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FILED PURSUANT TO RULE 424(b)(3)
PROSPECTUS REGISTRATION NO. 333-37081
OFFER TO EXCHANGE
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007 OF
[LOGO OF DOSKOCIL] [LOGO OF DOGLOO]
DOSKOCIL MANUFACTURING COMPANY, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 27,
1998
Doskocil Manufacturing Company, Inc. a Texas corporation ("Doskocil"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal") to exchange its outstanding 10 1/8%
Senior Subordinated Notes Due 2007 (the "Old Notes"), of which $85,000,000
aggregate principal amount is outstanding as of the date hereof, for a like
aggregate principal amount of its newly issued 10 1/8% Senior Subordinated
Notes Due 2007, which have been registered under the Securities Act of 1933,
as amended (the "New Notes"). The New Notes are being offered hereby in order
to satisfy certain obligations of Doskocil under the Registration Rights
Agreement (the "Registration Rights Agreement"), dated September 19, 1997,
among Donaldson, Lufkin & Jenrette Securities Corporation and Nationsbanc
Capital Markets, Inc. (collectively, the "Initial Purchasers") and Doskocil.
The form and terms of the New Notes will be the same as those of the Old Notes
except that the New Notes will have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), and consequently will not be
subject to certain transfer restrictions, registration rights and related
liquidated damages provisions applicable to the Old Notes. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits
of an indenture (the "Indenture"), dated as of September 19, 1997, by and
between Doskocil and First Trust National Associates, as trustee (the
"Trustee"). The Indenture provides for the issuance of both the Old Notes and
the New Notes. The Old Notes and the New Notes are referred to herein
collectively as the "Notes" and holders of the Notes are sometimes referred to
herein as the "Holders."
The Old Notes were issued on September 19, 1997 pursuant to an offering (the
"Offering") which was exempt from registration under the Securities Act. The
Old Notes were issued in connection with, among other transactions, the
September 19, 1997 merger (the "Merger") of Dogloo, Inc., a California
corporation ("Dogloo," and together with Doskocil, the "Company"), with and
into Doskocil, with Doskocil as the surviving corporation. At December 31, the
Company had approximately $167.5 million of Senior Debt (as defined)
outstanding and no outstanding indebtedness to which the Old Notes are, or New
Notes will be, senior.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE
EXCHANGE OFFER.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(Cover continued on next page)
The date of this Prospectus is February 23, 1998
<PAGE>
The Notes will mature on September 15, 2007. Interest on the Notes will be
payable in cash semi-annually on March 15 and September 15 of each year,
commencing on March 15, 1998. The Notes will be redeemable, in whole or in
part, at the option of the Company, at any time on or after September 15,
2002, at the redemption prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages (as defined herein), if any, to the date of
redemption. In addition, at any time on or before September 15, 2000, the
Company may redeem up to 35% of the original aggregate principal amount of the
Notes with the net proceeds of an Initial Public Equity Offering (as defined
herein) at a redemption price equal to 110 1/8% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of redemption. Upon a Change of Control Redemption Event (as defined
herein), the Company will have the option, at any time on or prior to
September 15, 2002, to redeem the Notes in whole but not in part at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium (as defined herein) plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption. Upon a Change of
Control (as defined herein), each holder of the Notes will have the right to
require the Company to repurchase all or any part of such holder's Notes
(unless previously redeemed in connection with a Change in Control Redemption
Event) at 101% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of repurchase. There can,
however, be no assurance that sufficient funds will be available at the time
of any Change of Control to make any required repurchases of Notes tendered,
or that restrictions in the New Credit Facility (as defined) or under the
Company's debt instruments existing at such time will allow the Company to
make such required repurchases.
The Old Notes are, and the New Notes will be, senior subordinated,
unsecured, general obligations of the Company, subordinated in right of
payment to all Senior Debt (as defined herein) of the Company, including
indebtedness under the New Credit Facility. The Old Notes were, and the New
Notes will be, guaranteed (the "Guarantees") by the Company's future
Guarantors (as defined herein). The Guarantees will be subordinated in right
of payment to all Senior Debt of the Guarantors. As of June 30, 1997, on a pro
forma basis after giving effect to the Transactions (as defined herein), the
Company would have had approximately $80.0 million of outstanding Senior Debt,
all of which would have been secured debt outstanding under the New Credit
Facility. The Indenture (as defined herein) will permit the Company and its
Subsidiaries (as defined herein) to incur additional indebtedness, including
Senior Debt, subject to certain limitations. See "Description of Notes."
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes, or if no interest has been paid on
the Old Notes, from September 19, 1997. Accordingly, if the relevant record
date for interest payment occurs after the consummation of the Exchange Offer,
registered Holders of New Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from September 19, 1997. If, however, the relevant
record date for interest payment occurs prior to the consummation of the
Exchange Offer, registered Holders of Old Notes on such record date will
receive interest accruing from the most recent date to which interest has been
paid, or if no interest has been paid, from September 19, 1997. Old Notes
accepted for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer, except as set forth in the immediately
preceding sentence. Holders of Old Notes whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on such Old Notes
otherwise payable on any interest payment date the record date for which
occurs on or after consummation of the Exchange Offer.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "SEC") as set forth in no action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by Holders thereof (other than any such Holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such Holder's business and such Holder has
no arrangement with any person to participate in the distribution of such New
Notes. However, the Company
2
<PAGE>
does not intend to request the SEC to consider, and the SEC has not
considered, the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of such
New Notes and has no arrangement or understanding to participate in a
distribution of New Notes. If any holder of Old Notes is an affiliate of the
Company, is engaged in or intends to engage in or has any arrangement or
understanding with any person to participate in the distribution of the New
Notes to be acquired in the Exchange Offer, such holder (i) could not rely on
the foregoing applicable interpretations of the Commission and (ii) must
comply with the registration requirements of the Securities Act in connection
with any resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Company will not receive any proceeds from the Exchange Offer and will
pay all the expenses incident to the Exchange Offer. Tenders of Old Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. In the event the Company terminates the Exchange Offer and
does not accept for exchange any Old Notes, the Company will promptly return
the Old Notes to the Holders thereof. See "The Exchange Offer."
The Old Notes were issued on September 19, 1997 to institutional investors
and are eligible for trading in the Private Offering, Resales and Trading
through Automated Linkages ("PORTAL") market, the National Association of
Securities Dealers' screen-based, automated market for trading of securities
eligible for resale under Rule 144A. There is no existing trading market for
the New Notes, and there can be no assurance as to the development of any
market or the liquidity of any market that may develop for the New Notes or
the price at which such Holders may be able to sell their New Notes. Although
the Initial Purchasers have advised the Company that they currently intend to
make a market in the New Notes, the Initial Purchasers are not obligated to do
so, and any market-making with respect to the New Notes may be discontinued at
any time without notice. The Company does not intend to apply to list the Old
Notes or the New Notes on any securities exchange or for quotation through the
National Association of Securities Dealers Automated Quotation System.
3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 5
Special Cautionary Notice Regarding Forward-Looking Statements............ 6
Prospectus Summary........................................................ 7
Risk Factors.............................................................. 20
The Exchange Offer........................................................ 26
The Doskocil Recapitalization............................................. 32
The Merger................................................................ 32
Use of Proceeds........................................................... 34
Capitalization............................................................ 36
Pro Forma Condensed Financial Data........................................ 36
Unaudited Pro Forma Condensed Statements of Operations.................... 37
Notes to Unaudited Pro Forma Condensed Statements of Operations........... 39
Doskocil Selected Historical Financial Data............................... 41
Dogloo Selected Historical Financial Data................................. 43
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 45
Business.................................................................. 58
Management................................................................ 67
Summary Compensation Table................................................ 69
Principal Stockholders.................................................... 72
Description of Capital Stock.............................................. 74
Certain Relationships and Related Transactions............................ 74
Description of New Credit Facility........................................ 76
Description of the Notes.................................................. 78
Registration Rights; Liquidated Damages................................... 106
Plan of Distribution...................................................... 109
Legal Matters............................................................. 109
Experts................................................................... 110
Index to Financial Statements............................................. F-1
</TABLE>
4
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AVAILABLE INFORMATION
The Company has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New
Notes offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts
of which are omitted in accordance with the rules and regulations of the SEC.
For further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement. Any statements made
in this Prospectus concerning the provisions of certain documents are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement.
The Registration Statement, including the exhibits and schedules thereto,
may be inspected and copied at the public reference facilities maintained by
the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at
its regional offices located at Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New
York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC maintains a Web site that contains reports and
other information regarding registrants that file electronically with the SEC.
Such reports and other information may be found on the SEC's site address,
http://www.sec.gov. Copies of such material also can be obtained from the
Company upon request.
Upon completion of the Exchange Offer, the Company will be subject to
certain of the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, will file
reports with the SEC. The Company has agreed that, whether or not it is
required to do so by the rules and regulations of the SEC, it will deliver to
the Trustee and to each Holder of the Notes within 15 days after it is or
would have been (if it were subject to such reporting obligations) required to
file such with the SEC, annual and quarterly financial statements
substantially equivalent to financial statements that would have been included
in reports filed with the SEC, if the Company were subject to the requirements
of Section 13 or 15(d) of the Exchange Act, including, with respect to annual
information only, a report thereon by the Company's certified independent
public accountants as such would be required in such reports to the SEC, and,
in each case, together with a management's discussion and analysis of
financial condition and results of operations which would be so required and,
unless the SEC will not accept such reports, file with the SEC the annual,
quarterly and other reports which it is or (if it were subject to such
reporting obligations), would have been required to file with the SEC.
5
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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. Such
forward-looking statements are principally contained in the sections
"Prospectus Summary," "Summary Pro Forma Combined Financial Information," "The
Merger," "Unaudited Pro Forma Condensed Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and include, without limitation, the Company's expectation and
estimates as to the Company's business operations following the Merger,
including, but not limited to, the integration of Dogloo's business with
Doskocil's and the achievement of certain cost savings related thereto, the
introduction of new products, future financial performance, including growth
in net sales and earnings, cash flows from operations, capital expenditures,
and the sale of assets. In addition, in those and other portions of this
Prospectus, the words "anticipates," "believes," "estimates," "expects,"
"plans," "intends" and similar expressions, as they relate to the Company or
the Company's, Doskocil's or Dogloo's management and business, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in this
Prospectus. In addition to factors that may be described in this Prospectus,
the following factors, among others, could cause the actual results to differ
materially from those expressed in any forward-looking statements made by the
Company, Doskocil or Dogloo; (i) difficulties or delays in integrating
Doskocil's and Dogloo's product offerings, management, systems, research and
development, manufacturing and sales and marketing efforts; (ii) difficulties
or delays in achieving estimated cost savings and operational efficiencies
related to the Merger; (iii) changes in consumer preferences and the ability
of the Company to adequately anticipate such changes; (iv) difficulties or
delays in developing and introducing products or failure of customers to
accept product offerings; (v) the seasonal nature of the Company's operations;
(vi) effects of and changes in general economic and business conditions; (vii)
actions by competitors, including new product offerings and marketing and
promotional successes; (viii) claims which might be made against the Company,
including product liability claims; (ix) the loss of any significant suppliers
or sponsors; and (x) changes in business strategy or new product lines. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
6
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PROSPECTUS SUMMARY
The following is a summary of certain information contained herein. This
summary is qualified in its entirety by, and should be read in conjunction
with, the more detailed information and financial statements, including the
notes thereto, contained elsewhere in this Prospectus and incorporated herein
by reference. Market data used throughout this Prospectus were obtained from
internal company surveys and industry publications, which generally indicate
that the information contained therein has been obtained from sources believed
to be reliable, but the accuracy and completeness of such information is not
guaranteed and has not been independently verified. Unless otherwise expressly
stated or the context otherwise requires, (i) "Doskocil" refers to Doskocil
Manufacturing Company, Inc. and Spectrum Polymers, Ltd., prior to giving effect
to the Merger, (ii) "Dogloo" refers to Dogloo, Inc. prior to giving effect to
the Merger and (iii) the "Company" refers to the combined entity comprised of
Doskocil and Dogloo after giving effect to the Transactions (as defined
herein), including the Merger.
THE COMPANY
The Company, created by the Merger of Dogloo and Doskocil, is among the
leading plastic pet products companies in the United States, manufacturing a
broad range of plastic and other pet products sold through a distribution
network of more than 2,000 retailers, including PETsMART, Wal-Mart, K-Mart,
Petco and Costco. Doskocil brings to the combined Company its strength in the
pet carrier category, along with a broad range of products and efficient
manufacturing capabilities. Dogloo adds its strength in the pet shelter
category, along with its demonstrated product development and marketing
abilities. Accordingly, the Merger created a company with complementary pet
product lines, including both pet carriers and pet shelters, complementary
customer bases and substantial opportunities for cost reductions. The Company
expects to take advantage of Doskocil's historically under-utilized
manufacturing and distribution facilities to achieve a lower combined cost
structure. The Company's cost structure is also enhanced through Doskocil's
vertically integrated manufacturing operations which include a facility for the
recycling, blending and compounding of plastic resins, the largest raw material
component in the Company's products. The combined sales of Doskocil and Dogloo
have increased from $105.1 million in 1993 to $160.0 million in 1996,
representing a compound annual growth rate of 15.0%. On a pro forma combined
basis after giving effect to the Transactions (as defined herein), the
Company's pro forma EBITDA (as defined herein) for the twelve-month period
ended June 30, 1997 would have been $38.5 million.
The Merger combined complementary product lines in several categories in
which both companies have traditionally had a smaller presence and offers
further opportunities to expand product offerings. Doskocil produces a broad
line of plastic products, including pet products such as pet carriers, pet
shelters, cat litter boxes, bowls, feeders, waterers and cat toys, as well as
sporting goods and other products. Management believes Doskocil's Vari
Kennel(R), Sky Kennel(R), Pet Mate(R), Pet Porter(R), Pet Taxi(R) and Kennel
Cab(R) pet carrier brand names are widely known and have enjoyed increasing use
in the transportation and indoor training of pets. Management believes
Doskocil's Gun Guard(R) brand (firearms and archery cases) and Woodstream(TM)
brand (fishing tackle cases) are similarly well-recognized in the sporting
goods market. Dogloo's product line consists of plastic pet shelters, pet
carriers, pet bedding and pet feeding and watering products. Dogloo's numerous
styles and sizes of pet shelters include the Dogloo(R), Indigo(R), Ruff
Hauz(R), Barney(R), Cape Cod(TM) and Brik Hauz(R). These shelters are made from
a structural foam plastic which provides exceptional durability and insulation
relative to other types of plastic or wooden pet shelters. The Company believes
the Dogloo, Dogloo's igloo-shaped best-seller, is unique in style, wind
resistant, easy to clean and popular among breeders, kennel owners and general
consumers. In the Merger, the Company acquired Dogloo's federal configuration
trademark on its igloo-shaped pet shelters. In 1995, Dogloo successfully relied
upon this trademark to obtain a preliminary injunction against the manufacture
and sale by Doskocil of a confusingly similar product, after which Doskocil
agreed to discontinue sales of its dome-shaped pet shelters.
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As a result of the Merger, the Company has a substantially broadened customer
base and reduced customer concentration. Doskocil's principal products are sold
to a wide variety of retailers including specialty pet superstores such as
PETsMART and Petco, mass merchandisers such as Wal-Mart and K-Mart, food and
drug stores, hardware stores and a number of distributors that sell to
independent pet stores. Dogloo's products are sold through a variety of similar
retail channels, including mass merchandisers such as Wal-Mart, wholesale clubs
such as Sam's Club, home centers such as Lowe's and Menards, pet specialty
superstores such as PETsMART, farm and agricultural stores such as Tractor
Supply Company, and distributors that sell to independent pet stores. Despite
similar distribution channels, there is little overlap among the major
customers of Doskocil and Dogloo -- only three shared customers rank in the top
ten customers of each individual company. On a pro forma combined basis after
giving effect to the Transactions, no one customer accounted for more than
11.9% of the Company's total net revenues in 1996.
PET PRODUCTS INDUSTRY
The U.S. retail market for non-food pet supplies and accessories generated
approximately $4.0 billion in sales in 1995, up 29.3% from $3.1 billion in
1991, according to a study published in 1996 by Packaged Facts, an independent
research group. The study indicated that since 1991, dog and cat segments have
dominated consumption in, and have grown faster than the overall non-food pet
supplies market. The study estimated that of the $4.0 billion in 1995 non-food
pet supplies and accessories sales, the dog and cat segments represented
approximately 68.8%. The study attributed the growth in non-food pet supply and
accessories sales in recent years to both an increasing number of pets and an
increasing annual customer expenditure per pet. Packaged Facts estimated that
the total number of cats and dogs in the United States in 1995 was 121 million,
up from 116 million in 1991. Based on these estimates, the average annual
expenditure per cat and dog increased to $22.76 in 1995, up 35.4% from $16.81
in 1991. Packaged Facts attributed these increases to a number of factors,
including (i) the baby boomer generation, who are now purchasing pets for
children, (ii) the increasing senior citizen component of the population who
appreciate the companionship of pets, and (iii) the expansion of pet supply
outlets which has stimulated consumer demand.
BUSINESS STRATEGY
The Company's strategic objectives are to further enhance its position among
the leading manufacturers and marketers of plastic pet products in the United
States and to continue its expansion internationally. The Company will seek to
leverage its competitive strengths to accomplish the following objectives:
. Capitalize on Market Position. The Company expects to strengthen its
market position by continuing to develop new products, using advertising
and other promotional programs to implement a consumer driven "pull
strategy," and making strategic acquisitions of related product lines
that will take advantage of the Company's existing markets and broad
distribution channels.
. Continue to Introduce New Products. The Company is committed to
continued product development within its current product categories and
the creation of innovative new product categories. Management believes
that both Doskocil and Dogloo have demonstrated the ability to develop
and market new products to both retail consumers and those who influence
the purchasing patterns of consumers, such as breeders and
veterinarians. Doskocil and Dogloo launched a combined total of 27 new
products over the past two years. The Company expects to launch an
additional 30 new products in 1997. Net sales from new products
introduced in the calendar years 1995 and 1996 accounted for 16.7% of
the Company's total pro forma combined net sales for 1996.
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. Achieve Substantial Cost Savings. The Company will seek to utilize
Doskocil's existing production and distribution capacity and the
combined Company's complementary strengths to substantially reduce the
manufacturing and operating expenses of the combined entity. The Company
intends to close Dogloo's administrative and manufacturing facilities
and centralize those operations at Doskocil's Arlington, Texas facility,
thereby eliminating redundant expenses and spreading higher production
volumes over a relatively fixed cost base. Upon complete integration of
the two companies, management estimates approximately $17.5 million in
annual cost savings resulting from the combination of Doskocil and
Dogloo. While the pro forma annual cost savings for the twelve months
ended June 30, 1997 are estimated to be approximately $9.0 million,
management believes additional annual savings estimated to be
approximately $8.5 million can be achieved over time. To achieve these
pro forma and additional cost savings, the Company intends to focus on:
(i) consolidating production and distribution facilities to Doskocil's
campus in Arlington, Texas; (ii) utilizing Doskocil's vertically
integrated resin operation for the production of Dogloo's pet shelters
and carriers; (iii) transferring production of Dogloo's carrier line to
Doskocil's production facilities (the production is currently
outsourced); (iv) rationalizing the administration, sales and marketing
overheads of the two companies; and (v) benefiting from the Company's
increased purchasing power of new materials and supplies as a larger
combined entity. There can be no assurance that the cost savings
discussed here and elsewhere will be realized or that there will not be
significant delays in achieving such cost savings. See "Risk Factors--
Risks Related to the Merger."
. Capitalize on Plastic Resin Cost Advantage. The Company's vertically
integrated plastic resin compounding facility ("Spectrum"), together
with the Company's resin compounding experience, enable the Company to
produce plastic resins using a significantly reduced proportion of prime
resins, while achieving raw material specifications which meet or exceed
the Company's product and manufacturing requirements. The Company's
principal raw materials are various plastic resins, which are either
"prime" resins purchased from petrochemical producers, or less expensive
blends of prime resins and recycled materials purchased from third-party
suppliers or produced by the Company. Spectrum has an estimated annual
capacity in excess of 100 million pounds, and uses a mixture of prime
resins and recycled materials to produce plastic resins. In 1996,
Doskocil used 49 million pounds of plastic resins, approximately 92% of
which were compounded by Spectrum. In 1996, Dogloo used approximately 28
million pounds of prime plastic resins purchased from outside suppliers.
Spectrum is expected to satisfy all of Dogloo's resin needs, which the
Company expects will substantially increase Spectrum's capacity
utilization and further reduce the Company's average resin cost per
pound.
. Exploit International Growth Opportunities. While international sales
represented approximately 12.4% of the combined Company's net sales in
1996, management believes that the international markets, especially
Europe and Latin America, represent a significant growth opportunity.
The international expansion of U.S. retailers is also expected to
provide a significant opportunity for the Company to increase
international sales. Management believes the 1996 acquisition by
PETsMART of Pet City Holdings PLC, the United Kingdom's largest pet
superstore chain, is indicative of the international expansion of such
retailers and represents one opportunity for growth in international
markets. Management is currently evaluating the establishment of
distribution facilities in continental Europe and Latin America. The
combination of Doskocil and Dogloo is also expected to allow the Company
to redeploy certain overlapping product molds for international contract
manufacturing.
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THE MERGER
On September 19, 1997, Doskocil and Dogloo entered into a merger agreement
(the "Merger Agreement"), pursuant to which Dogloo was merged with and into
Doskocil on that same date. The Company is now controlled by an investor group
(the "Investor Group") consisting of various Westar Capital entities and
certain of their affiliates, including Westar Capital L.P., a California
limited partnership ("Westar LP"), Westar Capital II, LLC, a Delaware limited
liability company ("Westar LLC"), and HBI Financial Inc., a Washington
corporation ("HBI") (collectively "Westar"), and various Enterprise Partners
funds and certain of their affiliates (collectively "Enterprise"). See
"Principal Stockholders."
Certain members of the Investor Group acquired control of Doskocil on July 1,
1997, pursuant to a leveraged recapitalization transaction (the
"Recapitalization"). The total enterprise valuation of Doskocil in the
Recapitalization, including $34.3 million of net indebtedness and amounts
required to buy out operating leases, was approximately $140.8 million. The
Investor Group controlled Dogloo prior to consummation of the Merger, and
contributed its Dogloo common stock equity and a portion of its preferred stock
equity to the Company as part of the Merger. The total enterprise valuation of
Dogloo in the Merger, including $30.0 million of net indebtedness as of June
30, 1997, was approximately $77.3 million, and the total common stock equity
value was approximately $21.2 million based on the same valuation method as was
used in the Recapitalization. Simultaneously with the Merger, a restructuring
of the capital structure of Doskocil created by the Recapitalization occurred.
The Investor Group has invested a total of $20.0 million in cash equity in the
Company and the Investor Group and other shareholders of Dogloo have
contributed Dogloo common and preferred equity estimated at $30.1 million,
based on the same valuation method used in the Recapitalization. The
Recapitalization, the Merger, the Offering, the New Credit Facility and the
application of the net proceeds therefrom, including the refinancing of the
Bridge Notes (as defined below) and the Existing Credit Facility (as defined
below), the acquisition of certain preferred stock and common stock of Doskocil
and Dogloo, and the payment of accrued dividends on shares of Doskocil
preferred stock, are collectively referred to herein as the "Transactions."
The Company operates under the "Doskocil" name with headquarters at
Doskocil's facilities in Arlington, Texas. The Company's principal executive
offices are located at 4209 Barnett, Arlington, Texas, and its telephone number
is (817) 467-5116. Principal stockholders of the Company are Westar
(approximately 70.9%) and Enterprise (approximately 17.7%). See "Principal
Stockholders."
WESTAR AND ENTERPRISE
Westar is a private investment partnership group, founded in 1987 to pursue
investment opportunities including leveraged buyouts, recapitalizations, and
private equity investments. Using capital principally from a private investor,
Westar has made 12 equity investments in a portfolio of companies with
collective 1996 revenues of more than $2.0 billion. Westar is based in Costa
Mesa, California.
Westar acquired control of Dogloo in September 1995 through a
recapitalization. Westar changed numerous management procedures and practices,
replaced or added two senior managers and actively mentored Dogloo's co-founder
and former Chief Executive Officer. Under Westar's guidance, Dogloo's operating
results improved from EBITDA of $1.6 million in 1995 to $10.0 million in 1996.
In addition to Dogloo, representative past and present Westar investments
include: Homedco Group, Inc., a home healthcare provider purchased from
National Medical Enterprises in 1987, and taken public in 1991 and merged in
1996 to form Apria Healthcare Group, Inc. (NYSE: AHG); USCS International,
Inc., a provider of software and billing services which was taken public
(NASDAQ: USCS) subsequent to Westar's 1988 investment; Tecstar, Inc., the
leading provider of high efficiency power systems for satellites and other
spacecraft; All Post, Inc., a leading video and film post-production and
restoration provider; and Scripps Clinic Management Services Organization,
Inc., a physician practice management company spun out of The Scripps Institute
of Medicine and Science of La Jolla, California.
10
<PAGE>
Enterprise is a leading venture capital firm which has raised four funds from
institutional investors since 1985, totaling in excess of $430 million.
Enterprise has made approximately 66 investments in a portfolio of companies
with collective 1996 revenues in excess of $2.8 billion. In addition to
investments in early stage and emerging growth companies, Enterprise has
selectively invested in leveraged buyouts. Enterprise and Westar are controlled
and operated independently. The firms have one individual general partner in
common.
THE EXCHANGE OFFERING
Notes Offered............... Up to $85.0 million aggregate principal amount of
10 1/8% Senior Subordinated Notes due 2007 which
have been registered under the Securities Act.
The form and terms of the New Notes will be the
same as those of the Old Notes except that the
New Notes will have been registered under the
Securities Act, and consequently will not be
subject to certain transfer restrictions,
registration rights and related liquidated
damages provisions applicable to the Old Notes.
See "Description of the Notes."
The Exchange Offer.......... The New Notes are being offered in exchange for a
like principal amount of Old Notes. The issuance
of the New Notes is intended to satisfy
obligations of the Company contained in the
Registration Rights Agreement. For procedures for
tendering, see "The Exchange Offer--Procedures
for Tendering Old Notes."
Tenders; Expiration Date;
Withdrawal.................. The Exchange Offer will expire at 5:00 p.m., New
York City time, on March 27, 1998, or such later
date and time to which it is extended. The tender
of Old Notes pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration
Date. Any Old Note not accepted for exchange for
any reason will be returned without expense to
the tendering holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer. See "The Exchange Offer--
Terms of the Exchange Offer; Period for Tendering
Old Notes" and "The Exchange Offer--Withdrawal
Rights."
Conditions to Exchange
Offer....................... The Exchange Offer is subject to the condition
that the Exchange Offer not violate any
applicable law, policy or interpretation of the
staff of the SEC.
Procedures for Tendering
Old Notes................... Each Holder wishing to accept the Exchange Offer
must complete and sign the Letter of Transmittal,
in accordance with the instructions contained
therein, and submits the Letter of Transmittal to
the exchange agent identified below. See "The
Exchange Offer--Procedures for Tendering Old
Notes."
Federal Income Tax
Consequences................ The exchange pursuant to the Exchange Offer
should not result in gain or loss to the Holders
or the Issuer for federal income tax purposes.
Use of Proceeds............. There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer. See "Use
of Proceeds."
Exchange Agent.............. First Trust National Association is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
11
<PAGE>
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register Old Notes under the Securities Act.
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to third parties, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such New Notes. However, the Company does not intend to request the SEC to
consider, and the SEC has not considered, the Exchange Offer in the context of
a no-action letter and there can be no assurance that the staff of the SEC
would make a similar determination with respect to the Exchange Offer as in
such other circumstances. Each holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in a
distribution of New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. If any Holder is an affiliate of
the Company, is engaged or intends to engage in or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the SEC and (ii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes must acknowledge that such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with any resale
of such New Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period of 180 days after the Expiration Date, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." In addition, to comply with the state
securities laws, the New Notes may not be offered or sold in any state unless
they have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with. The Offer
and sale of the New Notes to "qualified institutional buyers" (as such term is
defined under Rule 144A of the Securities Act) is generally exempt from
registration or qualification under the state securities laws. The Company
currently does not intend to register or qualify the sale of the New Notes in
any state where an exemption from registration or qualification is required and
not available. See "The Exchange Offer--Consequences of Exchanging Old Notes"
and "Description of the Notes."
12
<PAGE>
SUMMARY DESCRIPTION OF THE NOTES
The form and terms of the New Notes will be the same as those of the Old
Notes except that the New Notes will have been registered under the Securities
Act, and consequently will not be subject to certain transfer restrictions,
registration rights and related liquidated damages provisions applicable to the
Old Notes. See "Description of the Notes--Registration Rights; Liquidated
Damages."
Company..................... Doskocil Manufacturing Company, Inc.
Guarantor................... The Old Notes are, and the New Notes will be,
guaranteed on a senior subordinated basis by all
future Subsidiaries of the Company (other than
any Receivables Subsidiaries or Foreign
Subsidiaries).
Maturity Date............... September 15, 2007.
Interest Payment Dates...... March 15 and September 15 of each year,
commencing March 15, 1998.
Ranking..................... The Old Notes are, and the New Notes will,
constitute general unsecured obligations of the
Company and will be subordinated in right of
payment to all Senior Debt of the Company. At
December 31, the Company had approximately $167.5
million of Senior Debt outstanding, all of which
was secured under the New Credit Facility, and no
outstanding indebtedness to which the Old Notes
are, or New Notes would be, senior. The Indenture
prohibits the Company and the Guarantors from
incurring, assuming or guaranteeing any
Indebtedness that is subordinated to any Senior
Debt and senior in right of payment to the Notes
or the Guarantees, as applicable. See
"Description of the Notes--Subordination."
Optional Redemption......... The Notes are redeemable, in whole or in part, at
the option of the Company at any time on or after
September 15, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest,
if any, thereon, plus Liquidated Damages, if any.
In addition, at any time on or before September
15, 2000, the Company may redeem up to 35% of the
original aggregate principal amount of the Notes
with the net proceeds of an Initial Public Equity
Offering at a redemption price equal to 110% of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the date of redemption; provided, however,
that at least 65% of the original aggregate
principal amount of the Notes must remain
outstanding following such redemption. See
"Description of the Notes--Optional Redemption."
Change of Control........... Upon a Change of Control Redemption Event, the
Company will have the option, at any time on or
prior to September 15, 2002, to redeem the Notes
in whole but not in part at a redemption price
equal to 100% of the principal amount thereof
plus the Applicable Premium set forth herein,
plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of redemption. Upon
a Change of Control, each holder of the Notes
will have the right to require the Company to
repurchase all or any part of such holder's Notes
(unless previously redeemed in connection with a
Change of Control Redemption Event) at 101% of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to
13
<PAGE>
the date of repurchase. See "Description of the
Notes--Optional Redemption" and "--Certain
Covenants--Repurchase of Notes at the Option of
the Holder Upon a Change of Control." There can,
however, be no assurance that sufficient funds
will be available at the time of any Change of
Control to make any required repurchases of Notes
tendered or that restrictions in the New Credit
Facility or under the Company's debt instruments
existing at such time will allow the Company to
make such required repurchases.
Certain Covenants........... The Indenture contains certain covenants,
including, but not limited to, covenants
limiting: (i) the incurrence by the Company and
its Subsidiaries of additional Indebtedness; (ii)
the payment of dividends on and the redemption of
capital stock by the Company; (iii) the creation
of liens securing indebtedness; (iv) restrictions
on the ability of Subsidiaries to pay dividends
or make other restricted payments; (v)
transactions with affiliates; (vi) certain sales
of assets; (vii) the ability of the Company and
the Subsidiaries to engage in certain businesses;
and (viii) the Company's ability to consolidate
or merge with or into, or transfer all or
substantially all of its assets to, another
person. Under the covenant limiting the
incurrence by the Company of additional
Indebtedness, the Company is permitted to incur
Indebtedness if the Consolidated Coverage Ratio
of the Company for the Reference Period
immediately preceding the date of incurrence of
the Indebtedness is, after giving effect on a pro
forma basis to the incurrence of such
Indebtedness and the use of proceeds thereof, at
least 2.0 to 1. In addition, and without regard
to the Consolidated Coverage Ratio, the Company
may incur up to $100 million of Indebtedness
pursuant to the New Credit Facility, up to $10
million of Purchase Money Indebtedness and $10
million of additional Indebtedness. See
"Description of the Notes--Certain Covenants."
Events of Default........... The Indenture defines an Event of Default to
include, among other things: (i) the failure of
the Company to pay interest when due and
continuance of any such failure for 30 days; (ii)
the failure to pay principal on the Notes when
due; (iii) the failure by the Company or any
Subsidiary to comply with the covenants contained
in the Indenture and, subject to certain
exceptions, the continuance of such failure for a
period of 30 days (60 days in the case of certain
covenants) after written notice is given to the
Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% in
aggregate principal amount of the Notes
outstanding, (iv) certain events of bankruptcy,
insolvency or reorganization; (v) the failure of
the Company to pay Indebtedness of the Company or
any Subsidiary when due if the aggregate
principal amount of such Indebtedness exceeds
$5.0 million and (vi) the existence of final
unsatisfied judgments not covered by insurance
aggregating in excess of $5.0 million at any one
time that are not stayed, bonded or discharged
within 60 days. See "Description of the Notes--
Events of Default and Remedies."
14
<PAGE>
Use of Proceeds............. The Company will not receive any proceeds from
the Exchange Offer. The Company used the net
proceeds of the Offering, together with
borrowings under the New Credit Facility, to
repay the Bridge Notes and the Existing Credit
Facility, to acquire certain shares of preferred
and common stock of Doskocil and certain shares
of preferred and common stock of Dogloo in
connection with the Merger, to pay accrued
dividends on shares of Doskocil preferred stock
and to pay related fees and expenses. See "Use of
Proceeds."
Risk Factors................ See "Risk Factors" for a discussion of certain
factors that should be considered by Holders in
connection with the Exchange Offer, including the
consequences of failure to exchange and
requirements for a transfer of New Notes, the
substantial leverage and debt service obligations
of the Company, restrictive covenants and asset
encumbrances applicable to the Company under the
New Credit Facility, the risk related to the
merger and integration of Doskocil and Dogloo,
the seasonality and quarterly fluctuations of the
Company's business and results of operations, the
Company's dependence on raw material pricing and
availability, the concentration of the Company's
customers, the Company's reliance on trademark,
patent and proprietary information, the risks
associated with intense competition, limited
market data and the susceptibility of the Company
to changing economic conditions, the inability of
the Company to purchase Notes upon a Change of
Control, the risks associated with the
subordination of the Notes, fraudulent transfer
considerations, the lack of a public market for
the Notes and the fact that Westar Capital owns a
controlling interest in the Company.
15
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
The following summary pro forma combined financial information was derived in
part from, and should be read in conjunction with, the historical combined
financial statements of Doskocil and the historical financial statements of
Dogloo and the respective notes thereto, the Pro Forma Financial Data (as
defined) of the Company and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
Doskocil followed a 52/53 week convention through fiscal year ended 1996; all
references to December 31 relate to Doskocil's actual year end. The historical
combined financial statements of Doskocil and the historical financial
statements of Dogloo as of and for the year ended December 31, 1996 have been
audited. The financial data for both Doskocil and Dogloo for the latest twelve
months ended June 30, 1997 have not been audited. The summary pro forma data
for the latest twelve months ended June 30, 1997 and the six months ended
December 31, 1997 give effect to the Transactions as if they had occurred on
July 1, 1996. The pro forma financial data do not purport to be indicative of
the Company's financial position or results of operations that would actually
have been obtained had the Transactions been completed as of the date or for
the periods presented, or to project the Company's financial position or
results of operations at any future date or for any future period.
LATEST TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DOSKOCIL DOGLOO ADJUSTMENTS(1) COMBINED(2)
-------- ------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................... $103,474 $57,209 $160,683
Gross profit.................... 29,302 20,548 $ 858 50,708
Operating income................ 664 6,430 5,418 12,512
CASH FLOWS:
Provided by operating
activities.................... 12,294 5,482 4,910 22,686
Provided by (used in) investing
activities.................... 1,645 (1,686) -- (41)
Used in financing activities... (15,483) (3,288) (10,964) (29,735)
OTHER FINANCIAL DATA:
EBITDA(3)....................... $ 19,331 $10,173 $ 8,994 $ 38,498
Interest expense, net........... 897 3,452 11,472 15,821
Depreciation and amortization... 5,908 3,361 3,295 12,564
Capital expenditures............ 2,360 1,645 13,254 17,259
EBITDA/interest expense,
net(3)......................... 2.4x
Total debt/EBITDA(3)............ 4.3x
Deficiency of pro forma
earnings to fixed charges(4)... $ 5,581
MARGINS:
Gross margin.................... 28.3% 35.9% 31.6%
EBITDA(3)....................... 18.7% 17.8% 24.0%
</TABLE>
16
<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
DOGLOO
JULY 1 TO
HISTORICAL SEPTEMBER 19, PRO FORMA PRO FORMA
DOSKOCIL 1997 ADJUSTMENTS(1) COMBINED(2)
---------- ------------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................. $ 79,506 $12,992 $ 92,498
Gross profit.............. 28,611 5,168 33,779
Operating income.......... 14,556 1,635 $ 77 16,268
CASH FLOWS:
Provided by (used in)
operating activities..... 13,502 (1,491) 12,011
Used in investing
activities............... (20,504) (524) -- (21,028)
Provided by financing
activities............... 14,492 2,842 (1,845) 15,489
OTHER FINANCIAL DATA:
EBITDA(3)................. $ 19,123 $ 2,382 $ 4,437 $ 25,942
Interest expense, net..... 9,130 947 (1,733) 8,344
Depreciation and
amortization............. 5,020 747 374 6,141
Capital expenditures...... 22,467 515 -- 22,982
EBITDA/interest expense,
net(3)................... 3.1x
Pro forma ratio of
earnings to fixed
charges(4)............... 1.8x
MARGINS:
Gross Margin.............. 36.0% 39.8% 36.5%
EBITDA(3)................. 24.1% 18.3% 28.0%
</TABLE>
- --------
(1) For a description of certain of the pro forma adjustments, see Notes to
Unaudited Pro Forma Condensed Statements of Operations.
(2) Pro forma combined data have been adjusted to reflect the Transactions. In
order to match the combined Company's fiscal year reporting with its
seasonality, management has changed its fiscal year end to June 30. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
(3) The term EBITDA as used herein means the sum of operating income plus (i)
depreciation and amortization, (ii) operating lease expense related to
capital assets repurchased from operating lessors, (iii) impairment of
molds, tools and dies, (iv) unusual inventory write-offs, (v) unusual
reserves for workers' compensation, (vi) non-recurring write-offs of
intangible assets and the write-offs of certain development costs for
abandoned projects, (vii) non-recurring settlement costs, (viii) non-
recurring retention and officer's bonuses and (ix) management fees and
other expenses. Pro forma EBITDA also includes estimated cost savings
resulting from (i) the closure of Dogloo's Corona, California and
Indianapolis, Indiana facilities and the elimination of duplicative
manufacturing expenses and selling, general and administrative costs
associated with those facilities, and (ii) the availability of lower cost
resin from Doskocil's Spectrum facility for the manufacture of Dogloo
products. While EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flow from
operating activities, which are determined in accordance with generally
accepted accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements. EBITDA
is not necessarily a measure of the Company's ability to fund its cash
needs and there can be no assurance that costs similar to certain of the
costs added back to operating income as part of EBITDA will not be incurred
again in the future. EBITDA is included herein because management believes
that certain investors find it to be a useful tool for measuring the
ability to service debt. The term EBITDA as used herein may not be
comparable to other similarly titled measures of EBITDA used by other
companies.
(4) For the purpose of determining the deficiency of pro forma earnings to
fixed charges and the pro forma ratio of earnings to fixed charges,
earnings are defined as pre-tax income (loss) plus fixed charges. Fixed
charges consist of interest expense on all indebtedness plus one third of
rental expense, deemed to be representative of that portion of rental
expense estimated to be attributable to interest.
17
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary historical financial information was derived in part
from, and should be read in conjunction with, the historical combined financial
statements of Doskocil and the historical financial statements of Dogloo and
the respective notes thereto and "Selected Historical Financial Data," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The historical combined
financial statements of Doskocil as of and for each of the years ended December
31, 1993 through 1996, and for the six-month period ended June 30, 1997 have
been audited. The historical combined financial statements of Doskocil as of
and for the six-month period ended June 30, 1996 and as of and for each of the
six-month periods ended December 31, 1996 and 1997 are unaudited. The
historical financial statements of Dogloo as of and for the years ended
December 31, 1993 through December 31, 1996 have been audited. The historical
financial statements of Dogloo as of and for each of the eight-month periods
ended August 31, 1996 and 1997 are unaudited.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30, DECEMBER 31,
------------------------------------ ---------------- -----------------
1993 1994 1995 1996 1996 1997 1996 1997
------- -------- ------- -------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DOSKOCIL
INCOME STATEMENT DATA:
Net sales.............. $74,325 $ 92,267 $97,496 $103,455 $51,737 $51,756 $51,716 $ 79,506
Gross profit........... 26,788 29,782 25,944 30,327 14,392 13,367 15,738 28,611
Operating income
(loss)................ 2,967 4,729 3,105 7,615 3,151 (3,800) 4,009 14,103
CASH FLOWS:
Provided by (used in)
operating activities.. 4,513 1,480 (4,785) 16,830 7,302 2,766 10,485 13,502
Used in investing
activities............ (7,631) (14,113) (5,319) (74) (2,691) (972) 2,618 (20,504)
Provided by (used in)
financing activities.. 3,615 12,846 13,218 (14,039) (5,259) (6,703) (8,780) 14,492
OTHER FINANCIAL DATA:
EBITDA(1).............. $12,313 $ 13,689 $11,409 $ 17,848 $ 8,018 $ 9,501 $ 9,542 $ 19,123
Interest expense, net.. 240 822 2,456 2,176 1,750 471 1,030 9,130
Depreciation and
amortization.......... 2,963 4,283 5,545 5,928 2,877 2,857 3,141 5,020
Capital expenditures... 6,796 11,474 19,156 4,129 2,740 971 1,390 22,467
MARGINS:
Gross margin........... 36.0% 32.3% 26.6% 29.3% 27.8% 25.8% 30.4% 36.0%
EBITDA(1).............. 16.6 14.9 11.8 17.2 15.5 18.3 18.5 24.1
BALANCE SHEET DATA:
Fixed assets, net...... $17,306 $ 28,350 $28,078 $ 22,566 $28,019 $16,904 $22,573 $ 56,183
Total assets........... 40,524 58,663 72,876 66,135 70,431 50,679 65,864 177,098
Current liabilities.... 5,575 7,403 22,050 22,966 10,807 14,936 23,855 25,266
Long-term debt......... 8,538 21,284 21,213 9,110 9,888 8,302 710 167,250
Equity................. 26,411 30,462 31,148 35,638 32,225 29,090 34,556 (19,480)
</TABLE>
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED AUGUST
FISCAL YEAR ENDED DECEMBER 31, 31,
---------------------------------- ----------------
1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
DOGLOO
INCOME STATEMENT DATA:
Net sales............... $30,766 $44,267 $51,520 $56,519 $30,656 $31,260
Gross profit............ 11,787 14,090 11,298 18,633 8,462 9,702
Operating income (loss). 3,429 2,620 (4,273) 6,625 1,739 1,308
CASH FLOWS:
Provided by (used in)
operating activities... 1,923 (2,854) (5,758) 7,097 2,480 (487)
Used in investing
activities............. (3,824) (8,276) (7,899) (1,020) (460) (1,088)
Provided by (used in)
financing activities... 2,014 9,809 13,657 (5,975) (2,020) 2,007
OTHER FINANCIAL DATA:
EBITDA(1)............... $ 3,771 $ 3,679 $ 1,597 $10,031 $ 3,969 $ 3,819
Interest expense, net... 231 1,229 7,027 3,599 2,361 2,184
Depreciation and
amortization........... 342 1,059 2,303 3,067 1,991 2,311
Capital expenditures(2). 5,450 16,621 9,130 1,000 451 1,054
MARGINS:
Gross margin............ 38.3% 31.8% 21.9% 33.0% 27.6% 31.0%
EBITDA(1)............... 12.3 8.3 3.1 17.7 13.0 12.2
BALANCE SHEET DATA:
Fixed assets, net....... $ 6,926 $22,557 $27,547 $25,948 $26,083 $25,096
Total assets............ 19,995 39,364 47,250 42,438 46,791 45,580
Current liabilities..... 10,732 15,247 25,802 21,438 20,453 20,399
Long-term debt.......... 2,196 17,702 27,470 23,576 24,674 21,356
Stockholders' equity
(deficit).............. 7,186 7,682 (2,517) (2,470) (4,290) (4,137)
</TABLE>
(See Notes on following page)
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(Notes to table on previous page)
- --------------------
(1) The term EBITDA as used herein means the sum of operating income plus (i)
depreciation and amortization, (ii) operating lease expense related to
capital assets repurchased from operating lessors, (iii) impairment of
molds, tools and dies, (iv) unusual inventory write-offs, (v) unusual
reserves for workers' compensation, (vi) non-recurring write-offs of
intangible assets and the write-offs of certain development costs for
abandoned projects, (vii) non-recurring patent litigation and settlement
costs, (viii) non-recurring retention and officer's bonuses and (ix)
management fees and other expenses. While EBITDA should not be construed as
a substitute for operating income or a better indicator of liquidity than
cash flow from operating activities, which are determined in accordance
with generally accepted accounting principles, it is included herein to
provide additional information with respect to the ability of the Company
to meet its future debt service, capital expenditure and working capital
requirements. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs and there can be no assurance that costs similar to
certain of the costs added back to operating income as part of EBITDA will
not be incurred again in the future. EBITDA is included herein because
management believes that certain investors find it to be a useful tool for
measuring the ability to service debt. The term EBITDA as used herein may
not be comparable to other similarly titled measures of EBITDA used by
other companies.
(2) Capital expenditures in years 1993, 1994 and 1995 include $1,645, $8,355
and $2,500, respectively for capital leases incurred for the acquisition of
machinery and equipment.
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RISK FACTORS
In addition to the other information set forth elsewhere in this Prospectus,
holders of the Old Notes should carefully consider the following risk factors
prior to tendering their Old Notes in the Exchange Offer. This Prospectus
contains forward-looking statements which involve risk and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere herein.
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register Old Notes under the Securities Act.
The Company currently does not intend to register or qualify the sale of the
New Notes in any state where an exemption from registration or qualification
is required and not available. See "The Exchange Offer--Consequences of
Exchanging Old Notes."
