<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: SEPTEMBER 30, 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 SEPTEMBER 30, 2000, WAS 3,203,644.
<PAGE> 2
DOSKOCIL MANUFACTURING COMPANY, INC.
SEC FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<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........................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.. 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 21
SIGNATURES................................................................ 22
</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
SEPTEMBER 30,
------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---------- ----------
<S> <C> <C>
Net sales ........................................ $ 41,238 $ 36,487
Cost of goods sold ............................... 29,838 25,720
---------- ----------
GROSS PROFIT ................................ 11,400 10,767
Selling, general and administrative expense ...... 10,702 11,972
---------- ----------
OPERATING INCOME (LOSS) ..................... 698 (1,205)
Other (income) expense:
Net interest expense ........................ 5,796 4,677
Other, net .................................. (69) (433)
---------- ----------
NET LOSS .................................... (5,029) (5,449)
Preferred stock accretion ........................ 42 --
Preferred stock dividends ........................ 421 229
---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS ..................................... $ (5,492) $ (5,678)
========== ==========
NET LOSS PER COMMON SHARE (BASIC AND
DILUTED) ......................................... $ (1.72) $ (1.81)
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ....... 3,197 3,139
========== ==========
</TABLE>
See accompanying notes.
Page 3
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DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
(DOLLARS IN THOUSANDS) 2000 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ -- $ 1,253
Accounts receivable, less allowance for doubtful
accounts of $606 and $558 ............................. 20,189 17,189
Inventories (Note 6) ..................................... 22,703 25,605
Other current assets ..................................... 1,421 1,313
------------ ------------
Total current assets .................................. 44,313 45,360
Property, plant and equipment, less accumulated
depreciation of $54,534 and $52,182 ................... 47,789 49,497
Goodwill ................................................... 48,583 49,036
Debt issuance costs ........................................ 3,609 4,633
Other assets (includes $0.8 million from shareholders) ..... 1,784 1,825
------------ ------------
Total assets .......................................... $ 146,078 $ 150,351
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable ......................................... $ 7,873 $ 6,890
Accrued liabilities (Includes $1.0 million at
September 2000 and $1.1 million at June 2000
to shareholders) ...................................... 5,269 4,187
Current portion of long-term debt ........................ 10,079 10,116
Accrued interest ......................................... 1,336 3,311
Accrued taxes ............................................ 673 411
Payroll and benefits payable ............................. 3,101 3,212
Additional credit facility ............................... 10,000 8,000
------------ ------------
Total current liabilities ............................. 38,331 36,127
Revolving credit facility .................................. 24,336 24,336
Long-term debt and capital leases .......................... 56,361 58,809
Senior subordinated notes .................................. 85,000 85,000
------------ ------------
Total liabilities ..................................... 204,028 204,272
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
Series D redeemable preferred stock, $100 liquidation
preference no par value net of discount: authorized
shares--500,000, issued and outstanding--73,670 ....... 6,703 5,662
Warrants to purchase common stock ........................ 4,180 4,180
Common stock, no par value: authorized shares--
15,000,000 issued and outstanding--3,203,644 at
September 30, 2000; 3,143,644 at June 30, 2000 ........ 34,289 34,288
Accumulated deficit ...................................... (112,283) (107,212)
------------ ------------
Total shareholders' deficit ...................... (57,950) (53,921)
------------ ------------
Total liabilities and shareholders' (deficit)
equity ........................................ $ 146,078 $ 150,351
============ ============
</TABLE>
See accompanying notes.
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DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
(DOLLARS IN THOUSANDS) 2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................... $ (5,029) $ (5,449)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ............................... 2,965 2,616
Amortization of debt issuance costs ......................... 1,023 184
Loss/(Gain) on sale of assets ............................... 5 (423)
Changes in operating assets and liabilities:
Accounts Receivable ..................................... (3,000) (3,442)
Inventories ............................................. 2,902 (2,601)
Accounts Payable ........................................ 983 939
Accrued liabilities and other ........................... (844) (385)
---------- ----------
Net cash used in operating activities ................... (995) (8,561)
INVESTING ACTIVITIES:
Capital expenditures ........................................ (785) (2,531)
Net proceeds from sale of assets ............................ 10 3,617
Other ....................................................... -- (33)
---------- ----------
Net cash (used in)/provided by investing activities ..... (775) 1,053
FINANCING ACTIVITIES:
Payments on long-term debt .................................. (2,338) (1,344)
Net proceeds from revolving credit agreement ................ -- 1,800
Net proceeds from additional credit facility ................ 2,000 7,000
Proceeds from sale of preferred stock ....................... 1,000 --
Other debt payments ......................................... (146) (67)
Proceeds from sale of common stock .......................... 1 5
---------- ----------
Net cash provided by financing activities ............... 517 7,394
---------- ----------
Net decrease in cash and cash equivalents ................... (1,253) (114)
Cash and cash equivalents at beginning of period ............ 1,253 114
---------- ----------
Cash and cash equivalents at end of period .................. $ -- $ --
========== ==========
</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 three month period ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ended June 30, 2001. 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, 2000.
