10-Q 1 d87238e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM _____________ TO _____________ COMMISSION FILE NO. 333-37081 DOSKOCIL MANUFACTURING COMPANY, INC. (Exact Name of Registrant as Specified in its Charter) TEXAS 75-1281683 (State of Incorporation) (I.R.S. Employer Identification No.) 4209 BARNETT BOULEVARD ARLINGTON, TEXAS 76017 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (817) 467-5116 -------------------------------------------------------------------------------- INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S NO PAR VALUE COMMON STOCK AT MARCH 31, 2001, WAS 3,233,644. 2 DOSKOCIL MANUFACTURING COMPANY, INC. SEC FORM 10-Q QUARTER ENDED MARCH 31, 2001 INDEX 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 2. LEGAL PROCEEDINGS ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................... 21 SIGNATURES ............................................................. 22

-------------------------------------------------------------------------------- Page 2 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS DOSKOCIL MANUFACTURING COMPANY, INC. STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes. -------------------------------------------------------------------------------- Page 3 4 DOSKOCIL MANUFACTURING COMPANY, INC. BALANCE SHEETS

See accompanying notes. -------------------------------------------------------------------------------- Page 4 5 DOSKOCIL MANUFACTURING COMPANY, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes. -------------------------------------------------------------------------------- Page 5 6 DOSKOCIL MANUFACTURING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION General. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation of the results for the periods covered have been included. Interim results are not based on physical counts of inventory and, therefore, include estimates to arrive at cost of goods sold for the period. Operating results for the nine month period ended March 31, 2001 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. Effective for fiscal year ending June 30, 2001, the Company's fiscal year is a 52/53 week operating cycle that ends on the Saturday nearest the end of the reporting period. Fiscal 2001 represents a 52-week operating cycle. Recent Developments. In September 1997, the Company consummated a merger with Dogloo, Inc. (See Note 4 below.) 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 liquidity problems. 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. Management believes the system is now 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 fiscal 2001. The Company is highly leveraged and has relied upon debt financing and additional equity infusions to provide for working capital and certain capital expenditures. The Company's ability to meet its financial covenant requirements under the Credit Facility and the Additional Credit Facility (as such terms are defined in Note 5 below) and its debt amortization requirements under the Term Loan Facility (as defined in Note 5 below) has been significantly impaired as a result of the difficulties experienced since September 1997. With respect to the twelve months ended December 30, 2000, the Company did not achieve the fixed charge coverage ratio, interest coverage ratio, leverage ratio or senior leverage ratio required under the Credit Facility by various amounts, the largest of which was approximately $8.0 million. As a result, the Company is in default of certain financial covenants contained in the Credit Facility and the Additional Credit Facility applicable at December 30, 2000. In addition, as of February 1, 2001, an additional default existed which occurred when the Company failed to make certain lease payments. Effective as of February 14, 2001, the Company entered into a limited forbearance agreement with the lenders under the Credit Facility and the Additional Credit Facility (the "Limited Forbearance Agreement"). Pursuant to the Limited Forbearance Agreement, such lenders agreed that, unless there are further defaults, they would not exercise prior to July 1, 2001, rights and remedies available to them with respect to the defaults described in the immediately preceding paragraph, other than their right to block payments in respect of the Subordinated Notes (as defined in Note 5 below) and their rights under the Support Agreement (as defined in Note 5 below). The Limited Forbearance Agreement also temporarily amended provisions in the Credit Facility with respect to the borrowing base and the maximum borrowing amount for periods ending on or before January 31, 2001, with such amendment to terminate automatically upon the earliest to occur of (i) any further default, (ii) the making of the $4.6 million capital infusion required to be made by the Westar -------------------------------------------------------------------------------- Page 6 7 DOSKOCIL MANUFACTURING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (UNAUDITED ) Funds (as defined in Note 5 below) on or prior to February 28, 2001, under the Support Agreement, or (iii) June 30, 2001. A further default occurred under the Credit Facility and the Additional Credit Facility when the Westar Funds elected not to make the required $4.6 million capital infusion on or prior to February 28, 2001. Effective as of February 28, 2001, the Company entered into an amendment to the Limited Forbearance Agreement pursuant to which the lenders under the Credit Facility and the Additional Credit Facility agreed that they would not exercise prior to March 13, 2001, rights and remedies available to them in respect of the additional default resulting from the failure of the Westar Funds to make the required $4.6 million capital infusion or any of the other defaults described above. Effective as of March 12, 2001, the Company entered into another amendment to the Limited Forbearance Agreement pursuant to which the lenders under the Credit Facility and the Additional Credit Facility agreed that (i) they would not exercise prior to March 27, 2001, rights and remedies available to them in respect