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company incurred substantial indebtedness in connection with the
consummation of the Transactions and will remain highly leveraged following
the Exchange Offer. As of September 30, 1997, the Company had total
consolidated indebtedness of approximately $170 million. On a pro forma basis
after giving effect to the Transactions, the Company's ratio of earnings to
fixed charges would have been 1.2 to 1.0 for the latest twelve months ended
June 30, 1997. Subject to the restrictions in the New Credit Facility and the
Indenture, the Company and its subsidiaries may incur additional indebtedness
from time to time to finance capital expenditures and acquisitions and for
other general corporate purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including: (i) the possible
limitation in the future on the Company's ability to obtain additional
financing for working capital, product development, capital expenditures, debt
service requirements or other purposes; (ii) a substantial portion of the
Company's cash flow from operations will be dedicated to the payment of the
principal of and interest on its indebtedness, thereby reducing funds
available for operations and capital additions; (iii) certain of the Company's
borrowings, primarily the borrowings under the New Credit Facility, will be at
variable rates of interest which could cause the Company to be vulnerable to
increases in interest rates; (iv) the Company may be more vulnerable to
economic downturns and more limited in its ability to withstand competitive
pressures than its competitors that are not as highly leveraged; (v) the Notes
will mature after substantially all of the Company's other indebtedness,
including all borrowings under the New Credit Facility; and (vi) the Company's
leveraged status may affect its ability to make acquisitions in the future.
The Company's scheduled payments of principal and interest on existing
borrowings under the New Credit Facility and the Notes are $281,250 for the
year ended June 30, 1998 and increase to $4.1 million in fiscal 1999 and $8.4
million in fiscal 2000. The Company's ability to make scheduled payments of
the principal of, or interest on, or to refinance, its indebtedness, including
the Notes, will depend on its future operating performance and cash flow,
which are subject to prevailing economic conditions, prevailing interest rate
levels, and financial, competitive, business and other factors, many of which
are beyond its control, as well as the availability of borrowings under the
New Credit Facility or successor facilities. However, based upon the current
and anticipated level of operations, the Company believes that its cash flow
from operations, together with amounts available under the New Credit
Facility, will be adequate to meet its anticipated cash requirements for
working
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capital, capital expenditures, interest payments and scheduled principal
payments. There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels. If the Company is
unable to generate sufficient cash flow from operations in the future to
service its indebtedness, it may be required to refinance all or a portion of
its indebtedness, including the Notes, or to obtain additional financing or to
dispose of material assets or operations. The New Credit Facility and the
Indenture restrict the Company's ability to sell assets and/or use the
proceeds therefrom. There can be no assurance that any such refinancing or
asset sales would be possible under the Company's debt instruments existing at
such time, that the proceeds which the Company could realize from such
refinancing or asset sales would be sufficient to meet the Company's
obligations then due or that any additional financing could be obtained.
RESTRICTIVE COVENANTS AND ASSET ENCUMBRANCES UNDER THE NEW CREDIT FACILITY AND
INDENTURE
The New Credit Facility and the Indenture contain numerous restrictive
covenants which limit the discretion of Company management with respect to
certain business matters. These covenants place significant restrictions on,
among other things, the ability of the Company to incur additional
indebtedness, to create liens or other encumbrances, to pay dividends or make
other restricted payments, to make investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of assets to, or merge or
consolidate with, another entity. The New Credit Facility also contains a
number of financial covenants that require the Company to meet certain
financial ratios and tests and provide that a "change of control" will
constitute an event of default. A failure to comply with the obligations
contained in the New Credit Facility or the Indenture, 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. In addition, the obligations of the Company under the New
Credit Facility are secured by substantially all of the assets of the Company.
In the case of an event of default under the New Credit Facility, the lenders
under the New Credit Facility are entitled to exercise the remedies available
to a secured lender under applicable law. If the Company were obligated to
repay all or a significant portion of its indebtedness, there can be no
assurance that the Company would have sufficient cash to do so or that the
Company could successfully refinance such indebtedness. Other indebtedness of
the Company that may be incurred in the future may contain financial or other
covenants more restrictive than those applicable to the New Credit Facility or
the Notes. See "Description of the Notes--Certain Covenants" and "Description
of New Credit Facility."
RISKS RELATED TO THE MERGER AND INTEGRATION OF DOSKOCIL AND DOGLOO
The Merger involved the combination of two companies that previously
operated independently. The assimilation of the companies may be difficult and
requires integration and coordination of the Company's product offerings,
management, systems, research and development, manufacturing and sales and
marketing efforts. The difficulties of such assimilation may be increased by
the necessity of coordinating geographically separated organizations,
consolidating manufacturing operations in Arlington, Texas, relocating and
integrating personnel and combining different corporate cultures. In addition,
the process of integrating the manufacturing, systems and other operations of
Dogloo and Doskocil requires substantial attention from management and could
cause the interruption of, or a loss of momentum in, the business activities
of the Company, which could have an adverse effect on the Company's financial
position, results of operations and cash flows. There can be no assurance that
the Company will retain its key personnel or that the research and
development, manufacturing and sales and marketing teams of Dogloo and
Doskocil will successfully cooperate to realize any benefits or that the
Company will realize any anticipated benefits from the Merger or the
Transactions as a whole. Accordingly, no assurance can be given that
difficulties will not be encountered in integrating the operations of Dogloo
and Doskocil or that the efficiencies and benefits expected from such
integration will be realized. In addition, the Merger could cause customers
and potential customers of the Company to delay or cancel orders for products
as a result of customer concerns and uncertainty over product evolution,
integration and support of the combined Company's products. Such a delay or
cancellation of orders could have a material adverse effect on the Company's
financial position, business, operating results or cash flows. The Company's
future success will be dependent in part upon its continued ability to
recruit, motivate and retain qualified personnel. There can be no assurance
that the Company will be successful in this regard. See "Management."
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<PAGE>
Consistent with its desire to be a focused pet products company, management
may consider the sale or other disposition, including a sale or distribution
to existing shareholders, of the Doskocil sporting goods and other products
line described in "Business--Products--Sporting Goods and Other Products."
This product line generated sales of approximately $24 million during 1996.
Any such sale or other disposition of this product line would be subject to
obtaining the consent of the Company's lenders under the New Credit Facility
and compliance with applicable Indenture covenants.
The Pro Forma Financial Data set forth in the "Prospectus Summary" and under
"Unaudited Pro Forma Condensed Financial Data" and management's estimates of
certain additional cost savings from the Merger are based upon a number of
assumptions and estimates that, while presented with numerical specificity and
considered reasonable by the Company when taken as a whole, are inherently
subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond the control of the Company, and are
based upon assumptions with respect to future business decisions that are
subject to change. The Pro Forma Financial Data, and such other estimates of
management, assume that the Company will achieve certain cost savings and
operational efficiencies related to the Merger. Certain of the assumptions
underlying the Pro Forma Financial Data are described in more detail under
"Unaudited Pro Forma Condensed Financial Data." In addition, the Pro Forma
Financial Data exclude the effect of certain non-recurring costs relating to
the Merger and the Offering that will be expensed in 1997. Accordingly, the
Pro Forma Financial Data, and such other estimates by management, are only
estimates that are necessarily speculative in nature. It can be expected that
some or all of the assumptions of the Pro Forma Financial Data will not
materialize and that actual results will vary from the Pro Forma Financial
Data, which variations may be material. The Pro Forma Financial Data do not
purport to represent what the Company's results of operations actually would
have been if the Transactions had been consummated on the date indicated, or
what such results will be for any future date or for any future period.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The business and results of operations of the Company are seasonal. Dogloo's
business and results of operations are especially seasonal due to the
increased number of pet shelters sold during periods of inclement weather;
because retailers build inventories in anticipation of these periods, sales
are typically weighted towards the third and fourth quarters of each calendar
year. Doskocil's business and results of operations are also seasonal because
of the increased number of pet shelters sold during the third and fourth
quarters of each calendar year and because of the increased number of sporting
goods and certain other products sold in anticipation of the spring and summer
selling seasons. In order to finance these seasonal variations and resulting
inventory and receivable levels, Dogloo and Doskocil have both utilized
revolving lines of credit. The outstanding balances on the revolving lines of
credit have generally followed the seasonal cycle described above, increasing
until sales and the collection of receivables could be used to reduce the
outstanding balances on the lines. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." There can be no assurances,
however, that the Company will be able to finance seasonal variations in its
liquidity requirements.
DEPENDENCE ON RAW MATERIAL PRICING AND AVAILABILITY
The major raw materials used in the manufacturing of the Company's products
are various plastic resins and recycled plastic materials, including primarily
polypropylene and polyethylene and their derivatives. The plastic resins used
by the Company are produced from petrochemical intermediates which are, in
turn, derived from petroleum extracts. Plastic resin prices may fluctuate as a
result of worldwide changes in natural gas and crude oil prices and capacity,
as well as changes in supply and demand for resin and petrochemical
intermediates from which they are produced. Among other industries, the
automotive and housing industries are significant users of plastic resin. As a
result, significant changes in worldwide capacity and demand in these and
other industries may cause significant fluctuations in the prices of plastic
resin. In the past, Dogloo and Doskocil have had limited ability to increase
product pricing in response to plastic resin price increases. Any future
increases in the prices of plastic resins could have a material adverse effect
on the Company's financial position, results of operations and cash flows. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Raw Materials."
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Significant increases in the prices of other raw materials used to
manufacture the Company's products could have a material adverse effect on the
Company's financial position, operating results, and cash flows. There can be
no assurance that severe shortages of raw materials will not occur in the
future that could increase the cost or delay the shipment of the Company's
products and have a material adverse effect on the Company's financial
position, operating results and cash flows.
CONCENTRATION OF CUSTOMERS
In 1996, the six months ended June 30, 1997 and the three months ended
September 30, 1997, Wal-Mart, the Company's largest customer, accounted for
approximately 11.7%, 11.1% and 16.6%, respectively of net sales, and the
Company's ten largest customers accounted for, in the aggregate, approximately
39.6%, 36.4% and 48.2%, respectively, of net sales. See "Business--Customers."
The loss of, or significant reduction of orders from, any of the Company's
major customers could have a material adverse effect on the Company's
financial position, results of operations and cash flows.
RELIANCE ON TRADEMARK, PATENT AND PROPRIETARY INFORMATION
The Company's continuing success depends in part on its ability to protect
and maintain the proprietary nature of its products through a combination of
trademarks, patents, licenses and other proprietary arrangements. The Company
intends to protect vigorously the proprietary nature of its products; however,
monitoring and identifying unauthorized use of the Company's proprietary
rights may prove difficult. There can be no assurance that the Company's
pending trademark or patent applications will issue or that, if issued, or
licensed to the Company, they will be enforceable or will provide substantial
protection from competition or be of commercial benefit to the Company, or
that the Company will possess the financial resources necessary to enforce or
defend any of its trademark and patent rights. Neither can there be any
assurances that a third party will not violate, or attempt to invalidate, the
Company's proprietary rights, possibly forcing the Company to expend
substantial legal fees. Successful challenges to certain of the Company's
patents or trademarks, particularly the federal configuration trademark
relating to its igloo-shaped pet shelter, would materially adversely affect
its financial condition, business, operating results and cash flows. While
Dogloo has successfully relied upon this configuration trademark in the past,
there can be no assurance that the Company will again be successful in this
regard. Further, there can be no assurance that actions taken by the Company
to establish and protect its proprietary rights would be adequate to prevent
imitation of its products by others or to prevent others from seeking to block
sales of the Company's products as violative of the proprietary rights of
others. Moreover, there can be no assurance that third parties will not assert
infringement claims against the Company in the future. If any of the Company's
products are found to infringe upon patents or other third party rights, the
Company could be required to obtain a license to continue to manufacture or
market such products. There can be no assurance that licenses to such patent
rights would be made available to the Company on commercially reasonable
terms, if at all. If the Company does not obtain such licenses, it could
encounter delays while it attempts to redesign these products to avoid
infringement, or it could find that the manufacture or marketing of these
products is not possible. In addition, the laws of certain foreign countries
may not protect proprietary rights to the same extent as do the laws of the
United States.
INTENSE COMPETITION, LIMITED MARKET DATA AND THE SUSCEPTIBILITY TO CHANGING
ECONOMIC CONDITIONS
The Company's products are sold in highly competitive markets. In each of
its markets, the Company competes with a significant number of companies of
varying sizes on the basis of quality, price, availability and service.
Competitive pressures or other factors could cause the Company to lose market
share or could result in significant price erosion, either of which could have
a material adverse effect upon the Company's financial position, results of
operations and cash flows. Some of the Company's competitors have greater
financial and other resources than the Company and may consequently have more
operating flexibility and a greater ability to expand production capacity and
increase research and development expenditures.
The market data contained in this Prospectus is based on independent
industry publications or the good faith belief of the Company's management.
However, such market data cannot be verified with certainty due in part
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<PAGE>
to the unavailability of raw data in certain circumstances and the voluntary
nature of the data-gathering process, and estimates may be incorrect, possibly
to a material degree. In particular, the Company is not aware of the
availability of reliable statistics with respect to specific pet and sporting
goods products. Therefore, management's estimates with respect to such
specific pet and sporting goods products are based only on the limited data in
the public domain and the Company's participation in the pet and sporting
goods industries. Accordingly, no assurance can be given as to the accuracy of
management's estimates. Holders of the Notes should not place undue emphasis
on the market data and predictions of future trends contained in the
Prospectus, as there can be no assurance that such data or predictions are
accurate in all material respects.
Sales of pet products can be dependent upon discretionary consumer spending,
which may be affected by general economic conditions, as well as continued
interest in pet ownership. A decrease in consumer spending on pet products or
a reduction in pet ownership could have an adverse effect on the Company's
financial position, business, operating results and cash flows.
INABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase. However, there can be no assurance that sufficient funds will be
available at the time of any Change of Control to make any required
repurchases of Notes tendered, or that restrictions in the New Credit Facility
or under the Company's debt instruments existing at such time will allow the
Company to make such required repurchases. Notwithstanding these provisions,
the Company could enter into certain transactions, including certain
recapitalizations, that would not constitute a Change of Control but would
increase the amount of debt outstanding at such time. See "Description of the
Notes--Certain Covenants--Repurchase of Notes at the Option of the Holder Upon
a Change of Control."
SUBORDINATION OF NOTES
The Old Notes are, and the New Notes will be, unsecured senior subordinated
obligations of the Company and, as such, are, and will be, respectively,
subordinated to all existing and future Senior Debt of the Company and its
subsidiaries, including borrowings under the New Credit Facility. The Old
Notes are, and the New Notes will also be effectively subordinated to all
secured indebtedness of either the Company or any of its subsidiaries to the
extent of the assets secured by such indebtedness. As of June 30, 1997, on a
pro forma basis after giving effect to the Transactions, the Company would
have had approximately $80.0 million of outstanding Senior Debt, all of which
would have been secured debt under the New Credit Facility. By reason of such
subordination, in the event of the insolvency, liquidation, reorganization,
dissolution or other winding-up of the Company or upon a default in payment
with respect to, or the acceleration of, any Senior Debt, the holders of such
Senior Debt and any other creditors of subsidiaries, if any, must be paid in
full before the holders of the Notes may be paid. Moreover, under certain
circumstances, if any non-payment default exists with respect to certain
Senior Debt, the Company may not make any payments on the Notes for a
specified time, unless such default is cured or waived, any acceleration of
such indebtedness has been rescinded or such indebtedness has been paid in
full. See "Description of the Notes--Subordination." If the Company incurs any
additional pari passu debt, the holders of such debt would be entitled to
share ratably with the holders of the Notes in any proceeds distributed in
connection with any insolvency, liquidation, reorganization, dissolution or
other winding-up of the Company. This may have the effect of reducing the
amount of such proceeds paid to holders of the Notes.
FRAUDULENT TRANSFER CONSIDERATIONS
As described under "Use of Proceeds," the net proceeds of the Offering were
used in part to repay the Bridge Notes and all amounts outstanding under the
Existing Credit Facility, which were incurred in connection with the
Recapitalization, and to redeem certain preferred and common stock of Doskocil
and certain preferred and common stock of Dogloo. The obligations of the
Company under the indebtedness represented by the Notes may be subject to
review under relevant federal and state fraudulent transfer laws, as well as
other similar laws regarding creditors rights generally or distributions to
shareholders, if a bankruptcy case or a lawsuit (including
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<PAGE>
circumstances not involving bankruptcy) is commenced by or on behalf of any
unpaid creditor or a representative of the Company's creditors, such as a
trustee in bankruptcy or the Company as debtor in possession. If a court, in
such a lawsuit, were to find that the Company incurred the indebtedness
represented by the Bridge Notes, the Existing Credit Facility or the Notes (i)
with the intent to hinder, delay or defraud present or future creditors or
contemplated insolvency with a design to prefer one or more creditors to the
exclusion in whole or in part of others; or (ii) received less than a
reasonably equivalent value or fair consideration for any such indebtedness
and, at the time of such incurrence (a) was insolvent; (b) was rendered
insolvent by reason of such incurrence; (c) was engaged or about to engage in
a business or transaction for which its remaining assets constituted
unreasonably small capital to carry on its business; or (d) intended to incur,
or believed or reasonably should have believed that it would incur, debts
beyond its ability to pay such debts as they matured, such court could void
the obligations under the Notes, direct the return of any amounts paid
thereunder to the Company or to a fund for the benefit of its creditors,
subordinate such obligations to all other indebtedness of the relevant obligor
or take other action detrimental to the holders of the Notes. A court would
likely conclude that the Company did not receive reasonably equivalent value
or fair consideration for incurring its obligations under the Notes to the
extent that the proceeds of the Notes were used to refinance the Bridge Notes
and the Existing Credit Facility (each as defined below) and that the Bridge
Notes and the Existing Credit Facility were used to repurchase stock of
Doskocil or Dogloo, or that the proceeds of the Notes were used to repurchase
such stock.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured. There can be no assurance as to what standard a
court would apply in order to determine whether Doskocil was "insolvent" at
the time of the Recapitalization or to determine whether the Company was
insolvent at the time the Transactions, including the Offering, were
consummated. Further, there can be no assurance that, regardless of the method
of valuation, a court would not determine that Doskocil was insolvent at the
time of the Recapitalization or that a court would not determine that the
Company was insolvent at the time the Transactions, including the Offering,
were consummated.
CONTROLLING STOCKHOLDER
Westar owns approximately 70.9% of the outstanding shares of Doskocil Common
Stock. Shares of Doskocil Common Stock are the only outstanding class of
voting capital stock of the Company. As a result, Westar has the ability to
elect the board of directors of the Company, to approve or disapprove of other
matters requiring stockholder approval and to effectively control the affairs
and policies of the Company.
LACK OF PUBLIC MARKET FOR THE NOTES
The Old Notes were issued on September 19, 1997 to institutional investors
and are eligible for trading in the PORTAL Market, the National Association of
Securities Dealers' screen-based, automated market for trading of securities
eligible for resale under Rule 144A. To the extent that Old Notes are tendered
and accepted in the Exchange Offer, the trading market for the remaining
untendered Old Notes could be adversely affected. There is no existing trading
market for the New Notes, and there can be no assurance regarding the future
development of a market for the New Notes, or the ability of holders of the
New Notes to sell their New Notes or the price at which such holders may be
able to sell their New Notes. Although the Initial Purchasers have informed
the Company that they currently intend to make a market in the New Notes, they
are not obligated to do so and any such market making may be discontinued at
any time without notice. As a result, the market price of the New Notes could
be adversely affected.
The Company does not intend to apply to list the Old Notes or the New Notes
on any securities exchange or for quotation through the National Association
of Securities Dealers Automated Quotation System.
The liquidity of, and trading market for, the Notes also may be adversely
affected by general declines in the market for similar securities, regardless
of the Company's financial performance or prospects.
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<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD SENIOR NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on March 27, 1998; provided, however, that if the Company,
in its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $85,000,000 aggregate principal amount of
the Old Notes were outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about March 2, 1998, to all holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to the conditions that
the Exchange Offer does not violate any applicable law, policy or
interpretation of the staff of the SEC.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
Any Old Notes not accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not therefore accepted for
exchange, upon the occurrence of any of the events specified below under "--
Conditions to the Exchange Offer." The Company will give oral or written
notice of any extension, amendment, non-acceptance or termination to the
holders of the Old Notes as promptly as practicable, such notice in the case
of any extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to
tender Old Notes for exchange pursuant to the Exchange Offer must transmit
either (i) a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to First
Trust National Association, as Exchange Agent, at the address set forth below
under "--Exchange Agent" on or prior to the Expiration Date, or (ii) if such
Old Notes are tendered pursuant to the procedures for book-entry transfer set
forth below, a holder tendering Old Notes may transmit an Agent's Message (as
defined herein) to the Exchange Agent in lieu of the Letter of Transmittal, in
either case on or prior to the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, along with the Letter of Transmittal or an Agent's
Message, as the case may be, must be received by the Exchange Agent prior to
the Expiration Date, or (iii) the holder must comply with the guaranteed
delivery procedures described below. The term "Agent's Message" means a
26
<PAGE>
message, transmitted to the Book-Entry Transfer Facility and received by the
Exchange Agent and forming a part of the Book-Entry Confirmation, which states
that the Book-Entry Transfer Facility has received an express acknowledgement
from the tendering Participant (as defined herein) that such Participant has
received and agrees to be bound by the Letter of Transmittal and the Company
may enforce the Letter of Transmittal against such Participant. THE METHOD OF
DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL OR AGENT'S MESSAGE AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES
SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined herein). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust
company having an office or correspondent in the United States (collectively,
"Eligible Institutions"). If Old Notes are registered in the name of a person
other than a signer of the Letter of Transmittal, the Old Notes surrendered
for exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by, the registered Holder with
the signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities of the Exchange Offer as to any particular
Old Notes either before or after the Expiration Date. The interpretation of
the terms and conditions of the Exchange Offer as to any particular Old Notes
either before or after the Expiration Date (including the Letter of
Transmittal and the instructions thereto) by the Company shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes for exchange must be cured within such
reasonable period of time as the Company shall determine. Neither the Company,
the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders that appear on the
Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder, that neither the holder nor
such other person has any arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the New Notes, and that neither the holder nor such other person is an
"affiliate" of the Company within the meaning of Rule 405 of the Securities
Act (or that if it is such an affiliate, it will comply
27
<PAGE>
with the registration and prospectus delivery requirement of the Securities
Act to the extent applicable). In the case of a Holder that is not a broker-
dealer, each such holder, by tendering, will also represent to the Company
that such holder is not engaged in, or does not intend to engage in, a
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account in exchange for Old Senior Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such New Notes. See "Plan of Distribution."
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Conditions to the Exchange Offer." For purposes of the
Exchange Offer, the Company shall be deemed to have accepted properly tendered
Old Notes for exchange when, as and if the Company has given oral or written
notice thereof to the Exchange Agent, with written confirmation of any oral
notice to be given promptly thereafter.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes, or if no interest has been paid on
the Old Notes, from September 19, 1997. Accordingly, if the relevant record
date for interest payment occurs after the consummation of the Exchange Offer,
registered Holders of New Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid from September 19, 1997. If, however, the relevant
record date for interest payment occurs prior to the consummation of the
Exchange Offer, registered Holders of Old Notes on such record date will
receive interest accruing from the most recent date to which interest has been
paid, or if no interest has been paid, from September 19, 1997. Old Notes
accepted for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer, except as set forth in the immediately
preceding sentence. Holders of Old Notes whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on such Old Notes
otherwise payable on any interest payment date the record date for which
occurs on or after consummation of the Exchange Offer. If the Exchange Offer
is not consummated within the time period set forth herein under the heading
"Description of the Notes--Registration Rights; Liquidated Damages," special
interest in the form of Liquidated Damages will accrue and be payable on the
Old Notes until the Exchange Offer is consummated.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents or, in the case of a Book-Entry
Confirmation, an Agent's Message in lieu thereof. If any tendered Old Notes
are not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount
than the holder desired to exchange, such unaccepted or non-exchanged Old
Notes will be resumed without expense to the tendering holder thereof (or, in
the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
procedures described below, such non-exchanged Old Notes will be credited to
an account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may
28
<PAGE>
make book-entry delivery of Old Notes by causing the Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for transfer. However, although delivery of Old Notes
may be effected through book-entry transfer at the Book-Entry Transfer
Facility, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees, or an Agent's Message in lieu of a Letter of
Transmittal, and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at one of the addresses set
forth below under "--Exchange Agent" on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender Old Notes held by
such holder and such Old Notes are not immediately available, or time will not
permit such holder's Old Notes or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if
(i) the tender is made through an Eligible Institution, (ii) prior to the
Expiration Date, the Exchange Agent received from such Eligible Institution a
properly completed and duly executed Letter of Transmittal (or a facsimile
thereof) and Notice of Guaranteed Delivery, substantially in the form provided
by the Company (by telegram, telex, facsimile transmission, mail or hand
delivery), setting forth the name and address of the holder of Old Notes and
the amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that within three New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-
Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within three
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon
as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes"
above at any time on or prior to the Expiration Date.
29
<PAGE>
CONDITIONS TO THE EXCHANGE OFFER
The Exchange Offer is not subject to any condition, other than that the
Exchange Offer does not violate any applicable law, policy or interpretation
of the staff of the SEC.
EXCHANGE AGENT
First Trust National Association has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or
of the Letter of Transmittal and requests for Notices of Guaranteed Delivery
should be directed to the Exchange Agent addressed as follows:
Delivery To: First Trust National Association, Exchange Agent
<TABLE>
<S> <C>
By Facsimile: By Mail, Overnight Courier or Hand:
(612) 244-1537 First Trust National Association
Confirm by Telephone: 180 East Fifth Street
(612) 244-1215 St. Paul, Minnesota 55101
Attn: Specialized Finance Department
Cindy DeValk
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax thereon.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of the exchange. Accordingly, no gain or loss for accounting purposes
will be recognized. The expenses of the Exchange Offer and the unamortized
expenses related to the issuance of the Old Notes will be amortized over the
term of the New Notes.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be
30
<PAGE>
offered or sold, unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act
and applicable state securities laws. The Company does not currently
anticipate that it will register Old Notes under the Securities Act. See
"Description of the Notes--Registration Rights; Liquidated Damages." Based on
interpretations by the staff of the SEC, as set forth in no-action letters
issued to third parties, the Company believes that New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold or otherwise transferred by holders thereof (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders
have no arrangement or understanding with any person to participate in the
distribution of such New Notes. However, the Company does not intend to
request the SEC to consider, and the SEC has not considered, the Exchange
Offer in the context of a no-action letter and there can be no assurance that
the staff of the SEC would make a similar determination with respect to the
Exchange Offer as in such other circumstances. Each Holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. If any Holder is
an affiliate of the Company, is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such Holder (i) could not rely
on the applicable interpretations of the staff of the SEC and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with state securities laws, the New
Notes may not be offered or sold in any state unless they have been registered
or qualified for sale in such state or an exemption from registration or
qualification is available and is complied with. The Offer and sale of the New
Notes to "qualified institutional buyers" (as such term is defined under Rule
144A of the Securities Act) is generally exempt from registration or
qualification under the state securities laws. The Company currently does not
intend to register or qualify the sale of the New Notes in any state where an
exemption from registration or qualification is required and not available.
31
<PAGE>
THE DOSKOCIL RECAPITALIZATION
On July 1, 1997, pursuant to the terms of a recapitalization agreement dated
July 1, 1997 (the "Recapitalization Agreement"), the following Enterprise
entities collectively acquired control of Doskocil: Enterprise Partners III,
L.P., a Delaware limited partnership ("EPIII"), Enterprise Partners III
Associates, L.P., a Delaware limited partnership ("EPIIIA"), Enterprise
Partners IV, L.P., a Delaware limited partnership "EPIV"), Enterprise Partners
IV Associates, L.P., a Delaware limited partnership ("EPIVA"), and Enterprise
Management Partners Corporation, a California corporation ("EMPC" and,
together with EPIII, EPIIIA, EPIV and EPIVA, the "Enterprise Funds"). EPIII,
EPIIIA, EPIV and EPIVA are managed by limited partnerships and Mr. Charles D.
Martin is one of the general partners of such limited partnerships. Mr. Martin
is also one of six general partners of Westar LP and one of six members of
Westar LLC. Mr. George L. Argyros owns HBI and an entity that is a general
partner of Westar LP and a member of Westar LLC.
The following events and transactions, together with certain other events
and transactions, constituted the recapitalization (the "Recapitalization") of
Doskocil: (i) the Enterprise Funds purchased, indirectly and directly, all of
the general and limited partnership interests of the partnership which
formerly owned the Spectrum facility for approximately $11.0 million, net of
debt (the "Spectrum Purchase Amount"), paid off approximately $1.0 million of
existing debt of Spectrum, and subsequently contributed such partnership
interests to Doskocil in exchange for 798,612 shares of Doskocil common stock,
no par value ("Doskocil Common Stock"); (ii) the Enterprise Funds contributed
$3.0 million to Doskocil in exchange for 199,654 shares of Doskocil Common
Stock and $23.0 million in exchange for 1,530,674 shares of Doskocil Series A
Preferred Stock, no par value ("Doskocil Series A Preferred Stock"); (iii)
Doskocil Funding, Inc. and NationsBridge, L.L.C. purchased an aggregate of
$32.5 million of senior subordinated increasing rate notes (the "Bridge
Notes") from Doskocil; (iv) NationsBank of Texas, N.A. ("NationsBank of
Texas") and DLJ Capital Funding, Inc. loaned an aggregate of $65.0 million to
Doskocil (the "Existing Credit Facility"); and (v) Doskocil purchased
5,666,145 shares of Doskocil Common Stock from Mr. Benjamin Doskocil, Sr. and
his spouse for approximately $87.4 million (the "Doskocil Purchase Amount,"
and together with the Spectrum Purchase Amount, the "Purchase Amount").
THE MERGER
Pursuant to the Merger Agreement, on September 19, 1997 Dogloo merged with
and into Doskocil, with Doskocil as the surviving corporation. Except as
described below, all of the outstanding shares of Dogloo common stock, no par
value ("Dogloo Common Stock"), Dogloo Series A Preferred Stock, no par value
("Dogloo Series A Preferred Stock") and Dogloo Series B Preferred Stock, no
par value ("Dogloo Series B Preferred Stock") were converted into,
respectively, shares of Doskocil Common Stock, Doskocil Series B Preferred
Stock, no par value ("Doskocil Series B Preferred Stock") and Doskocil Series
C Preferred Stock, no par value ("Doskocil Series C Preferred Stock"). The
outstanding shares of Dogloo Common Stock were converted into, in the
aggregate, 1,400,603 shares of Doskocil Common Stock. No certificates
representing fractional shares of Doskocil Common Stock were issued in the
Merger; rather, in lieu thereof, each stockholder of Dogloo otherwise entitled
to receive such a fractional share of Doskocil Common Stock received a cash
payment or a right thereto. Pursuant to the Merger Agreement, each issued and
outstanding share of Dogloo Series A Preferred Stock was converted into one
share of Doskocil Series B Preferred Stock and each issued and outstanding
share of Dogloo Series B Preferred Stock was converted into one share of
Doskocil Series C Preferred Stock. In connection with the Merger, except as
described below, all of the outstanding options to purchase shares of Dogloo
Common Stock were assumed by Doskocil and thereby become options to purchase
shares of Doskocil Common Stock, with adjustments to such options to reflect
the ratio into which shares of Dogloo Common Stock are converted into shares
of Doskocil Common Stock.
In connection with the Merger, Doskocil offered to purchase up to an
aggregate of 328,851 shares of Dogloo Common Stock for an aggregate price of
approximately $575,500 from shareholders of Dogloo other than the Investor
Group and Mr. Aurelio F. Barreto, III, the co-founder and former Chief
Executive Officer of Dogloo. In addition, Doskocil offered to cash out for
$0.41 per option all vested and unvested options of Dogloo employees
32
<PAGE>
who did not continue with the Company after the Merger. All Dogloo employees
who continued with the Company had their options assumed by the Company and
therefore converted into options to purchase Doskocil Common Stock.
Immediately prior to the Merger Dogloo had 761,000 outstanding options to
purchase shares of Dogloo Common Stock. Shareholders of Dogloo Common Stock
owning 23,148 shares of Dogloo Common Stock (0.071% of the outstanding shares
of Dogloo Common Stock immediately prior to the Merger) are entitled to
dissenter rights in connection with the Merger and such shareholders who
exercise such rights are, in accordance with California law, entitled to
receive in cash the fair market value of their shares, excluding any
appreciation or depreciation as a consequence of the Merger.
Concurrent with the closing of the Merger, 1,064,816 shares of Doskocil
Series A Preferred Stock owned by EMPC were distributed by EMPC to Westar and
HBI to satisfy certain indebtedness of EMPC to Westar and HBI. Immediately
after such distribution, all such shares of Doskocil Series A Preferred Stock
owned by Westar and HBI were converted into 1,064,816 shares of Doskocil
Common Stock.
Concurrent with the closing of the Merger, the Company used proceeds of the
Offering and the New Credit Facility to redeem for $14.9 million (including
dividends accrued through September 19, 1997) 598,959 shares of Doskocil
Common Stock and 359,376 shares of Doskocil Series A Preferred Stock owned by
EMPC, and to redeem for $3.6 million 64,448 shares of Doskocil Common Stock
and 51,558 shares of Doskocil Series A Preferred Stock from EPIII, 5,604
shares of Doskocil Common Stock and 4,483 shares of Doskocil Series A
Preferred Stock from EPIIIA, 63,050 shares of Doskocil Common Stock and 47,917
shares of Doskocil Series A Preferred Stock from EPIV, and 2,524 shares of
Doskocil Series A Preferred Stock from EPIVA.
Immediately following the Merger, the Company also used proceeds from the
Offering and the New Credit Facility to redeem the following additional shares
of Doskocil Series B Preferred Stock and Doskocil Series C Preferred Stock (i)
6,890,000 shares of Doskocil Series B Preferred Stock held by Mr. Barreto for
$8.4 million (including dividends accrued through September 19, 1997); (ii)
3,334,255 shares of Doskocil Series B Preferred Stock held by Darrell R.
Paxman, co-founder of Dogloo, for $4.0 million (including dividends accrued
through September 19, 1997); (iii) 495,358 shares of Doskocil Series C
Preferred Stock held by EPIII for $594,158 (including dividends accrued
through September 19, 1997); (iv) 43,075 shares of Doskocil Series C Preferred
Stock held by EPIIIA for $727,567 (including dividends accrued through
September 19, 1997); and (v) 2,141,260 shares of Doskocil Series C Preferred
Stock held by Mr. Barreto for $2.6 million (including dividends accrued
through September 19, 1997). Further, immediately following the Merger, the
Company paid approximately $1.5 million of accrued dividends on the shares of
Doskocil Series C Preferred Stock which remain outstanding.
In connection with the conversion and redemption of shares of Doskocil
Series A Preferred Stock, the Company borrowed $469,000 under the New Credit
Facility to pay cumulative dividends on such shares of Doskocil Series A
Preferred Stock as of the date of the Merger.
As of December 31, 1997, the Company had 3,053,640 shares of Doskocil Common
Stock outstanding and 9,161,567 shares of Doskocil Series C Preferred Stock
outstanding. No shares of Doskocil Series A Preferred Stock or Doskocil Series
B Preferred Stock are outstanding.
After giving effect to the Transactions, the Investor Group will have
invested a total of $20.0 million in cash equity and the Investor group and
other shareholders of Dogloo will have contributed Dogloo common and preferred
equity with a value of $30.1 million, based on the same valuation method used
in the Recapitalization. In addition, Benjamin C. Doskocil, Sr., will also
have retained approximately 10.9% of the outstanding shares of Doskocil Common
Stock after giving effect to the Transactions.
33
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds to the Company from the issuance of the Old Notes of approximately
$82.4 million (after deducting the estimated discounts to the Initial
Purchasers), together with proceeds from the New Credit Facility and existing
cash, were used as part of the Transactions to repay the Bridge Notes, the
Existing Credit Facility and existing Dogloo Debt, to redeem certain shares of
Doskocil Common Stock and Doskocil preferred stock, no par value ("Doskocil
Preferred Stock") (as described in "The Merger") and to pay related fees and
expenses. The Existing Credit Facility repaid in the Transactions bore
interest rates and maturity dates as follows: (i) $40 million borrowed under
Term A Loans bore interest ranging from prime plus 0% to .75% to LIBOR plus
1.5% to 2.25% and matured on June 30, 2003; and (ii) $25 million borrowed
under Term B Loans bore interest at prime plus 1.25% to LIBOR plus 2.75% and
matured on June 30, 2004. The Bridge Notes repaid in the Transactions bore
interest initially at prime plus 3.5%, increasing on each Rate Determination
Date, as defined, and matured on July 1, 1998 (or January 1, 2005 if the
Company elected not to pay the debt in full on July 1, 1998 and no default had
occurred prior to such time). The Dogloo debt repaid in the Transaction
consisted of Senior and Subordinated indebtedness and a revolving line of
credit aggregating $34.1 million, including accrued interest and penalties,
and bore interest at rates ranging from 9.25% to 16% and had maturities
ranging from September, 1998 through January, 2011. Both the Existing Credit
Facility and the Bridge Notes were incurred to finance the Doskocil
Recapitalization completed on July 1, 1997.
The following table sets forth the approximate sources and uses of funds in
the Transactions.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
CASH SOURCES OF FUNDS:
New Credit Facility(/1/):
Revolving Credit Facility(/2/)...................... $ 3,000
Senior Term A....................................... 45,000
Senior Term B....................................... 37,500
Senior Subordinated Notes offered hereby.............. 85,000
Existing cash......................................... 1,886
--------
172,386
NON-CASH SOURCES OF FUNDS:
Conversion of Dogloo Common Stock into Doskocil Common
Stock(/3/)........................................... 21,210
Conversion of Dogloo Series B Preferred Stock for
Doskocil Series C Preferred Stock (shares that will
not be redeemed as part of the Transactions)......... 9,162
Retention of Doskocil Common Stock by Doskocil common
stockholders......................................... 25,000
--------
Total sources of funds.............................. $227,758
========
CASH USES OF FUNDS:
Refinance Existing Credit Facility.................... $ 65,316
Refinance Bridge Notes(/4/)........................... 33,355
Refinance Dogloo Debt(/5/)............................ 34,135
Redeem Doskocil Common Stock.......................... 11,000
Redeem Doskocil Series A Preferred Stock(/6/)......... 7,469
Redeem Doskocil Series B Preferred Stock (formerly
Dogloo Series A Preferred Stock)(/7/)................ 12,390
Redeem Doskocil Series C Preferred (formerly Dogloo
Series B Preferred Stock)(/8/)....................... 5,041
Payment of accrued dividends on Doskocil Series C
Preferred Stock not redeemed(/8/).................... 1,576
Fees and Expenses paid at the time of the closing of
the Transactions(/8/)................................ 3,680
--------
172,386
NON-CASH USES OF FUNDS:
Conversion of Dogloo Common Stock into Doskocil Common
Stock(/3/)........................................... 21,210
Conversion of Dogloo Series B Preferred Stock for
Doskocil Series C Preferred Stock (shares that will
not be redeemed as part of the Transactions)......... 9,162
Retention of Doskocil Common Stock by Doskocil Common
Stockholders......................................... 25,000
--------
Total uses of funds................................. $227,758
========
</TABLE>
(See Notes on following page)
34
<PAGE>
(Notes to table on previous page)
- ---------------------
(1) See "Description of New Credit Facility."
(2) Does not give effect to an aggregate amount of $523,490 that Doskocil
borrowed under the New Credit Facility to (i) purchase in connection with
the Merger an aggregate of 249,703 shares of Dogloo Common Stock from
shareholders of Dogloo other than the Investor Group and Mr. Aurelio F.
Barreto, III, and (ii) to cash out in connection with the Merger 211,000
options to purchase shares of Dogloo Common Stock held by certain Dogloo
employees who are not continuing with the Company.
(3) Includes an aggregate of 249,703 shares of Dogloo Common Stock which
Doskocil purchased in connection with the Merger from shareholders of
Dogloo other than the Investor Group and Mr. Barreto.
(4) Includes approximately $855,000 of accrued interest.
(5) Of this amount, approximately $786,240 represented outstanding loans from
Westar to Dogloo, including accrued interest thereon.
(6) Includes $469,000 in cumulative dividends on shares of Doskocil Series A
Preferred Stock that were paid on the date of the Merger.
(7) Included accrued dividends through the date of the Merger.
(8) Includes a $450,000 transaction advisory fee agreed by Dogloo to be paid
to Westar as part of the 1995 Dogloo recapitalization.
35
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of December 31, 1997. This table should be read in conjunction with
"Doskocil Selected Historical Financial Data," "Dogloo Selected Historical
Financial Data," and "Unaudited Pro Forma Condensed Financial Data" included
elsewhere in this Prospectus. For a description of the capital stock of the
Company, see "Capital Stock of the Company." The Company is currently indebted
under the New Credit Facility and the Notes. See "Description of New Credit
Facility" and "Description of the Notes."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
(IN THOUSANDS)
<S> <C>
Revolving Credit Facility................................ $ --
Senior Debt--Term A...................................... 45,000
Senior Debt--Term B...................................... 37,500
Senior Subordinated Notes................................ 85,000
--------
Total Debt............................................. 167,500
Preferred Stock.......................................... 9,161
Common Stock............................................. 33,580
Retained earnings (deficit).............................. (62,221)
--------
Total Capitalization................................... $148,020
========
</TABLE>
PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited pro forma condensed financial data (the "Pro Forma
Financial Data") have been derived by the application of pro forma adjustments
to the historical financial statements. The pro forma income statement data
for the periods presented give effect to the Transactions as if they had
occurred as of July 1, 1996. The adjustments are described in the accompanying
notes. The Pro Forma Financial Data do not purport to represent what the
Company's results of operations actually would have been if the Transactions
had been consummated on the date indicated, or what such results will be for
any future date or for any future period. The Pro Forma Financial Data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical financial statements
and the notes thereto included elsewhere in this Prospectus.
36
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
LATEST TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
DOSKOCIL DOGLOO ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Net sales.......................... $103,474 $57,209 $160,683
Costs of goods sold................ 74,172 36,661 $ (858)A 109,975
-------- ------- --------
Gross profit..................... 29,302 20,548 50,708
Selling, general & administrative
expenses.......................... 20,740 14,118 (508)B 34,350
Officer and retention bonuses...... 4,052 -- (4,052)C --
Writedown of equipment to be
disposed.......................... 3,846 -- 3,846
-------- ------- --------
Operating income................... 664 6,430 12,512
Other (income) expense:
Interest expense, net............ 897 3,452 11,472 D 15,821
Amortization..................... -- -- 1,653 E 1,653
Other, net....................... 630 (11) 619
-------- ------- --------
Total other (income) expense... 1,527 3,441 18,093
-------- ------- --------
Pre tax income (loss).............. (863) 2,989 (5,581)
Provision (benefit) for income
taxes............................. -- 1,040 (3,105)F (2,065)
-------- ------- --------
Net income (loss).................. $ (863) $ 1,949 $ (3,516)
======== ======= ========
Pro forma net loss per share
(basic)........................... -- -- -- G $ (1.45)
Pro forma net loss per share
(diluted)......................... -- -- -- G $ (1.45)
Deficiency of pro forma earnings to
fixed charges..................... -- -- -- H $ 5,581
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Statements of
Operations.
37
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
DOGLOO
JULY 1 TO
HISTORICAL SEPTEMBER 19, PRO FORMA
DOSKOCIL 1997 ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales....................... $79,506 $12,992 $92,498
Costs of goods sold............. 50,895 7,824 58,719
------- ------- -------
Gross profit.................. 28,611 5,168 33,779
Selling, general and
administrative expenses........ 14,055 3,533 (77)B 17,571
------- ------- -------
Operating income................ 14,556 1,635 16,268
Other (income) expense:
Interest expense, net......... 9,130 947 (1,733)D 8,344
Amortization.................. 453 -- 374 E 827
Other, net.................... (223) 5 (218)
------- ------- -------
Total other (income)
expense.................... 9,360 952 8,953
------- ------- -------
Pre tax income.................. 5,196 683 7,315
Provision (benefit) for income
taxes.......................... 3,594 42 (929)F 2,707
------- ------- -------
Net income...................... $ 1,602 $ 641 $ 4,608
======= ======= =======
Pro forma net income per share
(basic)........................ -- -- -- G $ 1.35
Pro forma net income per share
(diluted)...................... -- -- -- G 1.35
Pro forma ratio of earnings to
fixed charges.................. -- -- -- H 1.8x
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Statements of
Operations.
38
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(A) The following represents the adjustment to cost of sales:
<TABLE>
<CAPTION>
LATEST TWELVE SIX MONTHS
MONTHS ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
Operating leases(1)............................... $(858) $ --
===== =======
</TABLE>
---------------------
(1) Elimination of amount estimated to represent interest on Doskocil's
equipment operating leases. Doskocil purchased the assets covered by
the leases as part of the Recapitalization and the related operating
leases were terminated on July 1, 1997.
(B) The following represents the adjustment to SG&A:
<TABLE>
<CAPTION>
LATEST TWELVE SIX MONTHS
MONTHS ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
Elimination of Dogloo debt issuance costs(1)..... $(508) $(77)
===== ====
</TABLE>
---------------------
(1) Elimination of the amortization of Dogloo's debt issuance costs as the
related debt will be refinanced as part of the Transactions.
(C) The following summarizes the elimination of certain bonuses:
<TABLE>
<CAPTION>
LATEST TWELVE SIX MONTHS
MONTHS ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
Elimination of bonuses(1)......................... $(4,052) $ --
======= =======
</TABLE>
---------------------
(1) Elimination of officer's bonus consisting of amounts paid to one of
Doskocil's former owners, which was intended to compensate the owner
for personal tax liability associated with taxable income arising from
Doskocil's Subchapter S earnings. Also includes elimination of
retention bonuses paid by Doskocil upon the completion of the
Recapitalization.
39
<PAGE>
(D) The following summarizes the total interest adjustment:
<TABLE>
<CAPTION>
LATEST TWELVE SIX MONTHS
MONTHS ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
Interest on New Credit Facility(1)............... $15,313 $ 3,898
Interest on Existing Credit Facility(2).......... (4,349) (5,743)
Amortization of new debt issuance costs (6 to 10
years).......................................... 508 112
------- -------
Total interest adjustment.................... $11,472 $(1,733)
======= =======
</TABLE>
- --------
(1) Interest expense associated with the New Credit Facility and the Notes.
(2) Elimination of the interest expense associated with the Existing Credit
Facility which was repaid in full in connection with the Transactions.
(E) The following summarizes the amortization of goodwill of $49.6 million
over a period of 30 years arising from the Merger:
<TABLE>
<CAPTION>
LATEST TWELVE SIX MONTHS
MONTHS ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
Amortization of goodwill.......................... $1,653 $374
====== ====
</TABLE>
(F) The following summarizes the adjustment of the provision for income taxes
using an estimated statutory tax rate of 37 percent:
<TABLE>
<CAPTION>
LATEST TWELVE SIX MONTHS
MONTHS ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1997
------------- ------------
<S> <C> <C>
Adjustment of provision for income taxes.......... $(3,105) $(929)
======= =====
</TABLE>
(G) Basic pro forma income (loss) per common share is based on the common
shares of Doskocil outstanding after the acquisition of Dogloo, 3,064,384,
divided into net income as reduced by preferred stock dividend
requirements of $916 for the year ended June 30, 1997 and $458 for the six
month period ended December 31, 1997. Diluted pro forma income (loss) per
common share includes the impact of options outstanding after the Merger
and is based on 3,078,254 shares for the six months ended December 31,
1997. For the twelve months ended June 30, 1997, the options were
antidilutive.