Certain prior year amounts have been reclassified to conform to the fiscal
year 2001 presentation, including the reclassification of marketing rebates from
selling, general and administrative expense to net sales within the statement of
operations. 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 were reconfigured and were re-launched in
June 2000. The Company has been operating this version of its software
successfully for the last five months. Management believes the system is
providing accurate information and processing for invoicing, inventory
management, production planning, sales and financial reporting. In addition, the
Company has experienced excellent on time deliveries during the first quarter of
fiscal 2001.
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 28, 2001. 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
Page 6
<PAGE> 7
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
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 and outside manufacturing. It expects to lower production costs with
the purchase of new equipment and molds. In May 2000, construction was completed
on a new warehouse that is expected to reduce costs for material handling and
outside warehousing. The Company has also negotiated price reductions in
non-resin raw materials. Resin material costs are expected to be higher with
higher natural gas and oil prices. Liquidity is expected to improve from
increased cash flow from operations, lower projected capital spending and
reductions in inventories.
The Credit Facility and the Additional Credit Facility, as amended, waived
all past covenant violations and established new covenants. The Company, based
on its operating plan, the Additional Credit Facility and the Support Facility
(as described below) expects to be able to fund operations and comply with the
revised covenants through 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. The fifth amendment (see Note 5)
includes a Support Agreement with Westar Funds to provide the capital necessary
to meet certain of its financial covenants for the four quarters of fiscal 2001.
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.
NOTE 2. ACCOUNTING STANDARDS
On December 3, 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition, to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements. While SAB 101 provides a framework by which to recognize revenue in
the financial statements, the Company believes that adherence to this SAB will
not have a material impact on the Company's financial statements.
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
Page 7
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
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. The Subordinated Notes
contain cross acceleration 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 $24.7 million revolving credit
facility (the "Revolving Credit Facility") and includes a subfacility for
swingline borrowings and a sublimit for letters of credit. As of September 30,
2000, the principal amount outstanding on tranche A was $31.0 million, on
tranche B was $34.1 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 8
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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
bears interest at a rate based (at the Company's option) upon (i)LIBOR for one,
two, three or six months, plus 3.5% with respect to the tranche A term loan
facility and the Revolving Credit Facility or plus 4.0% with respect to the
tranche B term loan facility, or (ii) the Alternate Base Rate (as defined in the
Credit Facility) plus 2.0% with respect to the tranche A term loan facility and
the Revolving Credit Facility or plus 2.5% with respect to the tranche B term
loan facility; provided, however, the interest rates for the Revolving Credit
Facility and tranche A term loan are subject to several 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. 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. In September 2000
the lenders amended the Additional Credit Facility to extend its terms to
September 28, 2001. 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
Page 9
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
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.
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. In September 2000 the lenders amended the
Additional Credit Facility to extend its terms to September 28, 2001.
Page 10
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
On June 30, 2000, the Bank Group and the Company amended the Credit Facility
for the fifth time (the "Fifth Amendment"). The Fifth Amendment includes a
Support Agreement with Westar Funds to provide the capital necessary to enable
the Company to meet its EBITDA financial covenant for the quarter ending June
2000 and its minimum fixed charge coverage ratio covenant for the four quarters
of fiscal 2001. The Bank Group in turn agreed to remove the minimum EBITDA
requirement for fiscal 2001 and redefined the minimum fixed charge coverage
ratio (detailed below). The Fifth Amendment also confirms an interest rate
increase negotiated as part of the Fourth Amendment, increases the borrowing
base for the Company until September 2000 to allow the Company to reduce its
inventories, at which time it will revert to the borrowing base in the Credit
Facility dated September 19, 1997 and also extends the period for the fourth
quarter for adding capital to meet financial covenants to ninety days.