of the defaults described above and (ii) the temporary amendment to the provisions of the Credit Facility with respect to the borrowing base and maximum borrowing amount would apply to periods ending on or before February 28, 2001. In addition, on March 12, 2001, as permitted by the terms of the Indenture governing the Subordinated Notes (the "Indenture"), the lenders under the Credit Facility and the Additional Credit Facility delivered to the trustee under the Indenture a written notice of the defaults under the Credit Facility and the Additional Credit Facility, thereby blocking, in accordance with the terms of the Indenture, the ability of the Company to make any payment in respect of the Subordinated Notes. Accordingly, the Company did not make the $4.3 million interest payment on the Subordinated Notes due March 15, 2001. Effective as of March 26, 2001, the Company entered into a third amendment to the Limited Forbearance Agreement pursuant to which the lenders under the Credit Facility and the Additional Credit Facility agreed that (i) they would not exercise prior to April 14, 2001, rights and remedies available to them in respect of the defaults described above or any defaults resulting from the failure to make a scheduled term loan principal payment of $2.3 million due under the Credit Facility on March 31, 2001 and (ii) the temporary amendment to the provisions of the Credit Facility with respect to the borrowing base and maximum borrowing amount would apply to periods ending on or before March 31, 2001. On March 31, 2001, as a result of, among other things, the failure of the Westar Funds to make the $4.6 million capital infusion required under the Support Agreement to be made by them on or prior to February 28, 2001, the Company was unable to make a scheduled term loan principal payment of $2.3 million then due under the Credit Facility. The failure to make such payment constitutes an event of default under the Credit Facility and the Additional Credit Facility. In addition, with respect to the twelve months ended March 31, 2001, the Company did not achieve the fixed coverage ratio, interest coverage ratio, leverage ratio or senior leverage ratio required under the Credit Facility for such period by various amounts, the largest of which is approximately $8.4 million. As a result, in addition to the defaults described above, the Company is in default of certain financial covenants contained in the Credit Facility and the Additional Credit Facility at March 31, 2001. Effective April 13, 2001, the Company entered into a fourth amendment to the Limited Forbearance Agreement pursuant to which the lenders under the Credit Facility and the Additional Credit Facility agreed that, unless there are further defaults, (i) they would not exercise prior to June 29, 2001, rights and remedies available to them in respect of the defaults described above, any defaults resulting from the event of default under the indenture described below or any defaults resulting from the failure of the Westar Funds to make the capital infusion required to be made by them on or prior to May 30, 2001, as described below or certain other specified defaults and (ii) the temporary amendments to the provisions of the Credit Facility with respect to the borrowing base and maximum borrowing amount would apply to periods ending on or before June 29, 2001. Effective as of April 16, 2001, an event of default existed under the Indenture as a result of the failure of the Company to make the -------------------------------------------------------------------------------- Page 7 8 DOSKOCIL MANUFACTURING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (UNAUDITED) $4.3 million interest payment that was due on March 15, 2001. As a result of such event of default, the trustee under the Indenture or the holders of 25% in aggregate principal amount of the outstanding Subordinated Notes have the right to accelerate all amounts payable in respect of the Subordinated Notes. Such event of default under the Indenture also constitutes an additional default under the Credit Facility and the Additional Credit Facility. As a result of the various defaults under the Credit Facility and the Additional Credit Facility described above, the lenders thereunder are currently entitled to accelerate all amounts payable under such facilities and to pursue their rights in the collateral securing payments of such amounts. The Company does not have in place any arrangements to refinance or fund its indebtedness under the Credit Facility or the Additional Credit Facility or in respect of the Subordinated Notes upon acceleration. Based on the Company's current interpretation of the Support Agreement, the Westar Funds are obligated to make a $5.8 million capital infusion on or before May 30, 2001, such amount reflects the failure of the Westar Funds to make the $4.6 million capital infusion required under the Support Agreement to be made by them on or prior to February 28, 2001. If the Westar Funds had made such $4.6 million capital infusion on or prior to February 28, 2001, based on the Company's current interpretation of the Support Agreement, the Westar Funds would be obligated to make a $1.2 million capital infusion on or prior to May 30, 2001. Based on, among other things, the failure of the Westar Funds to make the $4.6 million capital infusion required under the Support Agreement to be made by them on or prior to February 28, 2001, the Company does not currently anticipate that the Westar Funds will make the further capital infusion required to be made by them under the Support Agreement on or prior to May 30, 2001. The Westar Funds have advised the Company that they intend to pursue discussions with the lenders under the Credit Facility and the Additional Credit Facility and are willing to make an appropriate additional financial contribution to the Company, though not necessarily under the current terms of the Support Agreement. In light of the foregoing, the Company is continuing discussions with the Westar Funds and the lenders under the Credit Facility and the Additional Credit