(H) For the purposes of defining the pro forma ratio of earnings to fixed
charges and the pro forma deficiency of earnings to cover fixed charges,
earnings are defined as pretax income (loss) plus fixed charges. Fixed
charges consist of interest expense on all indebtedness plus one-third of
rental expense, deemed to be representative of that portion of rental
expense estimated to be attributable to interest.
(I) In addition to the pro forma adjustments discussed in notes (A) through
(F) above, management believes there will be additional cost savings
associated with the Merger. These savings include the following estimated
cost savings related to the latest twelve months ended June 30, 1997 and
for the six months ended December 31, 1997 which would be reflected as
reductions in cost of sales:
(1) Reduction of resin costs associated with the utilization of Spectrum
instead of external sources to satisfy Dogloo's resin needs of $2,698
and $1,614, respectively.
(2) Elimination of duplicative manufacturing expenses directly associated
with the closure and relocation of Dogloo's Corona, California and
Indianapolis, Indiana operations of $4,036 and $1,726, respectively.
Additionally, management estimates that cost savings from the elimination of
duplicative selling, general and administrative costs directly associated with
the closure of Dogloo's Corona, California and Indianapolis, Indiana
operations would have been $2,260 and $1,020 for the latest twelve months
ended June 30, 1997 and for the six months ended December 31, 1997,
respectively.
40
<PAGE>
DOSKOCIL SELECTED HISTORICAL FINANCIAL DATA
The following selected historical combined financial data were derived in
part from, and should be read in conjunction with, the historical combined
financial statements of Doskocil and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus(/1/). The historical combined financial
statements of Doskocil as of December 31, 1992 through 1996 and for each of
the years ended December 31, 1992 through 1996, and for the six month period
ended June 30, 1997 have been audited. The historical combined financial
statements of Doskocil as of and for the six month period ended June 30, 1996
and as of and for each of the six-month periods ended December 31, 1996 and
1997 are unaudited. In order to match the combined Company's fiscal year
reporting with its seasonality, the Company has changed its fiscal year end to
June 30. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality."
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31,
--------------------------------------------- ------------------- -----------------
1992 1993 1994 1995 1996 1996 1997 1996 1997
------- ------- -------- ------- -------- ----------- ------- ------- --------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $63,651 $74,325 $ 92,267 $97,496 $103,455 $51,737 $51,756 $51,716 $ 79,506
Cost of goods sold...... 40,121 47,537 62,485 71,552 73,128 37,345 38,389 35,978 50,895
------- ------- -------- ------- -------- ------- ------- ------- --------
Gross profit............ 23,530 26,788 29,782 25,944 30,327 14,392 13,367 15,738 28,611
Selling, general and
administrative
expenses............... 14,278 17,518 20,675 20,733 20,682 10,388 10,446 10,474 14,508
Retention bonuses(2).... -- -- -- -- -- -- 2,875 -- --
Officer's bonus(3)...... 7,829 6,303 4,378 -- 2,030 853 -- 1,255 --
Write down of equipment
to be disposed......... -- -- -- -- -- -- 3,846 -- --
Litigation expense(4)... -- -- -- 2,106 -- -- -- -- --
------- ------- -------- ------- -------- ------- ------- ------- --------
Total operating
expenses............... 22,107 23,821 25,053 22,839 22,712 11,241 17,167 11,729 14,508
------- ------- -------- ------- -------- ------- ------- ------- --------
Operating income
(loss)................. 1,423 2,967 4,729 3,105 7,615 3,151 (3,800) 4,009 14,103
Other (income) expenses:
Interest expense, net... 246 240 822 2,456 2,176 1,750 471 1,030 9,130
Other, net.............. (859) (215) (44) (541) 696 71 5 482 (223)
------- ------- -------- ------- -------- ------- ------- ------- --------
Total other (income)
expense................ (613) 25 778 1,915 2,872 1,821 476 1,512 8,907
------- ------- -------- ------- -------- ------- ------- ------- --------
Pretax income (loss).... 2,036 2,942 3,951 1,190 4,743 1,330 (4,276) 2,497 5,196
Income tax provision.... -- -- -- -- -- -- -- -- 3,594
------- ------- -------- ------- -------- ------- ------- ------- --------
Net income (loss)....... 2,036 2,942 3,951 1,190 4,743 1,330 (4,276) 2,497 1,602
Preferred stock
dividends.............. -- -- -- -- -- -- -- -- 726
------- ------- -------- ------- -------- ------- ------- ------- --------
Net income (loss)
attributable to common
stockholders........... 2,036 2,942 3,951 1,190 4,743 1,330 (4,276) 2,497 876
Pro forma income tax
(benefit).............. 753 1,088 1,580 440 1,755 492 (1,582) 949 --
------- ------- -------- ------- -------- ------- ------- ------- --------
Pro forma net income
(loss) attributable to
common stockholders.... $ 1,283 $ 1,854 $ 2,371 $ 750 $ 2,988 $ 838 $(2,694) $ 1,548 $ 876
======= ======= ======== ======= ======== ======= ======= ======= ========
Pro forma basic and
diluted net income
(loss) per share
(Unaudited 1992-
1996)(5)............... $ .96 $ 1.39 $ 1.78 $ .56 $ 2.25 $ .63 $ (2.02) $ 1.16 $ .38
======= ======= ======== ======= ======== ======= ======= ======= ========
CASH FLOWS:
Provided by (used in)
operating activities... 2,884 4,513 1,480 (4,785) 16,830 7,302 2,766 10,485 13,502
Provided by (used in)
investing activities... (6,596) (7,631) (14,113) (5,319) (74) (2,691) (972) 2,618 (20,504)
Provided by (used in)
financing activities... 264 3,615 12,846 13,218 (14,039) (5,259) (6,703) (8,780) 14,492
OTHER DATA:
EBITDA(6)............... $11,812 $12,313 $ 13,689 $11,409 $ 17,848 $ 8,018 $ 9,501 $ 9,542 $ 19,123
EBITDA margin........... 18.6% 16.6% 14.9% 11.8% 17.2% 15.5% 18.3% 18.5% 24.1%
Capital expenditures.... $ 4,707 $ 6,796 $ 11,474 $19,156 $ 4,129 $ 2,740 $ 971 $ 1,390 $ 22,467
Depreciation and
amortization........... 2,559 2,963 4,283 5,545 5,928 2,877 2,857 3,141 5,020
BALANCE SHEET DATA:
Fixed assets, net(7).... $14,209 $17,306 $ 28,350 $28,078 $ 22,566 $28,019 $16,904 $22,573 $ 56,183
Total assets............ 32,586 40,524 58,663 72,876 66,135 70,431 50,679 65,864 177,098
Net working capital(8).. 12,401 14,963 20,501 31,899 25,743 29,208 25,318 11,363 28,858
Equity.................. 23,469 26,411 30,462 31,148 35,638 32,225 29,090 34,333 (19,480)
</TABLE>
(See Notes on following page)
41
<PAGE>
(Notes to table on previous page)
- --------
(1) Doskocil elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code ("IRC") from January 1, 1988 until the
Recapitalization, effective July 1, 1997. This election allowed for
federal income taxation at the shareholder level rather than at the
corporate level. Prior to the Recapitalization, Spectrum operated as
Spectrum Polymers, Ltd., a Texas limited partnership, which was owned by
Benjamin L. Doskocil, Sr. and his spouse. The financial data set forth
herein combines the historical financial statements of Doskocil and
Spectrum. Further, in 1993, Doskocil acquired the assets of Contico,
Inc.'s pet products division, and, in 1994, Doskocil acquired the assets
of a sporting goods product line from Ekco Canada, Inc. and Ekco Group,
Inc. These acquisitions were accounted for using the purchase method and
accordingly, the operating results of the acquired operations have been
included in Doskocil's combined financial statements since the dates of
the respective acquisitions.
(2) Retention bonuses consist of amounts paid to certain Doskocil employees at
the time of the Recapitalization.
(3) Officer's bonus consists of amounts paid to one of Doskocil's
shareholders, a portion of which was intended to compensate both of the
shareholders for their personal tax liability associated with taxable
income arising from Doskocil's Subchapter S earnings.
(4) During 1995, Doskocil settled a patent infringement lawsuit initiated by
Dogloo involving Dogloo's federal configuration trademark for its igloo-
shaped pet shelters. Doskocil incurred legal costs during 1995 of
$2.1 million in connection with this case.
(5) For all periods other than the six months ended December 31, 1997, pro
forma net income (loss) per share and pro forma weighted average common
shares outstanding are based on the termination of Doskocil's S
Corporation status and the common shares outstanding after the
recapitalization. For the six month period ended December 31, 1997,
historical basic earnings per share is presented and is based on weighted
average common shares outstanding during the period, while diluted
earnings per share also includes the dilutive effect, when dilutive, of
22,598 options outstanding at the time of the Merger.
(6) The term EBITDA as used herein means the sum of operating income plus (i)
depreciation and amortization, (ii) operating lease expense related to
capital assets repurchased from operating lessors, (iii) impairment of
molds, tools and dies, (iv) unusual inventory write-offs, (v) unusual
reserves for workers' compensation, (vi) non-recurring write-offs of
intangible assets and the write-offs of certain development costs for
abandoned projects, (vii) non-recurring patent litigation and settlement
costs, (viii) non-recurring retention and officer's bonuses and (ix)
management fees and other expenses. While EBITDA should not be construed
as a substitute for operating income or a better indicator of liquidity
than cash flow from operating activities, which are determined in
accordance with generally accepted accounting principles, it is included
herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditure and
working capital requirements. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs and there can be no assurance
that costs similar to certain of the costs added back to operating income
as part of EBITDA will not be incurred again in the future. EBITDA is
included herein because management believes that certain investors find it
to be a useful tool for measuring the ability to service debt. The term
EBITDA as used herein may not be comparable to other similarly titled
measures of EBITDA used by other companies.
(7) Fixed assets excludes assets sold and leased back under operating leases.
Assets with a net book value of $14.1 million and $3.9 million were sold
and leased back in December 1995 and 1996, respectively. On July 1, 1997,
these assets were reacquired and the operating leases paid off.
(8) Net working capital is current assets, excluding cash, less current
liabilities, excluding current portion of long-term debt and lines of
credit.
42
<PAGE>
DOGLOO SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data were derived in part from,
and should be read in conjunction with, the historical financial statements of
Dogloo and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus(/1/). The historical financial statements of Dogloo as of and for
the years ended December 31, 1993 through December 31, 1996 have been audited.
The historical financial statements of Dogloo as of and for the year ended
December 31, 1992 and as of and for each of the eight month periods ended
August 31, 1996 and 1997 are unaudited.
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED AUGUST
YEAR ENDED DECEMBER 31, 31,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $24,226 $30,766 $44,267 $ 51,520 $56,519 $30,656 $31,260
Cost of goods sold...... 13,576 18,979 30,177 40,222 37,886 22,194 21,558
------- ------- ------- -------- ------- ------- -------
Gross profit............ 10,650 11,787 14,090 11,298 18,633 8,462 9,702
Selling, general and
administrative
expenses............... 7,302 8,358 11,470 13,680 12,008 6,723 8,394
Impairment of molds,
tools and dies......... -- -- -- 1,891 -- -- --
------- ------- ------- -------- ------- ------- -------
Total operating
expenses............... 7,302 8,358 11,470 15,571 12,008 6,723 8,394
------- ------- ------- -------- ------- ------- -------
Operating income (loss). 3,348 3,429 2,620 (4,273) 6,625 1,739 1,308
Other (income) expenses:
Interest expense, net... 112 231 1,229 7,027 3,599 2,361 2,184
Other, net.............. (55) (25) 35 199 (35) (30) (4)
------- ------- ------- -------- ------- ------- -------
Total other (income)
expense................ 57 206 1,264 7,226 3,564 2,331 2,180
------- ------- ------- -------- ------- ------- -------
Pretax income (loss).... 3,291 3,223 1,356 (11,499) 3,061 (592) (872)
Income tax provision
(benefit).............. 772 82 34 (1,896) 1,071 (237) (349)
------- ------- ------- -------- ------- ------- -------
Net income (loss)....... $ 2,519 $ 3,141 $ 1,322 $ (9,603) $ 1,990 $ (355) $ (523)
======= ======= ======= ======== ======= ======= =======
CASH FLOWS:
Provided by (used in)
operating activities... $(1,337) $ 1,923 $(2,854) $ (5,758) $ 7,097 $ 2,480 $ (487)
Used in investing
activities............. (1,191) (3,824) (8,276) (7,899) (1,020) (460) (1,088)
Provided by (used in)
financing activities... 2,142 2,014 9,809 13,657 (5,975) (2,020) 2,007
OTHER DATA:
EBITDA(2)............... $ 3,553 $ 3,771 $ 3,679 $ 1,597 $10,031 $ 3,969 $ 3,819
EBITDA margin........... 14.7% 12.3% 8.3% 3.1% 17.7% 13.0% 12.2%
Capital expenditures(3). $ 1,165 $ 5,450 $16,621 $ 9,130 $ 1,000 $ 451 $ 1,054
Depreciation and
amortization........... 205 342 1,059 2,303 3,067 1,991 2,311
BALANCE SHEET DATA:
Fixed assets, net....... $ 1,813 $ 6,926 $22,557 $ 27,547 $25,948 $26,083 $25,096
Total assets............ 10,584 19,995 39,364 47,250 42,438 46,791 45,580
Net working capital(4).. 2,221 5,110 9,577 9,644 8,455 6,928 9,557
Shareholders' equity
(deficit).............. 4,860 7,186 7,682 (2,517) (2,470) (4,290) (4,137)
</TABLE>
(See Notes on following page)
43
<PAGE>
(Notes to table on previous page)
- --------
(1) Dogloo elected to be taxed under the provisions of Subchapter S of the IRC
from July 1, 1992 through September 21, 1995. This election allowed for
federal income taxation at the shareholder level rather than at the
corporate level.
(2) The term EBITDA as used herein means the sum of operating income plus (i)
depreciation and amortization, (ii) operating lease expense related to
capital assets repurchased from operating lessors, (iii) impairment of
molds, tools and dies, (iv) unusual inventory write-offs, (v) unusual
reserves for workers' compensation, (vi) non-recurring write-offs of
intangible assets and the write-offs of certain development costs for
abandoned projects, (vii) non-recurring settlement costs and (viii)
management fees and other expenses. While EBITDA should not be construed
as a substitute for operating income or a better indicator of liquidity
than cash flow from operating activities, which are determined in
accordance with generally accepted accounting principles, it is included
herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditure and
working capital requirements. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs and there can be no assurance
that costs similar to certain of the costs added back to operating income
as part of EBITDA will not be incurred again in the future. EBITDA is
included herein because management believes that certain investors find it
to be a useful tool for measuring the ability to service debt. The term
EBITDA as used herein may not be comparable to other similarly titled
measures of EBITDA used by other companies.
(3) Capital expenditures in years 1993, 1994 and 1995 include $1,645, $8,355
and $2,500, respectively for capital leases incurred for the acquisition
of machinery and equipment.
(4) Net working capital is current assets, excluding cash, less current
liabilities, excluding current portion of debt, lines of credit, and
capital lease obligations.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with "Unaudited Pro Forma
Condensed Financial Data" and the historical combined financial statements of
Doskocil and historical financial statements of Dogloo and the related notes
thereto included elsewhere in this Prospectus.
OVERVIEW
Doskocil began manufacturing wooden and wire pet carriers in the early
1960s. In 1972, Doskocil purchased its first injection molding machine and
began manufacturing plastic pet carriers, quickly becoming the primary
supplier to the domestic airline market. Subsequently, Doskocil expanded into
the portable firearms case market and became a principal supplier of both pet
carriers and firearms cases to the airline industry. Building on its success
with the airline industry (which is now a small component of the Company's
overall business) and using the flexibility of the injection molding
manufacturing process, Doskocil began to target the consumer market directly
in the mid-70s. From a base of $4.0 million in sales in 1977, Doskocil
experienced growth for a ten-year period with sales increasing at a compound
annual rate of over 23% per annum through 1987. From 1988 to 1994, sales grew
at a compound annual rate of over 14% annually, increasing from $41.9 million
to $92.3 million, driven in part by expansion of Doskocil's product offerings.
In 1993, Doskocil acquired the pet products division (consisting primarily of
pet carriers and pet shelters) of Contico, Inc. through an asset purchase. In
1994, Doskocil purchased the Woodstream product line, consisting primarily of
firearms cases and fishing products, from Ekco Canada, Inc. and Ekco Group,
Inc. During the period from 1994 to 1996, Doskocil's net sales and operating
income increased in total amount by 12.1% and 5.9%, respectively.
During 1993 to 1995, Doskocil invested a portion of its new product
development budget in the rapidly growing pet shelter segment to compete with
Dogloo. In 1995, Dogloo filed a lawsuit against Doskocil to enjoin
infringement of its federal configuration trademark on its igloo-shaped pet
shelters. Dogloo subsequently obtained a preliminary injunction prohibiting
Doskocil from manufacturing and selling a confusingly similar product in the
United States. In settlement of this litigation, Doskocil agreed to entry of a
permanent injunction against Doskocil from selling dome-shaped pet shelters
once its then existing inventory of such pet shelters was sold. Doskocil's
litigation expenses totalled $2.1 million in 1995, while Dogloo incurred
approximately $1.0 million in legal fees. Accordingly, Doskocil's pet shelter
sales declined 15.6% in 1995, and a significant portion of Doskocil's new
product development dollars spent during the 1993 to 1995 period did little to
generate new product sales in 1995 and 1996. Management believes that
Doskocil's inability to offer the dome-shaped pet shelters negatively affected
sales of its other pet shelter models because many retailers prefer buying an
entire product line from a single manufacturer.
Beginning in 1993 and continuing through 1995, Doskocil invested heavily in
future growth by constructing the Spectrum facility, purchasing new molding
machines, and leasing a new distribution facility adjacent to its
manufacturing facilities. During this period, Doskocil's margins were
adversely affected by this buildup in capacity, creating fixed costs which
were not fully absorbed by Doskocil's volume in 1995 and, to a lesser extent,
1996. The total investments in plant and equipment in 1995 and 1996 were $19.2
million and $4.1 million, respectively. As discussed below, increases in resin
prices in 1995 also affected Doskocil's results, though management believes
that the Spectrum operations reduced the impact of these price increases.
Operating results subsequently improved in 1996 as a result of reduced resin
prices and increased absorption of the new capacity added during 1994 and
1995.
Dogloo designed and produced the first igloo-shaped pet shelters in 1987,
initially marketing to local pet retailers in Southern California. Throughout
the next four years, Dogloo increased its product offerings by building
various sizes of the igloo-shaped pet shelter and adding additional designs to
its product line. Distribution was expanded in 1989 when the first sales were
made to Sam's Club and national distribution of Dogloo products began. Dogloo
continued to focus on new product development, using unaffiliated vendors
45
<PAGE>
to manufacture its products. Prior to 1993, Dogloo offered only one line of
pet shelters and outsourced all production. Due to production supply problems
experienced by Dogloo's suppliers in 1992 and 1993, Dogloo management decided
to begin manufacturing structural foam products. Accordingly, Dogloo began to
manufacture and distribute its own products in 1994 in a new facility it
constructed in Indianapolis, Indiana. Dogloo purchased five structural foam
molding machines in order to commence manufacturing operations. The
distribution facility was later expanded with the addition of approximately
108,000 square feet and a sixth structural foam molding machine. The
cumulative total investment in plant and equipment at the Indianapolis
facility at December 31, 1994 and 1995 was $12.0 million and $17.5 million,
respectively. These investments were principally related to the manufacturing
of pet shelters, as Dogloo also introduced a pet carrier line in 1994 whose
production was and continues to be outsourced.
In 1995, Dogloo encountered growth-related financial difficulties caused
primarily by a combination of (i) start-up problems at the new Indianapolis
facility which caused unfavorable product cost variances, (ii) outsourced
manufacturing problems related to Dogloo's new pet carrier line, (iii) a
business which had grown beyond the capabilities of its then-existing
infrastructure and organizational controls, (iv) increased service
requirements on debt, and (v) an increased number of unusual expenditures,
including expansion of the Indianapolis facility, installation of a new
information system, and the incurrence of significant legal fees associated
with Dogloo's lawsuit against Doskocil, which was settled in 1995. In
September 1995, Westar acquired control of Dogloo through a recapitalization.
Westar changed numerous management procedures and practices, replaced or added
two senior managers and actively mentored Dogloo's co-founder and Chief
Executive Officer. As discussed below, Dogloo's operating results improved
from an operating loss of $4.3 million in 1995 to operating income of $6.6
million in 1996. Key elements of the improvement included (i) the reduction
and control of sales returns and allowances, (ii) the elimination of excessive
manufacturer's profit on outsourced pet carriers, (iii) a substantial increase
in manufacturing efficiency, (iv) a reduction in inter-company freight costs,
and (v) a shift in product mix toward higher-margin products.
In addition to the factors described above, both companies were affected by
a five-year high in resin prices in 1995. Market prices of polypropylene
("PP") resin increased from an average price of $0.35 per pound in 1994 to
$0.50 per pound in 1995, while high-density polyethylene ("HDPE") market
prices increased from $0.32 per pound in 1994 to $0.41 cents per pound in
1995. Doskocil sought to mitigate its exposure to the increased resin prices
through utilization of its Spectrum facility, which became fully operational
in mid-1995; Spectrum's average cost for PP resin increased only $0.07 per
pound from 1994 to 1995. During this time period, Dogloo took more limited
steps to reduce its exposure to the fluctuations in HDPE resin prices by
making short-term volume commitments with its principal supplier. Thus, while
both companies attempted to reduce their exposure to the increased resin
prices, gross margins were adversely affected. During 1996, market resin
prices decreased as new industry capacity came on-line, declining from a high
of $0.50 for PP and $0.41 for HDPE in 1995 to $0.44 and $0.37 respectively, at
the end of 1996.
Management expects the consolidation of the two companies' operations to
result in substantial cost-savings over time. The Company will seek to utilize
Doskocil's existing production and distribution capacity and the combined
Company's complementary strengths to substantially reduce the manufacturing
and operating expenses of the combined entity. Following the Merger, the
Company intends to close Dogloo's administrative and manufacturing facilities
and centralize those operations at Doskocil's Arlington, Texas facility,
thereby eliminating redundant expenses and spreading higher production volumes
over a relatively fixed cost base. Upon complete integration of the two
companies, management estimates approximately $17.5 million in annualized cost
savings resulting from the combination of Doskocil and Dogloo. To achieve
these cost savings, the Company intends to focus on: (i) consolidating
production and distribution facilities to Doskocil's campus in Arlington,
Texas; (ii) utilizing Doskocil's vertically integrated resin operation for the
production of Dogloo's pet shelters and carriers; (iii) transferring
production of Dogloo's carrier line to Doskocil's production facilities (the
production is currently outsourced); (iv) rationalizing the administration,
sales and marketing overheads of the two companies; and (v) benefiting from
the Company's increased purchasing power of new materials and supplies as a
larger combined entity. There can be no assurance that the cost savings
discussed here and
46
<PAGE>
elsewhere will be realized or that there will not be significant delays in
achieving such cost savings. See "Risk Factors."
In order to achieve certain of these potential cost savings, management
estimates that it will be necessary in the next year to spend a net amount of
approximately $9.0 million for unusual capital expenditures and costs, net of
approximately $4.0 million of net proceeds from the sale of the Indianapolis
facility. The unusual capital expenditures are necessary for, among other
uses, (i) the construction of a new manufacturing facility in Arlington to
house Dogloo's and other production equipment; (ii) certain enhancements to
Doskocil's existing distribution center; (iii) the costs of moving and rigging
Dogloo's production equipment; (iv) and other items such as systems
integration, including a year 2000 conversion project to address all necessary
code changes, testing and implementation. Unusual costs relate primarily to
employee termination and relocation costs and other costs such as the
temporary carrying costs of vacated facilities. The Company expects its year
2000 date conversion to be completed on a timely basis.
DOSKOCIL
GENERAL
The following discussion provides an assessment of the combined results of
operations for Doskocil during the period from 1994 to 1996 and a comparison
of such results of operations for each of the six-month periods ended June 30,
1997 and June 30, 1996 and each of the six-month periods ended December 31,
1997 and 1996. Doskocil elected to be taxed under the provisions of
Subchapter S of the IRC from January 1, 1988 until the Recapitalization,
effective July 1, 1997. This election allowed for federal income taxation at
the shareholder level rather than at the corporate level. During this period,
an officer's bonus was paid to one of the shareholders, a portion of which was
intended to compensate both of the shareholders for their personal tax
liability associated with taxable income arising from Doskocil's Subchapter S
earnings.
47
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, operating results
and EBITDA, as defined, in thousands of dollars and expressed as a percentage
of sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, DECEMBER 31,
-------------------------------------------- ----------------------------- ----------------------------
1994 1995 1996 1996 1997 1996 1997
------------- ------------- -------------- ------------- -------------- ------------- -------------
$ % $ % $ % $ % $ % $ % $ %
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pet products
sales........... $64,762 70.2% $69,389 71.2% $ 72,692 70.3% $34,732 67.1% $35,838 69.2% $37,654 72.8% $63,855 80.3%
Sporting goods
and other....... 25,639 27.9 23,772 24.4 23,589 22.8 12,245 23.7 13,346 25.8 11,648 22.5 13,001 16.4
Custom molding... 1,795 1.9 3,741 3.8 4,761 4.6 4,262 8.2 -- -- 499 1.0 109 0.1
Outside resin
sales........... 71 -- 594 0.6 2,413 2.3 498 1.0 2,572 5.0 1,915 3.7 2,541 3.2
------- ----- ------- ----- -------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net sales....... 92,267 100.0 97,496 100.0 103,455 100.0 51,737 100.0 51,756 100.0 51,716 100.0 79,506 100.0
Costs of goods
sold............ 62,485 67.7 71,552 73.4 73,128 70.7 37,345 72.2 38,389 74.2 35,978 69.6 50,895 64.0
------- ----- ------- ----- -------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit..... 29,782 32.3 25,944 26.6 30,327 29.3 14,392 27.8 13,367 25.8 15,738 30.4 28,611 36.0
Selling, general
& administrative
expenses........ 20,675 22.4 20,733 21.3 20,682 20.0 10,388 20.1 10,446 20.2 10,474 20.2 14,508 18.2
Retention bonus.. 2,875 5.5
Officer's bonus.. 4,378 4.7 -- 2,030 2.0 853 1.6 1,255 2.4
Write-down of
equipment ...... -- -- -- -- -- -- -- -- 3,846 7.4 -- -- -- --
Litigation
expense......... 2,106 2.1
------- ----- ------- ----- -------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income
(loss).......... 4,729 5.2 3,105 3.2 7,615 7.3 3,151 6.1 (3,800) (7.3) 4,009 7.8 14,103 17.8
Adjustments:
Retention
bonus(1) ...... 2,875 5.5
Officer's
bonus(2) ...... 4,378 4.7 -- 2,030 2.0 853 1.6 1,255 2.4 -- --
Write-down of
equipment(3)... -- -- -- -- -- -- -- -- 3,846 7.4 -- -- -- --
Operating
leases:(4)
Income effect... 149 0.2 149 0.2 799 0.8 400 0.8 459 0.9 400 0.8 -- --
Depreciation
effect......... 150 0.2 150 0.2 1,476 1.4 737 1.4 936 1.8 737 1.4 -- --
Non-cash write-
offs(5)......... -- -- -- -- -- -- -- -- 2,328 4.5 -- -- -- --
Dogloo
litigation(6)... -- -- 2,460 -- -- -- -- -- -- -- -- -- --
Depreciation &
amortization(7). 4,283 4.6 5,545 5.7 5,928 5.7 2,877 5.6 2,857 5.5 3,141 6.1 5,020 6.3
------- ----- ------- ----- -------- ----- ------- ----- ------- ----- ------- ----- ------- -----
EBITDA(8)....... $13,689 14.9% $11,409 11.8% $ 17,848 17.2% $ 8,018 15.5% $ 9,501 18.3% $ 9,542 18.5% $19,123 24.1%
======= ===== ======= ===== ======== ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
(See Notes on following page)
48
<PAGE>
(Notes to table on previous page)
- ---------------------
(1) The retention bonus was provided to Doskocil employees upon completion of
the recapitalization transaction and will not recur.
(2) The officer's bonus was paid to one of Doskocil's former owners, the
majority of which was intended to compensate the owner for personal tax
liability associated with taxable income arising from Doskocil's
Subchapter S earnings.
(3) Management decided to discontinue the production of resin furniture which
had sales of $0.2 million and $1.6 million for 1995 and 1996,
respectively, and $1.6 million and $2.3 million for the six months ended
1996 and six months ended 1997, respectively.
(4) As part of the Recapitalization, equipment was repurchased by Doskocil
from operating lessors for $18.7 million. Adjustments reflect this
transaction as if it had been effected at the beginning of the periods
shown, by adding back operating lease payments made. These payments have
been allocated between income and depreciation, as if the assets had been
owned by Doskocil and depreciated pursuant to its accounting policies.
(5) As discussed below, these adjustments were recorded primarily to increase
reserves for inventory and workers' compensation liabilities.
(6) Write-off of dome-shaped pet shelter inventory following settlement of
Dogloo infringement lawsuit and costs associated with the litigation.
(7) Excludes depreciation associated with equipment repurchased from operating
lessors.
(8) The term EBITDA as used herein means the sum of operating income plus (i)
depreciation and amortization, (ii) operating lease expense related to
capital assets repurchased from operating lessors, (iii) impairment of
molds, tools and dies, (iv) unusual inventory write-offs, (v) unusual
reserves for workers' compensation, (vi) non-recurring write-offs of
intangible assets and the write-offs of certain development costs for
abandoned projects, (vii) non-recurring patent litigation and settlement
costs, (viii) non-recurring retention and officer's bonuses and (ix)
management fees and other expenses. While EBITDA should not be construed
as a substitute for operating income or a better indicator of liquidity
than cash flow from operating activities, which are determined in
accordance with generally accepted accounting principles, it is included
herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditure and
working capital requirements. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs and there can be no assurance
that costs similar to certain of the costs added back to operating income
as part of EBITDA will not be incurred again in the future. EBITDA is
included herein because management believes that certain investors find it
to be a useful tool for measuring the ability to service debt. The term
EBITDA as used herein may not be comparable to other similarly titled
measures of EBITDA used by other companies.
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
Net Sales. Net sales increased to $79.5 million in the first six months of
fiscal 1998 from $51.7 million in the comparable period of the prior year, an
increase of $27.8 million or 53.8%. The increase was the result of the
inclusion of Dogloo net sales of $26.1 million from the merger date (September
19, 1997) through December 31, 1997 and an increase in the net sales of the
Company of $1.7 million. The increase in the Company's net sales was the
result of several factors, including an increase in sporting goods and other
of $1.4 million as the sales of firearms cases increased from the lower levels
experienced after the 1995 passage of the federal legislation regulating
firearm ownership and a general increase in other sporting goods and hardware
products as retail distribution improved, and an increase of $0.6 million in
outside resin sales due to increased utilization of the Spectrum facility.
These increases were partially offset by a reduction in custom molding as
management discontinued this low margin business during the quarter ended
September 30, 1997.
Gross Profit. Gross profit increased to $28.6 million in the first six
months of fiscal 1998 from $15.7 million in the comparable period of the prior
year, an increase of $12.9 million or 82.2%. As a percentage of net sales,
gross margin increased to 36.0% in the first six months of fiscal 1998 from
30.4% in the comparable period of the prior year. The increase was the result
of several factors including the inclusion of the results of Dogloo from the
merger date through December 31, 1997 and the improvement of the Company's
gross margin on a stand-alone basis. Dogloo's results contributed $10.8
million of gross profit, which was 41.4% as a percentage of its net sales
during the period. The Company's gross profit as a percentage of net sales was
favorably effected by a decrease in the cost of the principal raw material,
plastic resin, and a more favorable mix of sales. During the quarter ended
September 30, 1997, the Company discontinued custom molding, which
historically carried a low gross profit margin, and increased sales of firearm
cases, which carry a substantially higher gross margin.
49
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $14.5 million in the first six months of
fiscal 1998 from $10.5 million in the comparable period of the prior year, an
increase of $4.0 million or 38.1%. The increase was the result of several
factors including the inclusion of Dogloo expenses of $2.9 million incurred
from the merger date through December 31, 1997, the amortization of goodwill
associated with the Dogloo merger of $0.4 million, higher freight and
management fees of $0.4 million and other individually immaterial spending
increases. As a percentage of net sales, SG&A spending decreased to 18.2% in
the first six months of fiscal 1998 from 20.2% in the comparable period of the
prior year.
Depreciation and Amortization. Depreciation and amortization increased to
$5.0 million in the first six months of fiscal 1998 from $3.1 million for the
comparable period of the prior year, an increase of $1.9 million or 61.3%. The
increase was the result of depreciation taken on machinery and equipment
purchases, the inclusion of the Dogloo depreciation for the period from the
effective date of the merger and the amortization of goodwill related to the
merger with Dogloo.
Operating Income. Operating income increased to $14.1 million in the first
six months of fiscal 1998 from $4.0 million for the comparable period of the
prior year, an increase of $10.1 million or 252.5%. The increase was the
result of the factors discussed above plus the elimination of a bonus of
$1.3 million to the former owner paid during the 1996 period.
EBITDA. EBITDA increased to $19.1 million in the first six months of fiscal
1998 from $9.5 million for the comparable period of the prior year, an
increase of $9.6 million or 101.1%. The increase was the result of the factors
discussed above.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net Sales. Net sales were essentially unchanged for the six months ended
June 30, 1997 as compared to the comparable period in 1996. This was largely
due to the absence of custom molding sales in the first six months of 1997,
compared to $4.3 million of custom molding sales in the comparable period for
1996. Doskocil's custom molding operations were reduced as management decided
to terminate a large custom molding contract with unacceptable margins. Thus,
excluding custom molding, the Company's net sales in its core business
increased approximately 9.0%, or $4.3 million, to $51.8 million for the first
six months of 1997, compared to $47.5 million for its core business in 1996.
Pet products sales increased $1.1 million, or 3.2%, to $35.8 million for the
six months ended June 30, 1997 from $34.7 million for the six months ended
June 30, 1996. Pet products sales increased despite temporary inventory
reduction programs by certain major customers. Sporting goods and other sales
increased by $1.1 million, or 9.0%, to $13.3 million. Resin furniture sales, a
low margin product line now discontinued, represented $0.7 million of this
sales increase.
Gross Profit. Gross profit decreased to $13.4 million for the six months
ended June 30, 1997 from $14.4 million for the comparable period in 1996, a
decrease of $1.0 million or 7.1%. As a percentage of net sales, gross margin
decreased to 25.8% from 27.8%. Gross profit for the first six months of 1997
was adversely affected by a charge of $1.9 million for the write-off of
inventory and workers' compensation reserves. Excluding these charges, the
gross profit would have been $15.3 million, or 29.6% of net sales, due to a
shift in product mix to higher margin products and a reduction in resin costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") remained essentially flat at $10.4 million
for the period ended June 30, 1997. As a percentage of net sales, SG&A
increased to 20.2% from 20.1%.
Depreciation and Amortization. Depreciation and amortization remained
approximately the same for the periods ended June 30, 1997 and 1996.
50
<PAGE>
Operating Income (Loss). Operating income (loss) declined to a loss of $3.8
million for the six months ended June 30, 1997 from operating income of $3.2
million for the six months ended June 30, 1996, a decrease of $7.0 million.
The decrease was the result of the write down of equipment to be disposed, the
retention bonus of $2.9 million partially offset by the elimination in the
1997 period of the officer's bonus of $0.9 million paid in the 1996 period and
the other factors discussed above.
EBITDA. EBITDA (as defined herein) increased to $9.5 million for the six
months ended June 30, 1997 as compared to $8.0 million for the comparable
period in 1996, an increase of $1.5 million or 18.5%. As a percentage of
sales, EBITDA margin increased from 15.5% to 18.3%.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased to $103.5 million in 1996 from $97.5 million
in 1995, an increase of $6.0 million or 6.1%. Pet products sales increased to
$72.7 million in 1996 from $69.4 million in 1995, an increase of $3.3 million
or 4.8%. This increase in sales was attributable in part to the introduction
of a new line of pet shelters, significant growth in sales of cat toys and
houses, and the full year's effect of a price increase taken in late 1995.
These factors were partially offset by an inventory realignment by a large
customer, resulting in the cancellation of a significant number of pet
products orders. Sporting goods and other sales decreased by $0.2 million, or
0.8%, to $23.6 million. This decrease was primarily caused by lower sales of
firearm cases, due to overall market softness in this category. Custom molding
sales increased to $4.8 million in 1996 from $3.7 million in 1995, an increase
of $1.1 million or 27.3% as a result of the growth in sales to a large custom
molder. Outside resin sales totaled $2.4 million in 1996, the first full year
for this line of business compared to $0.6 million in 1995.
Gross Profit. Gross profit increased to $30.3 million in 1996 from $25.9
million in 1995, an increase of $4.4 million or 16.9%. As a percentage of net
sales, gross margin increased to 29.3% in 1996 from 26.6% in 1995. Gross
profit in 1996 was adversely affected by an increase in operating lease
payments as the result of the sales of equipment in December 1995 pursuant to
an operating lease. This increase in gross margin was primarily the result of
increased capacity utilization, lower resin prices and the full year's effect
of a price increase taken in late 1995. These factors were partially offset by
higher overhead costs relating to additional capacity purchased in the prior
year.
Selling, General and Administrative Expenses. SG&A remained essentially flat
at $20.7 million in 1996. As a percentage of net sales, SG&A decreased to
20.0% in 1996 from 21.3% in 1995.
Depreciation and Amortization. Depreciation and amortization increased by
$0.4 million to $5.9 million for the year ended December 31, 1996 from $5.5
million for the year ended December 31, 1995.
Operating Income (Loss). Operating income increased to $7.6 million for the
year ended December 31, 1996 from $3.1 million for the year ended December 31,
1995, an increase of $4.5 million or 145.2%. As a percentage of sales,
operating income margin increased to 7.3% for 1996 from 3.2% in 1995. The
improvements were the result of the elimination in 1996 of litigation expenses
incurred in 1995 of $2.1 million substantially offset by the payment in 1996
of an officer's bonus of $2.0 million and the factors discussed above.
EBITDA. EBITDA (as defined herein) increased to $17.8 million for 1996 as
compared to $11.4 million in 1995, an increase of $6.4 million or 56.4% for
the reasons discussed above. As a percentage of sales, EBITDA margin increased
from 11.8% to 17.2%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased to $97.5 million in 1995 from $92.3 million
in 1994, an increase of $5.2 million or 5.7%. Sales of pet products increased
to $69.4 million in 1995 from $64.8 million in 1994, an increase of $4.6
million or 7.1%. This increase was primarily due to the introduction of new
products and
51
<PAGE>
generally strong demand for Doskocil's products. The increase was offset by
the trademark infringement lawsuit initiated by Dogloo which resulted in a
preliminary injunction prohibiting Doskocil from manufacturing and selling
dome-shaped pet shelters. Management believes that Doskocil's inability to
offer the dome-shaped pet shelters negatively affected sales of its other pet
shelter models because many retailers prefer buying an entire product line
from a single manufacturer. Separate from this, Dogloo introduced a competing
line of pet carriers, which management believes decreased Doskocil's pet
carrier sales. Sporting goods and other sales decreased by $1.9 million, or
7.3%, to $23.8 million. This was primarily attributable to a decrease in
firearm cases, as compared to unusually high sales levels in 1994, when
consumers bought high levels of firearms (and firearm cases) in anticipation
of new federal legislation regulating ownership. Custom molding sales
increased to $3.7 million in 1995 from $1.8 million in 1994, an increase of
$1.9 million or 108.4%.
Gross Profit. Gross profit decreased to $25.9 million in 1995 from $29.8
million in 1994, a decrease of $3.9 million or 12.9%. As a percentage of net
sales, gross margin decreased to 26.6% in 1995 from 32.3% in 1994. Gross
profit in 1995 was adversely affected by an increase in resin prices. In
addition, gross profit was affected by an increase in factory overhead
associated with the cost of facilities expansion at both Doskocil and Spectrum
and the construction of a new 450,000 square foot warehouse and distribution
center. Gross profit in 1995 was also adversely affected by an unusual charge
of $0.4 million for the write-off of dome-shaped pet shelter inventory
following settlement of the Dogloo infringement lawsuit.
Selling, General and Administrative Expenses. SG&A remained essentially flat
at $20.7 million in 1995. As a percentage of net sales, SG&A decreased to
21.3% in 1995 from 22.4% in 1994.
Depreciation and Amortization. Depreciation and amortization increased by
$1.3 million, reflecting high levels of capital expenditures in 1994 and 1995
incurred to add manufacturing and distribution capacity, including the
Spectrum facility.
Operating Income (Loss). Operating income declined to $3.1 million for the
year ended December 31, 1995 from $4.7 million for the year ended December 31,
1994, a decrease of $1.6 million or 34.0%. As a percentage of sales, operating
income margin declined to 3.2% in 1995 from 5.2% in 1994. The decline was the
result of the factors noted above partially offset by the elimination in 1995
of the officer's bonus of $4.4 million paid in 1994 partially offset by
litigation expenses of $2.1 million incurred in 1995.
EBITDA. For the reasons discussed above, EBITDA (as defined herein)
decreased to $11.4 million in 1995 as compared to $13.7 million in 1994, a
decrease of $2.3 million or 16.7%. As a percentage of sales, EBITDA margin
decreased from 14.9% to 11.8%.
DOGLOO
GENERAL
The following discussion provides an assessment of the results of operations
of Dogloo during the period from 1994 to 1996 and a comparison of the eight
months ended August 31, 1997 to the eight months ended August 31, 1996.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, operating results
and EBITDA, as defined, in thousands of dollars and expressed as a percentage
of net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, EIGHT MONTHS ENDED AUGUST 31,
-------------------------------------------- ---------------------------------
1994 1995 1996 1996 1997
------------- -------------- ------------- ---------------- ----------------
$ % $ % $ % $ % $ %
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pet product sales....... $44,005 99.4% $50,258 97.6% $53,315 94.3% $ 28,453 92.8% $ 28,555 91.3%
Custom molding.......... 262 0.6 1,262 2.4 3,204 5.7 2,203 7.2 2,705 8.7
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
Net sales............... 44,267 100.0% 51,520 100.0% 56,519 100.0% 30,656 100.0% 31,260 100.0%
Costs of goods sold..... 30,177 68.2 40,222 78.1 37,886 67.0 22,194 72.4 21,558 69.0
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
Gross profit............ 14,090 31.8 11,298 21.9 18,633 33.0 8,462 27.6 9,702 31.0
SG&A.................... 11,470 25.9 13,680 26.5 12,008 21.3 6,723 21.9 8,394 26.8
Impairment of molds,
tools and dies......... -- -- 1,891 3.7 -- -- -- -- -- --
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
Operating income (loss). 2,620 5.9 (4,273) (8.3) 6,625 11.7 1,739 5.7 1,308 4.2
Adjustments:
Writeoff and impairment
of certain assets(1)... -- -- 3,567 6.9 -- -- -- -- -- --
Management fees and
other(2)............... -- -- -- -- 204 0.4 239 0.8 200 0.6
Settlement costs(3)..... -- -- -- -- 135 0.2 -- -- -- --
Depreciation and
amortization........... 1,059 2.4 2,303 4.5 3,067 5.4 1,991 6.5 2,311 7.4
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
EBITDA(4).............. $ 3,679 8.3% $ 1,597 3.1% $10,031 17.7% $ 3,969 13.0% $ 3,819 12.2%
======= ===== ======= ===== ======= ===== ======== ====== ======== ======
</TABLE>
- --------
(1) Write off and impairment of certain assets includes impairment of molds,
tools and dies no longer used of $1,891, write off of abandoned product
development costs, deposits and disputed items with vendors of $700, write
off of intangible assets of $594 and a provision for obsolete and slow
moving inventory of $382.
(2) Management fees from Westar and other expenses.
(3) Settlement costs related to the cessation of employment of an executive.
(4) The term EBITDA as used herein means the sum of operating income plus (i)
depreciation and amortization, (ii) operating lease expense related to
capital assets repurchased from operating lessors, (iii) impairment of
molds, tools and dies, (iv) unusual inventory write-offs, (v) unusual
reserves for workers' compensation, (vi) non-recurring write-offs of
intangible assets and the write-offs of certain development costs for
abandoned projects, (vii) non-recurring settlement costs and (viii)
management fees and other expenses. While EBITDA should not be construed
as a substitute for operating income or a better indicator of liquidity
than cash flow from operating activities, which are determined in
accordance with generally accepted accounting principles, it is included
herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditure and
working capital requirements. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs and there can be no assurance
that costs similar to certain of the costs added back to operating income
as part of EBITDA will not be incurred again in the future. EBITDA is
included herein because management believes that certain investors find it
to be a useful tool for measuring the ability to service debt. The term
EBITDA as used herein may not be comparable to other similarly titled
measures of EBITDA used by other companies.
EIGHT MONTHS ENDED AUGUST 31, 1997 COMPARED TO EIGHT MONTHS ENDED AUGUST 31,
1996
Net Sales. Net sales increased to $31.3 million for the eight months ended
August 31, 1997 from $30.7 million for the comparable period in 1996, an
increase of $0.6 million or 2.0%. Net pet product sales remained essentially
flat for the eight months ended August 31, 1997, increasing $0.1 million,
compared to the eight months ended August 31, 1996. There were, however,
several changes in net pet product sales including a decline of $1.4 million
in pet shelter sales, a decline of $1.2 million in pet bedding sales and a
decline of $1.3 million in bowl sales. These decreases were offset by an
increase of $2.5 million in feeding and watering products sales and an
increase of $0.8 million in carrier sales and a reduction in sales returns and
allowances of $0.7 million. The declines in pet shelter and bedding sales in
the first eight months of 1997 were attributable to two main factors: (1)
warehouse clubs changed their inventory strategy and began stocking these
products only in the peak selling season which is August through December; and
(2) a major pet specialty superstores chain significantly increased purchases
of these products in December 1996, thereby reducing its purchases in the
first
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<PAGE>
eight months of 1997. This retailer has since resumed a more normalized
purchasing pattern. The reduction in bowl sales was the result of management's
decision to de-emphasize this low-margin product line in 1997. Feeding and
watering products were introduced in 1997 and the increase in carrier sales
was the result of increased sales to pet superstores in 1997. The decrease in
sales returns and allowances was the result of increased management control
over rebates and damages. Custom molding sales increased $0.5 million to $2.7
million in 1997 from $2.2 million in 1996. The increase resulted from more
efficient manufacturing processes and the resulting availability of machine
time to manufacture products for others.
Gross profit. Gross profit increased to $9.7 million for the eight months
ended August 31, 1997 from $8.5 million for the eight months ended August 31,
1996, an increase of $1.2 million or 14.1%. As a percentage of net sales,
gross margin increased to 31.0% from 27.6%. The improvement in the gross
margin percentage was the result of an improvement in pet carrier margin, the
elimination of lower margin bowl sales in 1997, a reduction in sales returns
and allowances and more efficient utilization of the manufacturing plant.