In conjunction with the Fifth Amendment, the Westar Funds entered into a
Support Agreement dated June 30, 2000 with the Company and Bank of America,
N.A., as administrative agent for certain lenders named therein (the "Support
Agreement"). The Westar Funds agreed to jointly and severally provide capital to
the Company pursuant to the Support Agreement in an amount that would meet the
minimum EBITDA covenant of the Credit Facility that is applicable as of June 30,
2000. The Westar Funds also agreed to jointly and severally provide capital to
the Company pursuant to the Support Agreement in an amount necessary, when added
to EBITDA, to make EBITDA greater than the sum of the maintenance capital
expenditures plus scheduled payments of principal on indebtedness for borrowed
money and capital leases plus payments of cash interest of the previous nine
months ended June 30 and the previous twelve months ending on September 30,
2000, December 31, 2000, March 31, 2001 and June 30, 2001. All capital
contributions made under the Support Agreement will be included in EBITDA for
purposes of calculating certain financial covenants in the Credit Facility as
further provided in the Fifth Amendment.
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.
Page 11
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
The Company did not achieve the cumulative minimum EBITDA financial
covenants for the six months ended March 2000 by approximately $1.4 million. As
permitted by the Credit Facility, as amended, this shortfall was satisfied by an
equity infusion in the amount of the EBITDA shortfall in May 2000. In September
2000, an equity infusion of $1.0 million was contributed for Series D Preferred
Stock. Of that additional investment, $0.1 million was required under the
Support Agreement to meet the June 2000 EBITDA shortfall. A capital infusion of
approximately $2.0 million will be required to be made by Westar Funds under the
Support Agreement to meet the Fixed Coverage Charge and senior leverage
shortfall for the twelve months ended September 2000. The Company anticipates
that the Westar Funds will make this payment in accordance with the Support
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>
September 30, June 30,
(DOLLARS IN THOUSANDS) 2000 2000
------------ ------------
<S> <C> <C>
Finished Goods $ 14,343 $ 15,708
Work-in-Process 614 1,604
Raw Materials 7,746 8,293
------------ ------------
Net inventories $ 22,703 $ 25,605
============ ============
</TABLE>
NOTE 7. INCOME TAXES
The effective tax rate for the three months ended September 30, 2000 was
0.0% due to the net operating loss generated for the period, for which a
valuation allowance has been provided. As the net operating loss carry forward
and net deductible temporary differences which existed at the date of the Dogloo
merger are realized, the associated tax benefit will reduce goodwill.
Realization of net operating losses and deductible temporary differences
generated subsequent to the date of the Dogloo merger will be recognized as a
reduction of income tax expense.
Page 12
<PAGE> 13
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 ended September 30, 2000 and 1999
are calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
(IN THOUSANDS EXCEPT PER SHARE DATA) 2000 1999
---------- ----------
<S> <C> <C>
Net loss attributable to common stockholders ............... $ (5,492) $ (5,678)
Average shares outstanding during the period ............... 3,197 3,139
Net loss per share (basic and diluted) ..................... $ (1.72) $ (1.81)
</TABLE>
NOTE 10. COMPREHENSIVE INCOME
For the first three months of fiscal 2001 and 2000, there were no
differences between comprehensive income and net income.
Page 13
<PAGE> 14
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
producers of plastic pet products in the United States. The Company manufactures
and markets a broad range of pet products through multiple distribution
channels. The following discussion should be read in conjunction with the
financial statements and notes for the quarter ended September 30, 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, 2000.
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 as amended 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 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; (iv) a
relatively small number of customers account for a significant percentage of the
Company's business; (v) the Company relies heavily on trademarks, patents and
licenses to protect the proprietary nature of its products; (vi) from fiscal
1998 - fiscal 2000, the Company experienced difficulties fulfilling customer
orders on a timely basis and may experience such difficulties in the future;
(vii) consumer preferences may change and the Company may fail to adequately
anticipate such changes; (viii) the Company's results of operations have
historically been seasonal; (ix) the Company is highly susceptible to the effect
of changes in general economic and business conditions; (x) the Company's
competitors may be more successful in introducing new product offerings, and
(xi) 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, 2000 and the risk factors described there are
incorporated herein by reference. The forward-looking statements contained
herein also include the statements made under the caption "Outlook" 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.