Facility regarding the defaults under the Credit Facility and the Additional Credit Facility as described above and the obligations of the Westar Funds under the Support Agreement. In addition, the Company and the Westar Funds have initiated discussions with certain holders of Subordinated Notes. No assurance can be given with respect to the outcome of any of these discussions, or the timing thereof. The Company has engaged the investment banking firm of Chanin Capital Partners to assist in the restructuring of its debt and equity capitalization, which might include a restructuring through bankruptcy proceedings. This process is ongoing and, as a result, the Company cannot predict what form of restructuring, if any, may be effected or the timing thereof, or what impact any such restructuring may have on the Company's creditors. Included in the Other Asset balance sheet caption is $.8 million of costs incurred to date by the Company related to the possible equity restructuring. These costs will reduce the value of equity issued in conjunction with the proposed restructuring. In the event a restructuring is not completed, these items would be expensed. Due to the uncertainties discussed above, the Company has classified all indebtedness under the Credit Facility, the Additional Credit Facility and the Subordinated Notes as a current liability on its balance sheet. The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern and does not include any adjustments that may be required if the Company is successful with its efforts to recapitalize the Company. These financial statements do not include any adjustments to reflect possible future effects on the recoverability and classifications of assets or liabilities, except as disclosed above, that may result should the Company be unable to continue as a going concern. Assuming the Company continues to have access to sufficient working capital, the Company's plan is to grow sales, reduce fixed costs through facility consolidation and continue to improve manufacturing productivity. The Company has lowered manufacturing and operating costs. It expects to lower production costs further with the facility consolidation and other operating cost reductions. 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 continue to be higher in the short term due to higher natural gas and oil prices. -------------------------------------------------------------------------------- Page 8 9 DOSKOCIL MANUFACTURING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (UNAUDITED) 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 Company was recapitalized through the following transactions: (1) 100% of the Spectrum Polymers, Ltd. partnership interest ("Spectrum") 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 Company's common stock; (3) the Company's Articles of Incorporation were amended to establish the Company 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 Company redeemed 5,666,145 shares of common stock from the majority stockholder for approximately $87.4 million. The acquisition of Spectrum has been accounted for as a combination of entities under common control and, accordingly, the assets acquired were recorded at their historical cost. NOTE 4. MERGER On September 19, 1997, Doskocil consummated a merger with Dogloo, Inc. (the "Merger"), wherein 1,400,603 of the Company's common shares were exchanged for Dogloo equity in the approximate amount of $21.2 million and Dogloo was merged with and into Doskocil. The Company is now controlled by an investor group (the "Investor Group") consisting of various Westar Capital entities and certain of their affiliates (collectively "Westar") and Enterprise entities ("Enterprise"). As of April 2000, Westar acquired the equity interest of Enterprise. The Merger was accounted for as a purchase transaction under generally accepted accounting principles and, accordingly, the purchase price was allocated on the basis of the estimated fair value of the assets acquired. This purchase price allocation resulted in goodwill of approximately $57.3 million which is being amortized on the straight line basis over 30 years. Concurrent with the consummation of the Merger, the Company issued 10 1/8% Senior Subordinated Notes (the "Notes") due September 15, 2007, in the aggregate principal amount of $85.0 million. The Notes were exchanged for registered Notes (the "Subordinated Notes") pursuant to the Offer to Exchange dated February 23, 1998 effective as of March 30, 1998. Discounts and commissions aggregated 3% of the face amount of the Subordinated Notes and net proceeds to the Company were $82.5 million. Interest on the Notes was, and on the Subordinated Notes is, payable semi-annually on March 15 and September 15 of each year commencing on March 15, 1998. The Subordinated Notes are a general, unsecured obligation of the Company, subordinated in right of payment to all senior debt of the Company. The Subordinated Notes are subject to certain optional redemptions at declining premiums beginning in 2002 and continuing through 2005. 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 Recent Developments. The Company is currently in default of certain financial covenants contained in the Credit Facility and the Additional Credit Facility applicable at December 30, 2000 and March 31, 2001, as well as other covenants thereunder. (See Note 1.) Moreover, based on current short-term forecasts, the Company believes it is unlikely it will be in compliance with its financial or other covenants over the next few periods. -------------------------------------------------------------------------------- Page 9 10 DOSKOCIL MANUFACTURING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (UNAUDITED) Credit Facility. Concurrent with the consummation of the Merger, the Company entered a credit facility (the "Credit Facility") with a syndicate of lending institutions party thereto (the "Lenders"), which agreement provides for an aggregate principal amount of loans of up to $110 million. Loans under the Credit Facility consist of $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 