Selling, General and Administrative Expenses. S,G & A increased to $8.4
million for the eight months ended August 31, 1997 from $6.7 million, an
increase of $1.7 million or 25.4%. The increase was the result of several
factors including an increase in freight expense to customers, increased
salaries related to the expansion of the sales, marketing and management
staff, an increase in marketing and promotional spending and additional costs
associated with the Indianapolis facility.
Depreciation and Amortization. Depreciation and amortization increased to
$2.3 million for the eight months ended August 31, 1997 from $2.0 million for
the eight months ended August 31, 1996, an increase of $0.3 million or 13.0%.
The increase was the result of normal depreciation recorded on assets acquired
in the second half of 1996, principally tooling, and the amortization of
certain transaction costs incurred in December 1996.
Operating Income. Operating income decreased to $1.3 million for the eight
months ended August 31, 1997 from $1.7 million for the eight months ended
August 31,1996, a decrease of $0.4 million or 23.5%. The decrease was the
result of the factors discussed above, particularly the increase in S,G & A
spending.
EBITDA. EBITDA (as defined) decreased to $3.8 million for the eight months
ended August 31, 1997 from $4.0 million for the eight months ended August 31,
1996, a decrease of $0.2 million or 5.0%. The decrease was the result of the
factors discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased to $56.5 million in 1996 from $51.5 million
in 1995, an increase of $5.0 million or 9.7%. Net pet products sales increased
$3.1 million or 6.1%, to $53.3 million in 1996 from $50.3 million in 1995. The
increase in net pet products sales was the result of several factors including
an increase of $2.5 million in pet shelter sales, an increase of $2.1 million
in pet carrier sales, an increase of $0.5 million in bowl sales and a
reduction in sales returns and allowances of $0.6 million. These increases
were partially offset by a decrease of $2.7 million in bedding sales. The
increase in pet product sales was primarily a result of increased sales in the
pet specialty and the mass merchandise channels. Custom molding sales
increased $1.9 million as a result of more efficient use and scheduling of
machinery and equipment and the demand for press time from other
manufacturers. The reduction in sales returns and allowances resulted
principally from better customer management and the consummation of vendor
supply agreements which stipulate defined allowances for retailer customers.
Gross Profit. Gross profit increased to $18.6 million in 1996 from $11.3
million in 1995, an increase of $7.3 million or 64.9%. As a percentage of
sales, gross margin increased to 33.0% in 1996 from 21.9% in 1995. These
increases were the result of several factors, including (i) a decline in the
average cost of resin by $.07 per pound for Dogloo's pet shelters, which
contributed $2.0 million of the increase; (ii) gross margin on higher sales
volume of $1.7 million; (iii) a reduction in the level of sales returns and
allowances of $0.9 million; (iv) a
54
<PAGE>
reduction in unusual, non-recurring inventory charges of $0.7 million; (v) the
elimination of outside manufacturers' profits on pet shelters when
manufacturing moved in-house in 1996 of $0.9 million; (vi) a reduction of the
average cost of carriers purchased from outside vendors of $0.9 million; and
(vii) manufacturing efficiencies and other of $0.2 million.
Selling, General, and Administrative Expenses. SG&A decreased to $12.0
million in 1996 from $13.7 million in 1995, a decrease of $1.7 million or
12.2%. The reduction was the result of several factors, including: (i)
elimination of costs associated with the consolidation of distribution
activities in Indianapolis and the reduction in freight expenses realized by
the consolidation of distribution operations in Indianapolis, which
contributed $0.8 million of the reduction; (ii) the elimination of unusual
charges related to the elimination of certain intangible assets having no
continuing value in 1995, which contributed $0.6 million of the reduction; and
(iii) a general reduction in most other spending categories after
reorganization activities ceased in 1996. These reductions were partially
offset by increased freight costs in 1996, resulting from an increased number
of shipments and higher freight rates.
Depreciation and Amortization. Depreciation and amortization increased to
$3.1 million in 1996 from $2.3 million in 1995, an increase of $0.8 million or
33.2%. The increase was the result of a full year of depreciation of assets
added in 1995, principally one additional structural foam molding machine and
related equipment.
Operating Income (Loss). Operating income increased to $6.6 million for the
year ended December 31, 1996 from a loss of $4.3 million for the year ended
December 31, 1995, an increase of $10.0 million. The increase is the results
of the factors noted above.
EBITDA. EBITDA (as defined herein) increased to $10.0 million in 1996 from
$1.6 million in 1995, an increase of $8.4 million.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased to $51.5 million in 1995 from $44.3 million
in 1994, an increase of $7.3 million or 16.4%. Net pet products sales
increased $6.3 million or 14.2% to $50.3 million in 1995 from $44.0 million in
1994. The increase in net pet products sales was the result of several
factors, including an increase in pet shelter sales of $4.8 million, an
increase in carrier sales of $2.0 million, an increase in bedding sales of
$0.1 million, and an increase in bowl sales of $1.2 million, which were
partially offset by an increase in sales returns and allowances and other
charges of $1.8 million. The increase in the pet shelter, pet carrier and
bedding sales were comprised of increases in sales to all major retailer
channels. The increase in net pet products sales resulted from increased
consumer demand for pet shelters and carriers driven by overall industry
growth and increased exposure in retailer channels. The increase in bowl sales
resulted from the introduction of the product line in 1995. Custom molding
sales increased $1.0 million in 1995 due to the opening of the Indianapolis
manufacturing facility, allowing capacity for the custom manufacturing of
other companies' products.
Gross Profit. Gross profit decreased to $11.3 million in 1995 from $14.1
million in 1994, a decrease of $2.8 million or 19.8%. As a percentage of net
sales, gross margin decreased to 21.9% in 1995 from 31.8% in 1994. Gross
profit for 1995 was adversely affected by an unusual charge of $0.7 million
related to the write-off of previously capitalized product development
projects which were abandoned in 1995. Excluding this unusual charge, the
gross margin would have been 23.3%. The decrease in gross profit was also due,
in part, to the increased cost of resin and start-up costs in the Indianapolis
plant, as discussed below, plus a significant increase in sales returns and
allowances experienced in 1995. The increase in allowances was the result of
management's decision to pursue increased distribution of products through the
granting of liberal volume rebate, discount and damage allowances.
Specifically, these factors contributed to the decrease in gross profit as
follows: (i) an increase in the cost of resin contributed $1.5 million of the
decrease; (ii) an overall decline in gross margin on the prior year's sales
level which contributed $1.2 million of the decrease; (iii) the incurrence of
substantial start-up costs related to the commencement of manufacturing at the
Indianapolis facility contributed $1.0 million
55
<PAGE>
of the decrease; and (iv) several unusual charges related to the previously
capitalized cost of product development projects which were abandoned in 1995
contributed $0.7 million of the decrease. These decreases in gross profit were
partially offset by gross profit earned on higher sales in 1995 of $1.6
million.
Selling, General and Administrative Expenses. SG&A increased to $13.7
million in 1995 from $11.5 million in 1994, an increase of $2.2 million or
19.3%. This increase was the result of several factors, including: (i) the
cost of consolidating distribution and establishing manufacturing activities
in Indianapolis, Indiana, which contributed $1.3 million of the increase; (ii)
unusual charges related to intangible assets which were determined to have no
continuing value, which contributed $0.6 million of the increase; (iii)
amortization of capitalized costs related to the 1995 recapitalization
transaction; and (iv) other cost increases associated with increased
operations in Indianapolis and support staff in Corona. These increases were
partially offset by a reduction in freight expenses due to the relocation of
manufacturing and distribution facilities to the more centrally located
Indianapolis, Indiana location rather than the Southern California area.
Depreciation and Amortization. Depreciation and amortization increased to
$2.3 million in 1995 from $1.1 million in 1994, an increase of $1.2 million or
117.5%. The increase related to a full year of depreciation taken on assets
placed in service in 1994 and a partial year for assets placed in service in
1995.
Operating Income (Loss). Operating income (loss) declined to a loss of $4.3
million for the year ended December 31, 1995 from operating income of $2.6
million for the year ended December 31, 1994, a decline of $6.9 million. The
decline was the result of the factors discussed above.
EBITDA. EBITDA (as defined herein) declined to $1.6 million in 1995 from
$3.7 million in 1994, a decrease of $2.1 million. The decrease was the result
of several factors, including the decline in gross profit and the increase in
selling, general and administrative expenses discussed above.
SEASONALITY
The business and results of operations of both Doskocil and Dogloo are
seasonal. Dogloo's business and results of operations are seasonal due to the
increased number of pet shelters sold during periods of inclement weather;
because retailers build inventories in anticipation of these periods of bad
weather, sales are typically weighted towards the third and fourth quarters of
the calendar year. As a consequence, custom molding sales typically represent
a higher percentage of net sales for the six month period ended June 30 and
profitability is higher during the six month period ended December 31 as a
result of the increased sales of proprietary products. Doskocil's business and
results of operations are also seasonal. However, Doskocil's broad mix of
products insulates it somewhat from seasonal fluctuations. In the first
quarter, sales of hardware, fishing tackle, and custom molding are typically
strong. In the second quarter, pet carriers and firearms cases are usually the
sales leaders. Sales of fishing tackle, pet shelters, other pet products and
firearms cases are normally higher in the third and fourth quarters. In order
to match the Company's fiscal year reporting with its seasonality, management
has changed the Company's fiscal year end to June 30.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity is cash flow from operations and
borrowings under the New Credit Facility. Financing available under the New
Credit Facility consists of a $27.5 million revolving credit facility, $27.5
of which remained available at December 31, 1997. In addition, the New Credit
Facility includes two term loans in the aggregate amount of $82.5 million,
which were fully drawn upon closing of the Offering. The Company intends to
use cash flow from operations and borrowings under the revolving credit
facility to meet seasonal fluctuations in working capital requirements
primarily related to inventory and accounts receivable, which historically
reach their peak in the period from May through August, and for capital
expenditure requirements including tooling requirements for new products as
well as replacement tooling for existing products. The Company's obligations
under the New Credit Facility are secured by a security interest in
substantially all of the Company's assets.
56
<PAGE>
Doskocil's aggregate capital expenditures for the years ended December 31,
1995 and 1996, for the six months ended June 30, 1997 and for the six months
ended December 31, 1997 were $19.2 million, $4.1 million, $1.0 million and
$22.5 million, respectively. Doskocil's capital spending related principally
to the acquisition of molds and molding machines and capacity expansion at
Spectrum. Dogloo's aggregate capital expenditures for the years ended December
31, 1995 and 1996, for the six months ended June 30, 1997 and for the eight
months ended August 31, 1996 were $9.1 million, $1.0 million, $0.9 million and
$1.1 million, respectively. Dogloo's capital spending related principally to
manufacturing efficiency improvements to existing tooling and new tooling for
1996 and 1997 and one additional structural foam molding machine in 1995.
Management anticipates incurring capital expenditures for the fiscal year
ending June 30, 1998 of approximately $9.0 million relating to upgraded
machinery and tooling. Management plans to fund these capital expenditures
through cash flow from operations and, if necessary, borrowings under the
revolving credit facility.
The Company anticipates that it will incur certain non-recurring
expenditures related to the integration of the operations of Doskocil and
Dogloo. The estimated total cash requirements of these unusual expenditures in
the next year is approximately $9.0 million net of approximately $4.0 million
of net proceeds from the sale of the Indianapolis facility. Such unusual
charges include costs related to consolidation of manufacturing and
distribution facilities, severance obligations, and integration of management
information systems. Such costs are expected to be partially offset by cash
proceeds of the sale of the Indianapolis facility. Management expects these
non-recurring costs to be initially funded through cash flows and borrowings
under the revolving credit facility.
The New Credit Facility and the Notes Indenture contain various covenants
which impose certain restrictions on the Company, including with respect to
the incurrence of additional indebtedness, the payment of dividends, and the
ability to make acquisitions. See "Risk Factors." In addition, the New Credit
Facility requires compliance with the maintenance of certain financial ratios.
Availability under the revolving credit facility will be determined among
other things by receivables and inventory levels.
57
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BUSINESS
GENERAL
The Company, created by the Merger of Dogloo and Doskocil, is among the
leading plastic pet products companies in the United States, manufacturing a
broad range of plastic and other pet products sold through a distribution
network of more than 2,000 retailers, including PETsMART, Wal-Mart, K-Mart,
Petco and Costco. Doskocil brings to the combined Company its strength in the
pet carrier category, along with a broad range of products and efficient
manufacturing capabilities. Dogloo adds its strength in the pet shelter
category, along with its demonstrated product development and marketing
abilities. Accordingly, the Merger created a company with complementary pet
product lines, including both pet carriers and pet shelters, complementary
customer bases and substantial opportunities for cost reductions. The Company
expects to take advantage of Doskocil's historically under-utilized
manufacturing and distribution facilities to achieve a lower combined cost
structure. The Company's cost structure is also enhanced through Doskocil's
vertically integrated manufacturing operations which include a facility for
the recycling, blending and compounding of plastic resins, the largest raw
material component in the Company's products. The combined sales of Doskocil
and Dogloo have increased from $105.1 million in 1993 to $160.0 million in
1996, representing a compound annual growth rate of 15.0%. On a pro forma
combined basis after giving effect to the Transactions, the Company's pro
forma EBITDA (as defined herein) for the twelve-month period ended June 30,
1997 would have been $38.5 million.
The Merger combined complementary product lines in several categories in
which both companies have traditionally had a smaller presence and offers
further opportunities to expand product offerings. Doskocil produces a broad
line of plastic products, including pet products such as pet carriers, pet
shelters, cat litter boxes, bowls, feeders, waterers and cat toys, as well as
sporting goods and other products. Doskocil's Vari Kennel(R), Sky Kennel(R),
Pet Mate(R), Pet Porter(R), Pet Taxi(R) and Kennel Cab(R) pet carrier brand
names are widely known and have enjoyed increasing use in the transportation
and indoor training of pets. Doskocil's Gun Guard(R) brand (firearms and
archery cases) and Woodstream(TM) brand (fishing tackle cases) are similarly
well-recognized in the sporting goods market. Dogloo's product line consists
of plastic pet shelters, pet carriers, pet bedding and pet feeding and
watering products. Dogloo's numerous styles and sizes of pet shelters include
the Dogloo(R), Indigo(R), Ruff Hauz(R), Barney(R), Cape Cod(TM) and Brik
Hauz(R). These shelters are made from a structural foam plastic which provides
exceptional durability and insulation relative to other types of plastic or
wooden pet shelters. The Company believes the Dogloo, Dogloo's igloo-shaped
best-seller, is unique in style, wind resistant, easy to clean and popular
among breeders, kennel owners and general consumers. In the Merger, the
Company acquired Dogloo's federal configuration trademark on its igloo-shaped
pet shelters. In 1995, Dogloo successfully relied upon this trademark to
obtain a preliminary injunction against the manufacture and sale by Doskocil
of a confusingly similar product, after which Doskocil agreed to discontinue
sales of its dome-shaped pet shelters.
As a result of the Merger, the Company has a substantially broadened
customer base and reduced customer concentration. Doskocil's principal
products are sold to a wide variety of retailers including specialty pet
superstores such as PETsMART and Petco, mass merchandisers such as Wal-Mart
and K-Mart, food and drug stores, hardware stores and a number of distributors
that sell to independent pet stores. Dogloo's products are sold through a
variety of similar retail channels, including mass merchandisers such as Wal-
Mart, wholesale clubs such as Sam's Club, home centers such as Lowe's and
Menards, pet specialty superstores such as PETsMART, farm and agricultural
stores such as Tractor Supply Company, and distributors that sell to
independent pet stores. Despite similar distribution channels, there is little
overlap among the major customers of Doskocil and Dogloo--only three shared
customers rank in the top ten customers of each individual company. On a pro
forma combined basis after giving effect to the Transactions, no one customer
would have accounted for more than 11.9% of the Company's total net revenues
in 1996.
PET PRODUCTS INDUSTRY OVERVIEW
The U.S. nonfood pet supplies industry was estimated in a study published in
1996 by Packaged Facts to have generated approximately $4.0 billion in sales
in 1995, up from $3.1 billion in 1991, an increase of
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<PAGE>
approximately $900 million over the four-year period or a 6.6% compound annual
growth rate. The study indicated that since 1991, the dog and cat segments
have dominated consumption in, and have grown faster than, the overall non-
food pet supplies market. The study estimated that of the $4.0 billion in 1995
non-food pet supplies sales, the dog and cat segments represented
approximately 68.8%. According to this study, sales growth for the dog and cat
segment surpassed $2.7 billion by the end of 1995, up from $1.9 billion in
1991, a 41% increase which outpaced the growth of the overall pet supplies
market during that period. Packaged Facts attributed this recent growth in
non-food pet supply sales to both an increasing number of pets and an
increasing annual expenditure per pet. Packaged Facts estimated that from 1991
to 1995, the total number of cats and dogs increased from 116 million to 121
million, growing at an approximate 1.0% compound annual rate over the period.
Based on these estimates, the average annual expenditure per cat and dog has
increased during this period from $16.81 in 1991 to $22.76 in 1995, a compound
annual growth rate of 7.9% over this period. Packaged Facts attributed the
growth in the pet supplies market to a number of factors, including (i) the
baby boomer generation, who are now purchasing pets for children, (ii) the
increasing senior citizen component of the population who appreciate the
companionship of pets, and (iii) the expansion of pet supply outlets which has
stimulated consumer demand. Management believes that pet superstores have
stimulated retail sales by increasing product turnover through advertising,
promotions and a larger selection of products. Management further believes the
Company is well-positioned to benefit from these retailers as they continue to
expand their store count, both domestically and internationally.
The Company estimates that the total U.S. plastic pet shelter market for
1996 was approximately 1.4 million units. The Company believes that important
sources of ongoing pet shelter sales are the birth or purchase of new dogs,
family lifestyle changes such as a new home or child, and the replacement of
wooden shelters. The Company estimates that 75% of the pet shelters in use are
wooden. The Company's research also indicates that plastic shelters have
largely replaced wooden pet shelters in retail stores. Accordingly, the
Company believes that demand for its plastic pet shelters will increase over
time as wooden shelters are replaced with plastic shelters.
The Company estimates that the total U.S. plastic pet carrier market for
1996 was approximately 4.1 million units. An American Pet Products
Manufacturers Association ("APPMA") 1996/1997 study indicates that, within the
pet carrier market, 25% of dog owners and 56% of cat owners in 1996 owned pet
carriers. In addition, according to APPMA data, of all cages or traveling
crates owned by dog owners, 75% were made of plastic in 1996 as compared to
only 51% in 1992. The Company believes that pet carrier purchases will
continue to increase due to increased market awareness of the use of pet
carriers for the transportation and indoor training of dogs and consumer
transition from wire to plastic carriers.
BUSINESS STRATEGY
The Company's strategic objectives are to further enhance its position among
the leading manufacturers and marketers of plastic pet products in the United
States and to continue its expansion internationally. The Company will seek to
leverage its competitive strengths to accomplish the following objectives:
Capitalize on Market Position. The Company expects to strengthen its market
position by continuing to develop new products, using advertising and other
promotional programs to implement a consumer driven "pull strategy," and
making strategic acquisitions of related product lines that will take
advantage of the Company's existing markets and broad distribution channels.
Continue to Introduce New Products in Order to Fuel Growth. The Company is
committed to continued product development within its current product
categories and the creation of innovative new product categories. Management
believes that both Doskocil and Dogloo have demonstrated the ability to
develop and market new products to both retail consumers and those who
influence the purchasing patterns of consumers, such as breeders and
veterinarians. Doskocil and Dogloo launched a combined total of 27 new
products over the past two years. The Company expects to launch an additional
30 new products in 1997. Net sales from new products introduced
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<PAGE>
in the calendar years 1995 and 1996 would have accounted for 16.7% of the
Company's total pro forma combined net sales for 1996. The Company intends to
focus additional efforts in new product development and annual expenditures
for this area may amount to $2-4 million per year. These increased
expenditures for new product development may partially affect some of the cost
savings discussed below. There can be no assurance that these additional
expenditures will result in the successful introduction of new products or in
increased sales.
Achieve Substantial Cost Savings. The Company intends to close Dogloo's
administrative, distribution and manufacturing facilities and centralize those
operations at Doskocil's Arlington, Texas facility, thereby eliminating
redundant expenses and spreading higher production and distribution volumes
over a relatively fixed cost base. By integrating operations and capitalizing
on the complementary strengths of the two companies, the Company will seek to
achieve the following cost savings:
. Elimination of Duplicative Manufacturing, General & Administration
Expense. By closing Dogloo's Corona and Indianapolis operations and not
replacing duplicative expenses, management expects substantial savings
in manufacturing, distribution and administrative personnel, facilities
expense and other operating expenses. The pro forma operating income
adjustments herein for the 12 months ended June 30, 1997 do not include
$6.3 million for this consolidation; however, management believes that
upon full integration of these operations, these savings plus additional
savings can be achieved.
. Reduction of Resin Costs. As discussed below, the Company expects to
reduce its resin costs through better utilization of Spectrum. The pro
forma operating income adjustments herein for the 12 months ended
June 30, 1997 do not include an estimated $2.7 million of cost savings
resulting from utilization of Spectrum instead of external sources;
however, management believes that these savings can be achieved plus
additional savings through the reformulation of resins currently used in
Dogloo products and through other purchasing savings.
. Restructuring Sales & Marketing Operations. Although not reflected in
the pro forma adjustments herein, the Merger is expected to allow the
realization of substantial savings through the consolidation of
distributors and increased use of direct sales representatives.
. Direct Labor Savings. Due to the configuration and material handling
systems included in the new facility discussed below, management expects
to achieve substantial savings in manufacturing direct labor costs.
These savings are not included in the pro forma adjustments herein.
. Shipping Consolidation Savings. The consolidation of distribution is
expected to allow volume discounts on freight rates and reduce the
number of less-than-truckload shipments. While management expects these
savings to be substantial, these amounts are not included in the pro
forma adjustments herein.
. Pet Carrier Savings. The Company anticipates moving the previously
outsourced production of Dogloo's pet carriers into Doskocil's
manufacturing facilities, which is expected to result in substantial
savings in product costs. These savings are not included in the pro
forma adjustments herein.
. Other Savings. While not included in the pro forma adjustments herein,
management believes additional savings can be achieved through improved
manufacturing, further purchasing economics and other improvements.
While the estimated annual cost savings for the twelve months ended June 30,
1997 are approximately $9.0 million, management believes that additional
annual cost savings estimated to be approximately $8.5 million can be achieved
over time. However, there can be no assurance that the $17.5 million of
potential annual cost savings discussed above will be realized or that there
will not be significant delays in achieving such cost savings. See "Risk
Factors--Risks Related to the Merger and Integration of Dogloo and Doskocil."
In order to achieve certain of these potential cost savings, management
estimates that it will be necessary to spend a net amount of approximately
$8.5 million in the next two years for unusual capital expenditures, net of
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approximately $4.0 million of net proceeds from the sale of the Indianapolis
facility, plus $8.0 million for unusual costs. The unusual capital
expenditures are necessary for (i) the construction of a new manufacturing
facility in Arlington to house Dogloo's and other production equipment; (ii)
certain enhancements to Doskocil's existing distribution center; (iii) the
costs of moving and rigging Dogloo's production equipment; and (iv) other
items such as systems integration. Unusual costs relate primarily to employee
termination and relocation costs, a $3.5 million bonus program tied to the
achievement of potential cost savings, and other costs such as the temporary
carrying costs of vacated facilities.
Capitalize on Plastic Resin Cost Advantage. Spectrum, the Company's
vertically integrated plastic resin compounding facility, together with the
Company's resin compounding experience, enable the Company to produce plastic
resins using a significantly reduced proportion of prime resins, while
achieving raw material specifications which meet or exceed the Company's
product and manufacturing requirements. The Company's principal raw materials
are various plastic resins, which are either "prime" resins, purchased from
petrochemical producers, or blends of prime resins and recycled materials
purchased from third-party suppliers or produced by the Company. Spectrum has
an estimated annual capacity in excess of 100 million pounds, and uses a
mixture of prime resins and recycled materials to produce plastic resins. In
1996, Doskocil used 49 million pounds of plastic resins, approximately 92% of
which were compounded in Spectrum. In 1996, Dogloo used approximately 28
million pounds of prime plastic resins purchased from outside suppliers.
Spectrum is expected to satisfy all of Dogloo's resin needs, which the Company
expects will substantially increase Spectrum's capacity utilization and
further reduce the Company's average resin cost per pound.
Exploit International Growth Opportunities. While international sales
represented approximately 12.4% of the combined Company's net sales in 1996,
management believes that the international markets, especially Europe and
Latin America, represent a significant growth opportunity. The international
expansion of U.S. retailers is also expected to provide a significant
opportunity for the Company to increase international sales. Management
believes the 1996 acquisition by PETsMART of Pet City Holdings PLC, the United
Kingdom's largest pet superstore chain, is indicative of the international
expansion of such retailers and represents one opportunity for growth in
international markets. Management is currently evaluating the establishment of
distribution facilities in continental Europe and Latin America. The
combination of Doskocil and Dogloo is also expected to allow the Company to
redeploy certain overlapping product molds for international contract
manufacturing.
PRODUCTS
The combination of the two businesses created a company with broad product
lines in many key segments of the pet supplies industry. Doskocil is a leading
industry participant in its core business of plastic pet carriers, while
Dogloo is a market leader in the plastic pet shelter segment. Doskocil
produces numerous additional plastic products, including pet shelters, cat
litter boxes, bowls, feeders, waterers and cat toys, as well as products for
the sporting goods, hardware and lawn and garden markets. Dogloo also produces
other complementary products such as pet bedding.
Pet Carriers. (31.4% of 1996 combined sales.) The Company currently produces
a total of 98 SKUs of pet carriers ranging in domestic retail price from
approximately $10 to $200. Management believes the Company's Vari Kennel, Pet
Porter, Pet Taxi, Furrarri(R) and Innovator(R) brand names are widely known
among retail consumers as well as pet product retailers and airlines. These
pet carriers come in a variety of colors and have an assortment of features
such as quick-release latches, dual door locks and snap-on waterer/feeder
dishes. The Company's pet carriers have been developed and refined over a 35-
year period and have achieved strong brand awareness among consumers. The
combined Company sold in excess of 3.1 million units in 1996.
The Company believes that its plastic pet carriers are superior to cardboard
and wire carriers and have made wooden carriers practically obsolete. Plastic
pet carriers are durable, yet lightweight, and provide superior protection for
the animals while maintaining a clean environment outside of the carrier. In
addition to being used for transportation, pet carriers have enjoyed
increasing consumer acceptance for the indoor training of pets.
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<PAGE>
Pet Shelters. (25.2% of 1996 combined sales). The Company produces numerous
styles of pet shelters in various sizes, including the Dogloo, Indigo, Ruff
Hauz, Barney, Cape Cod, Pet Barn(R) and Brik Hauz. The Dogloo, the Company's
best seller, is unique because of its trademarked igloo-shape and structural
foam plastic construction, which management believes offers significant
advantages relative to wooden and other plastic pet shelters. The Company
currently manufactures a total of 52 different pet shelter SKUs, providing
retailers with the ability to tailor their product offerings to their customer
base. Domestic retail pricing on the Company's pet shelters ranges from
approximately $30 for a small Ruff Hauz to over $180 for a Dogloo Giant. The
combined Company sold in excess of 1.0 million units in 1996.
Management believes the Company's structural foam plastic pet shelters are
superior to wooden models or other non-structural foam plastic pet shelters on
the market. Dogloo pioneered the use of structural foam plastic in the
production of pet shelters in the late 1980s, and owns a configuration
trademark which protects certain aspects of its design from imitation by
competitors. See "Patents and Trademarks." The insulating qualities of
structural foam and the igloo-shaped design are strong selling features.
Structural foam plastic is an extremely durable, lightweight, thermal material
which enables the Company's pet shelters to remain warmer in winter and cooler
in summer. The igloo-shaped structural foam shelters manufactured by the
Company provide exceptional durability and insulation compared to other types
of wooden homes and non-structural foam plastic shelters. Another advantage of
these shelters over wooden shelters is that structural foam is non-porous,
making it easy to clean with soap or disinfectants and dry quickly and easily.
The non-porous surface also prevents fleas and disease from living in the
material, as can occur with wood products.
Other Pet Products. (22.1% of 1996 combined sales.) The combined Company's
other pet product lines include cat litter boxes, feeding and watering
systems, pet bowls, pet toys, and pet furniture and bedding. The Company's
feeding and watering systems are among the fastest growing segments of the
Company's "other" pet products category, and offer multiple day feeding and
watering solutions for pets in the absence of their owners. Management
believes the breadth of the Company's entire pet product line represents the
most complete assortment of durable dog and cat products in the industry.
Sporting Goods and Other Products. (15.1% of 1996 combined sales.) The
Company sells four sporting goods product lines with over 180 different SKUs,
which gives the Company a significant presence in this market. The Company is
one of the leading manufacturers and suppliers of hard-sided firearms cases,
fishing tackle boxes and golf cases in the United States and has substantial
market share in each of its product lines. In 1976, the Company became the
first manufacturer to sell hard-sided firearms cases to the airline industry
and eventually to retail customers. Management believes the Company's plastic
Gun Guard(R) cases are known for their high quality. The Company is the
leading producer of hard-sided firearms cases in the United States.
Through the Woodstream product line, the Company sells a full line of hard
and soft-sided fishing tackle boxes. In July 1996, the Company introduced a
waterproof modular fishing system utilizing MFS technology (patent pending).
MFS offers fishermen improved flexibility and performance in tackle
organization, and MFS waterproof and saltwater utility boxes feature DRI-Loc
seal, an airtight seal.
The Company also manufactures and supplies a line of photo/video camera
cases and utility bins. The photo/video case product line is sold under the
Camera Guard(R) name and includes products such as the Seal Tight(R), a water,
dust and airtight case with foam inside. The utility bin line, sold under the
Tote Bin name, includes several bins used to store, move or mix items. These
bins are made of rugged, lightweight, high-impact plastic, which facilitates
cleaning and are oil and chemical resistant.
In 1994, through the acquisition of the assets of the Woodstream sporting
goods product line from Ekco Canada, Inc. and Ekco Group, Inc., the Company
entered the golf accessories market with the Golf Guard(R) hard-sided travel
case for golf clubs. Because of its rugged outer shell, management believes
the Golf Guard travel case is superior to soft cases which can rip, stain, and
show dirt. In addition, the Golf Guard case has built-in padlock tabs, bail
latches and dual wheels. The Company also produces a variety of plastic
products for the home improvement market, including cord wheels and edging
products.
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Consistent with its desire to be a focused pet products company, management
may consider the sale or other disposition, including a sale or distribution
to existing shareholders, of the Doskocil sporting goods and other products
line. This product line generated sales of approximately $24 million during
1996. Any such sale or other disposition of this product line would be subject
to obtaining the consent of the Company's lenders under the New Credit
Facility and compliance with applicable Indenture covenants.
NEW PRODUCT DEVELOPMENT
New products introduced within the past two calendar years accounted for
approximately 16.7% of the combined Company's 1996 revenue. The Company is
committed to maintaining its reputation as an industry leader through
continued product development within its current product categories and the
creation of innovative new product categories. Management believes that the
Company has demonstrated the ability to develop and market new products to
both retail consumers and those who influence the purchasing patterns of
consumers such as breeders and veterinarians. Doskocil and Dogloo launched a
total of 27 new products over the past two years. The Company expects to
launch an additional 30 new products in 1997.
The Company's philosophy on new product development is to focus on the needs
of the consumer while creating products which will enhance the care, comfort,
lifestyle, and interaction of the pet with its owner. The Company evaluates
ideas from multiple sources, both internally and externally, and tests such
ideas against consumer reaction and market potential. Once a promising product
is identified through consumer and market research, the Company employs a
multifunctional team approach to accelerate the speed and improve the
effectiveness of the new product introduction. The Company has won 9 new
product industry awards during the past five years. The Company will also seek
to employ resources to acquire existing products that can be leveraged through
its broad distribution network.
While the Company intends to increase its new product development efforts,
there can be no assurance that these increased efforts will result in
successful new product introductions.
SALES, MARKETING AND DISTRIBUTION
The Company's marketing strategy is to communicate directly with the
consumer via direct marketing, advertising and promotional programs. The
Company believes that strong brand recognition and programs which influence
consumer purchase intentions provide the framework for establishing effective
merchandising presentations at point of sale. The Company has tailored its
products to nine distinct distribution channels. See "Business--Customers." By
focusing on multiple distribution channels, the Company believes it is well
positioned to meet the various needs and shopping habits of consumers.
Domestically, the Company employs a direct salesforce which is based near
key retail customers. The Company also utilizes manufacturer representatives
to support certain customers and to cover specific territories and channels of
distribution. The Company believes that this approach, along with its
proactive customer service function, will strengthen important customer
partnerships and will serve as a significant competitive advantage.
The Company also markets its products internationally, with primary emphasis
on Europe, Canada, Latin America and Japan. The Company has developed
multilingual packaging, customized case packs and trade advertising
capabilities as it continues to expand international distribution. With a base
of foreign pet distributors in place to service the pet specialty channel, the
Company is focusing on mass merchandisers and home and garden centers such as
Wal-Mart in Latin America and Canada, Sam's Club in Latin America, Home Depot
in Canada, Costco in Canada, Latin America and the United Kingdom, and
PETsMART in Canada and the United Kingdom. The Company primarily utilizes
direct sales personnel, in cooperation with selected distributors, to market
internationally. The Company believes that it is well positioned to assist
United States retailers expanding their operations abroad.
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CUSTOMERS
The Company distributes through nine distinct distribution channels in the
United States and to more than 2,000 retail customers worldwide, with the
largest customer accounting for 11.9% of 1996 revenues. The primary
distribution channels include mass merchants, pet superstores, hardware and
home centers, warehouse clubs, distributors, farm and agriculture, food and
drug, co-ops, and catalogs. The mass merchant channel accounted for 19.8% of
combined 1996 net sales, followed closely by the pet superstore channel
at 16.5%.
In 1996, Doskocil's ten largest customers accounted for approximately 38.1%
of its net sales and Dogloo's ten largest customers accounted for
approximately 53.3% of its net sales. On a combined basis, the Company's top
ten customers accounted for 39.6% of net sales during this period. The
Company's top 10 customers on a pro forma combined basis after giving effect
to the Merger for 1996 were as follows:
<TABLE>
<C> <S> <C> <C>
1. Wal-Mart Stores, Inc. 6. Petco Animal Supplies, Inc.
2. PETsMART 7. Lowe's Companies, Inc.
3. K-Mart Corporation 8. H & H Distributing
4. Sam's Club 9. Target Stores
5. Costco Wholesale 10. Army & Air Force Exchange Service
</TABLE>
As management believes is typical in the pet and sporting goods industries,
the Company does not have long-term or exclusive contracts with any of its
customers. Sales to customers and purchases from suppliers are generally made
pursuant to purchase orders.
FACILITIES, EMPLOYEES AND MANUFACTURING
The Company operates manufacturing facilities in Arlington, Texas,
Mansfield, Texas and Indianapolis, Indiana, a fabric cut and sew facility in
Corona, California and has offices and warehouse facilities in Arlington,
Texas, Indianapolis, Indiana and Corona, California.
The approximate size and location of the Company's significant facilities
and the approximate distribution of its employees are summarized below:
<TABLE>
<CAPTION>
SIZE NO. OF
LOCATION (SQ. FT) OWNED/LEASED EMPLOYEES
-------- -------- ------------ ---------
<S> <C> <C> <C>
MANUFACTURING, WAREHOUSE AND OFFICE:
Arlington, Texas.......................... 992,000 Leased 640
Indianapolis, Indiana..................... 268,000 Owned 249
Corona, California........................ 61,000 Leased 102
Mansfield, Texas.......................... 52,000 Leased 90
WAREHOUSE:
Indianapolis, Indiana..................... 181,000 Leased 4
</TABLE>
As discussed above, the Company expects to consolidate its Indianapolis and
Corona operations into the Arlington facilities.
The Company's manufacturing operations include 37 injection molding machines
ranging in size from 75 to 3,000 ton and nine structural foam molding
machines, eight of which are 750 ton and one of which is a dual platen 400
ton. With moderate additional capital expenditures after integration,
management believes that the Company's manufacturing facilities can
accommodate a substantial increase in product volume. The Company manufactures
substantially all of its products, with the current exception of Dogloo pet
carriers, fishing tackle boxes and aluminum firearm cases, which are
manufactured by contract suppliers. The Company's employees are not covered by
a collective bargaining agreement. The Company considers its relationship with
its employees to be good.
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RAW MATERIALS
The Company's principal raw materials are various plastic resins, which are
either "prime" resins, purchased from petrochemical producers, or blends of
prime resins and recycled materials, purchased from third-party suppliers or
produced by the Company. The main resins historically utilized by the Company
are HDPE, which Dogloo has used to manufacture its line of pet shelters, and
PP, which Doskocil uses to manufacture its pet carriers and other plastic
products. In manufacturing many products, including pet shelters, formulations
of PP can be substituted for HDPE. To a lesser extent, the Company utilizes
other raw materials such as steel, specialty chemicals (including impact
modifiers, blowing agents, antioxidants and u.v. stabilizers), carbon black,
synthetic fibers, natural rubbers, polyethylene, colorants, components of
polyester/cotton fabrics, polyurethane foam and PVC vinyl.
In 1996, Doskocil used approximately 49 million pounds of PP resins,
approximately 92% of which was compounded in its Spectrum facility. Of this
amount, approximately 3.5 million pounds were used in production of resin
furniture products which have since been discontinued. In 1996, Dogloo used
approximately 28 million pounds of plastic resins, consisting of 25 million
pounds of HDPE and 2.8 million pounds of PP. The Spectrum facility and the
Company's resin compounding expertise enable the Company to produce plastic
resins using a significantly reduced proportion of prime resins while
achieving raw material specifications which meet or exceed the Company's
product and manufacturing specifications.
Resin prices reached peaks in 1988 and 1995 and have declined significantly
in recent years (see chart below). As major petrochemical companies have built
polypropylene plants, hundreds of millions of pounds of resin compounding
capacity have been added to the marketplace, driving down resin prices. With
seven years between the two most recent resin price market highs, and the
recent resin price peak of 1995, industry analysts expect generally that resin
prices will continue to stabilize or decline as industry capacity increases.
Plastic resin prices can vary from year to year and are very difficult to
predict beyond a few months.
[LOGO of GRAPH]
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PATENTS AND TRADEMARKS
The Company maintains two distinct product brand identifications which
derive from the pre-Merger companies, Doskocil and Dogloo. Trademarked brands
marketed under the Doskocil name include Vari Kennel, Sky Kennel, Pet Mate,
Pet Taxi and Kennel Cab in pet products, as well as Gun Guard firearms and
archery cases, Woodstream fishing tackles cases, Camera Guard camera cases and
Golf Guard golf travel cases. Several Doskocil trademarks represent technology
improvements: MFS technology, DRI-Loc airtight utility box seals, and Seal
Tight brand camera cases (sold under the Camera Guard name). Brands marketed
under the Dogloo name include Furrarri and Innovator carriers as well as the
Dog Kabin, Ruff Hauz, Brik Hauz, Dogloo II, Indigo, Barney and Cape Cod pet
shelters. In the Merger, the Company acquired Dogloo's configuration trademark
for its igloo-shaped pet shelters. In 1995, Dogloo successfully relied upon
this trademark in litigation against Doskocil to obtain a preliminary
injunction against the manufacture and sale by Doskocil of a confusingly
similar product. In settlement of this litigation, Doskocil agreed to entry of
a permanent injunction prohibiting Doskocil from selling dome-shaped pet
shelters once their existing inventory of such pet shelters was sold. The
current registrations of the Company's trademarks in the United States and
foreign countries are effective for varying periods of time, and may be
renewed periodically provided that the Company, as the registered owner, and
its licensees, where applicable, comply with all applicable laws. The Company
also has several U.S. utility and design patents and several patent
applications pending. The Company is not aware of any material challenge to
the ownership by the Company of its major trademarks or patents. The Company
believes it benefits from its intellectual property and intends to defend its
exclusive use of such property against infringement by third parties, although
the Company cannot predict success in defending its intellectual property
rights. See "Risk Factors--Trademark, Patent and Proprietary Information."
COMPETITION
The market for the Company's products is highly competitive. The Company
competes with a number of smaller, privately held companies and certain public
companies, some of which have greater name/brand recognition, larger customer
bases and/or significantly greater financial resources than the Company, such
as Rubbermaid Inc. Among the smaller companies against which the Company
competes in the pet shelter category are Handy Home and Flowtron (Flowtron's
products include structural foam pet shelters). The Company competes against
Stylette and Kennel Air, among others, in the pet carrier category. There are
no substantial regulatory or other barriers to entry of new competitors into
the Company's market. There can be no assurance that the Company will be able
to compete successfully against current and future sources of competition or
that the current and future competitive pressures faced by the Company will
not adversely affect its profitability or financial performance.
LEGAL PROCEEDINGS
From time to time, the Company has been involved in legal proceedings
arising in the ordinary course of business. None of the matters in which the
Company is currently involved is expected to have a material adverse effect on
the Company's business or financial condition.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the name, age and position of each of the
individuals who serve as directors, executive officers and key employees of
the Company. Each director will hold office until the next annual meeting of
stockholders or until his successor has been duly elected and qualified.
Officers of the Company are elected by, and serve at the discretion of, the
board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<C> <C> <S>
Gary E. Kleinjan........... 48 President and Chief Executive Officer,
Director
Donald J. Fritschen........ 57 Vice President and Chief Financial Officer
Michael J. Farmer.......... 36 Senior Vice President of Sales and Marketing
Garland W. Strong.......... 44 Vice President and President of the Sporting
Goods and Hardware Division
William C. Bowie, Jr. ..... 39 Vice President and President of Spectrum
Bruce W. Schafer........... 49 Senior Vice President of Operations
C. Raymond Thomas.......... 51 Vice President of Information Systems
George L. Argyros.......... 60 Director
John W. Clark.............. 52 Director
Charles D. Martin.......... 60 Director
Benjamin L. Doskocil, Sr. . 59 Director
Michael P. Hoopis.......... 46 Director
Larry E. Rembold........... 56 Director
</TABLE>
Gary E. Kleinjan joined the Company as its President and Chief Executive
Officer and as a director effective October 6, 1997. Mr. Kleinjan has 20 years
of experience in the consumer products industry. From August 1997 to September
1997, Mr. Kleinjan served as President of Sales and Corporate Accounts of
Rubbermaid, Inc.'s Home Products division. From 1994 to August 1997, Mr.
Kleinjan served as President and General Manager of Rubbermaid, Inc.'s Little
Tikes division. During 1994, Mr. Kleinjan served as President and General
Manager of Rubbermaid, Inc.'s Office Products division. From 1992 to 1994, Mr.
Kleinjan served as Vice President and General Manager of Micro Computer
Accessories, a Rubbermaid, Inc. company.
Donald J. Fritschen has served as the Company's Vice President and Chief
Financial Officer since consummation of the Merger, prior to which he had
served as Doskocil's Vice President and Chief Financial Officer since 1990.
Mr. Fritschen has 14 years of experience in the injection molded plastic
products industry. From 1985 to 1990, Mr. Fritschen served as Chief Financial
Officer of the Max Fletcher companies, a diversified holding company. From
1978 to 1985, Mr. Fritschen served as Controller of Rubbermaid Inc.'s
Specialty Products Inc. division.
Michael J. Farmer has served as the Company's Senior Vice President of Sales
and Marketing since consummation of the Merger, prior to which he had served
as Executive Vice President and General Manager of Dogloo since May 1997. From
April 1994 to May 1997, Mr. Farmer served as Vice President, Sales and
Marketing of Dogloo. Mr. Farmer has 14 years of experience in the durable
consumer products business. From 1989 to 1994, Mr. Farmer served as Director
of Marketing and New Product Development of the Coleman Company. From 1983 to
1989, Mr. Farmer served in several positions including Director of Engineering
and Materials Management, Factory Operations Manager and Industrial
Engineering Manager of the Coleman Company.
Garland W. Strong has served as the Company's Vice President and President
of the Sporting Goods and Hardware Division since consummation of the Merger,
prior to which he had served as Doskocil's Executive Vice President of Sales
and Marketing since 1995. From 1989 to 1995, Mr. Strong served as Doskocil's
Executive Vice President and General Manager. Mr. Strong has 22 years of
experience in the injection molded plastic products industry.
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<PAGE>
William C. Bowie, Jr. has served as the Company's Vice President and
President of Spectrum since consummation of the Merger, prior to which he had
served as General Manager of Spectrum since January 1993. From January 1991 to
January 1994, Mr. Bowie served as Doskocil's Resin Manager. Mr. Bowie has nine
years of experience in the resin industry.
Bruce M. Schafer has served as the Company's Senior Vice President of
Operations since consummation of the Merger, prior to which he had served as
Dogloo's Vice President of Operations and Research and Development since
September 1996. From 1995 to September 1996, Mr. Schafer served as Chief
Operating Officer for McKecknie Plastics USA, a British custom injection
molding company. From 1992 to 1995, he served as General Manager of an
injection molding plant of Automotive Industries, a privately held company.
From 1981 to 1992, Mr. Schafer served in various positions with General Motors
Corporation, including Engineering Manager of a design implementation team for
automobile plastic components.
C. Raymond Thomas has served as the Company's Vice President of Information
Systems since consummation of the Merger, prior to which he had managed
Doskocil's information systems since July 1996. From 1990 to 1996, Mr. Thomas
worked as an independent systems consultant. Mr. Thomas has 27 years
experience in information systems management.
George L. Argyros has served as a director of the Company since consummation
of the Merger, prior to which he served as a director of Dogloo since
September 1995. Mr. Argyros has been a General Partner of Westar since its
formation in 1987. Mr. Argyros has also served as Chairman and Chief Executive
Officer of Arnel & Affiliates, a West Coast diversified investment company,
since 1968. Mr. Argyros is a member of the board of directors for Rockwell
International Corporation, First American Financial Corporation, the Newhall
Land and Farming Company and selected companies within the Westar portfolio.
Mr. Argyros was the 1993 recipient of the Horatio Alger Award of Distinguished
Americans and currently serves as President and Chief Executive Officer of the
Washington D.C. based Horatio Alger Association. Mr. Argyros formerly was a
co-owner of AirCal and owner of the Seattle Mariners Baseball Club of the
American League.
John W. Clark has served as a director of the Company since consummation of
the Merger, prior to which he served as a director of Dogloo since September
1995. Mr. Clark has been a General Partner of Westar since 1995. From 1990 to
May 1995, Mr. Clark was a private investor. Prior to 1990, Mr. Clark was
President of Valentec International Corporation, a producer of metal and
electronic components for military and commercial products. Mr. Clark is a
director of Amerigon, Inc., and serves on the boards of selected companies
within the Westar portfolio. Earlier in his career, Mr. Clark was founder and
Managing Partner of a CPA practice which grew substantially before merging
into Ernst & Young's predecessor firm, where he served as the office's
Managing Partner.