Page 14
<PAGE> 15
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
OVERVIEW - FIRST QUARTER
For the quarter, the Company continued to improve operating performance with
a $1.9 million improvement in operating income over the same period of last
year. The Company did not, however, meet management's performance expectations
for the first quarter of fiscal 2001 for two reasons. The Company experienced
significantly higher plastic resin costs in the current quarter. In addition,
costs associated with underutilization of the Company's facilities during the
fourth quarter of fiscal 2000 were included in inventory at June 30, 2000. As
this inventory was sold in the first quarter of fiscal 2001, cost of goods sold
for the period reflects these higher costs related to this plant
underutilization.
Compared with last year, net sales for the first quarter increased $4.8
million or 13.0%. This increase is the result of increased international sales
in addition to new product offerings. The first quarter of fiscal 2000 was
negatively affected by promotional activity in June 1999, which had the effect
of moving first quarter sales into the fourth quarter of fiscal 1999, and by an
increase in the Company's sales backlog due to order fulfillment difficulties.
The Company's sales backlog at September 30, 2000 has decreased 54% over the
same period last year and is now considered to be at normal levels.
Cash requirements for working capital (receivables plus inventories less
trade payables and accrued liabilities) were $29.8 million, down 6.0% from the
same period of the prior year. For the three months ended September 30, 2000,
capital expenditures were $0.7 million, down $1.7 million from the same period
of last year.
The Company did not achieve its minimum EBITDA covenant for the fiscal year
ending June 30, 2000 by an amount equal to approximately $0.1 million. This
shortfall was satisfied by an equity infusion of $1.0 million received from
Westar Funds in September 2000. The Company did not achieve the required fixed
coverage charge ratio and the senior leverage ratio for the twelve months ended
September 30, 2000 by an amount equal to approximately $2.0 million. As
permitted by the Credit Facility as amended, this shortfall may be satisfied by
an capital infusion in the amount of the shortfall made under the support
agreement by the Westar Funds. The Company anticipates the Westar Funds will
make this payment in accordance with the Support Agreement.
RESULTS OF OPERATIONS
NET SALES increased to $41.2 million in the first quarter of fiscal 2001
from $36.5 million in the comparable period of the prior year, an increase of
$4.7 million. The increase was primarily the result of higher pet sales of $4.4
million. The increase in pet sales is due to several factors including sales of
new products and increased international sales. In addition, promotional
activity in June 1999 reduced sales in the first quarter of fiscal 2000.
GROSS PROFIT increased to $11.4 million in the first quarter of fiscal 2001
from $10.8 million in the comparable period of the prior year, an increase of
$0.6 million. As a percentage of net sales, gross margin decreased to 27.6% in
the first quarter of fiscal 2001 from 29.5% in the comparable period of the
prior year. The Company's gross profit as a percentage of net sales was
negatively affected by higher material costs and lower plant utilization in the
fourth quarter of fiscal 2000, the costs of which were included in inventory at
June 30, 2000. Such costs have been included in cost of goods sold in the
current fiscal quarter as the inventory was sold.
Page 15
<PAGE> 16
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased to $10.7 million in
the first quarter of fiscal 2001 from $12.0 million in the comparable period of
the prior year. As a percentage of net sales, SG&A spending decreased to 25.9%
in the first quarter of fiscal 2001 from 32.8% in the comparable period of the
prior year. The decrease was the result of several factors including lower
consumer advertising, lower salaries, lower freight and lower outside
warehousing costs.
OTHER INCOME for the first three months of fiscal 2000 includes a $0.4
million gain on the sale of the Indianapolis facility.
INTEREST EXPENSE increased to $5.8 million in the first quarter of fiscal
2001 from $4.7 million in the comparable period of the prior year. The increase
is primarily due to higher interest rates, increased borrowings on the
Additional Credit Facility and an additional $0.8 million in non-cash
amortization of deferred financing costs related to the 4.1 million of guaranty
warrants.
PROVISION FOR INCOME TAXES for the three months ended September 30, 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, 2000 and September 30, 2000 included a valuation
allowance of approximately $13.4 million and $16.1 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 September 30, 2000 was $5.0 million compared
to a net loss of $5.4 million for the comparable period of the prior year. The
change in net loss primarily reflects the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Total debt outstanding at September 30, 2000 decreased by $0.5 million from
June 30, 2000, due to normal recurring debt payments partially offset by
additional borrowings against the Company's revolving credit agreements. Total
outstanding debt is comprised of bank borrowings of $99.4 million, Subordinated
Notes of $85.0 million and capital leases of $1.3 million. At September 30,
2000, the bank borrowings were comprised of a Term Loan Facility of $65.1
million, a Revolving Credit Facility of $24.7 million and an Additional Credit
Facility of $15.0 million, of which $24.3 million was outstanding under the
Revolving Credit Facility and $10.0 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 September 30, 2000, the
Company had $5.0 million of availability on the Additional Credit Facility and
$0.4 million of availability on the Revolving Credit Facility.