March 31, 2001, the principal amount outstanding on tranche A was $28.8 million, on tranche B was $34.0 million and $20.6 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 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. Through the Limited Forbearance Agreement, the Company has been notified it will no longer be able to have advances based on LIBOR. The tranche B term loan facility matures on September 30, 2004. The tranche A term loan facility and the Revolving Credit Facility mature on September 30, 2003. The Term Loan Facility is subject to repayment according to quarterly amortization of principal based upon the Scheduled Amortization (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. The Credit Facility also contains additional restrictions which, among other things, limit additional indebtedness, liens, sales of assets and business combinations. Certain Amendments to the Credit Facility; Additional 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. 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 term 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 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. -------------------------------------------------------------------------------- Page 10 11 DOSKOCIL MANUFACTURING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (UNAUDITED) In order to induce the Additional Lender to provide the Additional Credit Facility, the Westar Capital LP and the 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 Guaranty Warrants. The Guaranty Warrants expire on September 30, 2007. In connection with certain amendments to the Additional Credit Facility on October 12, 1999, the maximum amount under 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 Additional Credit Facility was amended to extend its term to September 28, 2001. On June 30, 2000, the Lenders 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 Lenders 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 adding capital to meet financial covenants to ninety days for the fourth quarter. 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. -------------------------------------------------------------------------------- Page 11 12 DOSKOCIL MANUFACTURING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (UNAUDITED) 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 $0.8 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 Warrants and the Guaranty Warrants, to the extent exercisable and dilutive, may affect future earnings per share calculations. Additional Capital Infusions. 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 $2.0 million was made by Westar Funds to meet the fixed coverage charge and senior leverage shortfall for the twelve months ended September 2000. NOTE 6. INVENTORIES Inventories consist of the following:

NOTE 7. INCOME TAXES The effective tax rate for the three months and nine months ended March 31, 2001 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 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 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. -------------------------------------------------------------------------------- Page 12 13 DOSKOCIL MANUFACTURING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (UNAUDITED) 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. As of January 1, 2001, the Company moved from a statutory workman's compensation coverage to a self-insurance program. Workman's compensation claims that exceed $.1 million per occurrence are covered through a private insurance carrier. NOTE 9. NET LOSS PER SHARE Net loss per share for the three months and nine months ended March 31, 2001 and March 31, 2000, respectively, are calculated as follows:

NOTE 10. COMPREHENSIVE INCOME For the three months and nine months ended March of fiscal years 2001 and 2000, there were no differences between comprehensive income and net income. -------------------------------------------------------------------------------- Page 13 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 March 31, 2001, 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 opinions 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 recapitalization and the Merger, has remained highly leveraged and is currently experiencing a severe liquidity problem; (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, and the Company is currently in default of a number of covenants under the Credit Facility, the Additional Credit Facility and the Subordinated Notes; (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 through 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, (xi) the Company expects sales for fiscal 2001 to be lower than sales for fiscal 2000 and the decline will adversely affect the Company's cash flow from operations and (xii) claims or lawsuits may be brought against the Company, including claims of product liability or workman's compensation. 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. OVERVIEW - THIRD QUARTER For the quarter, the Company experienced lower operating performance when compared with the prior year. The Company did not meet management's performance expectations for the third quarter of fiscal 2001 for several reasons, including significantly lower sales volume, higher plastic resin costs, and unabsorbed fixed costs associated with lower production levels required to bring about the significant inventory reductions. Net sales for the third quarter decreased $5.1 million or 13.3% from the same period of the prior year. This decrease was the result of lower sales in all product categories. This decline is primarily due to increased competition, a general economic slowdown and an inventory reduction at a key customer. Cash requirements for working capital (receivables plus inventories less trade payables and accrued liabilities) were $18.1 million, down 46.6% from the same period of the prior year primarily due to a significant decrease in inventory. For the nine months ended March 31, 2001, capital expenditures were $2.6 million, down $2.5 million from the same period of the prior year primarily due to lower spending