Charles D. Martin has served as a director of the Company since consummation
of the Merger, prior to which he served as a director of Doskocil since the
Recapitalization in July 1997. Mr. Martin served as a director of Dogloo from
September 1995 to April 1997. Mr. Martin has been a General Partner of
Enterprise since its formation in 1985 and has also been a General Partner of
Westar since its formation in 1987. Mr. Martin is a member of the board of
directors of USCS International, Inc. Mr. Martin has served on the board of
directors of 38 private and public companies.
Benjamin L. Doskocil, Sr. has served as a director of the Company since
consummation of the Merger. Mr. Doskocil founded Doskocil in the early 1960s
and served as Doskocil's President and Chief Executive Officer from its
formation until the Recapitalization in July 1997. Mr. Doskocil has 36 years
of experience with Doskocil. Pursuant to the Stockholders' Agreement (as
defined below), Benjamin L. Doskocil, Sr. or his son, Edward J. Doskocil, have
the right to a board seat so long as Benjamin L. Doskocil, Sr. and his spouse
own at least fifty percent (50%) of the Doskocil Common Stock owned by them
immediately following consummation of the Recapitalization.
Michael P. Hoopis has served as a director of the Company since consummation
of the Merger, prior to which he served as a director of Dogloo since December
1994. Since July 1996, Mr. Hoopis has served as
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President of Worldwide Household Products, Black & Decker Corporation. From
May 1992 to July 1996, Mr. Hoopis served as President of Price Pfister, Inc.,
a division of Black & Decker Corporation.
Larry E. Rembold served as the Company's Interim President and Chief
Executive Officer from July 1997 to October 1997 and has served on the
Company's board since July 1997. From March 1996 to June 1997, Mr. Rembold
worked on several consulting engagements for companies with an emphasis on
lender relations and acquisition evaluations. Mr. Rembold was a consultant to
Enterprise in its due diligence effort of Doskocil prior to the
Recapitalization. From April 1989 to March 1996, Mr. Rembold served as
President and Chief Executive Officer of Dolco Packaging Corporation
("Dolco"), a plastics company whose shares were traded publicly until March
1996, at which time Dolco was sold and taken private.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid by Doskocil for 1994, 1995
and 1996 to its Chief Executive Officer and the only other executive officer
whose total annual salary and bonus equaled at least $100,000 as of the end of
1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($)
---------------------------- ---- ---------- ----------
<S> <C> <C> <C>
Benjamin L. Doskocil, Sr. ....................... 1994 $520,000 $4,691,534
Chief Executive Officer 1995 520,000 340,752
and President 1996 520,000 507,250
Garland W. Strong................................ 1994 151,799 20,000
Executive Vice President 1995 151,799 --
of Sales and Marketing 1996 151,745 --
</TABLE>
EMPLOYMENT AND OTHER ARRANGEMENTS
Consulting Services. Mr. Benjamin L. Doskocil, Sr. retired from his position
as Doskocil's President and Chief Executive Officer in July 1997. Thereafter
Mr. Doskocil entered into a letter agreement with Doskocil whereby he agreed
to render certain consulting services to Doskocil. Pursuant to this agreement,
Mr. Doskocil receives $2,000 per day for consulting services, plus
reimbursement of expenses, and $2,000 per meeting of the board of directors.
Employment Agreement. Mr. Michael J. Farmer is party to an employment
agreement, pursuant to which Mr. Farmer serves as Senior Vice President of
Sales and Marketing of the Company. Pursuant to this agreement, Mr. Farmer
receives an annual base salary of approximately $166,000, plus an annual bonus
if Mr. Farmer meets certain performance targets agreed to by Mr. Farmer at the
start of each year. In the event Mr. Farmer's employment is terminated other
than for cause, Mr. Farmer will receive severance pay equal to his annual base
salary plus the greater of (a) his last annual bonus, or (b) the performance
bonus payable during the fiscal year of termination.
In connection with the Merger, the Company delivered letters to certain
members of Dogloo's management, including Messrs. Farmer and Schafer. The
letters provide, among other things, that if following the Merger the employee
is terminated without cause or resigns for good reason (as defined) on or
before August 31, 1999, the Company will continue to pay the employee's salary
and benefits for a twelve-month period following the termination or
resignation date.
Option Plan. In connection with the Merger, the Company adopted a stock
option plan (the "Option Plan") which provides for the grant to employees from
time to time of non-qualified stock options and incentive stock options
pursuant to Section 422 of the IRC to purchase up to an aggregate of 625,000
shares of Doskocil Common Stock. The Company granted "base" options to certain
employees following the Merger at an exercise
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price of $15.03 per share, based on management's estimate of the fair market
value of the Company's Common Stock. Additionally, all Dogloo employees who
held options to purchase shares of Dogloo Common Stock ("Dogloo Options") and
who continued with the Company after the Merger had their Dogloo Options
assumed by the Company and converted into options to purchase shares of
Doskocil Common Stock. All options to purchase shares of Doskocil Common
Stock, including those Dogloo Options assumed by the Company in the Merger,
will become exercisable at the rate of twenty percent (20%) per year on the
first through the fifth anniversaries of September 30, 1997. The Option Plan
also provides for the acceleration of the exercisability of 50 percent of the
previously unvested portion of the options, unless the Company's Board of
Directors determines that such option should not be accelerated, upon the
occurrence of certain corporate events involving the dissolution or
liquidation of the Corporation, merger or consolidation where less than 50% of
the outstanding voting securities of the surviving entity are owned by former
shareholders of the Corporation, or the sale of substantially all of the
Corporation's business or assets. All optionholders who exercise such options
will be required to execute and thereby become a party to the Second
Securityholders Agreement (see "Shareholder Agreements") and become subject to
certain of the rights and restrictions of that agreement.
In addition to the "base" options described above, the Company granted
additional stock options to certain employees of the Company following the
Merger. These options have an exercise price of $15.03 per share, based on
management's estimate of the fair market value of the Company's Common Stock,
and vest on the sixth anniversary of the date of grant provided, however, that
the options vest on June 30, 1999 (June 30, 1998 in the case of certain
options) if certain specified financial or other goals set by the board of
directors are met.
Stockholders Agreements. The following agreements regulate the relationship
among the Company's shareholders: (1) a Stockholders' Agreement dated as of
July 1, 1997, by and among Benjamin L. Doskocil, Sr., Mary Frances Doskocil
(collectively, the "Doskocils"), Enterprise and the Company (the
"Stockholders' Agreement"); (2) a First Amendment to Stockholders' Agreement,
dated as of September 19, 1997 by and among Enterprise, Westar, HBI, the
Doskocils and the Company (the "First Amendment"); and (3) an Amended and
Restated Securityholders Agreement, dated as of September 19, 1997 by and
among Enterprise, Westar, HBI, the Company and certain other securityholders
other than the Doskocils (the "Second Securityholders Agreement").
Prior to the Merger, Dogloo Securityholders were and are bound by a
Securityholders Agreement dated as of September 22, 1995 (the "First
Securityholders Agreement"). The Second Securityholders Agreement amends and
restates the First Securityholders Agreement to apply on a going-forward basis
to all Company shareholders who sign the Second Securityholders Agreement
(other than the Doskocils), including those Dogloo shareholders whose shares
of Dogloo capital stock were converted into shares of Doskocil capital stock
in the Merger and, with respect to certain provisions, any shareholders who
purchase shares or exercise options in the future. (Company shareholders who
do not sign the Second Securityholders Agreement will continue to be bound by
the First Securityholders Agreement, which contains, with certain exceptions,
provisions similar to those contained in the Second Securityholders
Agreement.) The Second Securityholders Agreement contains (i) certain
preemptive rights for all holders of more than ten percent (10%) of the fully
diluted Doskocil Common Stock ("Eligible Securityholders"); (ii) rights of
first offer in favor of Eligible Securityholders in the event any
securityholder proposes to sell the Company's securities; (iii) tag-along
rights entitling securityholders other than Westar, Enterprise and HBI ("Other
Securityholders") to join in certain proposed sales of Company securities by
Eligible Securityholders; (iv) drag-along rights entitling a majority in
interest of the Eligible Securityholders to compel participation in, or a vote
in favor of, stock sales and certain other transactions; and (v) certain
registrations rights for all holders of Doskocil Common Stock. The Second
Securityholders Agreement also contains certain other restrictions on transfer
of equity securities. In the event any existing Other Securityholder ceases to
be an employee of the Company, the Second Securityholders Agreement gives the
Company the option to repurchase the shares of such Other Securityholder. All
Other Securityholders who owned Company securities at the time of the Merger
will have the option to require the Company to repurchase their shares between
January 1, 2000 and June 30, 2000 for a price per share based on five times
the Company's EBITDA, minus its debt and the redemption value of its preferred
stock, divided by the number of shares of fully diluted Doskocil Common Stock
then currently outstanding (the "Repurchase Price").
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The Second Securityholders Agreement also gives holders of Doskocil Series B
and Series C Preferred Stock the right to convert such shares into
subordinated debt of the Company under certain conditions. Subject to the
consent of the Company's lenders and compliance with Texas law (and in the
case of conversion of Series C Preferred Stock if all holders of Series C
Preferred Stock also consent), the holders of Doskocil Series B and Series C
Preferred Stock may convert some or all of their shares into subordinated debt
which would accrue simple interest at the rate of ten percent per year. Such
debt would be subordinated and junior to any other debt under any working
capital or other credit agreement or facility with a commercial bank,
insurance company, other recognized financial institution, or any debt,
including the Notes, issued to the public pursuant to a private placement or
effective registration statement, any debt incurred in connection with any
past or future acquisitions by the Company, and any sale/leaseback financing
of equipment or real property by the Company. As part of the Transactions, the
Company redeemed all of the Doskocil Series B Preferred Stock and a portion of
the Doskocil Series C Preferred Stock. See "The Merger" and "Use of Proceeds."
The Stockholders' Agreement was executed in connection with the
Recapitalization and governs the relationship among Enterprise and the
Doskocils after the Recapitalization. It contains (i) limitations on transfer
of Company stock, including certain rights of first offer in favor of the
Company and Enterprise if the Doskocils propose to transfer their stock; (ii)
tag-along rights entitling the Doskocils to join in certain sales by
Enterprise; (iii) drag-along rights obligating the Doskocils to sell their
stock in certain transactions initiated by Enterprise; (iv) certain preemptive
rights in the event new securities are issued by the Company; and (v) certain
registration rights. Additionally, the parties to the Stockholders' Agreement
agreed to vote for the election of Mr. Doskocil (or his designee) as a
director of the Company for so long as the Doskocils (and/or their family
members) own at least fifty percent (50%) of the Company stock owned by the
Doskocils upon consummation of the Recapitalization.
The First Amendment added Westar, certain Westar affiliates and HBI as
signatories to the Stockholders' Agreement. The First Amendment also
reconciles certain provisions of the Stockholders' Agreement with the Second
Securityholders Agreement to provide for the Doskocils, Enterprise, Westar and
HBI to share in certain rights and restrictions of their stock ownership with
all other securityholders on a pro rata basis. Accordingly, pursuant to the
First Amendment, the Doskocils agree that the pro rata sharing provisions of
their tag-along rights and registration rights will be governed by the Second
Securityholders Agreement, rather than the Stockholders' Agreement, in order
to provide for the Doskocils to share in all rights and restrictions of such
provisions with all other Company securityholders. Similarly, pursuant to the
First Amendment, Westar, HBI, and certain Westar affiliates became parties to
the Stockholders' Agreement and agree that their preemptive rights and rights
of first offer will be governed by the Second Securityholders Agreement,
rather than the Stockholders' Agreement.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Doskocil Common Stock as of September 25, 1997 by (i) each person
who is known by the Company to own beneficially 5% or more of the outstanding
shares of Doskocil Common Stock, (ii) each of the Company's directors, (iii)
each of the Company's executive officers, and (iv) all directors and executive
officers as a group. Except as indicated in the footnotes to the table, the
persons named in the table have sole voting and investment power with respect
to all shares of Doskocil Common Stock shown as beneficially owned by them,
subject to community property laws where applicable, and are located at the
Company's principal offices at 4209 Barnett, Arlington, Texas 76017.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AFTER THE TRANSACTIONS
-------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(1)
<S> <C> <C>
Westar Capital II, LLC,(2)......................... 434,333 14.2%
a Delaware limited liability company
Attn: John W. Clark
949 South Coast Drive, Suite 650
Costa Mesa, California 92626
Westar Capital, L.P.,(3)(4)........................ 161,208 5.3%
a California limited partnership
Attn: John W. Clark
949 South Coast Drive, Suite 650
Costa Mesa, California 92626
HBI Financial Inc.,(4)(5).......................... 1,578,443 51.7%
a Washington corporation
Attn: Irwin Treiger
Bogle & Gates
Two Union Square
601 Union Street, Suite 4700
Seattle, Washington 98101
Enterprise Partners III, L.P.,(6).................. 322,347 10.6%
a Delaware limited partnership
Attn: Charles D. Martin
5000 Birch Street, Suite 6200
Newport Beach, California 92660
Enterprise Partners IV, L.P.,(4)(7)................ 177,666 5.8%
a Delaware limited Partnership
Attn: Charles D. Martin
5000 Birch Street, Suite 6200
Newport Beach, California 92660
George L. Argyros(8)............................... 2,173,984 71.2%
Benjamin L. Doskocil, Sr.(9)....................... 332,755 10.9%
John W. Clark(10).................................. 595,541 19.5%
Charles D. Martin(11).............................. 1,139,036 37.3%
Larry E. Rembold................................... -- --
Michael P. Hoopis.................................. -- --
Gary E. Kleinjan................................... -- --
Donald J. Fritschen................................ -- --
Michael J. Farmer(12).............................. 11,663 *
Garland W. Strong.................................. -- --
William C. Bowie, Jr............................... -- --
Bruce M. Schafer(13)............................... 1,004 *
C. Raymond Thomas.................................. -- --
All directors and executive officers
as a group (10 persons)(8)(9)(10)(11)(12)(13)(14). 3,062,901 99.9%
</TABLE>
- -----------------
* Less than 1%.
(1) Percentage of ownership is based on 3,053,640 shares of Doskocil Common
Stock outstanding as of December 31, 1997. The number of shares of
Doskocil Common Stock beneficially owned and calculation of percentage
ownership, in each case, takes into account those shares underlying stock
options that are exercisable within 60 days after December 31, 1997.
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(2) Shares held of record by Westar Capital II, LLC, a Delaware limited
liability company ("Westar LLC"). The members of Westar LLC are George L.
Argyros, Sr. and Westar Capital Associates II, LLC, a Delaware limited
liability company ("WCALLC"). The members of WCALLC are, among others,
Mr. Argyros, John W. Clark and Charles D. Martin. Messrs. Argyros, Clark
and Martin may be deemed to have shared voting or dispositive power with
respect to the shares held by Westar LLC. Messrs. Argyros, Clark and
Martin disclaim beneficial ownership of shares held by Westar LLC except
to the extent of their interests described above.
(3) Shares held of record by Westar Capital, L.P., a California limited
partnership ("Westar LP"). The sole general partner of Westar LP is
Westar Capital Associates, a California limited partnership ("WCALP"), of
which, among others, GLA Financial Corporation, a California corporation
("GLA"), Messrs. Clark and Martin are general partners. Mr. Argyros is
the sole shareholder of GLA Financial and a limited partner of Westar LP
and WCALP. GLA and Messrs. Argyros, Clark and Martin may be deemed to
have shared voting or dispositive power with respect to the shares held
by Westar LP. GLA and Messrs. Argyros, Clark and Martin disclaim
beneficial ownership of shares held by Westar LP except to the extent of
their interests described above.
(4) Prior to consummation of the Transactions, Aurelio F. Barreto, III (co-
founder and former Chief Executive Officer of Dogloo) Dogloo and
Doskocil, granted to Westar, or its designees, the right to purchase any
or all of the shares of Doskocil Common Stock that Mr. Barreto would own
upon completion of the Merger. Westar exercised this right on September
24, 1997, designating HBI, EPIV and EPIVA (each as defined above) as its
designees. On that same date, all of Mr Barreto's shares of Doskocil
Common Stock were purchased by HBI, EPIV and EPIVA (303,116, 61,028 and
5,986 shares of Doskocil Common Stock, respectively).
(5) Shares held of record by HBI, of which Mr. Argyros is the sole
shareholder.
(6) Shares held of record by EPIII (as defined above). The sole general
partner of EPIII is Enterprise Management Partners III, L.P., a Delaware
limited partnership ("EMPIII"), of which, among others, Charles D.
Martin, is a general partner. Shares exclude: (i) 28,033 shares of
Doskocil Common Stock held by EPIIIA (approximately 0.9%) of which EMPIII
is the sole general partner; (ii) 177,666 shares of Doskocil Common Stock
held by EPIV (approximately 5.8%) of which Enterprise Management Partners
IV, L.P., a Delaware limited partnership ("EMPIV"), is the sole general
partner; Mr. Martin, among others, is the general partner of EMPIV; and
(iii) 15,449 shares of Doskocil Common Stock held by EPIVA (approximately
0.5%) of which EMPIV is the sole general partner. Mr. Martin may be
deemed to have shared voting or dispositive power with respect to the
shares described above. Mr. Martin disclaims beneficial ownership of such
shares except to the extent of his interests described above.
(7) Shares held of record by EPIV (as defined above). The sole general
partner of EPIV is Enterprise Management Partners IV, L.P., a Delaware
limited partnership ("EMPIV"), of which, among others, Charles D. Martin,
is a general partner. Shares exclude: (i) 322,347 shares of Doskocil
Common Stock held by EPIII (approximately 10.5%) of which EMPIII is the
sole general partner; (ii) 28,033 shares of Doskocil Common Stock held by
EPIIIA (approximately 0.9%) of which EMPIII is the sole general partner;
and (iii) 15,499 shares of Doskocil Common Stock held by EPIVA
(approximately 0.5%) of which EMPIV is the sole general partner. Mr.
Martin may be deemed to have shared voting or dispositive power with
respect to the shares described above. Mr. Martin disclaims beneficial
ownership of such shares except to the extent of his interests described
above.
(8) Consists of 434,333 shares of Doskocil Common Stock held by Westar LLC,
161,208 shares held by Westar LP and 1,578,443 shares held by HBI. Mr.
Argyros disclaims beneficial ownership of the shares held by Westar LLC,
Westar LP and HBI, except to the extent of his ownership interests in
Westar LLC, Westar LP and HBI described above.
(9) Consists of 331,363 shares of Doskocil Common Stock held in the name of
Benjamin L. Doskocil, Sr. and 1,392 shares of Common Stock held in the
name of Mary Frances Doskocil, Mr. Doskocil's spouse.
(10) Consists of 434,333 shares of Doskocil Common Stock held by Westar LLC of
which WCALLC is a member, and 161,208 shares held by Westar LP of which
WCALP is the sole general partner. Mr. Clark disclaims beneficial
ownership of the shares held by Westar LLC and Westar LP, except to the
extent of his ownership interests therein as described above.
(11) Consists of 434,333 shares of Doskocil Common Stock held by Westar LLC of
which WCALLC is a member, 161,208 shares held by Westar LP of which WCALP
is the sole general partner, 322,347 shares held by EPIII, 28,033 shares
held by EPIIIA, 177,666 shares held by EPIV and 15,449 shares held by
EPIVA. Mr. Martin disclaims beneficial ownership of the shares held by
Westar Capital, EPIII, EPIIIA, EPIV and EPIVA except to the extent of his
interests described above.
(12) Includes approximately 9,253 shares of Doskocil Common Stock issuable
pursuant to options held by Mr. Farmer exercisable within 60 days of
December 31, 1997.
(13) Includes approximately 1,004 shares of Doskocil Common Stock issuable
pursuant to options held by Mr. Schafer exercisable within 60 days of
December 31, 1997.
(14) Includes approximately 10,257 shares of Doskocil Common Stock issuable
pursuant to options held by Mr. Farmer and Mr. Schafer exercisable within
60 days of December 31, 1997.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 15,000,000 shares of
Doskocil Common Stock and 25,000,000 shares of Doskocil Preferred Stock. The
Company has 3,064,384 outstanding shares of Doskocil Common Stock and
9,161,567 outstanding shares of Doskocil Series C Preferred Stock.
COMMON STOCK
Holders of shares of Doskocil Common Stock are entitled to one vote per
share on all matters to be voted on by shareholders. The holders of shares of
Doskocil Common Stock are entitled to receive such dividends, if any, as may
be declared from time to time by the board of directors in its discretion from
funds legally available therefor, and upon liquidation or dissolution are
entitled to receive all assets available for distribution to the shareholders.
Holders of Doskocil Common Stock have no preemptive or other subscription
rights, except those provided for in the Second Securityholders Agreement (see
"Management--Employment and Other Arrangements") and there are no conversion
rights or redemption or sinking fund provisions with respect to such shares.
All of the outstanding shares of Doskocil Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Company's board of directors will have the authority, without further
action by the stockholders, to issue up to a total of 25,000,000 shares of
Doskocil Preferred Stock in one or more additional series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designations of such series.
Doskocil's Series C Preferred Stock accumulates dividends at the rate of
$0.10 per share per annum, payable on March 1 of each year, subject to the
availability of funds and the terms of the Company's loan agreements.
Dividends are cumulative and accrue on each outstanding share of Doskocil
Series C Preferred Stock whether or not earned or declared. Doskocil Series C
Preferred Stock has a redemption price of $1.00 per share, plus all accrued
but unpaid dividends, and must be redeemed if the Company effects a business
combination with another entity (by way of merger, consolidation or
reorganization) or an initial underwritten public offering. Shares of Doskocil
Series C Preferred Stock may also be redeemed by voluntary repurchase. Holders
of Doskocil Series C Preferred Stock have a liquidation preference equal to
the redemption price. Doskocil Series C Preferred Stock has no voting rights,
except for such rights as are provided under applicable law and class voting
rights with respect to transactions adversely affecting the rights,
preferences, privileges or restrictions of Doskocil Series C Preferred Stock
or the issuance of any equity security having a preference over, or being on
parity with, Doskocil Series C Preferred Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 1, 1997, as part of the Recapitalization, Doskocil purchased
5,666,145 shares of Doskocil Common Stock from Mr. Benjamin L. Doskocil, Sr.
and his spouse, Doskocil's sole shareholders at the time, for approximately
$87.4 million.
In connection with the Recapitalization, Doskocil entered into twelve long-
term real property lease agreements with Mr. Doskocil and/or entities owned by
him (the "Lessors") pursuant to which Doskocil leases, and following
consummation of the Transactions, the Company will lease, substantially all of
its Arlington, Texas facilities. The Lessors leased these facilities to
Doskocil prior to the Recapitalization pursuant to agreements which provided
for aggregate lease payments in 1996 of approximately $285,000 per month. The
total payments to the Lessors by the Company under the current lease
agreements is approximately $284,000 per month. In July 2002, the base rent
for each of these leases is scheduled to increase by ten percent (10%). Each
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of the leases has an initial ten-year term, which may be renewed by the
Company (subject to certain conditions) for up to an additional 15 years. The
base rent for the renewal terms is the greater of (i) the fair market value,
or (ii) one hundred and ten percent (110%) of the existing base rent, but in
no event greater than one hundred and twenty-five percent (125%) of the then
existing base rent. Certain of the leases grant to the Company the option to
elect to purchase all of Lessors' interest in the Arlington facilities,
including without limitation, the buildings, parking lots, fixtures and
improvements constructed on the land, and all of Lessors' equipment,
machinery, furniture, used in connection with the operation of such property.
In connection with such leases, the Company may also elect to purchase any or
all vacant or undeveloped land that is contiguous to such property.
As part of the Recapitalization, Doskocil paid $380,000 plus expenses to
EMPC as a financing fee.
Prior to the Recapitalization, Doskocil made advances to fund the annual
premiums on a life insurance policy on Mr. Doskocil. The policy is owned by a
trust. As collateral for these advances, the trust assigned the premium
receivable rights in the cash value and death proceeds of the policy to
Doskocil. The advances for premiums receivable were approximately $764,000 and
$825,000 at December 30, 1995 and December 28, 1996, respectively. In
connection with the Recapitalization, Doskocil distributed in the form of a
dividend assets of approximately $1.2 million, which included this insurance
trust receivable, the cash surrender value of the life insurance policies on
Mr. Doskocil, and property and equipment. See "The Doskocil Recapitalization"
and "Management."
During the six-month period ended June 30, 1997, Doskocil made cash
distributions of approximately $1.0 million, to Mr. Doskocil and his spouse.
Pursuant to an agreement dated May 27, 1997, by and among Aurelio F.
Barreto, III, Dogloo, Westar, EPIII, EPIIIA and HBI, the parties agreed, among
other things, to the following: (i) Dogloo's payment of a $4,615 weekly salary
to Mr. Barreto from May 27, 1997 until September 30, 1998; (ii) Dogloo's
payment of a $1,195 monthly amount to Mr. Barreto from May 27, 1997 until
September 30, 1998; and (iii) Dogloo's redemption of the 6,890,000 shares of
Dogloo Series A Preferred Stock owned by Mr. Barreto upon certain specified
triggering events. Pursuant to a Stock Redemption Agreement, dated September
11, 1997, among Mr. Barreto, Doskocil and Westar, Mr. Barreto agreed that his
rights to payments under the above agreement terminate in the event that
Westar, or its designees, purchase all of the shares of Doskocil Common Stock
that Mr. Barreto acquired upon completion of the Merger provided that such
purchase occurs on the earlier of (i) 15 business days after the Merger is
effective or (ii) October 31, 1997. Westar exercised this right on September
24, 1997, designating HBI, EPIV and EPIVA as its designees. On that same date,
all of Mr. Barreto's shares of Doskocil Common Stock were purchased by HBI,
EPIV and EPIVA (303,116, 61,028 and 5,986 shares of Doskocil Common Stock,
respectively).
In September 1995, Mr. Barreto exchanged 13,291,889 shares of Dogloo Common
Stock for cash of approximately $4.5 million, 8,268,000 shares of Dogloo
Series A Preferred Stock and 2,141,280 shares of Dogloo Series B Preferred
Stock as part of a recapitalization of Dogloo. In connection with the
recapitalization of Dogloo, Westar made loans to Dogloo for an aggregate of
$5.0 million, bearing interest at 10.25%. These loans were repaid, in part, at
time of the closing of the Dogloo recapitalization. As of August 31, 1997,
$732,000 of such loans remained outstanding. The outstanding amount will be
repaid as part of the Transactions.
From July 1991 to February 1996, Dogloo leased a facility from Mr. Barreto
and the other then principal stockholder of Dogloo. The monthly lease payments
for this facility were approximately $10,000.
Dogloo agreed to pay a $450,000 transaction advisory fee to Westar as part
of the 1995 Dogloo recapitalization transaction. In addition, at that time
Dogloo agreed to pay fees for financial management and strategic advisory
services provided to Dogloo. Pursuant to the agreement, Dogloo paid fees to
Westar of approximately $200,000 and $50,000 in 1996 and 1995, respectively.
Fees paid during the eight-month period ended August 31, 1997 pursuant to this
agreement were approximately $200,000. The agreement may be terminated at any
time by either party, with or without cause.
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Pursuant to the terms of the Second Securityholders Agreement, Westar is
permitted to charge the Company a monthly advisory fee of $50,000. This fee
may be modified from time to time by the Company's board of directors.
During 1995, Doskocil advanced approximately $4.4 million to Marybe, Ltd.,
an entity owned directly and indirectly by Mr. Doskocil and his spouse. The
unpaid balance of such advances at December 28, 1996 was approximately
$427,000, which was paid in full during the six-month period ended June 30,
1997.
During 1994 and 1996, Doskocil expensed approximately $4.4 million and $2.0
million, respectively, in officer's bonus to Mr. Doskocil. A portion of these
officer's bonuses were intended to compensate Mr. Doskocil and his spouse for
their personal tax liability associated with taxable income arising from
Doskocil's Subchapter S earnings. The $1.5 million payable at December 28,
1996 was paid in full during 1997. No such bonuses were declared or paid for
the six-month period ended June 30, 1997. See "Doskocil Selected Historical
Financial Data."
Concurrent with the Merger, the Company used proceeds from the Offering and
the New Credit Facility to pay accrued dividends on shares of Doskocil
Preferred Stock and to redeem certain shares of Doskocil Common Stock and
Doskocil Preferred Stock. See "The Merger."
DESCRIPTION OF NEW CREDIT FACILITY
General. Concurrent with the consummation of the Merger, the Company entered
into the New Credit Facility with NationsBank of Texas, as administrative
agent (the "Agent"), NationsBanc Capital Markets, Inc. ("NationsBanc") and
Donaldson Lufkin & Jenrette Securities Corporation ("DLJ"), as arrangers and
syndication agents, and other lending institutions party thereto (the
"Lenders"), which agreement provides for an aggregate principal amount of
loans of up to $110 million. Loans under the New Credit Facility consist of
$82.5 million in aggregate principal amount of term loans (the "Term Loan
Facility"), which facility includes a $45 million tranche A term loan
subfacility and a $37.5 million tranche B term loan subfacility, and a
$27.5 million revolving credit facility (the "Revolving Credit Facility"),
which facility includes a subfacility for swingline borrowings and a sublimit
for letters of credit. The Company used the Term Loan Facility and a portion
of the Revolving Credit Facility to provide a portion of the funds necessary
to consummate the Transactions. See "Use of Proceeds." This summary of the New
Credit Facility is qualified in its entirety by reference to the complete text
of the documents entered into in connection therewith. The following is a
description of the general terms of the New Credit Facility.
Security. Indebtedness of the Company under the New Credit Facility is
guaranteed by each of Doskocil's domestic subsidiaries (direct or indirect),
hereafter acquired, and is secured by: (i) a first priority security interest
in substantially all of the assets and properties (including, without
limitation, accounts receivable, inventory, real property, machinery,
equipment, contracts and contract rights, trademarks, copyrights, patents,
license agreements and general intangibles) of the Company and each of its
domestic subsidiaries (direct or indirect) hereafter acquired; (ii) a first
priority perfected pledge of all capital stock of each of Doskocil's domestic
subsidiaries (direct or indirect) hereafter acquired; and (iii) a first
priority perfected pledge of 65% of the capital stock of foreign subsidiaries
of Doskocil or any of its domestic subsidiaries.
Interest. Indebtedness under the New Credit Facility bears interest at a
floating rate. Indebtedness under the Term Loan Facility and the Revolving
Credit Facility initially bears interest at a rate based (at the Company's
option) upon (i) LIBOR for one, two, three or six months, plus 2.25% with
respect to the Tranche A Term Loan Facility and the Revolving Credit Facility
or plus 2.75% with respect to the Tranche B Term Loan Facility, or (ii) the
Alternate Base Rate (as defined in the New Credit Facility) plus .75% with
respect to the Tranche A Term Loan Facility and the Revolving Credit Facility
or plus 1.25% with respect to the Tranche B Term Loan Facility; provided,
however, the interest rates are subject to several quarter point reductions in
the event the Company meets certain performance targets.
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Maturity. The Tranche B Term Loan Facility matures on the seventh
anniversary of the closing under the New Credit Facility. The Tranche A Term
Loan Facility and the Revolving Credit Facility mature on the sixth
anniversary of the closing under the New Credit Facility. The Term Loan shall
be subject to repayment according to quarterly amortization of principal based
upon the Scheduled Amortization (as defined in the New Credit Facility).
Prepayments. The New Credit Facility provides for mandatory prepayments 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 New Credit Facility. The mandatory prepayments defined in the New 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
exceptions, and reinvestment provisions and 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) 100% of the net cash proceeds from the
issuance of debt (excluding certain debt proceeds) by the Company, or any
subsidiary; and (d) 50% 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 New Credit Facility in
whole or in part at any time without penalty, subject to reimbursement of
certain costs or the Lenders.
Fees. 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 Company also is required to pay to the Lenders participating in
the Revolving Credit Facility letter of credit fees, due quarterly in arrears,
equal to the applicable margin over LIBOR for loans under the Revolving Credit
Facility, plus a facing fee of 1/4% per annum to be paid to the issuing bank
for its own account. Fees will be calculated on the aggregate stated amount
for each letter of credit for the stated duration thereof.
Covenants. The New Credit Facility requires the Company to meet certain
financial tests, including a minimum fixed charge coverage ratio, minimum
interest coverage ratio and maximum leverage ratio. The New Credit Facility
also contains covenants which include, without limitation (i) delivery of
financial statements and other reports; (ii) delivery of compliance and
borrowing base certificates; (iii) notices of default, material litigation and
material governmental and environmental proceedings; (iv) compliance with
laws; (v) payment of taxes; (vi) maintenance of insurance; (vii) limitation on
liens; (viii) limitations on mergers, consolidations and sales of assets; (ix)
limitations on incurrence of debt; (x) limitations on dividends and stock
redemptions and the redemption and/or prepayment of other debt; (xi)
limitations on investments; (xii) ERISA (as defined) matters;
(xiii) limitation on transactions with affiliates; and (xiv) limitation on
capital expenditures.
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DESCRIPTION OF THE NOTES
GENERAL
Set forth below is a summary of certain provisions of the Notes. The Old
Notes are, and the New Notes will be, issued pursuant to an indenture (the
"Indenture") dated as of September 19, 1997, by and between the Company and
First Trust National Association, as trustee (the "Trustee"), a copy of which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. The following summarizes all material provisions of the
Indenture and the Registration Rights Agreement only, does not purport to be
complete and is qualified in its entirety by reference to all of the
provisions of the Indenture and the Registration Rights Agreement. Capitalized
terms used herein and not otherwise defined shall have the meanings assigned
to them in the Indenture and the Registration Rights Agreement, as
appropriate. Wherever particular provisions of the Indenture or the
Registration Rights Agreement are referred to in this summary, such provisions
are incorporated by reference as a part of the statements made and such
statements are qualified in their entirety by such reference. The form and
terms of the New Notes will be the same as those of the Old Notes except that
the New Notes will have been registered under the Securities Act, and
consequently will not be subject to certain transfer restrictions,
registration rights and related Liquidated Damages provisions applicable to
the Old Notes. See "--Registration Rights; Liquidated Damages" below.
The Old Notes are, and the New Notes will be, senior subordinated,
unsecured, general obligations of the Company, limited in aggregate principal
amount to $85.0 million. The Notes are subordinate in right of payment to
certain other debt obligations of the Company. The Notes will be jointly and
severally irrevocably and unconditionally guaranteed on a senior subordinated
basis by each of the Company's future Subsidiaries other than any Receivables
Subsidiaries or any Foreign Subsidiaries (the "Guarantors"). The obligations
of each Guarantor under its guarantee, however, will be limited in a manner
intended to avoid it being deemed a fraudulent conveyance under applicable
law. See "Certain Bankruptcy Limitations" below. The term "Subsidiaries" as
used herein, however, does not include Unrestricted Subsidiaries. As of the
date of this Prospectus, the Company has no Subsidiaries. The Notes will be
issued only in fully registered form, without coupons, in denominations of
$l,000 and integral multiples thereof.
PRINCIPAL, MATURITY AND INTEREST
The Notes mature on September 15, 2007. The Notes bear interest at the rate
per annum stated on the cover page hereof from the date of issuance or from
the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually on March 15 and September 15 of each year,
commencing on March 15, 1998, to the persons in whose names such Notes are
registered at the close of business on the March 1 or September 1 immediately
preceding such Interest Payment Date. Interest is calculated on the basis of a
360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest and Liquidated Damages, if any,
on the Notes will be payable, and the Notes may be presented for registration
of transfer or exchange, at the office or agency of the Company maintained for
such purpose, which office or agency shall be maintained in the Borough of
Manhattan, The City of New York, except as set forth below. At the option of
the Company, but subject (as applicable) to the procedures of the DTC as
described in "Book-Entry, Delivery and Form," payment of interest may be made
by check mailed to the Holders of the Notes at the addresses set forth upon
the registry books of the Company. No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Until otherwise designated by the Company,
the Company's office or agency is the corporate trust office of the Trustee
presently located at the office of the Trustee in the Borough of Manhattan,
The City of New York.
SUBORDINATION
The Notes and the Guarantees are general, unsecured obligations of the
Company and the Guarantors, respectively, subordinated in right of payment to
all Senior Debt of the Company and the Guarantors, as applicable. As of June
30, 1997, on a pro forma basis after giving effect to the Transactions, the
Company would
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have had approximately $80.0 million of outstanding Senior Debt, all of which
would have been secured debt outstanding under the New Credit Facility.
The Indenture provides that no payment (by set-off or otherwise) may be made
by or on behalf of the Company or a Guarantor, as applicable, on account of
the principal of, premium, if any, or interest or Liquidated Damages on the
Notes (including any repurchases of Notes), or on account of any other
obligation for the payment of money due in respect of the Notes, or on account
of the redemption provisions of the Notes, for cash or property (other than
Junior Securities issued in connection with a reorganization pursuant to the
bankruptcy laws of any jurisdiction), (i) upon the maturity of any Senior Debt
of the Company or such Guarantor by lapse of time, acceleration (unless
waived) or otherwise, unless and until all principal of, premium, if any, and
the interest (and with respect to the New Credit Facility, any other
obligations) on such Senior Debt are first paid in full in cash or Cash
Equivalents (or, with respect to Senior Debt other than the New Credit
Facility, such payment is duly provided for) or otherwise to the extent
holders accept satisfaction of amounts due by settlement in other than cash or
Cash Equivalents, or (ii) in the event of default in the payment of any
principal of, premium, if any, or interest on Senior Debt of the Company or
such Guarantor when it becomes due and payable, whether at maturity, a
scheduled payment date, or at a date fixed for prepayment or by declaration or
otherwise (a "Payment Default"), unless and until such Payment Default has
been cured or waived or otherwise has ceased to exist.
Upon (i) the happening of an event of default (other than a Payment Default)
that permits the holders of Senior Debt (or a trustee or agent on behalf of
such holders) to declare such Senior Debt to be due and payable and (ii)
written notice of such event of default given to the Trustee by the holders
(or a trustee, agent or other representative of such holders) of Designated
Senior Debt (a "Payment Notice"), then, unless and until such event of default
has been cured or waived or otherwise has ceased to exist, no payment (by set-
off or otherwise) may be made by or on behalf of the Company or any Guarantor
which is an obligor under such Senior Debt on account of the principal of,
premium, if any, or interest or Liquidated Damages on the Notes (including any
repurchases of any of the Notes), or on account of any other obligation for
the payment of money due in respect of the Notes, or on account of the
redemption provisions of the Notes, in any such case, other than payments made
with Junior Securities issued in connection with a reorganization pursuant to
the bankruptcy laws of any jurisdiction. Notwithstanding the foregoing, unless
the Senior Debt in respect of which such event of default exists has been
declared due and payable in its entirety within 179 days after the Payment
Notice is delivered as set forth above (the "Payment Blockage Period") (and
such declaration has not been rescinded or waived), at the end of the Payment
Blockage Period, the Company and the Guarantors shall be required, unless the
provisions described in the immediately preceding paragraph are then
applicable, to pay all sums not paid to the Holders of the Notes during the
Payment Blockage Period due to the foregoing prohibitions and to resume all
other payments as and when due on the Notes. Any number of Payment Notices may
be given; provided, however, that (i) not more than one Payment Notice shall
be given within a period of any 360 consecutive days, and (ii) no default that
existed upon the date of such Payment Notice or the commencement of such
Payment Blockage Period (whether or not such event of default relates to the
same issue of Senior Debt) shall be made the basis for the commencement of any
other Payment Blockage Period (it being acknowledged that any subsequent
action, or any breach of any financial covenant for a period commencing after
the expiration of such Payment Blockage Period that, in either case, would
give rise to a new event of default, even though it is a breach pursuant to
any provision under which a prior event of default previously existed, shall
constitute a new event of default for this purpose).
Upon any distribution of assets of the Company or any Guarantor upon any
dissolution, winding up, total or partial liquidation or reorganization of the
Company or a Guarantor, whether voluntary or involuntary, in bankruptcy,
insolvency, receivership or a similar proceeding or upon assignment for the
benefit of creditors or any marshalling of assets or liabilities, (i) the
holders of all Senior Debt of the Company or such Guarantor, as applicable,
will first be entitled to receive payment in full in cash or Cash Equivalents
(or, with respect to Senior Debt other than the New Credit Facility, to have
such payment duly provided for) or, with respect to any holder, otherwise to
the extent such holder expressly acknowledges satisfaction of amounts due by
settlement in other than cash or Cash Equivalents (it being acknowledged that
approval of a plan of reorganization in a bankruptcy
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proceeding shall not constitute satisfaction of amounts due in settlement),
before the Holders are entitled to receive any payment on account of principal
of, premium, if any, and interest and Liquidated Damages on the Notes, or on
account of any other obligation for the payment of money due in respect of the
Notes (other than Junior Securities issued in connection with a reorganization
pursuant to the bankruptcy laws of any jurisdiction) and (ii) any payment or
distribution of assets of the Company or such Guarantor of any kind or
character from any source, whether in cash, property or securities (other than
Junior Securities issued in connection with a reorganization pursuant to the
bankruptcy laws of any jurisdiction) to which the Holders or the Trustee on
behalf of the Holders would be entitled (by set-off or otherwise), except for
the subordination provisions contained in the Indenture, will be paid by the
liquidating trustee or agent or other person making such a payment or
distribution directly to the holders of such Senior Debt or their
representative to the extent necessary to make payment in full on all such
Senior Debt remaining unpaid, after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Guarantor (other than Junior
Securities issued in connection with a reorganization pursuant to the
bankruptcy laws of any jurisdiction) shall be received by the Trustee or the
Holders at a time when such payment or distribution is prohibited by the
foregoing provisions, such payment or distribution shall be held in trust for
the benefit of the holders of such Senior Debt, and shall be paid or delivered
by the Trustee or such Holders, as the case may be, to the holders of such
Senior Debt remaining unpaid (or, with respect to Senior Debt other than the
New Credit Facility, unprovided for) or to their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Debt may have been issued,
ratably according to the aggregate principal amounts remaining unpaid on
account of such Senior Debt held or represented by each, for application to
the payment of all such Senior Debt remaining unpaid, to the extent necessary
to pay (or, with respect to Senior Debt other than the New Credit Facility, to
provide for the payment of) all such Senior Debt in full, or otherwise to the
extent holders expressly acknowledge satisfaction of amounts due after giving
effect to any concurrent payment or distribution to the holders of such Senior
Debt.
No provision contained in the Indenture or the Notes affects the obligation
of the Company and the Guarantors, which is absolute and unconditional, to
pay, when due, principal of, premium, if any, and interest and Liquidated
Damages, if any, on the Notes. The subordination provisions of the Indenture
and the Notes do not prevent the occurrence of any Default or Event of Default
under the Indenture or limit the rights of the Trustee or any Holder to pursue
any other rights or remedies with respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or
any Guarantor or a marshalling of assets or liabilities of the Company or any
Guarantor, holders of the Notes may receive ratably less than other creditors.
In the event of any liquidation or reorganization of the Company or any
Guarantor in bankruptcy, insolvency, receivership or similar proceeding, if
the Holders of the Notes (or the Trustee on their behalf) have not filed any
claim, proof of claim, or other instrument of similar character necessary to
enforce the obligations of the Company or any Guarantor in respect of the
Notes at least thirty (30) days before the expiration of the time to file the
same, then in such event, but only in such event, the holders of the
Designated Senior Debt or a representative on their behalf may, as an
attorney-in-fact for such Holders, file any claim, proof of claim, or other
instrument of similar character on behalf of such Holders.
The subordination provisions of the Indenture shall continue to be effective
or be reinstated, as the case may be, if at any time any payment of any of the
Senior Debt is rescinded or must otherwise be returned by any holder of the
Senior Debt upon the insolvency, bankruptcy, or reorganization of the Company,
any Guarantor, or otherwise, all as though such payment has not been made.
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CERTAIN BANKRUPTCY LIMITATIONS
The Company's future Subsidiaries (other than any Receivables Subsidiaries
or any Foreign Subsidiaries) will guarantee the Company's obligations with
respect to the Notes, as provided under "Future Subsidiary Guarantors" below.
Holders of the Notes will be direct creditors of each Guarantor by virtue of
its guarantee. Nonetheless, in the event of the bankruptcy or financial
difficulty of a Guarantor, such Guarantor's obligations under its guarantee
may be subject to review and avoidance under state and federal fraudulent
transfer laws. Among other things, such obligations may be avoided if a court
concludes that such obligations were incurred for less than reasonably
equivalent value or fair consideration at a time when the Guarantor was
insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude that a Guarantor did not
receive reasonably equivalent value or fair consideration to the extent that
the aggregate amount of its liability on its guarantee exceeds the economic
benefits it receives in the Offering. The obligations of each Guarantor under
its guarantee will be limited in a manner intended to cause it not to be a
fraudulent conveyance under applicable law, although no assurance can be given
that a court would give the holder the benefit of such provision. See "Risk
Factors--Fraudulent Transfer Considerations."
If the obligations of a Guarantor under its guarantee were avoided, Holders
of Notes would have to look to the assets of any remaining Guarantors for
payment. There can be no assurance in that event that such assets would
suffice to pay the outstanding principal and interest on the Notes.
OPTIONAL REDEMPTION
The Company does not have the right to redeem any Notes prior to September
15, 2002 (other than out of the Net Cash Proceeds of an Initial Public Equity
Offering or upon a Change of Control Redemption Event, as described in the
next two following paragraphs). The Notes will be redeemable for cash at the
option of the Company, in whole or in part, at any time on or after September
15, 2002, upon not less than 30 days nor more than 60 days notice to each
holder of Notes, at the following redemption prices (expressed as percentages
of the principal amount) if redeemed during the 12-month period commencing
September 15 of the years indicated below, in each case (subject to the right
of Holders of record on a Record Date to receive interest due on an Interest
Payment Date that is on or prior to such Redemption Date) together with
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.............................. 105.063%
2003.............................. 103.375%
2004.............................. 101.688%
2005 and thereafter............... 100.000%
</TABLE>
Until September 15, 2000, upon an Initial Public Equity Offering of common
stock for cash of the Company, up to 35% of the aggregate principal amount of
the Notes originally outstanding may be redeemed at the option of the Company
within 90 days of such Initial Public Equity Offering, on not less than 30
days, but not more than 60 days, notice to each holder of the Notes to be
redeemed, with cash from the Net Cash Proceeds of such Initial Public Equity
Offering, at a redemption price equal to 110 1/8% of principal, (subject to
the right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such Redemption Date) together
with accrued and unpaid interest and Liquidated Damages, if any, to the date
of redemption; provided, however, that at least 65% of the aggregate principal
amount of the Notes originally outstanding remain outstanding immediately
following such redemption.
At any time on or prior to September 15, 2002, the Notes may also be
redeemed in whole (but not in part) at the option of the Company upon the
occurrence of a Change of Control Redemption Event on not less than 15 days,
but not more than 30 days, notice (but in no event shall any such redemption
occur more than 45 Business Days after the occurrence of such Change of
Control Redemption Event) to each Holder of Notes, at a redemption price equal
to 100% of the principal amount thereof, plus the Applicable Premium as of,
and accrued and unpaid interest and Liquidated Damages, if any, to the
Redemption Date (subject to the right of Holders of
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record on a Record Date to receive interest due on an Interest Payment Date
that is on or prior to such Redemption Date).