Because half of the Company's outstanding borrowings at September 30, 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 September 30, 2000, was 10.3%.
Page 16
<PAGE> 17
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Management anticipates incurring capital expenditures for the fiscal year
ending June 30, 2001 of approximately $7.0 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, based on its operating plan, the Additional Credit Facility
and the Support Facility expects to be able to fund operations and comply with
the revised covenants through fiscal 2001.
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. On October 12, 1999 the Company entered
into a fourth amendment to the Credit Facility (the "Fourth Amendment"). On June
30, 2000 the Company entered into a fifth amendment to the Credit Facility (the
"Fifth 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 Funds to make a capital contribution of approximately
$2.0 million in November 2000, was in compliance with all applicable covenants
as of September 30, 2000.
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, have and in the future 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 were higher in the first quarter and are expected to be higher for
fiscal 2001, helped by growth internationally, better systems support and a new
manufacturing team focusing on customer service. The Company believes customer
relations and service continue to be very strong during the critical selling
season. In the short term, shipments may be affected negatively as customers
draw down their safety stocks, based on their renewed confidence in the
Company's ability to ship on time. Weather may again be a factor in the sale of
pet shelters. Competition has increased with other manufacturers' entry into
the shelter and kennel markets. Such competition is expected to have an impact
on sales and potentially margins. International sales are expected to be a
positive source of increased sales in fiscal 2001.
Certain costs, such as direct and indirect labor, continue to be lower than
fiscal 2000 and management expects that trend to continue. Machine efficiency
and the resulting increase in throughput should allow for somewhat lower cost of
sales in fiscal 2001. Resin costs have increased in the quarter ended September
30, 2000 with higher natural gas and oil prices, and are expected to remain high
throughout fiscal 2001. The new planning process and the new production planning
philosophy should allow much improved service while lowering inventories.
Page 17
<PAGE> 18
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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 from the prior year. Spending for outside manufacturing, in-bound
freight and direct labor should also be lower. The new warehouse on campus will
reduce costs for outside warehouses and inventory transfers.
Cash requirements for working capital and capital spending are expected to
be lower in fiscal year 2001. 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.
COMPARISON OF THE FIRST QUARTER ENDED SEPTEMBER 30, 2000 AND 1999 EBITDA.
The following table summarizes the three months ended September 30, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
(DOLLARS IN THOUSANDS) ---------- ----------
<S> <C> <C>
Pet products .............................................. $ 35,154 $ 30,709
Sporting goods ............................................ 4,070 3,952
Outside resin sales ....................................... 2,014 1,826
---------- ----------
Net sales ................................................. 41,238 36,487
Cost of goods sold ........................................ 29,838 25,720
---------- ----------
Gross profit ......................................... 11,400 10,767
Selling, general and administrative
expense .............................................. 10,702 11,972
---------- ----------
Operating (loss) income .............................. 698 (1,205)
Adjustments:
Depreciation and amortization ............................. 2,965 2,616
---------- ----------
EBITDA ............................................... $ 3,663 $ 1,411
========== ==========
</TABLE>
Page 18
<PAGE> 19
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
(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 19
November 9, 2000 6:23 PM
<PAGE> 20
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, 2000.
Page 20
<PAGE> 21
DOSKOCIL MANUFACTURING COMPANY, INC.
PART II OTHER INFORMATION
ITEM 5. - OTHER INFORMATION
Mr. Casey resigned as Chief Financial Officer in October 2000 and Mr. Farmer
resigned as Executive Vice President of Sales and Marketing in November 2000.
The Company has decided to divide its sales and marketing department into two
departments and to hire a senior executive to manage each of these departments.
The Company is currently engaged in a search for these three positions.
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 21
<PAGE> 22
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: November 14, 2000 /s/ Larry E. Rembold
-----------------------------------
Larry E. Rembold
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 /s/ David P. Laporte
-----------------------------------
David P. Laporte
Corporate Controller and
Chief Accounting Officer
(Principal Accounting Officer)
Page 22
<PAGE> 23
DOSKOCIL MANUFACTURING COMPANY, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