on systems issues. -------------------------------------------------------------------------------- Page 14 15 DOSKOCIL MANUFACTURING COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) With respect to the twelve months ended December 30, 2000, the Company did not achieve the fixed charge coverage ratio, interest coverage ratio, leverage ratio or senior leverage ratio required under the Credit Facility by various amounts, the largest of which was approximately $8.0 million. As a result, the Company is in default of certain financial covenants contained in the Credit Facility and the Additional Credit Facility applicable at December 30, 2000. In addition, as of February 1, 2001, an additional default existed when the Company failed to make certain lease payments. Effective as of February 14, 2001, the Company entered into the Limited Forbearance Agreement with the lenders under the Credit Facility and the Additional Credit Facility. Pursuant to the Limited Forbearance Agreement, such lenders agreed that, unless there are further defaults, they would not exercise prior to July 1, 2001, rights and remedies available to them with respect to the defaults described in the immediately preceding paragraph, other than their right to block payments in respect of the Subordinated Notes and their rights under the Support Agreement. The Limited Forbearance Agreement also temporarily amended provisions in the Credit Facility with respect to the borrowing base and the maximum borrowing amount for periods ending on or before January 31, 2001, with such amendment to terminate automatically upon the earliest to occur of (i) any further default, (ii) the making of the $4.6 million capital infusion required to be made by the Westar Funds on or prior to February 28, 2001, under the Support Agreement, or (iii) June 30, 2001. A further default occurred under the Credit Facility and the Additional Credit Facility when the Westar Funds elected not to make the required $4.6 million capital infusion on or prior to February 28, 2001. Effective as of February 28, 2001, the Company entered into an amendment to the Limited Forbearance Agreement pursuant to which the lenders under the Credit Facility and the Additional Credit Facility agreed that they would not exercise prior to March 13, 2001, rights and remedies available to them in respect of the additional default resulting from the failure of the Westar Funds to make the required $4.6 million capital infusion or any of the other defaults described above. Effective as of March 12, 2001, the Company entered into another amendment to the Limited Forbearance Agreement pursuant to which the lenders under the Credit Facility and the Additional Credit Facility agreed that (i) they would not exercise prior to March 27, 2001, rights and remedies available to them in respect of the defaults described above and (ii) the temporary amendment to the provisions of the Credit Facility with respect to the borrowing base and maximum borrowing amount would apply to periods ending on or before February 28, 2001. In addition, on March 12, 2001, as permitted by the terms of the Indenture governing the Subordinated Notes (the "Indenture"), the lenders under the Credit Facility and the Additional Credit Facility delivered to the trustee under the Indenture a written notice of the defaults under the Credit Facility and the Additional Credit Facility, thereby blocking, in accordance with the terms of the Indenture, the ability of the Company to make any payment in respect of the Subordinated Notes. Accordingly, the Company did not make the $4.3 million interest payment on the Subordinated Notes due March 15, 2001. Effective as of March 26, 2001, the Company entered into a third amendment to the Limited Forbearance Agreement pursuant to which the lenders under the Credit Facility and the Additional Credit Facility agreed that (i) they would not exercise prior to April 14, 2001, rights and remedies available to them in respect of the defaults described above or any defaults resulting from the failure to make a scheduled term loan principal payment of $2.3 million due under the Credit Facility on March 31, 2001 and (ii) the temporary amendment to the provisions of the Credit Facility with respect to the borrowing base and maximum borrowing amount would apply to periods ending on or before March 31, 2001. -------------------------------------------------------------------------------- Page 15 16 DOSKOCIL MANUFACTURING COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) On March 31, 2001, as a result of, among other things, the failure of the Westar Funds to make the $4.6 million capital infusion required under the Support Agreement to be made by them on or prior to February 28, 2001, the Company was unable to make a scheduled term loan principal payment of $2.3 million then due under the Credit Facility. The failure to make such payment constitutes an event of default under the Credit Facility and the Additional Credit Facility. In addition, with respect to the twelve months ended March 31, 2001, the Company did not achieve the fixed coverage ratio, interest coverage ratio, leverage ratio or senior leverage ratio required under the Credit Facility for such period by various amounts, the largest of which is approximately $8.4 million. As a result, in addition to the defaults described above, the Company is in default of certain financial covenants contained in the Credit Facility and the Additional Credit Facility at March 31, 2001. Effective April 13, 2001, the Company entered into a fourth amendment to the Limited Forbearance Agreement pursuant to which the lenders under the Credit Facility and the Additional Credit Facility agreed that, unless there are further defaults, (i) they would not exercise prior to June 29, 2001, rights and remedies available to them in respect of the defaults described above, any defaults resulting from the event of default under the indenture described below or any defaults resulting from the failure of the Westar Funds to make the capital infusion required to be made by them on or prior