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption (except for a
redemption of all outstanding Notes in connection with a Change of Control
Redemption Event, in which case notice will be sent within the applicable time
periods referenced above) to the Holder of each Note to be redeemed to such
Holder's last address as then shown upon the registry books of the Registrar.
Any notice which relates to a Note to be redeemed in part only must state the
portion of the principal amount equal to the unredeemed portion thereof and
must state that on and after the date of redemption, upon surrender of such
Note, a new Note or Notes in a principal amount equal to the unredeemed
portion thereof will be issued. On and after the date of redemption, interest
will cease to accrue on the Notes or portions thereof called for redemption,
unless the Company defaults in the payment thereof.
CERTAIN COVENANTS
Repurchase of Notes at the Option of the Holder Upon a Change of Control
The Indenture provides that in the event that a Change of Control has
occurred, if the Company has not first redeemed all of such holder's Notes in
connection with a Change of Control Redemption Event as provided above, each
holder of Notes has the right, at such holder's option, pursuant to an
irrevocable and unconditional offer by the Company (the "Change of Control
Offer"), to require the Company to repurchase all or any part of such holder's
Notes (provided, that the principal amount of such Notes must be $1,000 or an
integral multiple thereof) on a date (the "Change of Control Purchase Date")
that is no later than 45 Business Days after the occurrence of such Change of
Control, at a cash price equal to 101% of the principal amount thereof (the
"Change of Control Purchase Price"), together with accrued and unpaid interest
and Liquidated Damages, if any, to the Change of Control Purchase Date. Except
as provided in the next following paragraph, the Change of Control Offer shall
be made within 20 Business Days following a Change of Control and shall remain
open for 20 Business Days following its commencement (the "Change of Control
Offer Period"). Upon expiration of the Change of Control Offer Period, the
Company promptly shall purchase all Notes properly tendered in response to the
Change of Control Offer.
The Indenture provides that, prior to the commencement of a Change of
Control Offer, but in any event within 30 days following any Change of
Control, the Company will (i)(a) repay in full and terminate all commitments
under Indebtedness under the New Credit Facility and all other Senior Debt the
terms of which require repayment upon a Change of Control or (b) offer to
repay in full and terminate all commitments under all Indebtedness under the
New Credit Facility and all such other Senior Debt and repay the Indebtedness
owed to each lender which has accepted such offer in full or (ii) obtain the
requisite consents under the New Credit Facility and all such other Senior
Debt to permit the repurchase of the Notes as provided herein. The Company's
failure to comply with the preceding sentence shall constitute an Event of
Default described in clause (iv) and not in clause (ii) under "Events of
Default" below.
As used herein, a "Change of Control" means (i) any merger or consolidation
of the Company with or into any person or any sale, transfer or other
conveyance, whether direct or indirect, of all or substantially all of the
assets of the Company, on a consolidated basis, in one transaction or a series
of related transactions, if, immediately after giving effect to such
transaction(s), any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable)
(other than an Excluded Person) is or becomes the "beneficial owner," directly
or indirectly, of more than 50% of the total voting power
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in the aggregate normally entitled to vote in the election of directors,
managers, or trustees, as applicable, of the transferee(s) or surviving entity
or entities, (ii) any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable)
(other than an Excluded Person) is or becomes the "beneficial owner," directly
or indirectly, of more than 50% of the total voting power in the aggregate of
all classes of Capital Stock of the Company then outstanding normally entitled
to vote in elections of directors, or (iii) during any period of 24
consecutive months after the Issue Date, individuals who at the beginning of
any such 24-month period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved
by a vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Purchase Price (together with accrued and unpaid
interest and Liquidated Damages, if any) of all Notes so tendered and (iii)
deliver to the Trustee Notes so accepted together with an Officers'
Certificate listing the Notes or portions thereof being purchased by the
Company. The Paying Agent promptly will pay the Holders of Notes so accepted
an amount equal to the Change of Control Purchase Price (together with accrued
and unpaid interest and Liquidated Damages, if any), and the Trustee promptly
will authenticate and deliver to such Holders a new Note equal in principal
amount to any unpurchased portion of the Note surrendered. Any Notes not so
accepted will be delivered promptly by the Company to the Holder thereof. The
Company publicly will announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Purchase Date.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or
substantially all" of the assets of the Company has occurred. In addition, the
Company's ability to pay such purchase price is, and may in the future be,
limited by the terms of the New Credit Facility or other agreements relating
to indebtedness that constitute Senior Debt. The occurrence of certain of the
events that would constitute a Change of Control would constitute a default
under the New Credit Facility. Moreover, the exercise by the Holders of their
right to require the Company to repurchase the Notes could cause a default
under indebtedness constituting Senior Debt, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the
Company. Also, the Company's ability to pay cash to Holders of Notes upon a
Change of Control may be limited by the Company's then existing financial
resources. No assurances can be given that the Company will be able to acquire
Notes tendered upon the occurrence of a Change of Control.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock
The Indenture provides that, except as set forth in this covenant, the
Company and the Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, issue, assume, guaranty, incur,
become directly or indirectly liable with respect to (including as a result of
an Acquisition), or otherwise become responsible for, contingently or
otherwise (individually and collectively, to "incur" or, as appropriate, an
"incurrence"), any Indebtedness or any Disqualified Capital Stock (including
Acquired Indebtedness) other than Permitted Indebtedness. Notwithstanding the
foregoing, (A) the Company and the Guarantors may incur Indebtedness, (B)
Subsidiaries of the Company that are not Guarantors may incur Indebtedness
that is not subordinated in right of payment to any other Indebtedness, and
(C) the Company may issue Disqualified Capital
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Stock if (i) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect on a pro forma
basis to, such incurrence of Indebtedness or Disqualified Capital Stock and
(ii) on the date of such incurrence (the "Incurrence Date"), the Consolidated
Coverage Ratio of the Company for the Reference Period immediately preceding
the Incurrence Date, after giving effect on a pro forma basis to such
incurrence of Indebtedness or Disqualified Capital Stock and, to the extent
set forth in the definition of Consolidated Coverage Ratio, the use of
proceeds thereof, would be at least 2.0 to l (the "Debt Incurrence Ratio").
In addition, the foregoing limitations will not apply to:
(a) the incurrence by the Company or any Guarantor of Purchase Money
Indebtedness on or after the Issue Date, provided, that (i) the aggregate
principal amount of such Indebtedness incurred on or after the Issue Date
and outstanding at any time pursuant to this paragraph (a) (including any
Indebtedness issued to refinance, replace or refund such Indebtedness)
shall not exceed $10 million, and (ii) in each case, such Indebtedness
shall not constitute more than 100% of the cost (determined in accordance
with GAAP) to the Company or such Guarantor, as applicable, of the property
so purchased or leased;
(b) if no Event of Default shall have occurred and be continuing, the
incurrence by the Company or any Guarantor of Indebtedness in an aggregate
principal amount outstanding at any time (including Indebtedness incurred
to refinance, replace or refund such Indebtedness) of up to $10 million;
and
(c) the incurrence by the Company or any Guarantor of Indebtedness
pursuant to the New Credit Facility up to an aggregate principal amount
outstanding at any time (including any Indebtedness incurred to refinance,
replace or refund such Indebtedness) of $100 million, minus the amount of
any such Indebtedness (i) retired with the Net Cash Proceeds from any Asset
Sale applied to permanently reduce the outstanding amounts or the
commitments with respect to such Indebtedness pursuant to clause (1)(b)(ii)
of the first paragraph of the covenant "Limitation on Sale of Assets and
Subsidiary Stock" or (ii) assumed by a transferee in an Asset Sale.
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes a Subsidiary of the Company
(including upon designation of any subsidiary or other person as a Subsidiary)
or is merged with or into or consolidated with the Company or a Subsidiary of
the Company shall be deemed to have been incurred at the time such Person
becomes such a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company, as applicable.
Limitation on Restricted Payments
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Subsidiaries to, directly or indirectly, make any
Restricted Payment if, after giving effect to such Restricted Payment on a pro
forma basis, (1) a Default or an Event of Default shall have occurred and be
continuing, (2) the Company is not permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio in the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock," or (3) the aggregate amount of all Restricted Payments made by the
Company and its Subsidiaries, including after giving effect to such proposed
Restricted Payment, from and after the Issue Date, would exceed the sum of (a)
50% of the aggregate Consolidated Net Income of the Company for the period
(taken as one accounting period), commencing on the day next following the
Issue Date, to and including the last day of the fiscal quarter ended
immediately prior to the date of each such calculation (or, in the event
Consolidated Net Income for such period is a deficit, then minus 100% of such
deficit), plus (b) the aggregate Net Cash Proceeds received by the Company
from the sale (other than (i) to a Subsidiary of the Company, (ii) to the
extent applied in connection with a Qualified Exchange and (iii) to the extent
added to any amount available for repurchases, loans and advances under clause
(v) of the next following paragraph) after the Issue Date of Qualified Capital
Stock of the Company or debt securities of the Company or any of its
Subsidiaries that have been converted into or exchanged for Qualified Capital
Stock of the Company, plus (c) the amount of any Restricted Investments made
after the Issue Date (other than pursuant to clause (t) of the next following
paragraph) that are returned to the Company or the Subsidiary Guarantor that
made such prior Investment, without restriction, in cash on or prior to the
date of any such calculation.
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The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, do not prohibit (t) Restricted Payments, provided, that, after giving
pro forma effect to any such Restricted Payment, the aggregate amount of all
such Restricted Payments made on or after the Issue Date that are outstanding
at any time does not exceed $4 million, plus the amount of any Restricted
Investments made pursuant to this clause (t) that are returned to the Company
or the Subsidiary Guarantor that made such prior Investment, without
restriction, in cash on or prior to the date of any such calculation, (u) the
defeasance, redemption or repurchase of Subordinated Indebtedness issued after
the Issue Date with the Net Cash Proceeds from an incurrence of Refinancing
Indebtedness permitted under the Indenture, (v)(i) repurchases of Capital
Stock from departing or deceased directors, officers, employees or consultants
(provided that any such consultants are retained pursuant to written
agreements) (or their estates or authorized representatives) of the Company or
any of the Guarantors and (ii) loans and advances to employees and officers of
the Company or any Guarantors in the ordinary course of business for bona fide
business purposes, such (i) and (ii) in the aggregate not to exceed in any
fiscal year $1,000,000 (net of any repayments of principal during any such
year in respect of such loans and advances described in clause (ii)), plus (A)
the cumulative amount by which (1) the product of $1,000,000 times the number
of preceding fiscal years subsequent to the Issue Date exceeds (2) the amount
of all such payments, repurchases, loans or advances (in the case of such
loans and advances, net of principal repayments) made during such fiscal
years, plus (B) the aggregate Net Cash Proceeds received by the Company, after
the Issue Date and on or prior to the date of such repurchase, from the sale
or issuance of Qualified Capital Stock of the Company to directors, officers,
employees and consultants (provided that any such consultants are retained
pursuant to written agreements) of the Company and the Guarantors (including,
to the extent not otherwise included in the amount of such cash consideration,
cash repayments of principal received by the Company on loans made to such
persons to enable them to purchase such stock) to the extent such Net Cash
Proceeds were contributed, or are concurrently with such dividend contributed
to the capital surplus of the Company (provided that the net amount of all
such payments, repurchases, loans and advances (in the case of such loans and
advances, net of principal repayments and, in the case of such repurchases,
net of the Net Cash Proceeds received in respect of the sale of Qualified
Capital Stock of the Company) made under this clause (v) shall not exceed $7.5
million), and (w) payments for the purpose of and in an amount equal to the
amount required to redeem or repurchase Capital Stock of the Company from
certain stockholders of the Company as required pursuant to the Second
Securityholders Agreement in an aggregate amount not to exceed $250,000, and
the provisions of the foregoing paragraph will not prohibit (x) the
acquisition by a Receivables Subsidiary in connection with a Qualified
Receivables Transaction of Equity Interests of a trust or other person
established by such Receivables Subsidiary to effect such Qualified
Receivables Transaction, (y) a Qualified Exchange, or (z) the payment of any
dividend on Qualified Capital Stock within 60 days after the date of its
declaration if such dividend could have been made on the date of such
declaration in compliance with the foregoing provisions. The full amount of
any Restricted Payment made pursuant to the foregoing clauses (v), (w) and (z)
(but not pursuant to clause (t), clause (u), clause (x) or clause (y)) of the
immediately preceding sentence, however, will be deducted in the calculation
of the aggregate amount of Restricted Payments available to be made referred
to in clause (3) of the immediately preceding paragraph.
For purposes of this covenant, the amount of any Restricted Payment, if
other than in cash, shall be the fair market value thereof, as determined in
the good faith reasonable judgment of the Board of Directors of the Company.
Additionally, within 30 days of each Restricted Payment, the Company shall
deliver an Officers' Certificate to the Trustee describing in reasonable
detail the nature of such Restricted Payment, stating the amount of such
Restricted Payment, stating in reasonable detail the provisions of the
Indenture pursuant to which such Restricted Payment was made and certifying
that such Restricted Payment was made in compliance with the Indenture.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Subsidiaries to, directly or indirectly, create,
assume or suffer to exist any consensual restriction on the ability of any
Subsidiary of the Company to pay dividends or make other distributions to or
on behalf of, or to pay any
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obligation to or on behalf of, or otherwise to transfer assets or property to
or on behalf of, or make or pay loans or advances to or on behalf of, the
Company or any Subsidiary of the Company, except (a) restrictions imposed by
the Notes or the Indenture, or by indentures governing other Indebtedness of
the Company (and if such Indebtedness is guaranteed, by the guarantors
thereof) ranking on a parity with the Notes (or the Guarantees, if
applicable), provided that the restrictions imposed by such indentures are no
more restrictive than the restrictions imposed by the Indenture, (b)
restrictions imposed by applicable law, (c) existing restrictions under
Indebtedness outstanding on the Issue Date after giving effect to the
Transactions, including, without limitation, the New Credit Facility, to the
extent and in the manner such restrictions are in effect on the Issue Date,
(d) restrictions under any Acquired Indebtedness not incurred in violation of
the Indenture or any agreement relating to any property, asset, or business
acquired by the Company or any of its Subsidiaries, which restrictions in each
case existed at the time of acquisition, were not put in place in connection
with or in anticipation of such acquisition and are not applicable to any
person, other than the person acquired, or to any property, asset or business,
other than the property, assets and business so acquired, (e) any such
restriction or requirement imposed by Indebtedness incurred under clause (c)
of the second paragraph of the covenant "Limitation on Incurrence of
Indebtedness and Disqualified Capital Stock," provided that such restriction
or requirement is no more restrictive than that imposed by the New Credit
Facility as of the Issue Date, (f) restrictions with respect solely to the
Company or a Subsidiary of the Company imposed pursuant to a binding agreement
which has been entered into for the sale or disposition of the Equity
Interests or assets of such person permitted pursuant to the Indenture,
provided that such restrictions apply solely to the Equity Interests or assets
of such person which are being sold, (g) restrictions on transfer contained in
Purchase Money Indebtedness incurred pursuant to clause (a) of the second
paragraph of the covenant "Limitation on Incurrence of Indebtedness and
Disqualified Capital Stock," provided that such restrictions relate only to
the transfer of the property acquired with the proceeds of such Purchase Money
Indebtedness, (h) restrictions on transfer relating to the financing or
acquisition of real property and related personal property that relate only to
such property, and arise pursuant to a transaction otherwise permitted under
the Indenture, (i) any restriction or requirement imposed by Indebtedness
incurred under clause (B) of the first paragraph of the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock,"
provided that such restrictions and requirements apply only to Subsidiaries of
the Company that are not Guarantors, (j) in connection with and pursuant to
permitted Refinancings of Indebtedness referred to in clauses (a), (c), (d),
(e), (g), (h) or (i) of this paragraph, replacements of restrictions imposed
pursuant to clauses (a), (c), (d), (e), (g), (h) or (i) of this paragraph that
are not more restrictive in any material respect than those being replaced and
do not apply to any other person or assets than those that would have been
covered by the restrictions in the Indebtedness so refinanced, and (k)
Indebtedness or other contractual requirements of a Receivables Subsidiary in
connection with a Qualified Receivables Transaction, provided that such
restrictions apply only to such Receivables Subsidiary. Notwithstanding the
foregoing, neither (a) customary provisions restricting subletting or
assignment of any lease or other contract entered into in the ordinary course
of business, consistent with industry practice, nor (b) Liens permitted under
the terms of the Indenture on assets securing Purchase Money Indebtedness
incurred in accordance with clause (b) of the second paragraph of the covenant
"Limitation on Incurrence of Indebtedness and Disqualified Capital Stock,"
shall in and of themselves be considered a restriction on the ability of the
applicable Subsidiary to transfer such agreement or assets, as the case may
be.
Limitations on Layering Indebtedness
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Subsidiaries to, directly or indirectly, incur,
or suffer to exist any Indebtedness (other than the Notes) that is subordinate
in right of payment to any other Indebtedness of the Company or a Guarantor
unless, by its terms, such Indebtedness is subordinate in right of payment to,
or ranks pari passu with, the Notes or the Guarantee, as applicable.
Limitation on Liens Securing Indebtedness
The Company and the Guarantors will not, and will not permit any of their
Subsidiaries to, create, incur, assume or suffer to exist any Lien of any
kind, other than Permitted Liens, upon any of their respective assets now
owned or acquired on or after the date of the Indenture or upon any income or
profits therefrom securing
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any Indebtedness of the Company or any Subsidiary other than Senior Debt,
unless the Company and each of the Guarantors provides, and causes their
Subsidiaries to provide, concurrently therewith, that the Notes are equally
and ratably so secured, provided that, if such Indebtedness is Subordinated
Indebtedness, the Lien securing such Subordinated Indebtedness shall be
subordinate and junior to the Lien securing the Notes with the same relative
priority as such Subordinated Indebtedness shall have with respect to the
Notes.
Limitation on Sale of Assets and Subsidiary Stock
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Subsidiaries to, in one or a series of related
transactions, convey, sell, transfer, assign or otherwise dispose of, directly
or indirectly, any of its property, business or assets, including by merger or
consolidation (in the case of a Subsidiary of the Company), and including any
sale or other transfer or issuance of any Equity Interests of any Subsidiary
of the Company, whether by the Company or a Subsidiary of the Company, and
including any sale and leaseback transaction (any of the foregoing, an "Asset
Sale"), unless (l)(a) within 365 days after the date of such Asset Sale, the
Net Cash Proceeds therefrom (the "Asset Sale Offer Amount") are applied to the
optional redemption of the Notes in accordance with the terms of the Indenture
and other Indebtedness of the Company ranking on a parity with the Notes from
time to time outstanding with similar provisions requiring the Company to make
an offer to purchase or to redeem such Indebtedness with the proceeds for
asset sales, pro rata in proportion to the respective principal amounts (or
accreted values in the case of Indebtedness issued with an original issue
discount) of the Notes and such other Indebtedness then outstanding or to the
repurchase of the Notes and such other Indebtedness pursuant to an
irrevocable, unconditional cash offer (pro rata in proportion to the
respective principal amounts (or accreted values in the case of Indebtedness
issued with an original issue discount) of the Notes and such other
Indebtedness then outstanding) (the "Asset Sale Offer") to repurchase such
Indebtedness at a purchase price of 100% of principal amount (or accreted
amount in the case of Indebtedness issued with an original issue discount)
(the "Asset Sale Offer Price"), together with accrued and unpaid interest and
Liquidated Damages, if any, to the date of payment, made within 335 days of
such Asset Sale, or (b) within 365 days following such Asset Sale, the Asset
Sale Offer Amount is (i) used (x) to make one or more Acquisitions, (y) to
make capital expenditures or (z) to acquire other tangible assets, in each
case which in the good faith reasonable judgment of the Board of Directors of
the Company will immediately constitute or be a part of a Related Business of
the Company or a Subsidiary Guarantor (or, if such Asset Sale is by a Foreign
Subsidiary, such Foreign Subsidiary) immediately following such transaction or
(ii) used to retire permanently Senior Debt (including that in the case of a
revolver or similar arrangement that makes credit available, such commitment
is so permanently reduced by such amount), or, if such Asset Sale is by a
Foreign Subsidiary, Indebtedness of Foreign Subsidiaries or (c) any
combination permitted by the foregoing clauses (a) and (b), (2) at least 75%
of the total consideration for such Asset Sale or series of related Asset
Sales consists of cash or Cash Equivalents, provided that (A) the amount of
any liabilities (as shown on the Company's or such Subsidiary's most recent
balance sheet) of the Company or any such Subsidiary (other than Subordinated
Indebtedness) that are assumed by the transferee of any such assets (provided
that the Company and its Subsidiaries are released from all obligations in
respect thereof) shall be deemed to be cash for purposes of this provision,
(B) any notes or other obligations received by the Company or a Subsidiary
from such transferee in exchange for any such assets that are promptly
converted into cash (to the extent of cash received) shall be deemed to be
cash for purposes of this provision, and (C) in connection with any Asset Sale
or series of related Asset Sales involving exclusively assets and property
(including Equity Interests of any Subsidiary of the Company) comprising the
Company's business described under "Business--Products--Sporting Goods and
Other Products" in this Prospectus, the total consideration for any such Asset
Sale that does not consist of cash or Cash Equivalents may be up to the lesser
of (x) 50% of the total consideration of such Asset Sale or (y) $5,000,000,
(3) no Event of Default shall have occurred and be continuing at the time of,
or would occur after giving effect, on a pro forma basis, to, such Asset Sale,
unless such Asset Sale is in consideration solely of cash or Cash Equivalents
and such consideration is applied immediately to the permanent reduction of
the principal amount of Indebtedness outstanding pursuant to the New Credit
Facility, and (4) the Board of Directors of the Company determines in good
faith that the Company or such Subsidiary, as applicable, receives fair market
value for such Asset Sale.
The Indenture provides that an acquisition of Notes pursuant to an Asset
Sale Offer may be deferred until the accumulated Net Cash Proceeds from Asset
Sales not applied to the uses set forth in (1)(b) above (the "Excess
Proceeds") exceeds $5 million and that each Asset Sale Offer shall remain open
for 20 Business Days following its
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commencement (the "Asset Sale Offer Period"). Upon expiration of the Asset
Sale Offer Period, the Company promptly shall apply the Asset Sale Offer
Amount plus an amount equal to accrued and unpaid interest and Liquidated
Damages, if any, to the purchase of all Indebtedness properly tendered (on a
pro rata basis as described above if the Asset Sale Offer Amount is
insufficient to purchase all Indebtedness so tendered) at the Asset Sale Offer
Price (together with accrued interest and Liquidated Damages, if any). To the
extent that the aggregate amount of Indebtedness tendered pursuant to an Asset
Sale Offer is less than the Asset Sale Offer Amount, the Company may use any
remaining Net Cash Proceeds for general corporate purposes as otherwise
permitted by the Indenture and following each Asset Sale Offer the Excess
Proceeds amount shall be reset to zero. For purposes of (2) above, total
consideration received means the total consideration received for such Asset
Sales minus the amount of Purchase Money Indebtedness secured solely by the
assets sold and assumed by a transferee.
Notwithstanding the foregoing provisions of the two immediately prior
paragraphs, the following transactions shall not constitute Asset Sales:
(i) the Company and each of its Subsidiaries may, in the ordinary course
of business, convey, sell, transfer, assign or otherwise dispose of
property in the ordinary course of business;
(ii) the Company and each of its Subsidiaries may convey, sell, transfer,
assign or otherwise dispose of assets pursuant to and in accordance with
(A) the mergers, sales and consolidation provisions in the Indenture and
(B) the provisions in the covenant "Limitation on Restricted Payments"
(including transactions constituting Permitted Investments);
(iii) the Company and each of its Subsidiaries may sell or dispose of
damaged, worn out or other obsolete personal property in the ordinary
course of business so long as such property is no longer necessary for the
proper conduct of the business of the Company or such Subsidiary, as
applicable;
(iv) the Company and each of the Guarantors may convey, sell, transfer,
assign or otherwise dispose of assets to the Company or any of the
Guarantors, any Subsidiary of the Company may issue or sell Equity
Interests to the Company or any Guarantor, and any Foreign Subsidiary that
is not a Guarantor may issue or sell Equity Interests to any Foreign
Subsidiary;
(v) The Company and each of its Subsidiaries may grant in the ordinary
course of business non-exclusive licenses of patents, trademarks,
registrations therefore and other similar intellectual property;
(vi) the Company and each of its Subsidiaries may enter into contracts to
provide manufacturing consideration for Asset Sales and other services in
the ordinary course of business, including in connection with Asset Sales;
(vii) the Company and each of its Subsidiaries may surrender or waive
contract rights or the settlement, release or surrender of contract, tort
or other claims of any kind;
(viii) the Company and each of its Subsidiaries may grant Liens not
prohibited by the Indenture;
(ix) (1) sales of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction" to a
Receivables Subsidiary for the fair market value thereof, including cash in
an amount at least equal to 75% of the book value thereof as determined in
accordance with GAAP, and (2) transfers of accounts receivable and related
assets of the type specified in the definition of "Qualified Receivables
Transaction" (or a fractional undivided interest therein) by a Receivables
Subsidiary in a Qualified Receivables Transaction; and
(x) the Company and its Subsidiaries may convey, sell, transfer, assign
or otherwise dispose of assets (in addition to assets transferred or
disposed of as described in clauses (i), (ii), (iii), (iv), (v), (vi),
(vii), (viii) and (ix) above) with an aggregate fair market value not to
exceed $1 million during any fiscal year.
All Net Cash Proceeds from an Event of Loss relating to any Material
Facility (other than the proceeds of any business interruption insurance)
shall be invested, used for prepayment of Senior Debt or used to repurchase
Notes and other Indebtedness of the Company ranking on a parity with the Notes
from time to time outstanding of the type described in clause 1(a) of the
first paragraph of this covenant, all within 18 months from the occurrence of
such Event of Loss and as otherwise provided above in clause (1) of the first
paragraph of this covenant.
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In addition, the Company will not, and will not permit any Subsidiary to,
directly or indirectly make any Asset Sale of any of the Equity Interests of
any Subsidiary except (i) pursuant to an Asset Sale of all the Equity
Interests of such Subsidiary or (ii) pursuant to an Asset Sale of common stock
of such Subsidiary with no preferences or special rights or privileges and
with no redemption or prepayment provisions.
The Company's ability to pay the Asset Sale Offer Price is, and may in the
future be, limited by the terms of the New Credit Facility or other agreements
relating to indebtedness that constitute Senior Debt, and the Company's
ability to pay cash to Holders of Notes upon an Asset Sale may be limited by
the Company's then existing financial resources.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset
Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Transactions with Affiliates
The Indenture provides that neither the Company nor any of its Subsidiaries
will be permitted on or after the Issue Date to enter into or suffer to exist
any contract, agreement, arrangement or transaction with any Affiliate (an
"Affiliate Transaction"), or any series of related Affiliate Transactions,
other than Exempted Affiliate Transactions, unless (i) it is determined that
the terms of each Affiliate Transaction are fair and reasonable to the
Company, and no less favorable to the Company, than could have been obtained
in an arm's length transaction with a non-Affiliate, and (ii) (a) if involving
consideration to either party in excess of $1 million, unless such Affiliate
Transaction(s) is evidenced by an Officers' Certificate addressed and
delivered to the Trustee certifying that such Affiliate Transaction (or
Transactions) has been approved by a majority of the members of the Board of
Directors of the Company that are disinterested in such transaction and (b) if
involving consideration to either party in excess of $5 million, unless in
addition the Company, prior to the consummation thereof, obtains a written
favorable opinion as to the fairness of such transaction to the Company from a
financial point of view from an independent investment banking firm of
national reputation.
Limitation on Merger, Sale or Consolidation
The Indenture provides that the Company will not consolidate with or merge
with or into another person or, directly or indirectly, sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions,
to another Person or group of affiliated Persons or adopt a plan of
liquidation, unless (i) either (a) the Company is the continuing entity or (b)
the resulting, surviving or transferee entity or, in the case of a plan of
liquidation, the entity which receives the greatest value from such plan of
liquidation is a corporation organized under the laws of the United States,
any state thereof or the District of Columbia and expressly assumes by
supplemental indenture all of the obligations of the Company in connection
with the Notes and the Indenture; (ii) no Default or Event of Default shall
exist or shall occur immediately after giving effect on a pro forma basis to
such transaction; (iii) immediately after giving effect to such transaction on
a pro forma basis, the Consolidated Net Worth of the consolidated surviving or
transferee entity or, in the case of a plan of liquidation, the entity which
receives the greatest value from such plan of liquidation is at least equal to
the Consolidated Net Worth of the Company immediately prior to such
transaction; and (iv) immediately after giving effect to such transaction on a
pro forma basis, the consolidated resulting, surviving or transferee entity
or, in the case of a plan of liquidation, the entity which receives the
greatest value from such plan of liquidation would immediately thereafter be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Debt Incurrence Ratio set forth in the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company or consummation of a plan of liquidation in
accordance with the foregoing, the successor corporation formed by
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such consolidation or into which the Company is merged or to which such
transfer is made or, in the case of a plan of liquidation, the entity which
receives the greatest value from such plan of liquidation shall succeed to,
and (except in the case of a lease) be substituted for, and may exercise every
right and power of, the Company under the Indenture with the same effect as if
such successor corporation had been named therein as the Company, and (except
in the case of a lease) the Company shall be released from the obligations
under the Notes and the Indenture except with respect to any obligations that
arise from, or are related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company on a
consolidated basis shall be deemed to be the transfer of all or substantially
all of the properties and assets of the Company.
Limitation on Lines of Business
The Indenture provides that neither the Company nor any of its Subsidiaries
(except for any Receivables Subsidiaries) shall directly or indirectly engage
to any substantial extent in any line or lines of business activity other than
that which, in the reasonable good faith judgment of the Board of Directors of
the Company, is a Related Business.
Future Subsidiary Guarantors
The Indenture provides that all Subsidiaries of the Company jointly and
severally will guaranty irrevocably and unconditionally all principal,
premium, if any, and interest of the Notes on a senior subordinated basis,
except for (i) any Receivables Subsidiaries and (ii) any Foreign Subsidiaries.
Limitation on Merger of Subsidiaries and Release of Guarantors
The Indenture provides that no Guarantor shall consolidate or merge with or
into (whether or not such Guarantor is the surviving person) another person
unless (i) subject to the provisions of the following paragraph and certain
other provisions of the Indenture, the person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee, pursuant to which such person shall
unconditionally guarantee, on a senior subordinated basis, all of such
Guarantor's obligations under such Guarantor's guarantee and the Indenture on
the terms set forth in the Indenture; and (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis, no
Default or Event of Default shall have occurred or be continuing.
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) of a Subsidiary Guarantor (or all of its assets) to an entity
which is not a Subsidiary Guarantor (including the designation of a Subsidiary
to become an Unrestricted Subsidiary), which transaction is otherwise in
compliance with the Indenture (including, without limitation, the provisions
of the covenant "Limitations on Sale of Assets and Subsidiary Stock"), such
Subsidiary Guarantor will be deemed released from its obligations under its
Guarantee of the Notes; provided, however, that any such termination shall
occur only to the extent that all obligations of such Subsidiary Guarantor
under all of its guarantees of, and under all of its pledges of assets or
other security interests which secure, any Indebtedness of the Company or any
other Subsidiary shall also terminate upon such release, sale or transfer.
Limitation on Status as Investment Company
The Indenture prohibits the Company and its Subsidiaries from being required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming
subject to regulation under the Investment Company Act.
Transactions not Subject to Covenants
Notwithstanding anything to the contrary in the Indenture, the consummation
of the Transactions shall not be prohibited by the Indenture. In addition, the
Merger shall not constitute a Change of Control, and none of the
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Transactions shall be deemed to be a Restricted Payment or an Asset Sale, or
taken into account in any calculation under "Limitation on Restricted
Payments."
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and, to each Holder and to prospective purchasers
of Notes identified to the Company by an Initial Purchaser, within 15 days
after it is or would have been (if it were subject to such reporting
obligations) required to file such with the Commission, annual and quarterly
financial statements substantially equivalent to financial statements that
would have been included in reports filed with the Commission, if the Company
were subject to the requirements of Section 13 or 15(d) of the Exchange Act,
including, with respect to annual information only, a report thereon by the
Company's certified independent public accountants as such would be required
in such reports to the Commission, and, in each case, together with a
management's discussion and analysis of financial condition and results of
operations which would be so required and, unless the Commission will not
accept such reports, file with the Commission the annual, quarterly and other
reports which it is or (if it were subject to such reporting obligations),
would have been required to file with the Commission.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Notes as and when the same becomes
due and payable and the continuance of any such failure for 30 days, (ii) the
failure by the Company to pay all or any part of the principal, or premium, if
any, on the Notes when and as the same becomes due and payable at maturity,
redemption, by acceleration or otherwise, including, without limitation,
payment of the Change of Control Purchase Price or the Asset Sale Offer Price,
or otherwise, (iii) the failure by the Company or any Subsidiary otherwise to
comply with the covenants described under "Limitation on Merger, Sale or
Consolidation," (iv) the failure by the Company or any Subsidiary to observe
or perform any other covenant or agreement described under "Certain Covenants"
(except as provided in clauses (i), (ii) and (iii) above) and, subject to
certain exceptions, the continuance of such failure for a period of 30 days
after written notice is given to the Company by the Trustee or to the Company
and the Trustee by the Holders of at least 25% in aggregate principal amount
of the Notes outstanding, (v) the failure by the Company or any Subsidiary to
observe or perform any other covenant or agreement contained in the Notes or
the Indenture (except as provided in clauses (i), (ii), (iii) and (iv) above)
and, subject to certain exceptions, the continuance of such failure for a
period of 60 days after written notice is given to the Company by the Trustee
or to the Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Notes outstanding, (vi) certain events of bankruptcy,
insolvency or reorganization in respect of the Company or any of its
Significant Subsidiaries, (vii) the failure to pay at final stated maturity
(giving effect to any applicable grace periods) the principal amount of any
Indebtedness of the Company or any Subsidiary of the Company (other than a
Receivables Subsidiary) or the acceleration of the final stated maturity of
any Indebtedness if the aggregate principal amount of such Indebtedness,
together with the principal amount of any such Indebtedness in default for
failure to pay principal at final maturity or which has been accelerated,
aggregates $5 million or more at any time, and (viii) final unsatisfied
judgments not covered by insurance aggregating in excess of $5 million, at any
one time rendered against the Company or any of its Subsidiaries and not
stayed, bonded or discharged within 60 days. The Indenture provides that if a
Default occurs and is continuing, the Trustee must, within 90 days after the
occurrence of such default, give to the Holders notice of such default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (vi), above, relating to the Company or any
Significant Subsidiary,) then in every such case, unless the principal of all
of the Notes shall have already become due and payable, either the Trustee or
the Holders of 25% in aggregate principal amount of the Notes then
outstanding, by notice in writing to the Company (and to the Trustee if given
by Holders) (an "Acceleration Notice"), may declare all principal, determined
as set forth below, and accrued interest thereon to be due and payable and the
same (i) shall become immediately due and payable or (ii) if there are any
amounts outstanding under the New Credit Facility, shall become immediately
due and payable upon the
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first to occur of an acceleration under the New Credit Facility or five
business days after receipt by the Company and the representative of the
holders of the Indebtedness under the New Credit Facility of the notice of
such an acceleration, but only if such Event of Default is then continuing. In
the event a declaration of acceleration resulting from an Event of Default
described in clause (vii) above has occurred and is continuing, such
declaration of acceleration shall be automatically annulled if such default is
cured or waived or the holders of the Indebtedness which is the subject of
such default have rescinded their declaration of acceleration in respect of
such Indebtedness within 30 days thereof and the Trustee has received written
notice of such cure, waiver or rescission and no other Event of Default
described in clause (vii) above has occurred that has not been cured or waived
within 30 days of the declaration of such acceleration in respect of such
Indebtedness. If an Event of Default specified in clause (vi), above, relating
to the Company or any Significant Subsidiary occurs, all principal and accrued
interest thereon will be immediately due and payable on all outstanding Notes
without any declaration or other act on the part of Trustee or the Holders.
The Holders of a majority in aggregate principal amount of Notes generally are
authorized to rescind such acceleration if all existing Events of Default,
other than the non-payment of the principal of, premium, if any, and interest
on the Notes which have become due solely by such acceleration and except on
default with respect to any provision requiring a supermajority approval to
amend, which default may only be waived by such a supermajority, have been
cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a
default with respect to any provision requiring a supermajority approval to
amend, which default may only be waived by such a supermajority, and except a
default in the payment of principal of or interest on any Note not yet cured
or a default with respect to any covenant or provision which cannot be
modified or amended without the consent of the Holder of each outstanding Note
affected. Subject to the provisions of the Indenture relating to the duties of
the Trustee, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless such Holders have offered to the Trustee reasonable
security or indemnity. Subject to all provisions of the Indenture and
applicable law, the Holders of a majority in aggregate principal amount of the
Notes at the time outstanding will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time
within one year of the Stated Maturity of the Notes, elect to have its
obligations and the obligations of the Guarantors discharged with respect to
the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that
the Company shall be deemed to have paid and discharged the entire
indebtedness represented, and the Indenture shall cease to be of further
effect as to all outstanding Notes and Guarantees, except as to (i) rights of
Holders to receive payments in respect of the principal of, premium, if any,
and interest on such Notes when such payments are due from the trust funds;
(ii) the Company's obligations with respect to such Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes, and the maintenance of an office or agency for payment and money for
security payments held in trust; (iii) the rights, powers, trust, duties, and
immunities of the Trustee, and the Company's obligations in connection
therewith; and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and the Guarantors released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, guarantees,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, U.S. legal tender, U.S. Government Obligations or
a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such
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Notes on the stated date for payment thereof or on the redemption date of such
principal or installment of principal of, premium, if any, or interest on such
Notes, and the holders of Notes must have a valid, perfected, exclusive
security interest in such trust; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that (A) the
Company has received from, or there has been published by the Internal Revenue
Service, a ruling or (B) since the date of the Indenture, there has been a
change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the
holders of such Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to such Trustee confirming that the holders of such Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under the Indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the holders of such Notes over any other creditors of the
Company or with the intent of defeating, hindering, delaying or defrauding any
other creditors of the Company or others; and (vii) the Company shall have
delivered to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that the conditions precedent provided for in, in the case of the
officers' certificate, (i) through (vi) and, in the case of the opinion of
counsel, clauses (i) (with respect to the validity and perfection of the
security interest), (ii), (iii) and (v) of this paragraph have been complied
with.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of, premium, if any,
and interest on the Notes when due, then the obligations of the Company and
the Guarantors under the Indenture will be revived and no such defeasance will
be deemed to have occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, the Guarantors and
the Trustee to enter into a supplemental indenture for certain limited
purposes without the consent of the Holders. With the consent of the Holders
of not less than a majority in aggregate principal amount of the Notes at the
time outstanding, the Company, the Guarantors and the Trustee are permitted to
amend or supplement the Indenture or any supplemental indenture or modify the
rights of the Holders; provided that no such modification may, without the
consent of holders of at least 66 2/3% in aggregate principal amount of Notes
at the time outstanding, modify the provisions (including the defined terms
used therein) of the covenant "Repurchase of Notes at the Option of the Holder
upon a Change of Control" in a manner adverse to the holders; and provided,
that no such modification may, without the consent of each Holder affected
thereby: (i) change the Stated Maturity on any Note, or reduce the principal
amount thereof or the rate (or extend the time for payment) of interest
thereon or any premium payable upon the redemption thereof, or change the
place of payment where, or the coin or currency in which, any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date), or
reduce the Change of Control Purchase Price or the Asset Sale Offer Price or
alter the provisions (including the defined terms used therein) regarding the
right of the Company to redeem the Notes in a manner adverse to the Holders,
or (ii) reduce the percentage in principal amount of the outstanding Notes,
the consent of whose Holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture, or (iii) modify any of the
waiver provisions, except to increase any required percentage or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of the Holder of each outstanding Note affected thereby.
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The subordination provisions contained in the Indenture are for the benefit
of the holders from time to time of Senior Debt and may not be rescinded,
cancelled, amended or modified in any way other than any amendment or
modification that would not adversely affect the rights of any holder of
Senior Debt or any amendment or modification that is consented to by each
holder of Senior Debt that would be adversely affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company, the
Guarantors or any successor entity shall have any personal liability in
respect of the obligations of the Company or the Guarantors under the
Indenture or the Notes by reason of his or its status as such stockholder,
employee, officer or director, except to the extent such person is the Company
or a Guarantor.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of the
Company, including by designation, or is merged or consolidated into or with
the Company or one of its Subsidiaries.
"Acquisition" means the purchase or other acquisition of any person or
substantially all the assets of any person or operating unit by any other
person, whether by purchase, merger, consolidation, or other transfer, and
whether or not for consideration.
"Affiliate" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by
contract, or otherwise, provided that, with respect to ownership interest in
the Company and its Subsidiaries, a Beneficial Owner of 10% or more of the
total voting power normally entitled to vote in the election of directors,
managers or trustees, as applicable (except that Benjamin L. Doskocil, Sr.
shall not be deemed to be an Affiliate solely by reason of such voting power
so long as he is the Beneficial Owner of no more than 15% of such voting
power), shall for such purposes be deemed to constitute control; provided,
further, that no person (other than the Company or any Subsidiary of the
Company) in whom a Receivables Subsidiary makes an Investment in connection
with a Qualified Receivables Transaction shall be deemed to be an Affiliate
solely by reason of such Investment.
"Applicable Premium" means, with respect to a Note at any applicable
Redemption Date, the greater of (i) 1.0% of the principal amount of such Note
and (ii) the excess of (A) the present value at such time of (1) the
redemption price of such Note at September 15, 2002 (such redemption price
being described above under "Optional Redemption") plus (2) all required
interest payments due on such Note through September 15, 2002, computed using
a discount rate equal to the Treasury Rate plus 0.5% per annum, over (B) the
principal amount of such Note.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products (a) of the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of
such security or instrument and (b) the amount of each such respective
principal (or redemption) payment by (ii) the sum of all such principal (or
redemption) payments.
"Beneficial Owner" or "beneficial owner" for purposes of the definition of
Change of Control has the meaning attributed to it in Rules 13d-3 and 13d-5
under the Exchange Act (as in effect on the Issue Date), whether or not
applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time.
"Board of Directors" means, with respect to any person, the board of
directors of such person or any committee of the Board of Directors of such
person authorized, with respect to any particular matter, to exercise the
power of the board of directors of such person.
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"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capitalized Lease Obligation" means, as to any person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation, and with respect to any Person that is not a
corporation, any and all partnership or other equity interests of such Person.
"Cash Equivalent" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) obligations issued or
directly and fully guaranteed by any state of the United States of America or
political subdivision or instrumentality thereof and, at the time of
acquisition, having one of the two highest ratings obtainable from either
Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"), or (iii) time deposits and certificates of deposit and commercial
paper issued by the parent corporation of any domestic commercial bank of
recognized standing having capital and surplus in excess of $500 million and
commercial paper issued by others rated at least A-2 or the equivalent thereof
by S&P or at least P-2 or the equivalent thereof by Moody's, (iv) the
repurchase obligations with a term of not more than thirty days for underlying
securities of the types described in clause (i) above entered into with any
bank meeting the qualifications specified in clause (iii) above; and (v)
investments in money market funds having assets of at least $100 million and
which invest substantially all their assets in securities of the types
described in clauses (i) through (iv) above, and in the case of each of (i),
(ii), (iii), (iv) and (v), maturing within one year after the date of
acquisition.
"Change of Control Redemption Event" means a Change of Control pursuant to
clause (i) or clause (ii) of the definition of "Change of Control" in the
covenant "Repurchase of Notes at the Option of the Holder Upon a Change in
Control" that is approved by the Board of Directors of the Company, a majority
of the members of which are Continuing Directors.
"Consolidated Coverage Ratio" of any person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses discontinued or disposed of) for the Reference
Period to (b) the aggregate Consolidated Fixed Charges of such person
(exclusive of amounts attributable to operations and businesses discontinued
or disposed of, but only to the extent that the obligations giving rise to
such Consolidated Fixed Charges would no longer be obligations contributing to
such person's Consolidated Fixed Charges subsequent to the Transaction Date)
during the Reference Period; provided, that for purposes of such calculation,
(i) Acquisitions which occurred during the Reference Period or subsequent to
the Reference Period and on or prior to the Transaction Date shall be assumed
to have occurred on the first day of the Reference Period, (ii) transactions
giving rise to the need to calculate the Consolidated Coverage Ratio shall be
assumed to have occurred on the first day of the Reference Period, (iii) the
incurrence of any Indebtedness or issuance of any Disqualified Capital Stock
during the Reference Period or subsequent to the Reference Period and on or
prior to the Transaction Date (and the application of the proceeds therefrom
to the extent used to refinance or retire other Indebtedness) shall be assumed
to have occurred on the first day of such Reference Period, and (iv) the
Consolidated Fixed Charges of such person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a pro forma basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless
such Person or any of its
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Subsidiaries is a party to an Interest Swap or Hedging Obligation (which by
its terms will remain in effect for the 12-month period immediately following
the Transaction Date) that has the effect of fixing the interest rate on the
date of computation, in which case such rate (whether higher or lower) shall
be used. For purposes of this definition whenever pro forma effect is to be
given to a transaction, the pro forma calculations of Consolidated EBITDA and
Consolidated Fixed Charges shall be made in accordance with Article 11 of
Regulation S-X of the Commission and subject to agreed-upon procedures to be
performed by the Company's independent accountants to determine whether the
pro forma calculations are made in accordance with Article 11 of Regulation S-
X.
"Consolidated EBITDA" means, with respect to any person, for any period, the
Consolidated Net Income of such person for such period adjusted to add thereto
(to the extent deducted in determining Consolidated Net Income), without
duplication, the sum of (i) Consolidated income tax expense, (ii) Consolidated
depreciation and amortization expense, and other non-cash charges required to
be reflected as expenses for such period on the books and records of such
person, provided that consolidated depreciation and amortization and such
other non-cash charges of a Subsidiary that is a less than a wholly owned
Subsidiary shall only be added to the extent of the equity interest of the
Company in such Subsidiary, (iii) Consolidated Fixed Charges, less the amount
of all cash payments made by such person or any of its Subsidiaries during
such period to the extent such payments relate to non-cash charges that were
added back in determining Consolidated EBITDA for such period or any prior
period, (iv) amounts historically added back in order to calculate the
Company's EBITDA as described in the Prospectus, and (v) costs relating to the
integration of Doskocil and Dogloo as described in the Prospectus, not to
exceed $1 million.
