and $5.6 million in cash and marketable securities.
Because half of the Company's outstanding borrowings at December 31, 1999
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 December 31, 1999 was 9.8%.
Management anticipates incurring capital expenditures for the fiscal year
ending June 30, 2000 of approximately $10.0 million relating to machinery, molds
for additional capacity and product development 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 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 for terms and conditions of new bank
agreement.) The Company was in compliance with all applicable covenants as of
December 31, 1999.
14
<PAGE> 15
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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. There is no commitment or obligation on the part of any
shareholder of the Company to provide additional equity to the Company.
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
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
further reduced slow moving and low margin SKUs to 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 will be completed in the spring, reducing
the costs of outside warehousing and material movement.
In Manufacturing, a new management team started work with a focus on
reducing costs and increasing customer service. The plant is shifting to a
five-day schedule, which will reduce direct labor and overhead costs. Production
planning will improve because of the SKU reduction and customer consolidation.
Resin prices increased over the last six months due to increased demand and
raw material costs in spite of increases in industry supply capacity. Resin
producers are trying to implement another price increase in the spring and this
may adversely impact future profits.
The new Information Technology management and the systems support from the
outside consultants will increase costs in the short term but will improve the
effectiveness of the Company's systems and business processes.
Cash should be sufficient for seasonal requirements. The Company is
continuing to focus on reducing working capital and minimizing cash for capital
spending. A new planning process has been started to reduce inventories and
improve fulfillment rates to customers.
The Company is committed to the investment in growth through a variety of
new products and has aligned the product development group under the sales and
marketing department.
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
this time, any significant financial statements or operational impact due to
Year 2000 related issues. Capital expenditures for this project were
approximately $6.5 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.
15
<PAGE> 16
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 SECOND QUARTER AND THE SIX MONTHS ENDED DECEMBER 31, 1999 AND
1998 EBITDA.
The following table summarizes the three months and the six months ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pet products ............................ $ 42,330 $ 40,401 $ 73,578 $ 72,779
Sporting goods .......................... 3,700 4,387 7,826 9,606
Outside resin sales ..................... 1,129 2,654 2,955 5,032
-------- -------- -------- --------
Net sales .......................... $ 47,159 $ 47,442 $ 84,359 $ 87,417
Cost of goods sold ...................... 29,110 33,599 54,830 56,203
-------- -------- -------- --------
Gross profit ....................... $ 18,049 $ 13,843 $ 29,529 $ 31,214
Selling, general and administrative
expense ................................. 11,909 14,416 24,594 25,441
Impairment of long-lived assets...... 778 2,333 778 2,333
-------- -------- -------- --------
Operating (loss) income ............ $ 5,362 $ (2,906) $ 4,157 $ 3,440
Adjustments:
Depreciation, amortization
and impairment ........................ $ 3,507 4,903 6,123 7,682
-------- -------- -------- --------
EBITDA ............................. $ 8,869 $ 1,997 $ 10,280 $ 11,122
======== ======== ======== ========
</TABLE>
(1) The term EBITDA as used above means operating income plus depreciation,
amortization and asset impairments. EBITDA should not be construed as a
substitute for income from operations or be considered a better indicator of
liquidity or cash flow from operating activities which is determined in
accordance with generally accepted accounting principles. EBITDA is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditures and working
capital requirements. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs.
16
<PAGE> 17
DOSKOCIL MANUFACTURING COMPANY, INC.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There are no material changes to the disclosure on this matter made in the
Company's report on Form 10-K for the year ended June 30, 1999.
17
<PAGE> 18
DOSKOCIL MANUFACTURING COMPANY, INC.
PART II OTHER INFORMATION
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.
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: February 14, 2000 /s/ Larry E. Rembold
--------------------
Larry E. Rembold President
and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2000 /s/ John J. Casey
-----------------
John J. Casey
Chief Financial Officer
(Principal Accounting Officer)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 5,623
<SECURITIES> 0
<RECEIVABLES> 22,464
<ALLOWANCES> 686
<INVENTORY> 27,862
<CURRENT-ASSETS> 56,779
<PP&E> 101,163
<DEPRECIATION> (47,822)
<TOTAL-ASSETS> 169,748
<CURRENT-LIABILITIES> 36,234
<BONDS> 173,517
0
13,374
<COMMON> 34,288
<OTHER-SE> (87,665)
<TOTAL-LIABILITY-AND-EQUITY> 169,748
<SALES> 84,359
<TOTAL-REVENUES> 84,359
<CGS> 54,830
<TOTAL-COSTS> 54,830
<OTHER-EXPENSES> 25,319
<LOSS-PROVISION> 53
<INTEREST-EXPENSE> 10,772
<INCOME-PRETAX> (6,182)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,182)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,182)
<EPS-BASIC> (2.16)
<EPS-DILUTED> (2.16)
</TABLE>