to May 30, 2001, as described below or certain other specified defaults and (ii) the temporary amendments to the provisions of the credit facility with respect to the borrowing base and maximum borrowing amount would apply to periods ending on or before June 29, 2001. Effective as of April 16, 2001, an event of default existed under the Indenture as a result of the failure of the Company to make the $4.3 million interest payment that was due on March 15, 2001. As a result of such event of default, the trustee under the Indenture or the holders of 25% in aggregate principal amount of the outstanding Subordinated Notes have the right to accelerate all amounts payable in respect of the Subordinated Notes. Such event of default under the Indenture also constitutes an additional default under the Credit Facility and the Additional Credit Facility. As a result of the various defaults under the Credit Facility and the Additional Credit Facility described above, the lenders thereunder are currently entitled to accelerate all amounts payable under such facilities and to pursue their rights in the collateral securing payments of such amounts. The Company does not have in place any arrangements to refinance or fund its indebtedness under the Credit Facility or the Additional Credit Facility or in respect of the Subordinated Notes upon acceleration. Based on the Company's current interpretation of the Support Agreement, the Westar Funds are obligated to make a $5.8 million capital infusion on or before May 30, 2001 which amount reflects the failure of the Westar Funds to make the $4.6 million capital infusion required under the Support Agreement to be made by them on or prior to February 28, 2001. If the Westar Funds had made such $4.6 million capital infusion on or prior to February 28, 2001, based on the Company's current interpretation of the Support Agreement, the Westar Funds would be obligated to make a $1.2 million capital infusion on or prior to May 30, 2001. Based on, among other things, the failure of the Westar Funds to make the $4.6 million capital infusion required under the Support Agreement to be made by them on or prior to February 28, 2001, the Company does not currently anticipate that the Westar Funds will make the further capital infusion required to be made by them under the Support Agreement on or prior to May 30, 2001. The Westar Funds have advised the Company that they intend to pursue discussions with the lenders under the Credit Facility and the Additional Credit Facility and are willing to make an appropriate additional financial contribution to the Company, though not necessarily under the current terms of the Support Agreement. In light of the foregoing, the Company is continuing discussions with the Westar Funds and the lenders under the Credit Facility and the Additional Credit Facility regarding the defaults under the Credit Facility and the Additional Credit Facility as described above and the obligations of the Westar Funds under the Support Agreement. In addition, the Company and the Westar Funds have initiated discussions with certain holders of Subordinated Notes. No assurance can be given with respect to the outcome of any of these discussions, or the timing thereof. Based on current short-term forecasts, the Company believes it is unlikely it will be in compliance with its financial or other covenants over the next few periods. The Company has engaged the investment banking firm of Chanin Capital Partners to assist in the restructuring of its debt and equity capitalization. The Company cannot predict what form of restructuring, if any, may be effected or the timing thereof, or what impact any such restructuring may have on the Company's creditors. -------------------------------------------------------------------------------- Page 16 17 DOSKOCIL MANUFACTURING COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) Due to the uncertainties discussed above, the Company has classified all indebtedness under the Credit Facility, the Additional Credit Facility and the Subordinated Notes as a current liability on its balance sheet. The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. These financial statements do not include any adjustments to reflect possible future effects on the recoverability and classifications of assets or liabilities, except as disclosed above, that may result should the Company be unable to continue as a going concern. RESULTS OF OPERATIONS NET SALES decreased to $33.3 million in the third quarter of fiscal 2001 from $38.4 million in the comparable period of the prior year, a decrease of $5.1 million. The decrease was primarily the result of increased competition, a general economic slowdown and a key customer with an inventory reduction initiative. For the first nine months of fiscal 2001, sales decreased $4.3 million from the same period of last year primarily due to increased market competition, the elimination of the Company's largest customer's warehouse stock and other inventory reduction measures at other key customers. GROSS PROFIT decreased to $10.1 million in the third quarter of fiscal 2001 from $12.3 million in the comparable period of the prior year, a decrease of $2.2 million. As a percentage of net sales, gross margin decreased to 30.3% in the third quarter of fiscal 2001 from 32.0% 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, principally plastic resin costs, and lower plant utilization. For the first nine months of fiscal 2001, gross profit declined $4.8 million from the same period of the prior year primarily due to higher material costs and lower plant utilization. As a percentage of net sales, gross margin decreased to 30.5% in the first nine months of fiscal 2001, down from 33.3% in the same period of fiscal 2000. Gross profit was also negatively affected by lower plant utilization in the fourth quarter of fiscal 2000, the costs of which were included in inventory at June 2000. Such costs have been included in cost of goods sold in the current fiscal year as the inventory was sold. In addition, the Company has continued to operate at a low level of plant utilization in fiscal 2001 to affect inventory reductions while achieving record-level order fill rates and on-time delivery. This has resulted in a higher than normal level of fixed costs charged to cost of goods sold. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased to $10.5 million in the third quarter of fiscal 2001 from $11.0 million in the comparable period of the prior year. The decrease was the result of several factors including lower freight costs, outside warehousing and contract labor costs somewhat offset by higher management and professional fees. As a percentage of net sales, SG&A spending increased to 31.5% in the third quarter of fiscal 2001 from 28.7% in the comparable period of the prior year. For the first nine months ended March 31, 2001 SG&A expenses decreased to $32.8 million, down 4.3% from the same period of the prior year. As a percentage of net sales, SG&A spending decreased to 28.0% for the first nine months of the fiscal 2001 from 28.3% for the first nine months of fiscal 2000. This decrease is primarily due to lower freight and commission expense and outside warehousing costs somewhat offset by higher management and professional fees and severance costs. IMPAIRMENT OF LONG LIVED ASSETS during the third quarter of fiscal 2000 includes $1.8 million of costs related to the fast-forward ERP and warehousing systems implementation in July 1999 which had minimal future benefit. For the nine months ended March 2000, impairment also includes a $0.8 million charge to write-off certain molds due to an SKU reduction. OTHER INCOME for the first nine months of fiscal 2000 includes a $0.4 million gain on the sale of the Indianapolis facility. INTEREST EXPENSE decreased to $4.6 million in the third quarter of fiscal 2001 from $5.7 million in the comparable period of the prior year. The decrease is primarily due to $0.9 million lower non-cash amortization of deferred financing costs related to the 4.1 million of Guaranty Warrants and lower debt balances. Interest expense for the nine month period ending March 31, 2001 was lower than the comparable period of the prior year with lower non-cash amortization of deferred financing costs, lower fees related to new credit agreements and lower debt balances somewhat offset by higher interest rates. -------------------------------------------------------------------------------- Page 17 18 DOSKOCIL MANUFACTURING COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) PROVISION FOR INCOME TAXES for the three months ended March 31, 2001 and 2000, respectively, 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 sheets dated June 30, 2000 and March 31, 2001 include a valuation allowance of approximately $13.4 million and $18.6 million, respectively, for deferred tax assets. NET LOSS for the quarter ended March 31, 2001 was $5.0 million compared to a net loss of $6.1 million for the comparable period of the prior year. Net loss for the nine months ended March 2001 was $12.5 million compared to $12.3 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 at March 31, 2001 decreased by $6.9 million from June 30, 2000, due to normal recurring debt payments and repayments on the Revolving Credit Facility and the Additional Credit Facility. Total outstanding debt is comprised of bank borrowings of $93.4 million, Subordinated Notes of $85.0 million and capital leases of $0.9 million. At March 31, 2001, the bank borrowings were comprised of a Term Loan Facility of $62.8 million, a Revolving Credit Facility of $24.7 million and an Additional Credit Facility of $15.0 million, of which $20.6 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 included elsewhere in this report outlines the terms and conditions of the Subordinated Notes. At March 31, 2001, the Company had $5.0 million of availability on the Additional Credit Facility and no availability on the Revolving Credit Facility. In the event the loans under the Additional Credit Facility exceed $10.0 million, it is necessary for the Westar Funds to pledge additional collateral. At March 31, 2001, the Company was $1.6 million over the allowed borrowing on the Revolving Credit Facility. Because half of the Company's outstanding borrowings at March 31, 2001 and the additional availability from the Revolving Credit Facility and the Additional Credit Facility are at floating interest rates, the Company is subject to interest rate volatility. The weighted average interest rate on all floating rate borrowings at March 31, 2001 was 9.5%. Assuming the Company continues to have sufficient cash available for capital expenditures, management would expect to incur capital expenditures for the fiscal year ending June 30, 2001 of approximately $4.0 million relating to machinery, molds and information systems. The Company's highly leveraged financial condition, as well as the possible reactions of customers, employees and suppliers to publicity regarding the Company's potential liquidity needs, makes it extremely difficult to predict the Company's actual liquidity needs. In addition to ordinary working capital and capital expenditure needs, the Company has substantial debt service obligations. As of the date of this report, the Company has no access to additional borrowings under the Revolving Credit Facility or the Additional Credit Facility without additional collateral from the Westar Funds. The Company is continuing discussions with the Westar Funds and the lenders under the Credit Facility and the Additional Credit Facility regarding the defaults under the Credit Facility and the Additional Credit Facility described above and the obligations of the Westar Funds under the Support Agreement. In addition, the Company and the Westar Funds have initiated discussions with certain holders of Subordinated Notes. No assurance can be given as to the outcome of any of these discussions, or the timing thereof. In addition, the Company, with the assistance of Chanin Capital Partners, is pursuing a consensual restructuring of its debt and equity capitalization, which might include a restructuring through bankruptcy proceedings. As noted above, the Company cannot predict what form of restructuring, if any, may be effected or the timing thereof, or what impact any such restructuring may have on the Company's creditors. If the Company is unable to achieve a consensual solution to its liquidity problem, it may be forced to seek protection from its creditors under bankruptcy law. 