"Consolidated Fixed Charges" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in
accordance with GAAP) of (a) interest expensed or capitalized, paid or accrued
(including, in accordance with the following sentence, interest attributable
to Capitalized Lease Obligations) of such person and its Consolidated
Subsidiaries during such period, including (i) original issue discount and
non-cash interest payments or accruals on any Indebtedness, (ii) the interest
portion of all deferred payment obligations, and (iii) all commissions,
discounts and other fees and charges owed with respect to bankers' acceptances
and letters of credit financings and currency and Interest Swap and Hedging
Obligations, in each case to the extent attributable to such period, and (b)
the amount of dividends accrued or payable (or guaranteed) by such person or
any of its Consolidated Subsidiaries in respect of Preferred Stock (other than
by Subsidiaries of such person to such person or such person's wholly owned
Subsidiaries, and other than dividends paid in shares of such Preferred
Stock). For purposes of this definition, (x) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
in good faith by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such person or
a Subsidiary of such person of an obligation of another person shall be deemed
to be the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Net Income" means, with respect to any person for any period,
the net income (or loss) of such person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) all items which are either
extraordinary (as determined in accordance with GAAP) or are either unusual or
nonrecurring (including any gain from the sale or other disposition of assets
outside the ordinary course of business or from the issuance or sale of any
capital stock other than Disqualified Capital Stock), (b) the net income, if
positive, of any person, other than a Consolidated Subsidiary, in which such
person or any of its Consolidated Subsidiaries has an interest, except to the
extent of the amount of any dividends or distributions actually paid in cash
to such person or a Consolidated Subsidiary of such person during such period,
but in any case not in excess of such person's pro rata share of such person's
net income for such period, (c) the net income or loss of any person acquired
in a pooling of interests transaction for any period prior to the date of such
acquisition, (d) the net income, if positive, of any of such person's
Consolidated Subsidiaries to the extent that the declaration or payment of
dividends or similar distributions is not at the time permitted by operation
of the terms of its charter or bylaws or any other agreement, instrument,
judgment, decree, order, statute, rule or
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governmental regulation applicable to such Consolidated Subsidiary and (e)
without duplication, costs, fees and expenses (including retention bonuses)
actually incurred (or accrued on the Company's unaudited pro forma condensed
balance sheet as of June 30, 1997 contained in the Prospectus) in connection
with the Transactions.
"Consolidated Net Worth" of any person at any date means the aggregate
consolidated stockholders' equity of such person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would
be shown on the consolidated balance sheet of such person prepared in
accordance with GAAP, adjusted to exclude (to the extent included in
calculating such equity), (a) the amount of any such stockholders' equity
attributable to Disqualified Capital Stock or treasury stock of such person
and its Consolidated Subsidiaries, (b) all write-ups in the book value of any
asset of such person or a Consolidated Subsidiary of such person subsequent to
the Issue Date (other than writeups resulting from foreign currency
translations or of tangible assets of a going concern business made within 12
months after the acquisition of such business) and (c) all investments in
Subsidiaries that are not Consolidated Subsidiaries and in persons that are
not Subsidiaries.
"Consolidated Subsidiary" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting
purposes with the financial statements of such person in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board of Directors at the time of such
nomination or election.
"Default" means any event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designated Senior Debt" means, (a) so long as it is in effect and there is
at least $1 million of outstanding indebtedness thereunder, the New Credit
Facility and (b) any other Senior Debt designated by the Company to be
"Designated Senior Debt" that has an outstanding principal amount of at least
$25 million at the time of such designation.
"Disqualified Capital Stock" means (a) except as set forth in (b), with
respect to any person, Equity Interests of such person that, by its terms or
by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time
would be, required to be redeemed or repurchased (including at the option of
the holder thereof) by such person or any of its Subsidiaries, in whole or in
part, on or prior to the Stated Maturity of the Notes and (b) with respect to
any Subsidiary of such person (including with respect to any Subsidiary of the
Company), any Equity Interests other than any common equity with no
preference, privileges, or redemption or repayment provisions.
"Equity Interest" of any Person means any shares, interests, participation
or other equivalents (however designated) in such Person's equity, and shall
in any event include any Capital Stock issued by, or partnership or membership
interests in, such Person.
"Event of Loss" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"Excluded Person" means Westar, Enterprise, HBI and any of their respective
affiliates (as such term is defined in Rule 501(b) of Regulation D under the
Securities Act) and, in the event that any Excluded Person distributes any
Equity Interests of the Company to the limited partners or other equity
investors of such Excluded Person, such investors, and, including, in the case
of an individual, any spouse or immediate family member of such individual,
the estate or any heir of such individual or any trust established by such
individual for estate planning purposes.
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"Exempted Affiliate Transaction" means, without duplication, (a) reasonable
fees and compensation paid to (including issuances and grants of securities
and stock options), employment agreements and stock option and ownership plans
for the benefit of, and indemnity provided on behalf of, officers, directors,
employees or consultants of the Company or any Subsidiary of the Company
approved by the Board of Directors or the senior management of the Company,
(b) any Restricted Payment permitted by the Indenture, (c) transactions solely
between the Company and any of its Subsidiary Guarantors or solely among
Subsidiary Guarantors of the Company, (d) fees and expenses paid in connection
with the Transactions, including any such amounts paid to Westar or
Enterprise, (e) payments for the purpose of and in an amount equal to the
amount required to permit the Company to redeem or repurchase Capital Stock of
the Company from certain shareholders of the Company as required pursuant to
the Second Securityholders Agreement in an aggregate amount not to exceed
$250,000, (f) any obligations of the Company for management fees to Westar or
other Excluded Persons in an amount not to exceed $600,000 in any fiscal year
and the reimbursement of Westar's reasonable out-of-pocket expenses, provided
that all such amounts shall be subordinate to the obligations of the Company
and the Guarantors with respect to the Notes, and (g) Qualified Receivables
Transactions.
"Foreign Subsidiary" means any Subsidiary of the Company which (i) is not
organized under the laws of the United States, any state thereof or the
District of Columbia and (ii) conducts substantially all of its business
operations outside the United States of America.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"Indebtedness" of any person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of such person, to the extent that
such liabilities and obligations would appear as a liability upon a balance
sheet of such person prepared in accordance with GAAP, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of
the assets of such person or only to a portion thereof), (ii) evidenced by
bonds, notes, debentures or similar instruments, (iii) representing the
balance deferred and unpaid of the purchase price of any property or services,
except (other than accounts payable or other obligations to trade creditors
which have remained unpaid for greater than 90 days past their original due
date, which obligations are not being contested in good faith and for which
appropriate reserves have been established in accordance with GAAP) those
incurred in the ordinary course of its business that would constitute
ordinarily a trade payable to trade creditors; (b) all liabilities and
obligations, contingent or otherwise, of such person (i) evidenced by bankers'
acceptances or similar instruments issued or accepted by banks, (ii) relating
to any Capitalized Lease Obligation, or (iii) evidenced by a letter of credit
or a reimbursement obligation of such person with respect to any letter of
credit; (c) all net obligations of such person under Interest Swap and Hedging
Obligations; (d) all liabilities and obligations of others of the kind
described in the preceding clause (a), (b) or (c) that such person has
guaranteed or that is otherwise its legal liability or which are secured by
any assets or property of such person; and (e) all Disqualified Capital Stock
of such Person (measured at the greater of its voluntary or involuntary
maximum fixed repurchase price plus accrued and unpaid dividends). For
purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such
price is based upon, or measured by, the Fair Market Value of such
Disqualified Capital Stock, such Fair Market Value to be determined in good
faith by the board of directors of the issuer (or managing general partner of
the issuer) of such Disqualified Capital Stock.
"Initial Public Equity Offering" means an initial underwritten offering of
common stock of the Company for cash pursuant to an effective registration
statement under the Securities Act as a consequence of which the common stock
of the Company is listed on a national securities exchange or quoted on the
national market system of NASDAQ.
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"Interest Swap and Hedging Obligation" means any obligation of any person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any person in any other person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise)
by such person (whether for cash, property, services, securities or otherwise)
of capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such
other person; (b) the making by such person of any deposit with, or advance,
loan or other extension of credit to, such other person (including the
purchase of property from another person subject to an understanding or
agreement, contingent or otherwise, to resell such property to such other
person) (but excluding accounts receivable, endorsements for collection or
deposits arising in the ordinary course of business); (c) other than
guarantees of Indebtedness of the Company or any Guarantor to the extent
permitted by the covenant "Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock," the entering into by such person of any
guarantee of, or other credit support or contingent obligation with respect
to, Indebtedness or other liability of such other person; (d) the making of
any capital contribution by such person to such other person; and (e) the
designation by the Board of Directors of the Company of any person to be an
Unrestricted Subsidiary. The Company shall be deemed to make an Investment in
an amount equal to the fair market value of the net assets of any subsidiary
(or, if neither the Company nor any of its Subsidiaries has theretofore made
an Investment in such subsidiary, in an amount equal to the Investments being
made), at the time that such subsidiary is designated an Unrestricted
Subsidiary, and any property transferred to an Unrestricted Subsidiary from
the Company or a Subsidiary shall be deemed an Investment valued at its fair
market value at the time of such transfer; provided that if the Company
designates a Foreign Subsidiary that is not a Guarantor as a Unrestricted
Subsidiary, any prior Investments in such Foreign Subsidiary made as Permitted
Investments or Restricted Investments in accordance with the Indenture shall
not be deemed to be additional Investments at the time of such designation.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"Junior Securities" of any person means securities (including Capital Stock
but excluding Disqualified Capital Stock) issued by such person to a Holder on
account of the Notes that (a) has an Average Life and maturity or mandatory
redemption obligation, if any, longer than, or occurring after the final
maturity date of, all Designated Senior Debt of such person, (b) by their
terms or by law are subordinated to Senior Debt of such person outstanding on
the date of issuance of such Junior Securities at least to the same extent as
the Notes and (c) are not secured by any assets or property of the Company or
any of its Subsidiaries. As used herein, "Designated Senior Debt of such
person outstanding on the date of issuance of such Junior Securities" shall
include securities issued in connection with a reorganization pursuant to the
bankruptcy laws of any jurisdiction to persons which held "Designated Senior
Debt" in such reorganization proceeding.
"Material Facility" means each of the Company's facilities located in
Arlington or Mansfield, Texas and any other fixed asset of the Company or its
Subsidiaries; provided that the fair market value of such facility or fixed
asset exceeds $3 million.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale or equity contribution in
respect of Qualified Capital Stock and by the Company and its Subsidiaries in
respect of an Asset Sale plus, in the case of an issuance of Qualified Capital
Stock upon any exercise, exchange or conversion of securities (including
options, warrants, rights and convertible or exchangeable debt) of the Company
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that were issued for cash on or after the Issue Date, the amount of cash
originally received by the Company upon the issuance of such securities
(including options, warrants, rights and convertible or exchangeable debt)
less, in each case, the sum of all payments, fees, commissions, and customary
and reasonable expenses (including, without limitation, the fees and expenses
of legal counsel and investment banking fees and expenses) incurred in
connection with such Asset Sale or sale or equity contribution in respect of
Qualified Capital Stock, and, in the case of an Asset Sale only, less the
amount (estimated reasonably and in good faith by the Company) of income,
franchise, sales and other applicable taxes required to be paid by the Company
or any of its respective Subsidiaries in connection with such Asset Sale and
appropriate amounts to be provided by the Company or any of its Subsidiaries
as a reserve in accordance with GAAP against any liabilities associated with
such Asset Sale and retained by the Company or any such Subsidiary after such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification agreements associated with such Asset
Sale.
"New Credit Facility" means the credit agreement to be entered into on or
prior to the Issue Date by and among the Company, NationsBanc Capital Markets,
Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, as arrangers and
syndication agents, certain lending parties thereto and NationsBank of Texas,
N.A., as agent, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as such credit
agreement and/or related documents may be amended, restated, supplemented,
renewed, replaced or otherwise modified from time to time whether or not with
the same agent, trustee, representative lenders or holders, and, subject to
the proviso to the next succeeding sentence, irrespective of any changes in
the terms and conditions thereof. Without limiting the generality of the
foregoing, the term "New Credit Facility" shall include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any New Credit Facility and all refundings, refinancings and
replacements of any New Credit Facility, including any agreement (i) extending
the maturity of any Indebtedness incurred thereunder or contemplated thereby,
(ii) adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers include one or more of the Company and its Subsidiaries
and their respective successors and assigns, or (iii) increasing the amount of
Indebtedness incurred thereunder or available to be borrowed thereunder,
provided that if on the date any such Indebtedness is incurred it would not be
permitted by the covenant "Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock," such Indebtedness will not constitute Senior
Debt.
"Permitted Indebtedness" means any of the following:
(a) the Company and the Guarantors may incur Indebtedness evidenced by
the Notes and represented by the Indenture up to the amounts specified
therein as of the date thereof;
(b) the Company and its Subsidiaries, as applicable, may incur
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness
or Disqualified Capital Stock that was permitted by the Indenture to be
incurred;
(c) The Company and its Subsidiaries may incur Indebtedness solely in
respect of performance bonds, workers' compensation claims, payment
obligations in connection with self-insurance and other similar
requirements (to the extent that such incurrence does not result in the
incurrence of any obligation to repay any obligation relating to borrowed
money of others) in the ordinary course of business in accordance with
customary industry practices, in amounts and for the purposes customary in
the Company's industry;
(d) The Company may incur Indebtedness to any Subsidiary Guarantor, and
any Subsidiary Guarantor may incur Indebtedness to any other Subsidiary
Guarantor or to the Company; provided, that, in the case of Indebtedness of
the Company, such obligations shall be unsecured and subordinated in all
respects to the Company's obligations pursuant to the Notes and the date of
any event that causes such Subsidiary Guarantor to no longer be a
Subsidiary Guarantor shall be an Incurrence Date;
(e) The Company and its Subsidiaries may incur Indebtedness with respect
to Interest Swap and Hedging Obligations; provided, however, that such
Interest Swap and Hedging Obligations are entered into to protect the
Company and its Subsidiaries from fluctuations in interest rates on
Indebtedness incurred in accordance with the Indenture to the extent the
notional principal amount of such Interest Swap and
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Hedging Obligations does not exceed the principal amount of the
Indebtedness to which such Interest Swap and Hedging Obligations relate or
does not increase the Indebtedness of the Company and its Subsidiaries
outstanding other than as a result of fluctuations in foreign currency
exchange rates or by reason of customary fees, indemnities and compensation
payable thereunder;
(f) The Company and its Subsidiaries may incur Indebtedness arising from
the honoring by a bank or other financial institution of a check, draft or
similar instrument inadvertently drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence, or from endorsements
of instruments for deposit in the ordinary course of business;
(g) Other Indebtedness of the Company outstanding on the Issue Date;
(h) The Company and its Subsidiaries may incur Indebtedness arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from guarantees or letters of credit, surety bonds
or performance bonds securing any obligations of the Company or any such
Subsidiary pursuant to such agreements, in any case incurred in connection
with the disposition of any business, assets or Subsidiary of the Company
to the extent none of the foregoing results in Indebtedness required to be
reflected as indebtedness on the balance sheet of the Company or any such
Subsidiary in accordance with GAAP and are limited in aggregate amount to
no greater than 25% of the fair market value of such business, assets or
Subsidiary so disposed of; and
(i) A Receivables Subsidiary may incur Indebtedness in a Qualified
Receivables Transaction that is without recourse to the Company or to any
Subsidiary of the Company or their assets (other than such Receivables
Subsidiary and its assets), and is not guaranteed by any such person and is
not otherwise such person's legal liability.
"Permitted Investment" means (a) Investments by the Company or any Guarantor
in any person that is or immediately after such Investment becomes a
Guarantor, or immediately after such Investment merges or consolidates into
the Company or any Guarantor in compliance with the terms of the Indenture,
provided that such Person is engaged in all material respects in Related
Business; (b) Investments in the Company by any Guarantor; provided that in
the case of Indebtedness constituting any such Investment, such Indebtedness
shall be unsecured and subordinated in all respects to the Company's
obligations under the Notes; (c) Interest Swap and Hedging Obligations entered
into in the ordinary course of the Company's or its Subsidiaries' businesses
and otherwise in compliance with the Indenture; (d) Investments in securities
of trade creditors or customers received in settlement of obligations that
arose in the ordinary course of business or pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of
such trade creditors or customers; (e) Investments made by the Company or any
of its Subsidiaries as a result of consideration received in connection with
an Asset Sale in compliance with clause (2) of the first paragraph of the
covenant "Limitation on Sale of Assets and Subsidiary Stock," or not
constituting an Asset Sale pursuant to clause (x) of the third paragraph of
such covenant; (f) Investments in the form of promissory notes of members of
the Company's management not to exceed $2 million in principal amount at any
time outstanding solely in consideration of the purchase by such persons of
Qualified Capital Stock of the Company; (g) any Investment by the Company or
any Guarantor in a Receivables Subsidiary or any Investment by a Receivables
Subsidiary in any other person in connection with a Qualified Receivables
Transaction; provided, that the foregoing Investment is in the form of a note
that the Receivables Subsidiary or other person is required to repay as soon
as practicable from available cash collections less amounts required to be
established as reserves pursuant to contractual arrangements with entities
that are not Affiliates entered into as part of a Qualified Receivables
Transaction; (h) Investments by the Company outstanding on the Issue Date; (i)
agreements permitted pursuant to clause (h) of the definition of "Permitted
Indebtedness; (j) guarantees of the Company or any of its Subsidiaries entered
into in the ordinary course of business and otherwise in compliance with the
Indenture, guarantying obligations in an aggregate amount not in excess of $1
million at any time outstanding; (k) acquisitions by the Company of assets,
Equity Interests or other securities for consideration consisting solely of
Qualified Capital Stock of the Company; and (l) additional Investments not to
exceed $4 million at any one time outstanding.
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"Permitted Lien" means (a) Liens existing on the Issue Date after giving
effect to the Transactions; (b) Liens securing the Notes; (c) Liens securing
Indebtedness of a Person existing at the time such Person becomes a Subsidiary
or is merged with or into the Company or a Subsidiary or Liens securing
Indebtedness incurred in connection with an Acquisition, provided that such
Liens were in existence prior to the date of such acquisition, merger or
consolidation, were not incurred in anticipation thereof, and do not extend to
any other assets; (d) Liens arising from Purchase Money Indebtedness permitted
to be incurred under clause (a) of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," provided such Liens
relate solely to the property which is subject to such Purchase Money
Indebtedness; (e) Liens securing Refinancing Indebtedness incurred to
refinance any Indebtedness permitted under the Indenture; (f) Liens imposed by
governmental authorities for taxes, assessments or other charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or any of its Subsidiaries shall have
set aside on its books such reserves as may be required pursuant to GAAP; (g)
statutory Liens of landlords, carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen and other like Liens arising by operation of law in the
ordinary course of business for sums not yet delinquent for a period of more
than 90 days or being contested in good faith, if such reserves or other
appropriate provisions, if any, as shall be required by GAAP shall have been
made in respect thereof; (h) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security or similar obligations, including
any Lien securing letters of credit issued in the ordinary course of business
in connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations (exclusive
of obligations for the payment of borrowed money) incurred in the ordinary
course of business; (i) judgment Liens not giving rise to an Event of Default
so long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such judgment
shall not have been finally terminated or the period within which such
proceedings may be initiated shall not have expired; (j) easements, rights-of-
way, zoning restrictions, minor defects or irregularities with title and other
similar charges or encumbrances in respect of real property not materially
detracting from the value of the property subject thereto and not interfering
in any material respect with the ordinary conduct of the business of the
Company or any of its Subsidiaries; (k) any interest or title of a lessor
under any lease, whether or not characterized as capital or operating;
provided that such Liens do not extend to any property or assets which is not
leased property subject to such lease; (l) Liens upon specific items of
inventory or other goods and proceeds of any person securing such persons
obligations in respect of banker's acceptances issued or created for the
account of such person to facilitate the purchase, shipment or storage of such
inventory or other goods in the ordinary course of business; (m) Liens in
favor of the Company; (n) Liens encumbering deposits made to secure
obligations arising in the ordinary course of business from statutory,
regulatory, contractual, or warranty requirements of the Company or any of its
Subsidiaries, including rights of offset and set-off; (o) leases or subleases
granted to others not interfering in any material respect with the business of
the Company or its Subsidiaries; (p) Liens arising out of consignment or
similar arrangements for the sale of goods entered into by the Company or any
of its Subsidiaries in the ordinary course of business; (q) Liens on assets of
a Receivables Subsidiary incurred in connection with a Qualified Receivables
Transaction; and (r) Liens solely on property of Subsidiaries that are not
Guarantors arising from Indebtedness permitted to be incurred pursuant to
clause (B) of the first paragraph of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock."
"Purchase Money Indebtedness" of any person means any Indebtedness of such
person to any seller or other person incurred to finance the acquisition
(including in the case of a Capitalized Lease Obligation, the lease) of any
real or personal tangible property acquired after the Issue Date which, in the
reasonable good faith judgment of the Board of Directors of the Company, is
directly related to a Related Business of the Company and which is incurred
within 180 days of such acquisition and is secured only by the assets so
financed.
"Qualified Capital Stock" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"Qualified Exchange" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or Indebtedness of the
Company with the Net Cash Proceeds received by the Company from
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the substantially concurrent sale of Qualified Capital Stock (other than to a
Subsidiary) or any exchange of Qualified Capital Stock for any Capital Stock
or Indebtedness of the Company.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company, any Guarantor or any
Receivables Subsidiary pursuant to which the Company, any Guarantor or any
Receivables Subsidiary may sell, convey or otherwise transfer to, or grant a
security interest in for the benefit of, (a) a Receivables Subsidiary (in the
case of a transfer or encumbrancing by the Company or any Guarantor) and (b)
any other person (solely in the case of a transfer or encumbrancing by a
Receivables Subsidiary), solely accounts receivable (whether now existing or
arising in the future) of the Company or any Guarantor which arose in the
ordinary course of business of the Company or any Guarantor, and any assets
related thereto, including, without limitation, all collateral securing such
accounts receivable, all contracts and all guarantees or other obligations in
respect of such accounts receivable, proceeds of such accounts receivable and
other assets which are customarily transferred or in respect of which security
interests are customarily granted in connection with asset securitization
transactions involving accounts receivable.
"Receivables Subsidiary" means a Wholly Owned Subsidiary of the Company
which engages in no activities other than in connection with the financing of
accounts receivable and which is designated by the Board of Directors of the
Company (as provided below) as a Receivables Subsidiary (a) no portion of any
Indebtedness or any other obligations (contingent or otherwise) of which (i)
is guaranteed by the Company or any other Subsidiary of the Company (excluding
guarantees of obligations (other than the principal of, and interest on,
Indebtedness) pursuant to representations, warranties, covenants and
indemnities entered into in the ordinary course of business in connection with
a Qualified Receivables Transaction), (ii) is recourse to or obligates the
Company or any other Subsidiary of the Company in any way other than pursuant
to representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction, or (iii) subjects any property or asset of the Company or any
other Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction, (b) with which neither the Company nor any other Subsidiary of
the Company has any material contract, agreement, arrangement or understanding
other than those customarily entered into in connection with Qualified
Receivables Transactions, and (c) with which neither the Company nor any of
its other Subsidiaries has any obligation to maintain or preserve such
Subsidiary's financial condition or cause such Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors of
the Company shall be evidenced to the Trustee by the filing with the Trustee a
certified copy of the resolution of the Board of Directors of the Company
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions.
"Reference Period" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in
existence) ended immediately preceding any date upon which any determination
is to be made pursuant to the terms of the Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of
which are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or
(b) constituting an amendment, extension, modification or supplement to any
scheduled principal payment (or in the case of Disqualified Capital Stock, any
payment) of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the
case of Disqualified Capital Stock, liquidation preference, not to exceed
(after deduction of reasonable and customary fees and expenses incurred in
connection with the Refinancing) the lesser of (i) the principal amount or, in
the case of Disqualified Capital Stock, liquidation preference, of the
Indebtedness or Disqualified Capital Stock so Refinanced and (ii) if such
Indebtedness being Refinanced was issued with an original issue discount, the
accreted value thereof (as determined in accordance with GAAP) at the time of
such Refinancing; provided, that (A) such Refinancing Indebtedness of any
Subsidiary of the Company shall only be used to Refinance outstanding
Indebtedness or Disqualified Capital Stock of such Subsidiary, (B) such
Refinancing Indebtedness shall (x) not have an Average Life or final maturity
shorter than the Indebtedness or Disqualified Capital Stock to be so
refinanced at the time of such Refinancing and (y) in all
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respects, be no less subordinated or junior, if applicable, to the rights of
Holders of the Notes than was the Indebtedness or Disqualified Capital Stock
to be refinanced, and (C) except for Refinancing Indebtedness incurred to
refinance any Senior Debt incurred in accordance with the Indenture (with
respect to which this clause (C) shall be inapplicable), such Refinancing
Indebtedness shall be secured in a manner no more adverse to the Holders of
the Notes than the terms of the Liens securing such refinanced Indebtedness,
provided that the Indebtedness secured is not increased and the Lien is not
extended to any additional assets of property.
"Related Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any
and all businesses that in the good faith judgment of the Board of Directors
of the Company are materially related businesses.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than investments in Cash Equivalents and other than
Permitted Investments.
"Restricted Payment" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Equity
Interests of such person or any parent or Subsidiary of such person, (b) any
payment on account of the purchase, redemption or other acquisition or
retirement for value of Equity Interests of such person or any Subsidiary or
parent of such person, (c) other than with the proceeds from the substantially
concurrent sale of, or in exchange for, Refinancing Indebtedness, any
purchase, redemption, or other acquisition or retirement for value of, or any
payment in respect of any amendment of the terms of or any defeasance of, any
Subordinated Indebtedness, directly or indirectly, by such person or a parent
or Subsidiary of such person prior to the scheduled maturity, any scheduled
repayment of principal, or scheduled sinking fund payment, as the case may be,
of such Indebtedness and (d) any Restricted Investment by such person;
provided, however, that the term "Restricted Payment" does not include (i) any
dividend, distribution or other payment on or with respect to or with Equity
Interests of an issuer to the extent payable solely in or exchanged solely for
shares of Qualified Capital Stock of such issuer; (ii) any dividend,
distribution or other payment to the Company, or to any of its Subsidiary
Guarantors, by the Company or any of its Subsidiaries; (iii) any dividend,
distribution or other payment to a Foreign Subsidiary by a Foreign Subsidiary
that is not a Guarantor; (iv) redemptions of Doskocil Series C Preferred Stock
(or any Capital Stock of the Company into or for which such Doskocil Series C
Preferred Stock may be converted or exchanged in compliance with the
Indenture) in an aggregate amount not to exceed $2.4 million; provided that,
immediately after giving effect to any such redemption on a pro forma basis,
the Company could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio in the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock"; or (v) payments made pursuant to
the Transactions, including, without limitation, payments made after
consummation of the Merger to shareholders of the Company pursuant to the
Transactions.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a bankruptcy
petition at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless the instrument under which
such Indebtedness is incurred expressly provides that it is on parity with or
subordinated in right of payment to the Notes. Without limiting the generality
of the foregoing, "Senior Debt" shall also include the principal of, premium,
if any, interest (including any interest accruing subsequent to the filing of
a petition of bankruptcy at the rate provided for in the documentation with
respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, (y) all
monetary obligations (including guarantees thereof) of every nature of the
Company under the New Credit Facility, including, without limitation,
obligations to pay principal and interest, reimbursement obligations under
letters of credit, fees, expenses and indemnities, and (z) all Interest Swap
and Hedging Obligations (including guarantees thereof), in each case whether
outstanding on the Issue Date or thereafter incurred. Notwithstanding the
foregoing, "Senior Debt" shall not include (i) any Indebtedness of the Company
to a Subsidiary of the Company, (ii) Indebtedness of the Company or any of its
Subsidiaries to any shareholder (other than a parent corporation) of the
Company, (iii) Indebtedness to, or guaranteed by the Company or any of its
Subsidiaries for the benefit of, any director, officer or employee of the
Company or any Subsidiary of the Company (including,
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without limitation, amounts owed for compensation), (iv) Indebtedness and
other amounts incurred to trade creditors in connection with obtaining goods,
materials or services, (v) Indebtedness represented by Disqualified Capital
Stock, (vi) any liability for federal, state, local or other taxes owed or
owing by the Company, (vii) any Indebtedness incurred in violation of the
Indenture and (viii) any Indebtedness which is, by its express terms,
subordinated in right of payment to any other Indebtedness of the Company.
"Senior Debt," when used with respect to a Guarantor, shall have a meaning
substantially identical to that applied to the Indebtedness of the Company
(including any guarantees issued by such Guarantor).
"Significant Subsidiary" shall have the meaning provided under Regulation S-
X of the Securities Act, as in effect on the Issue Date.
"Stated Maturity" means September 15, 2007.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
that is subordinated in right of payment by its terms or the terms of any
document or instrument relating thereto to the Notes or such Guarantee, as
applicable, in any respect or has a stated maturity after the Stated Maturity.
"Subsidiary," with respect to any person, means (i) a corporation a majority
of whose Equity Interests with voting power, under ordinary circumstances, to
elect directors is at the time, directly or indirectly, owned by such person,
by such person and one or more Subsidiaries of such person or by one or more
Subsidiaries of such person, (ii) any other person (other than a corporation)
in which such person, one or more Subsidiaries of such person, or such person
and one or more Subsidiaries of such person, directly or indirectly, at the
date of determination thereof has at least majority ownership interest, or
(iii) a partnership in which such person or a Subsidiary of such person is, at
the time, a general partner. Notwithstanding the foregoing, an Unrestricted
Subsidiary shall not be a Subsidiary of the Company or of any Subsidiary of
the Company. Unless the context requires otherwise, Subsidiary means each
direct and indirect Subsidiary of the Company.
"Treasury Rate" means the yield to maturity at the time of computation of
U.S. Treasury securities with a constant maturity (as complied and published
in the most recent Federal Reserve Release H.15 (519) which has become
publicly available at least two Business Days prior to the applicable
Redemption Date (or, if such statistical release is no longer published, any
publicly available source or similar market data)) closest to the period from
the applicable Redemption Date to September 15, 2002, provided, however, that
if the period from such Redemption Date to September 15, 2002, is not equal to
the constant maturity of a U.S. Treasury security for which a weekly average
yield is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of one year) from the weekly average
yields of U.S. Treasury securities for which such yields are given, except
that if the period from the applicable Redemption Date to September 15, 2002,
is less than one year, the weekly average yield on actually traded U.S.
Treasury securities adjusted to a constant maturity of one year shall be used.
"Unrestricted Subsidiary" means any subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of the Company); provided, that (i) such subsidiary shall not
engage, to any substantial extent, in any line or lines of business activity
other than a Related Business, (ii) neither immediately prior thereto nor
after giving pro forma effect to such designation would there exist a Default
or Event of Default and (iii) immediately after giving pro forma effect
thereto, the Company could incur at least $1.00 of Indebtedness pursuant to
the Debt Incurrence Ratio in the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock." The Board of
Directors of the Company may designate any Unrestricted Subsidiary to be a
Subsidiary, provided that (i) no Default or Event of Default is existing or
will occur as a consequence thereof and (ii) immediately after giving effect
to such designation, on a pro forma basis, the Company could incur at least
$1.00 of Indebtedness pursuant to the Debt Incurrence Ratio in the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock." Each such designation shall be evidenced by filing with the Trustee a
certified copy of the resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions.
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"U.S. Government Obligations" means direct non-callable obligations of, or
noncallable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the
United States of America is pledged.
"Wholly-owned Subsidiary" means a Subsidiary all the Equity Interests of
which are owned by the Company or one or more Wholly-owned Subsidiaries of the
Company, other than directors' qualifying shares or an immaterial amount of
shares to the extent required to be owned by other persons pursuant to
applicable law.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Holders of the New Notes are not entitled to any registration rights
with respect to the New Notes. Pursuant to the Registration Rights Agreement,
the Company agreed to file with the SEC a registration statement (the
"Exchange Offer Registration Statement") on the appropriate form under the
Securities Act with respect to the New Notes. The Registration Statement of
which this Prospectus forms a part constitutes the Exchange Offer Registration
Statement.
The Registration Rights Agreement provides that in the event that applicable
interpretations of the staff of the SEC do not permit the Company to effect
the Exchange Offer, or if for any other reason the Exchange Offer is not
consummated within 210 days of the Issue Date, the Company will, at its own
expense, (a) as promptly as practicable, file a shelf registration statement
covering resales of the Notes (a "Shelf Registration Statement"), (b) use its
best efforts to cause such Shelf Registration Statement to be declared
effective under the Securities Act as promptly as practicable after the filing
of such Shelf Registration Statement and (c) use its best efforts to keep
effective such Shelf Registration Statement until the earlier of 24 months
following the Issue Date and such time as all of the Notes have been sold
thereunder, or otherwise cease to be a Transfer Restricted Security (as
defined in the Registration Rights Agreement). The Company will, in the event
a Shelf Registration Statement is required to be filed, provide to each Holder
of the Notes copies of the prospectus which is a part of such Shelf
Registration Statement, notify each such Holder when such Shelf Registration
Statement for the Notes has become effective and take certain other actions
that are required to permit unrestricted resales of the Notes. A Holder of the
Notes who sells such Notes pursuant to the Shelf Registration Statement
generally would be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which is applicable to such a Holder (including
certain indemnification and contribution rights and obligations).
If (a) the Company fails to consummate the Exchange Offer within 60 days of
the effectiveness of the Exchange Offer Registration Statement, or (b) the
Shelf Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Notes during the period
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) and (b) above a "Registration Default"), then the Company will pay
liquidated damages ("Liquidated Damages") to each holder of Transfer
Restricted Securities, during the first 90-day period immediately following
the occurrence of such Registration Default in an amount equal to $0.05 per
week per $1,000 principal amount of Notes constituting Transfer Restricted
Securities held by such holder. The amount of the Liquidated Damages will
increase by an additional $0.05 per week per $1,000 principal amount
constituting Transfer Restricted Securities for each subsequent 90-day period
until the Registration Default is cured, up to a maximum amount of liquidated
damages of $0.25 per week per $1,000 principal amount of Notes constituting
Transfer Restricted Securities. All accrued liquidated damages shall be paid
to Holders in the same manner as interest payments on the Notes on semi-annual
damages payment dates which correspond to interest payment dates for the
Notes.
Holders of Notes to be included in a Shelf Registration Statement will be
required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights
Agreement in order to have their Notes included in the Shelf Registration
Statement and benefit from the provisions regarding Liquidated Damages set
forth above.
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BOOK-ENTRY, DELIVERY AND FORM
The Old Notes were offered and sold to "qualified institutional buyers" in
reliance on Rule 144A. The Old Notes were issued in registered, global form in
minimum denominations of $1,000 and integral multiples of $1,000 in excess
thereof.
The Old Notes are represented by one or more Notes in registered, global
form without interest coupons (the "Restricted Global Note"), and, except as
set forth below, the New Notes will be represented by one or more Notes in
registered, global form without interest coupons (the "Unrestricted Global
Note," and together with the Restricted Global Note, the "Global Note"). The
Restricted Global Note was, and the Unrestricted Global Note will be,
deposited upon issuance with the Trustee as custodian for The Depository Trust
Company ("DTC"), in New York, New York and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Note may not be exchanged for
Notes in certificated form except in the limited circumstances described
below. See "Exchange of Book-Entry Notes for Certificated Notes."
The Trustee will act as paying agent and registrar.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests and
transfer of ownership interests of each actual purchaser of each security held
by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Note, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Note and (ii) ownership of such interests in
the Global Note will be maintained by DTC (with respect to the Participants)
or by the Participants and the Indirect Participants (with respect to other
owners of beneficial interests in the Global Note).
Investors in the Global Note may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations which are Participants in such system. All interests in the
Global Note may be subject to the procedures and requirements of DTC. The laws
of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of
a person having beneficial interests in a Global Note to pledge such interests
to persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests. For certain other restrictions
on the transferability of the Notes, see "--Exchange of Book-Entry Notes for
Certificated Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTE WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
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Payments in respect of the principal of and premium, if any, and interest
and Liquidated Damages, if any, on a Global Note registered in the name of DTC
or its nominee will be payable by the Trustee to DTC in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the persons in whose names the Notes,
including the Global Note, are registered as the owners thereof for the
purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Company, the Trustee nor any agent of
the Company or the Trustee has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Note, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect Participants's
records relating to the beneficial ownership interests in the Global Note or
(ii) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants. DTC has advised the Company that
its current practice, upon receipt of any payment in respect of securities
such as the Notes (including principal and interest), is to credit the
accounts of the relevant Participants with the payment on the payment date, in
amounts proportionate to their respective holdings in the principal amount of
beneficial interests in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee
or the Company. Neither the Company nor the Trustee will be liable for any
delay by DTC or any of its Participants in identifying the beneficial owners
of the Notes, and the Company and the Trustee may conclusively rely on and
will be protected in relying on instructions from DTC or its nominee for all
purposes.
Interests in the Global Note are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will therefore settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its participants. Transfers
between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Participants
to whose account with DTC interests in the Global Note are credited and only
in respect of such portion of the aggregate principal amount of the Notes as
to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the
right to exchange the Global Note for Notes in certificated form, and to
distribute such Notes to its Participants.
The information in this section concerning DTC and its book-entry system has
been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof. Neither the Company
nor the Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their obligations under the rules and
procedures governing the DTC's operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
The Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Notes in certificated form or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of
time or both would be an Event of Default with respect to the Notes. In all
cases, certificated Notes delivered in exchange for the Global Note or
beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures) and will bear the applicable
restrictive legend referred to in "Notice to Investors," unless the Company
determines otherwise in compliance with applicable law.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until May 25, 1998, (90 days after the date of this Prospectus) all
dealers effecting transactions in the New Notes may be required to deliver a
Prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer that resells New Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not be considered a taxable exchange for federal income tax purposes because
the New Notes will not differ materially in kind or extent from the Old Notes
and because the exchange will occur by operation of the terms of the Old
Notes. Accordingly, such exchange will have no federal income tax consequences
to Holders of Old Notes. A Holder's adjusted tax basis and holding period in a
New Note will be the same as such Holder's adjusted tax basis and holding
period, respectively, in the Old Note exchanged therefor.
Holders considering the exchange of Old Notes for New Notes should consult
their own tax advisors concerning the United States federal income tax
consequences in light of their particular situations as well as any
consequences arising under state, local and foreign income tax and other tax
law.
LEGAL MATTERS
Certain legal matters with respect to the validity of the New Notes will be
passed upon for the Company by O'Melveny & Myers LLP and Lidell, Sapp, Zivley,
Hill & LaBoon LLP.
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EXPERTS
The combined financial statements of Doskocil Manufacturing Company, Inc.
for the six months ended June 30, 1997 and the financial statements of Dogloo,
Inc. for each of the previous two years in the period ended December 31, 1996
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports
appearing elsewhere herein and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The combined financial statements of Doskocil Manufacturing Company, Inc.
and Spectrum Polymers, Ltd. as of December 28, 1996 and December 30, 1995, and
for the years ended December 28, 1996, December 30, 1995, and December 31,
1994, have been included herein in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Dogloo, Inc. for the year ended December 31,
1994 included in this Prospectus, have been audited by Grant Thornton LLP,
independent certified public accountants, as stated in their report appearing
herein.
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INDEX TO FINANCIAL STATEMENTS
DOSKOCIL MANUFACTURING COMPANY, INC.
AND SPECTRUM POLYMERS, LTD.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Reports of Independent Auditors.......................................... F-2
Combined Balance Sheets as of December 30, 1995, December 28, 1996, and
June 30, 1997........................................................... F-4
Combined Statements of Operations for the years ended December 31, 1994,
December 30, 1995, December 28, 1996, and for the six-month period ended
June 30, 1996 (unaudited) and 1997...................................... F-5
Combined Statements of Equity for the years ended December 31, 1994,
December 30, 1995, December 28, 1996, and for the six-month period ended
June 30, 1997........................................................... F-6
Combined Statements of Cash Flows for the years ended December 31, 1994,
December 30, 1995, December 28, 1996, and for the six-month period ended
June 30, 1996 (unaudited) and 1997...................................... F-7
Notes to Combined Financial Statements................................... F-8
</TABLE>
DOSKOCIL MANUFACTURING COMPANY, INC.
<TABLE>
<S> <C>
Condensed Balance Sheets as of June 30, 1997 and December 31, 1997
(unaudited).............................................................. F-16
Unaudited Statements of Operations for the six-month periods ended
December 31, 1996 and December 31, 1997.................................. F-17
Unaudited Statement of Changes in Preferred Stock and Shareholders Equity
(Deficit)................................................................ F-18
Unaudited Statements of Cash Flows for the six-month periods ended
December 31, 1996 and December 31, 1997.................................. F-19
Notes to Condensed Financial Statements................................... F-20
</TABLE>
DOGLOO, INC.
<TABLE>
<S> <C>
Reports of Independent Auditors........................................... F-25
Balance Sheets as of December 31, 1995 and 1996, and August 31, 1997
(unaudited).............................................................. F-27
Statements of Operations for the years ended December 31, 1994, 1995 and
1996, and for the eight month periods ended August 31, 1996 (unaudited)
and August 31, 1997 (unaudited).......................................... F-28
Statements of Changes in Redeemable Preferred Stock and Shareholders
Deficit for the years ended December 31, 1994, 1995 and 1996, and for the
eight month period ended August 31, 1997 (unaudited)..................... F-29
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996, and for the eight month periods ended August 31, 1996 (unaudited)
and August 31, 1997 (unaudited).......................................... F-30
Notes to Financial Statements............................................. F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors
Doskocil Manufacturing Company, Inc. and
Spectrum Polymers, Ltd.
We have audited the accompanying combined balance sheet of Doskocil
Manufacturing Company, Inc. (the Company), and Spectrum Polymers, Ltd. (the
Partnership), as of June 30, 1997, and the related combined statements of
operations, equity, and cash flows for the six-month period then ended. These
combined financial statements are the responsibility of the Company's and the
Partnership's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Doskocil
Manufacturing Company, Inc., and Spectrum Polymers, Ltd., as of June 30, 1997,
and the combined results of their operations and their cash flows for the six
month period then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
July 25, 1997
Dallas, Texas
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Doskocil Manufacturing Company, Inc. and Spectrum Polymers, Ltd.:
We have audited the accompanying combined balance sheets of Doskocil
Manufacturing Company, Inc. (Company) and Spectrum Polymers, Ltd.
(Partnership) as of December 28, 1996 and December 30, 1995, and the related
combined statements of operations, equity, and cash flows for the years ended
December 28, 1996, December 30, 1995, and December 31, 1994. These combined
financial statements are the responsibility of the Company's and the
Partnership's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Doskocil
Manufacturing Company, Inc. and Spectrum Polymers, Ltd. as of December 28,
1996 and December 30, 1995, and the results of their operations and their cash
flows for the years ended December 28, 1996, December 30, 1995, and December
31, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Fort Worth, Texas
March 12, 1997
F-3
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------- ------------- ------------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 4,258 $ 6,975 $ 2,066
Trade accounts receivable, less
allowance for doubtful accounts
of $120 in 1995, $220 in 1996,
and $248 in 1997 (Notes 1 and 8). 13,427 14,016 14,585
Other accounts receivable (Note
2)............................... 209 934 131
Accounts receivable from affiliate
(Note 6)......................... 4,435 427 --
Inventories (Note 2).............. 20,335 19,268 16,484
Prepaid expenses.................. 214 309 92
------------ ------------ ------------
Total current assets............ 42,878 41,929 33,358
Property, plant, and equipment, net
(Notes 3, 4, 5, and 6)............. 28,078 22,566 16,904
Other assets (Note 6)............... 1,920 1,640 417
------------ ------------ ------------
Total assets.................... $ 72,876 $ 66,135 $ 50,679
============ ============ ============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.................. $ 3,350 $ 3,840 $ 3,235
Accounts payable to affiliate, net
(Note 6)......................... -- 1,523 --
Accrued expenses.................. 3,371 3,842 2,733
Lines of credit................... 13,794 12,110 7,250
Current portion of long term debt
(Note 4)......................... 1,535 1,645 1,712
Current portion of deferred gain,
net (Note 5)..................... -- 6 6
------------ ------------ ------------
Total current liabilities....... 22,050 22,966 14,936
Revolving line of credit............ 10,569 -- --
Long term debt, less current portion
(Note 4)........................... 9,109 7,465 6,590
Deferred gain, net (Note 5)......... -- 66 63
------------ ------------ ------------
Total liabilities............... 41,728 30,497 21,589
------------ ------------ ------------
Commitments and contingencies (Notes
2, 5, and 9)
Equity:
Common stock, no par value:
Authorized shares--12,500,000,
Issued and outstanding shares--
5,998,900........................ 24 24 24
Retained earnings................. 25,827 31,336 25,258
------------ ------------ ------------
Total stockholders' equity...... 25,851 31,360 25,282
Limited partners.................. 5,244 4,235 3,770
General partner................... 53 43 38
------------ ------------ ------------
Total partners' equity.......... 5,297 4,278 3,808
------------ ------------ ------------
Total equity.................... 31,148 35,638 29,090
------------ ------------ ------------
Total liabilities and equity.... $ 72,876 $ 66,135 $ 50,679
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------- ---------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales (Note 8)...... $ 92,267 $ 97,496 $ 103,455 $ 51,737 $ 51,756
Cost of goods sold...... 62,485 71,552 73,128 37,345 38,389
--------- --------- --------- --------- ---------
Gross profit............ 29,782 25,944 30,327 14,392 13,367
Operating expenses:
Selling, general and
administrative
expenses............. 20,675 20,733 20,682 10,388 10,446
Officer's bonus (Note
6)................... 4,378 -- 2,030 853 --
Retention bonus (Note
7)................... -- -- -- -- 2,875
Write-down of
equipment to be
disposed (Note 3).... -- -- -- -- 3,846
Litigation expense
(Note 9)............. -- 2,106 -- -- --
--------- --------- --------- --------- ---------
Operating income (loss). 4,729 3,105 7,615 3,151 (3,800)
Other (income) expense:
Interest expense, net. 822 2,456 2,176 1,750 471
Other, net (Note 2)... (44) (541) 696 71 5
--------- --------- --------- --------- ---------
Total other (income)
expense............ 778 1,915 2,872 1,821 476
--------- --------- --------- --------- ---------
Net income (loss)....... 3,951 1,190 4,743 1,330 (4,276)
Pro forma income tax
expense (benefit) (Note
1)..................... 1,580 440 1,755 492 (1,582)
--------- --------- --------- --------- ---------
Pro forma net income
(loss)................. $ 2,371 $ 750 $ 2,988 $ 838 $ (2,694)
========= ========= ========= ========= =========
Pro forma net income
(loss) per share
(Note 1)............... $ 1.78 $ .56 $ 2.25 $ .63 $ (2.02)
========= ========= ========= ========= =========
Pro forma weighted
average common shares
outstanding (Note 1) .. 1,331,021 1,331,021 1,331,021 1,331,021 1,331,021
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
DOSKOCIL
MANUFACTURING SPECTRUM
COMPANY, INC. POLYMERS, LTD.