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. -------------------------------------------------------------------------------- Page 18 19 DOSKOCIL MANUFACTURING COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued) OUTLOOK Sales were disappointing in the second and third quarters and are expected to be lower for fiscal 2001 when compared to fiscal 2000. This decline is due to several factors including increased competition, elimination of customer warehouse stock and a general overall decline in the economy. The Company believes that key customers have completed their inventory reductions. In addition, sales are being negatively effected by the limited number of new products being offered by the Company. During the past three months, the Company has reinvigorated its' marketing, product development and sales leadership team with the hiring of a new Executive Vice President and two new Vice Presidents of Sales and Product Development. In addition, the Company added a new Chief Financial Officer. Certain costs, such as direct and indirect labor and related overhead spending, continue to be lower than fiscal 2000 levels and management expects that trend to continue. Resin costs have, however, increased in the nine months ended March 31, 2001 over the comparable period of the prior year due to higher natural gas and oil prices, and are expected to remain high throughout fiscal 2001. Over the past twelve months, the Company has increased its manufacturing productivity and, as a result, currently has excess production capacity. During the nine months ended March, 2001 and continuing through June, 2001, the Company has reduced production to draw down its inventories. As a result, the Company has experienced a high level of fixed costs relative to production and such costs have been and will continue to be charged to costs of goods sold as items are sold. This will continue to negatively impact reported earnings. Manufacturing spending continues to decline from the prior year. Spending for outside manufacturing, in-bound freight and direct labor should also continue to be lower in fiscal 2001 when compared to fiscal 2000. In addition, the Company expects to continue with record-level order fill rates and on-time delivery performance. COMPARISON OF THE THIRD QUARTER AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000 EBITDA. The following table summarizes EBITDA for the three months and nine months ended March 31, 2001 and 2000, respectively:

(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 20 DOSKOCIL MANUFACTURING COMPANY, INC. ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Based on quoted market prices at the date of this filing, the Subordinated Notes were trading in a range of 10-15% of face value. As a result of the failure of the Company to make the $4.3 million interest payment that was due in respect of the Subordinated Notes on March 15, 2001 the market for the Subordinated Notes has become more limited. -------------------------------------------------------------------------------- Page 20 21 DOSKOCIL MANUFACTURING COMPANY, INC. PART II OTHER INFORMATION ITEM 2. LEGAL PROCEEDINGS The Company has filed suit in District Court in Tarrant County, Texas and an arbitration demand against J.D. Edwards and Grant Thornton in connection with the failed implementation of the OneWorld computer system in 1998. J.D. Edwards developed and licensed the OneWorld software to the Company. Grant Thornton was the expert retained by the Company to implement the software. In this litigation, the Company is claiming damages including licensing fees and other monies paid to J.D. Edwards, fees paid to Grant Thornton, lost profits and costs incurred because of the failed implementation. J.D. Edwards and Grant Thornton have filed counterclaims. J.D. Edwards alleges it is owed amounts outstanding for certain services provided to the Company. Grant Thornton claims that the Company should be liable for lost profits, damage to reputation and attorney's fees allegedly incurred by Grant Thornton as a result of the Company's filing of suit against Grant Thornton. The counterclaims do not allege a dollar amount sought. J.D. Edwards and Grant Thornton have denied the Company's claims and asserted various defenses. By agreement between the Company and Grant Thornton, the claims pertaining to Grant Thornton will be decided in court. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.1 Fourth Amendment to the Limited Forbearance Agreement (b) Reports on Form 8-K: Form 8-K dated February 28, 2001 reported under Item 5, "Other Events", the announcement of an amendment to the Limited Forbearance Agreement. Form 8-K dated March 13, 2001 reported under Item 5, "Other Events", the announcement of the second amendment to the Limited Forbearance Agreement. Form 8-K dated March 26, 2001 reported under Item 5, "Other Events", the announcement of the third amendment to the Limited Forbearance Agreement. Form 8-K/A dated February 28, 2001 reported under Item 5, "Other Events", to clarify certain disclosures regarding the obligations of certain Westar Capital entities to make capital contributions to the Company. -------------------------------------------------------------------------------- Page 21 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: May 15, 2001 /s/ Larry E. Rembold ----------------------------- Larry E. Rembold President and Chief Executive Officer (Principal Executive Officer) Date: May 15, 2001 /s/ Susan M. Richman ----------------------------- Susan M. Richman Vice President and Chief Financial Officer (Principal Accounting Officer) -------------------------------------------------------------------------------- Page 22 23 EXHIBIT INDEX

DOSKOCIL MANUFACTURING CO INC 10-Q