--------------- ----------------
COMMON RETAINED LIMITED GENERAL
STOCK EARNINGS PARTNERS PARTNER TOTAL
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994............ $ 24 $26,387 $ -- $ -- $26,411
Capital contributions............... -- -- 99 1 100
Net income.......................... -- 922 2,999 30 3,951
----- ------- ------ ----- -------
Balance at December 31, 1994.......... 24 27,309 3,098 31 30,462
Distributions....................... -- -- (499) (5) (504)
Net income (loss)................... -- (1,482) 2,645 27 1,190
----- ------- ------ ----- -------
Balance at December 30, 1995.......... 24 25,827 5,244 53 31,148
Distributions....................... -- -- (250) (3) (253)
Net income (loss)................... -- 5,509 (759) (7) 4,743
----- ------- ------ ----- -------
Balance at December 28, 1996.......... 24 31,336 4,235 43 35,638
Distributions (Note 6).............. -- (1,836) (431) (5) (2,272)
Net loss............................ -- (4,242) (34) -- (4,276)
----- ------- ------ ----- -------
Balance at June 30, 1997.............. $ 24 $25,258 $3,770 $ 38 $29,090
===== ======= ====== ===== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------- --------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)...... $ 3,951 $ 1,190 $ 4,743 $ 1,330 $(4,276)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 4,283 5,545 5,928 2,877 2,857
Write-down of
equipment to be
disposed............. -- -- -- -- 3,846
Other................. (17) (22) 9 (39) (86)
Changes in current
assets and
liabilities:
Trade accounts
receivable.......... (4,012) (561) (589) (1,420) (569)
Other accounts
receivable.......... (137) 127 (725) (119) 803
Account receivable
from affiliate...... -- (4,435) 4,008 4,008 427
Inventories.......... (3,893) (6,366) 1,068 (243) 2,784
Prepaid expenses..... (37) 33 (95) (237) 217
Accounts payable..... 1,446 (459) 489 408 (605)
Accounts payable to
affiliate........... -- -- 1,523 -- (1,523)
Accrued expenses..... (104) 163 471 737 (1,109)
-------- -------- -------- ------- -------
Net cash provided by
(used in) operating
activities............. 1,480 (4,785) 16,830 7,302 2,766
Investing Activities
Acquisition of property,
plant, and equipment... (11,474) (19,156) (4,129) (2,740) (971)
Proceeds from sale of
property, plant, and
equipment.............. 9 13,939 4,116 -- --
Cash paid for
acquisition (Note 10).. (4,267) -- -- -- --
Repayments of advances
to related parties..... 1,760 -- -- -- --
Decrease (increase) in
other assets........... (141) (102) (61) 49 (1)
-------- -------- -------- ------- -------
Net cash used in
investing activities... (14,113) (5,319) (74) (2,691) (972)
Financing Activities
Net (payments)
borrowings on lines of
credit................. 10,500 5,325 (12,252) (4,253) (4,860)
Proceeds from long-term
debt................... 2,600 9,046 -- -- --
Payments on long-term
debt................... (354) (649) (1,534) (754) (808)
Capital (distributions)
contributions.......... 100 (504) (253) (252) (1,035)
-------- -------- -------- ------- -------
Net cash provided by
(used in) financing
activities............. 12,846 13,218 (14,039) (5,259) (6,703)
-------- -------- -------- ------- -------
Net increase (decrease)
in cash and cash
equivalents............ 213 3,114 2,717 (648) (4,909)
Cash and cash
equivalents at
beginning of period.... 931 1,144 4,258 4,258 6,975
-------- -------- -------- ------- -------
Cash and cash
equivalents at end of
period................. $ 1,144 $ 4,258 $ 6,975 $ 3,610 $ 2,066
======== ======== ======== ======= =======
Supplemental Disclosure
of Cash Flow
Information
Interest paid.......... $ 588 $ 2,376 $ 2,672 $ 1,676 $ 633
======== ======== ======== ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During 1997, the Company made noncash distributions of assets totaling $1,237
(Note 6).
During 1996, the Company deferred a gain of $246 on a sale-leaseback
transaction (Note 5).
In addition, the Company deferred a loss of $203 on a sale-leaseback in 1995,
which was included in other assets at December 30, 1995 (Note 5).
See accompanying notes.
F-7
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESSES
Doskocil Manufacturing Company, Inc. (the Corporation), and Spectrum
Polymers, Ltd. (the Partnership) are under common ownership and are referred
to herein collectively as the Company. Prior to July 1, 1997, the general
partnership interest of the Partnership was held by Bed Rock International,
Inc., a Texas corporation wholly owned by Benjamin L. Doskocil and Mary
Francis Doskocil (the "Doskocils"); prior to July 1, 1997, the limited
partnership interests of the Partnership were owned by the Doskocils and the
Corporation was owned by the Doskocils. The Corporation is a Texas corporation
engaged in the manufacturing and sale of injection molded consumer plastic
products primarily for the pet care, hardware, sports, and leisure industries
principally in the United States. The Partnership is organized under the Texas
revised Limited Partnership Act and is engaged in the purchasing, recycling,
and blending of plastic resin primarily for use by the Corporation in
injection molded consumer plastic products.
Effective July 1, 1997, the Company was recapitalized through the following
transactions: (1) 100% of the Partnership interest was sold to a group of
investors for $11,005; (2) the Partnership interests were exchanged for
798,612 shares of the Corporation's common stock; (3) the Corporation's
Articles of Incorporation were amended to establish the Corporation as a C
Corporation and authorized 15,000,000 shares of preferred stock and 15,000,000
shares of common stock, each with no par value per share; (4) the group of
investors purchased 199,654 shares of common stock for $3,000 and 1,530,674
shares of Series A Preferred Stock for $23,000; (5) all outstanding balances
under the lines of credit and long-term debt, along with related accrued
interest and pre-payment penalties were paid in full (see Note 4); and (6) the
Corporation redeemed 5,666,145 shares of common stock from the majority
stockholder for approximately $87.4 million.
Excluding the impact, if any, from any purchase price adjustments for the
acquisition of the Partnership interest and after giving effect to the above
mentioned recapitalization, the Corporation is expected to have a deficit in
equity of approximately $26,000 as of July 1, 1997.
The Series A Preferred Stock is convertible into common stock at the option
of the holder at a defined conversion price concurrent with or following the
consummation of the closing of a merger with or acquisition of another company
engaged principally in supplying products to the pet industry with annual
revenues in excess of $25,000. The preferred stock is also subject to a 10%
cash dividend per share commencing July 1, 1998, which is cumulative. The
conversion price is initially equivalent to one share of preferred stock for
one share of common stock based on a price of $15.02607 per share of preferred
stock. The preferred stockholders are entitled to vote their shares on any
matter submitted to the common stockholders, except those matters required by
law to be submitted to a class vote.
A portion of the proceeds received as a result of the recapitalization was
used to repurchase assets previously sold and leased back. The aggregate
purchase price was $18,724 (see Note 5). The remaining proceeds of
approximately $2,600 was used to pay fees incurred in connection with the
recapitalization.
The Company entered into two new debt agreements which include $65,000 in
borrowings from a $80,000 credit agreement and $32,500 in senior subordinated
increasing rate notes. The credit agreement was signed with a bank and an
unrelated investment company on July 1, 1997. Under the terms of the
agreement, $40,000 was borrowed under Term A Loans and $25,000 was borrowed
under Term B Loans. The Term A Loans bear interest at rates ranging from prime
plus 0% to .75% to LIBOR plus 1.5% to 2.25% and are payable in quarterly
principal installments of $1,000 beginning September 30, 1998, through June
30, 1999, $2,000 through June 30, 2001, and $2,500 through June 30, 2003. The
Term B Loans bear interest at prime plus 1.25% to LIBOR plus 2.75% and are
payable in quarterly principal installments of $62.5 beginning September 30,
1997, through June 30, 2003, and $5,875 through June 30, 2004. Borrowings may
also be made under the Revolving Credit Commitment
F-8
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of $15,000 subject to certain borrowing base provisions. The Revolving Credit
Commitment matures on June 30, 2003. The Credit agreement includes various
restrictive covenants including capital expenditure limitations, maintaining
maximum leverage ratios, minimum fixed charge coverage ratios and EBITDA, and
interest coverage ratios. Interest on the credit agreement is paid on a
quarterly basis.
The senior subordinated increasing rate notes initially bear interest at
prime plus 3.5% and increase on each Rate Determination Date, as defined.
Interest is payable quarterly in arrears, on the first day of each January,
April, July, and October. The notes mature on July 1, 1998; however, the notes
will be automatically extended until January 1, 2005, if on the first
anniversary no default of principal or interest exists, all fees payable on or
prior to the first anniversary have been paid in full, and an election was not
made by the Company to pay the debt in full on July 1, 1998.
If the senior subordinated increasing rate notes are not paid in full by
July 1, 1998, the holders of the senior subordinated increasing rate notes are
entitled to warrants representing 15% of the outstanding common stock at an
exercise price of $0.01 per share.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of the
Corporation and the Partnership. All significant intercompany balances and
transactions are eliminated. Certain amounts from prior years have been
reclassified from previous presentations.
FISCAL YEARS
The Company changed its fiscal year end to June 30 beginning in 1997. Prior
to 1997, the Company prepared its financial statements and reported its
results of operations on the basis of a fiscal year which ended on the
Saturday nearest December 31. Accordingly, the fiscal years ended December 31,
1994, December 30, 1995, and December 28, 1996, consist of 52 weeks.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of weighted-average cost or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost and depreciated over the
estimated useful lives of the respective assets on a straight-line basis.
Repairs and maintenance which do not extend the lives or improve the
respective assets are charged to expense as incurred.
INTANGIBLE ASSETS
The cost of intangible assets (patents and noncompete agreements) are being
amortized on a straight-line basis over the estimated useful lives of such
assets. The cost of such assets, net of the related accumulated amortization,
is included in other assets in the accompanying combined financial statements.
Accumulated amortization at December 30, 1995, December 28, 1996, and June 30,
1997, was $689, $847, and $926, respectively.
F-9
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISK CONCENTRATIONS
Financial instruments that potentially subject the Company to concentrations
of credit risk are accounts receivable. The Company generally sells consumer
products to wholesale distributors and retail customers throughout the United
States, Canada, and Europe who are associated with the pet, sport, home and
garden, and leisure industries. The Company continuously evaluates the
creditworthiness of its customers' financial condition and generally does not
require collateral. Included in trade accounts receivable at June 30, 1997, is
$4,300 of receivables which are not due until October 1997.
FEDERAL INCOME TAXES
Effective January 1, 1988, the Corporation elected to be taxed as an
Subchapter S Corporation under the provisions of the Internal Revenue Code.
Under these provisions, the Corporation did not pay a corporate level tax on
its taxable income. Rather, the Corporation's taxable income or loss was
passed through to the shareholders and included on their individual income tax
returns. However, the Corporation is subject to tax on "built-in-gains" as
prescribed by the Internal Revenue Code up through the date of termination of
its status as an S Corporation. The Corporation terminated its S Corporation
status on June 30, 1997. No provision for income taxes has been made in the
accompanying combined financial statements for the Corporation.
Under Subchapter K of the Internal Revenue Code, the Partnership is not
subject to income tax and its taxable income or loss is passed through to the
partners and included on their respective income tax returns. No provision for
income taxes has been made in the accompanying combined financial statements
for the Partnership.
As a result of the Corporation's termination as an S Corporation, it became
a C corporation effective July 1, 1997. For tax years subsequent to July 1,
1997, the Corporation's taxable income will be subject to a corporate level
income tax. Accordingly, the following deferred tax assets and liabilities
were established with a net charge to earnings on July 1, 1997:
<TABLE>
<S> <C>
Deferred tax assets:
Reserve for equipment to be disposed.......................... $ 1,423
Accrued expenses.............................................. 359
Reserve for inventory......................................... 298
Allowance for co-op advertising............................... 153
Allowance for doubtful accounts............................... 92
Other......................................................... 67
-------
Total deferred tax assets....................................... 2,392
Deferred tax liability:
Tax depreciation in excess of book............................ (4,062)
-------
Net deferred tax liability...................................... $(1,670)
=======
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Such estimates relate principally to allowances for
doubtful accounts and slow moving inventory. Actual results could differ from
those estimates.
F-10
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense was
approximately $2,702, $3,226, $3,443, and $1,762 for 1994, 1995, 1996, and the
six month period ended June 30, 1997, respectively.
PRO FORMA INCOME (LOSS) PER COMMON SHARE (UNAUDITED 1994-1996)
Pro forma net income (loss) per common share and pro forma weighted average
common shares outstanding are based on the common shares outstanding after the
recapitalization and the termination of the Company's S Corporation status
discussed above. Earnings have been reduced by pro forma income tax expense
(benefit) of $1,580, $440, $1,755, $492, and $(1,582), for 1994, 1995, 1996
and the six months ended June 30, 1996 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
during fiscal year 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the combined financial position or results of operations of the
Company.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
Finished goods............................ $ 9,385 $ 9,074 $ 9,610
Work in progress.......................... 1,622 1,346 876
Raw materials............................. 9,328 8,848 5,998
------- ------- -------
$20,335 $19,268 $16,484
======= ======= =======
</TABLE>
During 1997, the Company recorded $1,300 as an allowance for inventory and
wrote off $939 against such allowance.
During 1996, the Partnership had a fire at its manufacturing facility,
during which approximately $1,300 in raw material inventory was destroyed.
Other losses and expenses of approximately $130 were also incurred related to
the fire. The Partnership recorded a receivable from the insurance carrier of
$801 relating to the loss which is included in other accounts receivable in
the accompanying combined balance sheet as of December 28, 1996. The resulting
loss of $628 is included in other expense, net for the year ended December 28,
1996. The insurance proceeds were received during 1997.
F-11
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
2. INVENTORIES (CONTINUED)
As a result of the fire, the Partnership had environmental tests performed.
It is the opinion of management that there are no environmental liabilities
relating to this issue.
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
Machinery and equipment................. $ 52,505 $ 52,032 $ 48,239
Computer equipment...................... 2,455 2,525 2,540
Leasehold improvements.................. 1,834 2,225 2,199
Office furniture and equipment.......... 947 970 954
Equipment to be disposed................ -- -- 500
Autos and trucks........................ 196 196 196
Land and land improvements.............. 15 15 --
-------- -------- --------
57,952 57,963 54,628
Accumulated depreciation and
amortization........................... (29,874) (35,397) (37,724)
-------- -------- --------
$ 28,078 $ 22,566 $ 16,904
======== ======== ========
</TABLE>
During 1997, the Company decided to dispose of certain equipment (molds,
tools, and dies) which was deemed to be obsolete or in a line of business
which will no longer be manufactured by the Company. Accordingly, the assets
were written down to their net realizable value with a charge to operating
income of $3,846.
4. LINES OF CREDIT AND LONG-TERM DEBT
On July 2, 1997, all borrowings under lines of credit and long-term debt
discussed in this footnote were paid off and related agreements canceled. (See
Note 1).
The Company has an unsecured line of credit with a bank allowing for maximum
borrowings of $11,755. The line of credit matured on May 31, 1997, and was
extended to August 31, 1997, in connection with the anticipated
recapitalization (see Note 1). The line of credit bears interest at various
prime rate options, 8% at June 30, 1997. The balance outstanding at June 30,
1997, was $2,850.
The Company has another unsecured line of credit with another bank allowing
for maximum borrowings of $10,000. The line of credit matured on May 31, 1997,
and was extended to August 31, 1997, in connection with the anticipated sale
of the Company (see Note 1). The line of credit bears interest at various
prime rate options, 8% at June 30, 1997. The outstanding balance was $4,400 at
June 30, 1997.
The unsecured lines of credit include various affirmative and negative
covenants relating primarily to certain financial ratios, net worth levels and
incurrence of additional debt. The Company was in compliance with these
covenants at June 30, 1997. At June 30, 1997, the Company had available
borrowings of $14,505 from the lines of credit.
F-12
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
4. LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
Note payable due in monthly installments
including interest at 7.85%, maturing in
2002, secured by certain equipment with a
carrying value of approximately $5,000 at
June 30, 1997.............................. $ 8,884 $ 7,861 $ 7,319
Note payable due in quarterly installments
of principal and interest to mature in
1999, bearing interest at 5.12%, secured by
certain equipment with a carrying value of
approximately $4,400 at June 30, 1997...... 1,760 1,249 983
------- ------- -------
10,644 9,110 8,302
Less current portion........................ (1,535) (1,645) (1,712)
------- ------- -------
$ 9,109 $ 7,465 $ 6,590
======= ======= =======
</TABLE>
At June 30, 1997, the Company was party to a $1,800 amortizing interest rate
swap agreement which expires July 31, 1997. The Company utilizes this swap to
limit interest rate risk or modify terms of certain interest rate sensitive
liabilities.
The weighted average interest rate on the Company's short term borrowings
were 7.9%, 7.8%, and 8%, as of December 30, 1995, December 28, 1996, and June
30, 1997, respectively.
Based on current market rates and the outstanding balances being paid in
full subsequent to June 30, 1997, management believes the carrying values of
the lines of credit and long-term debt approximates their fair value.
5. LEASES
The Company is obligated under various long-term operating lease agreements
for the manufacturing plant, warehouse and office space, and equipment. Total
rent expense for all operating leases was approximately $3,148, $3,434,
$6,195, and $3,334 for the years ended 1994, 1995, and 1996 and the six month
period ended June 30, 1997, respectively.
In 1995 and 1996, the Company entered into agreements for the sale and
leaseback of certain equipment. The leases were classified as operating
leases. The book value of the equipment sold was approximately $18,012.
Ultimately, the transactions resulted in a net gain that was deferred and
amortized to income as an adjustment of rent expense over the lease term.
Rentals on the leases began in 1996 and ranged from approximately $1,725 to
$2,787 annually.
Effective July 1, 1997, the Company repurchased the equipment previously
sold and leased back in 1995 and 1996, for approximately $18,724 and canceled
the existing lease arrangements. The unamortized net deferred gain at June 30,
1997 of approximately $69 was offset against the purchase price. The lease
payments remaining at June 30, 1997, have been excluded from the Company's
future minimum lease payments.
The Company conducts the major part of its operations from leased facilities
which include the manufacturing plant, warehouse, and offices. These
facilities are leased under long-term noncancelable operating leases with the
Chairman of the Board of Directors who was formerly the majority stockholder.
Rent paid approximated $2,282, $2,448, $3,438, and $1,179 for the years ended
1994, 1995, and 1996, and the six month period ended June 30, 1997,
respectively.
F-13
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
5. LEASES (CONTINUED)
Effective July 1, 1997, the Company canceled its existing leases for the
manufacturing plant and warehouse and office space and entered into new lease
agreements with terms ranging from five to ten years. Leases with terms in
excess of ten years include a clause which increases the monthly rent payments
by 10% beginning in year six. The leases have various renewal options which
are available at the end of the lease term. Aggregate monthly payments are
$284.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of June 30, 1997,
are $3,465 in 1998, $3,409 in 1999 through 2002, and $17,382 thereafter.
6. RELATED PARTY TRANSACTIONS
During 1995, the Company advanced $4,435 to Marybe, Ltd., a related party.
The balance at December 28, 1996, was $427, which was paid in full during the
six month period ended June 30, 1997.
During 1994 and 1996, the Company expensed $4,378 and $2,030, respectively,
in officer's bonus to the former majority stockholder. The $1,523 payable at
December 28, 1996, was paid in full during 1997. No such bonuses were declared
or paid for the six month period ended June 30, 1997.
The Company also made advances to fund the annual premiums on a life
insurance policy on the former majority stockholder. The policy is owned by a
trust. As collateral for these advances, the trust assigned the premium
receivable rights in the cash value and death proceeds of the policy to the
Company. The advances for premiums receivable, included in other assets the
accompanying financial statements, were approximately $764 and $825 at
December 30, 1995, and December 28, 1996, respectively. The balance of the
trust was distributed to the stockholders prior to June 30, 1997.
During the six month period ended June 30, 1997, the Company made cash
distributions of $1,035 to the stockholders and partners. In addition, the
Company distributed other assets of $1,237, which included an insurance trust
receivable, the cash surrender value of life insurance policies on the
stockholders, and property and equipment.
7. PROFIT SHARING PLAN
The Company has established an employee defined contribution profit sharing
plan. Contributions are at the discretion of the Board of Directors and the
Partners. Eligible employees are those who have been employed for one year or
more and are currently employed on the admittance dates of January 1 and July
1 each year. Profit sharing plan expense was approximately $1,067, $452, $992,
and $29 in the years ended 1994, 1995, and 1996 and the six month period ended
June 30, 1997, respectively.
In connection with the recapitalization of the Company, employees who
remained with the Company through the date of the recapitalization were
eligible to receive a bonus. Such bonuses amounted $2,875 for the six month
period ended June 30, 1997.
8. MAJOR CUSTOMERS
During 1994, two customers accounted for 11% and 11% of total sales,
respectively. During 1995, no one customer accounted for more than 10% of
total sales. During 1996, two customers accounted for 10% and 11% of total
sales, respectively. During the six month period ended June 30, 1997, two
customers accounted for 11% and 11% of total sales. Included in trade accounts
receivable is approximately $2,610 and $1,963 due from these customers at
December 28, 1996, and June 30, 1997.
F-14
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC. AND SPECTRUM POLYMERS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
During 1995, the Company settled a patent infringement lawsuit. The Company
incurred $2,106 in legal costs during 1995 related to this case, which is
included in other income (expense).
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.
SELF-INSURANCE
The Company is a nonsubscriber for worker's compensation insurance in
accordance with the Texas Worker's Compensation Act and is therefore self
insured for all worker's compensation claims.
The Company is self-insured for medical and dental benefits for their
employees and their covered dependents. Medical claims exceeding $60 per
covered individual are covered through a private insurance carrier.
10. ACQUISITIONS
In January 1994, the Company purchased certain assets of a company for cash
of $4,267. The assets acquired consisted of the following: inventory of $496,
equipment of $3,705, and prepaid expenses of $65. This acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
acquired assets were recorded at their estimated fair values at the date of
the acquisition. The operating results of the acquired business are included
in the accompanying combined financial statements from the date of
acquisition. This acquisition did not have a significant effect on the 1994
operating results.
On July 3, 1997, the Company signed a letter of intent to acquire Dogloo,
Inc. (Dogloo). Under the terms of the letter of intent, all outstanding shares
of Dogloo common stock will be converted into shares of the Company's common
stock. In addition, shares of outstanding Dogloo preferred stock will be
converted into shares of newly designated Company Series B and Series C
Preferred Stock.
F-15
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE
DECEMBER 30,
31, 1997 1997
----------- -------
(UNAUDITED)
(DOLLARS IN
THOUSANDS)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 9,556 $ 2,066
Accounts receivable, net.................................. 22,070 14,585
Inventories (Note 6)...................................... 23,023 16,484
Deferred income taxes..................................... 7,497 --
Other current assets...................................... 1,284 223
-------- -------
Total current assets.................................... 63,430 33,358
Property, plant and equipment, net.......................... 52,683 16,904
Fixed assets held for sale.................................. 3,500 --
Goodwill.................................................... 49,197 --
Debt issuance costs......................................... 5,246 --
Deferred taxes.............................................. 1,407 --
Other assets................................................ 1,635 417
-------- -------
Total assets............................................ $177,098 $50,679
======== =======
<CAPTION>
LIABILITIES AND (DEFICIT) EQUITY
--------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 7,600 $ 3,235
Accrued liabilities....................................... 11,391 2,733
Current portion of long-term debt......................... 250 1,712
Lines of credit........................................... -- 7,250
Other current liabilities................................. 6,025 6
-------- -------
Total current liabilities............................... 25,266 14,936
Long-term debt ............................................. 82,250 6,590
Senior subordinated notes................................... 85,000 --
Deferred taxes and other.................................... 4,062 63
-------- -------
Total liabilities....................................... 196,578 21,589
-------- -------
(Deficit) equity:
Series C Preferred Stock, no par value: Authorized
shares--15,000,000, issued and outstanding 9,161,567 at
December 31, 1997........................................ 9,161 --
Common stock, no par value: Authorized shares--15,000,000,
issued and outstanding--3,053,640 at December 31, 1997;
Authorized shares--12,500,000, issued and outstanding--at
June 30, 1997............................................ 33,580 24
(Deficit) retained earnings............................... (62,221) 25,258
-------- -------
Total shareholders' (deficit) equity.................... (19,480) 25,282
Partners' equity.......................................... -- 3,808
-------- -------
Total shareholders' (deficit) equity.................... (19,480) 29,090
-------- -------
Total liabilities and shareholders' (deficit) equity.... $177,098 $50,679
======== =======
</TABLE>
See accompanying notes.
F-16
<PAGE>
FINANCIAL STATEMENTS
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER
31,
----------------
1997 1996
------- -------
(UNAUDITED)
(DOLLARS IN
THOUSANDS
EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net sales...................................................... $79,506 $51,716
Cost of goods sold............................................. 50,895 35,978
------- -------
Gross profit................................................... 28,611 15,738
Selling, general and administrative expense.................... 14,508 10,474
Officer's bonus................................................ -- 1,255
------- -------
Operating income............................................... 14,103 4,009
Other (income) expense:
Interest expense, net (1997 amount includes amortization
of bridge financing costs of $2,514)........................ 9,130 1,030
Other, net................................................... (223) 482
------- -------
Total other (income) expense............................... 8,907 1,512
------- -------
Income before income taxes..................................... 5,196 2,497
Less provision for income taxes................................ 3,594 --
------- -------
Net income..................................................... 1,602 2,497
Preferred stock dividends...................................... 726 --
------- -------
Net income attributable to common shareholders................. $ 876 $ 2,497
======= =======
Net income per common share (basis)............................ $ .38
=======
Net income per common share (diluted).......................... $ .38
=======
Weighted average common shares outstanding..................... 2,300
=======
Pro forma provision for income tax (Note 8).................... 949
-------
Pro forma net income........................................... $ 1,548
=======
Pro forma net income per common share.......................... $ 1.16
=======
Pro forma weighted average common shares outstanding........... 1,331
=======
</TABLE>
See accompanying notes.
F-17
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENT OF CHANGES IN PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED
PREFERRED STOCK PREFERRED STOCK STOCK
SERIES A SERIES B SERIES C COMMON STOCK RETAINED
---------------- ----------------- --------------- ---------------- EARNINGS SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT (DEFICIT) EQUITY (DEFICIT)
------ -------- ------- -------- ------ ------- ------ -------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1997. 5,999 $ 24 $ 25,258 $ 25,282
Stock issued in
exchange for the
partnership interest
of Spectrum Polymers. 798 4,804 4,804
Common and Series A
preferred stock
issued for cash...... 1,531 $ 23,000 200 3,000 26,000
Redemption of common
stock................ (5,677) (458) (87,377) (87,835)
Recapitalization
costs--investor
direct acquisition
costs................ (1,392) (1,392)
Stock issued in merger
with Dogloo.......... 10,224 $ 10,224 11,841 $11,841 1,400 21,210 43,275
Redemption of Series A
preferred stock,
common stock and
payment of dividends
on preferred stock... (466) (7,000) (732) (11,000) (469) (18,469)
Conversion of Series A
preferred stock to
common stock......... (1,065) (16,000) 1,065 16,000
Redemption of Series B
and Series C
preferred stock...... (10,224) (10,224) (2,680) (2,680) (12,904)
Fair value of options
assumed in connection
with the merger...... 157 157
Net loss.............. 1,602 1,602
------ -------- ------- -------- ------ ------- ------ -------- -------- --------
Balance at December
31, 1997............. -- -- -- -- 9,161 $ 9,161 3,053 $ 33,580 $(62,221) $(19,480)
====== ======== ======= ======== ====== ======= ====== ======== ======== ========
</TABLE>
See accompanying notes.
F-18
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------
1997 1996
--------- -------
(UNAUDITED)
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Operating activities:
Net income................................................ $ 1,602 $ 2,497
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization........................... 5,020 3,141
Deferred income taxes from tax status change............ 1,670 --
Other................................................... (224) --
Changes in:
Receivables........................................... 148 1,183
Inventories........................................... 2,150 1,687
Other assets.......................................... 461 141
Payables.............................................. (210) 383
Accrued and other liabilities......................... 3,752 1,483
All other non-current assets and liabilities.......... (867) --
--------- -------
Net cash from operating activities...................... 13,502 10,485
Investing activities:
Repurchase of leased assets............................... (18,724) --
Capital expenditures...................................... (3,743) (1,390)
Increase in other assets.................................. (200) (108)
Cash of acquired business................................. 1,335 --
Disposal of Assets........................................ 825 4,116
Other..................................................... 3 --
--------- -------
Net cash provided by (used in) investing activities..... (20,504) 2,618
--------- -------
Financing activities:
Proceeds from long-term debt.............................. 262,500 --
Payments of long-term debt................................ (102,319) (779)
Payment of debt of acquired business...................... (34,584) --
Proceeds from revolving credit agreement.................. 5,500 --
Payments of revolving credit agreement.................... (12,750) (8,001)
Proceeds from sale of common stock........................ 3,000 --
Redemption of common stock................................ (11,000) --
Proceeds from sale of preferred stock..................... 23,000 --
Redemption of preferred stock and accumulated dividends... (24,433) --
Cash paid to stockholders from recapitalization........... (87,922) --
Debt issuance costs....................................... (4,637) --
Recapitalization costs.................................... (1,394) --
Cash dividends............................................ (469) --
--------- -------
Net cash provided by (used in) financing activities..... 14,492 (8,780)
--------- -------
Net increase in cash and cash equivalents.................. 7,490 4,323
Cash and cash equivalents at beginning of year............. 2,066 3,609
--------- -------
Cash and cash equivalents at end of period................. $ 9,556 $ 7,932
========= =======
</TABLE>
See accompanying notes.
F-19
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to form 10-Q and Article 10 of Regulation S-
X. Accordingly, these financial statements do not include all of the
information required by generally accepted accounting principles for complete
financial statements. Included in the statements for the six months ended
December 31, 1997 are the operations for Dogloo, Inc. since September 19,
1997, the date it merged with and into Doskocil Manufacturing Company, Inc.
(the "Company"). The combined balance sheet at June 30, 1997 has been derived
from the audited combined financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The six month period ended December 31, 1996, and the balance sheet at June
30, 1997, represent combined results of the Company and Spectrum Polymers,
Ltd. ("Spectrum"), as they were under common ownership.
In the opinion of management, all normal recurring adjustments considered
necessary for a fair presentation have been included. Operating results for
the six month period ended December 31, 1997 are not necessarily indicative of
the results that may be expected for the year ended June 30, 1998,
particularly due to the increased number of pet shelters sold during periods
of inclement weather.
NOTE 2
Effective July 1, 1997, the Company 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 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 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 historical cost.
NOTE 3
On September 19, 1997, the Company 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 the Company. 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"). Pursuant to
the Merger Agreement, each issued and outstanding share of Dogloo Series A
Preferred Stock was converted into one share of Doskocil Series B Preferred
Stock and each issued and outstanding share of Dogloo Series B Preferred Stock
was converted into one share of Doskocil Series C Preferred Stock. In
connection with the Merger, except as described below, all of the outstanding
options to purchase shares of Dogloo Common Stock were assumed by Doskocil and
thereby became options to purchase shares of Doskocil Common Stock, with
adjustments to such options to reflect the ratio into which shares of Dogloo
Common Stock were converted into shares of Doskocil Common Stock.
NOTE 4
In connection with the Merger, Doskocil purchased an aggregate of 249,703
shares of Dogloo Common Stock for an aggregate price of approximately $436,980
from shareholders of Dogloo other than the Investor
F-20
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Group and Mr. Aurelio F. Barreto, III, the co-founder and former Chief
Executive Officer of Dogloo. In addition, Doskocil cashed out for $0.41 per
option 211,000 options held by Dogloo employees who did not continue with the
Company after the Merger. All Dogloo employees who continued with the Company
had their options assumed by the Company and therefore converted into options
to purchase Doskocil Common Stock. Immediately prior to the Merger, Dogloo had
736,000 outstanding options to purchase shares of Dogloo Common Stock.
Immediately after the closing of the Merger, 1,064,816 shares of Doskocil
Series A Preferred Stock were converted into 1,064,816 shares of Doskocil
Common Stock.
Concurrent with the closing of the Merger, the Company used proceeds of a
New Credit Facility (see Note 5) to redeem for $14.9 million (including
dividends accrued through September 19, 1997) 598,959 shares of Doskocil
Common Stock and 359,376 shares of Doskocil Series A Preferred Stock owned by
Enterprise, and to redeem for $3.6 million, 133,102 shares of Doskocil Common
Stock and 106,482 shares of Doskocil Series A Preferred Stock from various
Enterprise entities.
Immediately following the Merger, the Company also used proceeds from the
Offering and the New Credit Facility to redeem the following additional shares
of Doskocil Series B Preferred Stock and Doskocil Series C Preferred Stock (i)
6,890,000 shares of Doskocil Series B Preferred Stock held by Mr. Barreto for
$8.4 million (including dividends accrued through September 19, 1997); (ii)
3,334,255 shares of Doskocil Series B Preferred Stock held by Darrell R.
Paxman, co-founder of Dogloo, for $4.0 million (including dividends accrued
through September 19, 1997); (iii) 538,433 shares of Doskocil Series C
Preferred Stock held by Enterprise for $1,321,725 (including dividends accrued
through September 19, 1997); and (iv) 2,141,260 shares of Doskocil Series C
Preferred Stock held by Mr. Barreto for $2.6 million (including dividends
accrued through September 19, 1997). Further, immediately following the
Merger, the Company paid approximately $1.5 million of accrued dividends on
the shares of Doskocil Series C Preferred Stock which remained outstanding.
In connection with the conversion and redemption of shares of Doskocil
Series A Preferred Stock, the Company borrowed $469,000 under the New Credit
Facility to pay cumulative dividends on such shares of Doskocil Series A
Preferred Stock as of the date of the Merger.
The Merger has been accounted as a purchase transaction under generally
accepted accounting principles and accordingly, the purchase price has been
allocated on the basis of the estimated fair value of the assets acquired.
This preliminary purchase price allocation resulted in goodwill of
approximately $49.6 million which is being amortized on the straight line
basis over 30 years. The pro forma financial results of operations below
assume that the transaction was completed on July 1, 1996, and reflect the
increased interest costs, preferred stock dividends and the amortization of
the intangibles associated with the transaction and related income tax effect
(dollars in thousands except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER
31,
---------------
1997 1996
------- -------
<S> <C> <C>
Net sales................................................... $92,498 $88,403
Operating income............................................ 14,881 11,183
Net income attributable to common stockholders.............. 2,679 1,113
Earnings per share.......................................... $ 0.88 $ 0.36
</TABLE>
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, which will be exchanged for the
New Notes upon the pending registration statement becoming effective.
Discounts and commissions aggregated 3% of the face amount of the Notes and
net proceeds to the Company were
F-21
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$82,450,000. Interest is payable semi-annually on March 15 and September 15 of
each year commencing on March 15, 1998. The Notes are general, unsecured
obligations of the Company, subordinated in right of payment to all Senior
Debt of the Company. The Notes are subject to certain optional redemptions at
declining premiums beginning in 2002 and continuing through 2005. Until
September 15, 2000, upon an initial public equity offering of common stock for
cash, up to 35% of the aggregate principal amount of the Notes originally
outstanding may be redeemed at the option of the Company at a redemption price
stipulated in the Indenture. The Indenture limits, among other things,
dividends, incurrence of additional indebtedness and other restricted payments
as defined and contains cross default provisions with the Company's Senior
Indebtedness. Debt issuance costs of $5.0 million will be amortized over the
term of the Notes.
NOTE 5:
Concurrent with the consummation of the Merger, the Company entered into the
New 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 New Credit Facility consist of
$82.5 million in aggregate principal amount of term loans (the "Term Loan
Facility"), which facility includes a $45.0 million tranche A term loan
subfacility, a $37.5 million tranche B term loan subfacility, and a $27.5
million revolving credit facility (the "Revolving Credit Facility"), which
facility includes a subfacility for swingline borrowings and a sublimit for
letters of credit. The Company used the Term Loan Facility and a portion of
the Revolving Credit Facility to provide a portion of the funding necessary to
consummate the Merger.
Indebtedness under the Term Loan Facility and the Revolving Credit Facility
initially bears interest at a rate based (at the Company's option) upon (i)
LIBOR for one, two, three or six months, plus 2.25% with respect to the
Tranche A Term Loan Facility and the Revolving Credit Facility or plus 2.75%
with respect to the Tranche B Term Loan Facility, or (ii) the Alternate Base
Rate (as defined in the New Credit Facility) plus .75% with respect to the
Tranche A Term Loan Facility and the Revolving Credit Facility or plus 1.25%
with respect to the Tranche B Term Loan Facility; provided, however, the
interest rates are subject to several quarter point reductions in the event
the Company meets certain performance targets.
The Tranche B Term Loan Facility matures on the seventh anniversary of the
closing under the New Credit Facility. The Tranche A Term Loan Facility and
the Revolving Credit Facility mature on the sixth anniversary of the closing
under the New Credit Facility. The Term Loan shall be subject to repayment
according to quarterly amortization of principal based upon the Scheduled
Amortization (as defined in the New Credit Facility).
The New 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 New Credit Facility.
The mandatory prepayments defined in the New 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) 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 New 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.
F-22
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The New Credit Facility requires the Company to meet certain financial
tests, including a minimum fixed charge coverage ratio, minimum interest
coverage ratio and maximum leverage ratio. The New Credit Facility also
contains additional restrictions which, among other things, limit additional
indebtedness, liens, sales of assets and business combinations. The Company is
in compliance with all financial covenants.
NOTE 6:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ --------
<S> <C> <C>
Finished Goods......................................... $12,945 $ 8,853
Work-in-Process........................................ 1,231 876
Raw Materials.......................................... 8,675 6,615
Supplies............................................... 172 140
------- -------
$23,023 $16,484
======= =======
</TABLE>
NOTE 7:
Effective January 1, 1988, the Company elected to be taxed as a Subchapter S
Corporation under the provisions of the Internal Revenue Code. Under these
provisions, the Company did not pay a corporate level tax on its taxable
income. Rather, the Company's taxable income or loss was passed through to the
shareholders and included on their individual income tax returns. No provision
for income taxes has been made in the accompanying combined financial
statements for the six months ended December 31, 1996; however, a pro forma
income tax provision is presented in the statement of operations.
As a result of the Company's termination as an S Corporation on July 1,
1997, the Company became a C Corporation effective July 1, 1997. For tax years
subsequent to July 1, 1997, the Company's taxable income will be subject to a
corporate level income tax. Accordingly, the following deferred tax assets and
liabilities were established with a net charge to earnings on July 1, 1997 (in
thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Reserve for equipment to be disposed............................. $ 1,423
Accrued expenses................................................. 359
Reserve for inventory............................................ 298
Allowance for co-op advertising.................................. 153
Allowance for doubtful accounts.................................. 92
Other............................................................ 67
-------
Total deferred tax assets.......................................... $ 2,392
Deferred tax liability:
Tax depreciation in excess of book............................... (4,062)
-------
Net deferred tax liability......................................... $(1,670)
=======
</TABLE>
The estimated effective income tax rate was 37% for the six months ended
December 31, 1997. The Company has recorded income tax expense of $3.6 million
which represents the charge of $1.67 million for the change to a C Corporation
status and a charge of $1.9 million on the income for the six months ended
December 31, 1997.
F-23
<PAGE>
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8:
Pro forma net income (loss) per common share and pro forma weighted average
common shares outstanding are based on the common shares outstanding after the
recapitalization and the termination of the Company's S Corporation status
discussed above. Earnings have been reduced by pro forma income tax expense of
$949,000 for the six months ended December 31, 1996.
NOTE 9:
In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 establishes simplified standards for computing and presenting
earnings per share ("EPS"). Under SFAS 128 the presentation of primary EPS was
replaced with a presentation of basic EPS. Basic EPS is computed excluding
dilution caused by common stock equivalents such as stock options, and
therefore, tends to be slightly higher than primary EPS. The presentation of
fully diluted EPS was replaced with a presentation of diluted EPS. Diluted EPS
is computed in a similar fashion to how fully diluted EPS was computed. The
Company adopted this pronouncement to report results of operation for the six
months ended December 31, 1997. Previously reported EPS are required to be
restated to conform to SFAS 128. There was no impact on previously reported
EPS.
NOTE 10:
In 1997, the Company commenced a computer system conversion project in order
to facilitate the Merger. This conversion requires the purchase of new
computer hardware and software which will also incorporate year 2000
solutions. Most of the costs of this project will be capitalized and amortized
for a period not to exceed five years. The Company expects to complete this
conversion by early 1999.
NOTE 11:
Various claims and lawsuits are pending against the Company. In the opinion
of the Company's management, the potential loss on all claims will not be
significant to the Company's financial position or results of operations.
The Company is self-insured for medical and dental benefits for its
employees and their covered dependents. Medical claims exceeding $60,000 per
covered individual are covered through a private insurance carrier.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Dogloo, Inc.
We have audited the accompanying balance sheets of Dogloo, Inc. (the
"Company") as of December 31, 1996 and 1995, and the related statements of
operations, changes in redeemable preferred stock and shareholders deficit and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dogloo, Inc. at December
31, 1996 and 1995, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
January 30, 1997, except for Note 14, as to which the date is July 24, 1997
Riverside, California
F-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Dogloo, Inc.
We have audited the accompanying statements of operations, changes in
redeemable preferred stock and shareholders' equity (deficit) and cash flows
of Dogloo, Inc. for the year ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Dogloo,
Inc. for the year ended December 31, 1994, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Irvine, California
February 15, 1995
F-26
<PAGE>
DOGLOO, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1995 1996 1997
------------ ------------ ----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................... $ -- $ 102 $ 534
Accounts receivable, net of
allowance for doubtful accounts
of $211 in 1995, $172 in 1996,
and $240 in 1997.................. 8,130 7,929 8,019
Other receivables.................. 325 130 58
Inventories........................ 6,473 4,870 7,845
Prepaid expenses and other......... 495 464 962
Deferred income taxes.............. 738 589 589
------------ ------------ ------------
Total current assets................ 16,161 14,084 18,007
Property, plant and equipment:
Land.............................. 576 629 629
Buildings and improvements........ 4,010 4,017 4,024
Molds, tools and dies............. 9,198 10,436 11,178
Machinery and equipment........... 14,446 14,685 14,520
Furniture and fixtures............ 1,229 1,297 1,614
Leasehold improvements............ 326 334 334
Construction in progress.......... 1,039 417 570
------------ ------------ ------------
30,824 31,815 32,869
Less accumulated depreciation and
amortization..................... (3,277) (5,867) (7,773)
------------ ------------ ------------
27,547 25,948 25,096
Deferred income taxes............... 1,120 254 610
Other assets........................ 2,422 2,152 1,867
------------ ------------ ------------
Total assets....................... $ 47,250 $ 42,438 $ 45,580
============ ============ ============
LIABILITIES AND SHAREHOLDERS'
DEFICIT
Current liabilities:
Accounts payable................... $ 5,411 $ 3,542 $ 5,503
Accrued expenses................... 1,106 1,985 2,413
Line of credit..................... 8,140 6,323 9,854
Current portion of capital lease
obligations and long-term debt.... 11,145 9,588 2,629
------------ ------------ ------------
Total current liabilities....... 25,802 21,438 20,399
Long-term debt, less current
portion............................ 7,295 13,988 18,727
Capital lease obligations, less
current portion.................... 9,030 -- --
Redeemable preferred stock, Series
A, no par value:
Authorized shares--15,000,000
Issued and outstanding shares--
10,660,000......................... 7,640 9,482 10,591
Shareholders' deficit:
Preferred stock, Series B, no par
value:
Authorized shares--15,000,000
Issued and outstanding shares--
11,841,280........................ 9,700 9,700 9,700
Common stock, no par value:
Authorized shares--70,000,000
Issued and outstanding shares
32,668,481 in 1995, 32,573,296 in
1996, and 32,542,148 in 1997...... 5,386 5,285 5,250
Accumulated deficit................ (17,603) (17,455) (19,087)
------------ ------------ ------------
Total shareholders' deficit......... (2,517) (2,470) (4,137)
------------ ------------ ------------
Total liabilities and shareholders'
deficit............................ $ 47,250 $ 42,438 $ 45,580
============ ============ ============
</TABLE>
See accompanying notes.
F-27
<PAGE>
DOGLOO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31 AUGUST 31
-------------------------- -----------------------
1994 1995 1996 1996 1997
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................. $44,267 $ 51,520 $56,519 $30,656 $31,260
Cost of goods sold......... 30,177 40,222 37,886 22,194 21,558
------- -------- ------- ------- -------
Gross profit............... 14,090 11,298 18,633 8,462 9,702
Operating expenses......... 11,470 13,680 12,008 6,723 8,394
Impairment of molds, tools
and dies (Note 4)......... -- 1,891 -- -- --
------- -------- ------- ------- -------
Operating income (loss).... 2,620 (4,273) 6,625 1,739 1,308
Other (income) expense:
Interest expense--
warrants................ 35 3,995 -- -- --
Interest expense--other.. 1,194 3,032 3,599 2,361 2,184
Loss on disposal of fixed
assets.................. -- 203 -- -- --
Other.................... 35 (4) (35) (30) (4)
------- -------- ------- ------- -------
Income (loss) before income
taxes..................... 1,356 (11,499) 3,061 (592) (872)
Income tax (expense)
benefit................... (34) 1,896 (1,071) 237 349
------- -------- ------- ------- -------
Net income (loss).......... $ 1,322 $ (9,603) $ 1,990 $ (355) $ (523)
======= ======== ======= ======= =======
</TABLE>
See accompanying notes.
F-28
<PAGE>
DOGLOO, INC.
STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED TOTAL
REDEEMABLE EARNINGS SHAREHOLDERS'
PREFERRED STOCK PREFERRED STOCK (ACCUMULATED EQUITY
SERIES A SERIES B COMMON STOCK DEFICIT) (DEFICIT)
------------------- ----------------- ------------------- ------------ -------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... -- -- -- -- 32,350,000 $ 737 $ 6,449 $ 7,186
Stock issued for cash.. -- -- -- -- 389,000 425 -- 425
Stock repurchased...... -- -- -- -- (18,519) (20) -- (20)
Dividends paid......... -- -- -- -- -- -- (1,230) (1,230)
Net income............. -- -- -- -- -- -- 1,322 1,322
---------- ------- ---------- ------ ----------- ------ -------- -------
Balance at December 31,
1994................... -- -- -- -- 32,720,481 1,142 6,541 7,683
Stock issued for cash.. -- -- 11,841,280 $9,700 21,536,186 4,817 -- 14,517
Stock repurchased...... -- -- -- -- (4,779,630) (370) (3,074) (3,444)
Common stock exchanged
for Preferred
Series A.............. 12,792,000 $ 610 -- -- (16,808,556) (203) (407) (610)
Accretion of preferred
stock subject to
mandatory redemption,
net of canceled
shares................ (2,132,000) 7,030 -- -- -- -- (7,030) (7,030)
Dividends paid......... -- -- -- -- -- -- (4,030) (4,030)
Net loss............... -- -- -- -- -- -- (9,603) (9,603)
---------- ------- ---------- ------ ----------- ------ -------- -------
Balance at December 31,
1995................... 10,660,000 7,640 11,841,280 9,700 32,668,481 5,386 (17,603) (2,517)
Stock repurchased...... -- -- -- -- (95,185) (101) -- (101)
Accretion of preferred
stock subject to
mandatory redemption.. -- 1,842 -- -- -- -- (1,842) (1,842)
Net income............. -- -- -- -- -- -- 1,990 1,990
---------- ------- ---------- ------ ----------- ------ -------- -------
Balance at December 31,
1996................... 10,660,000 9,482 11,841,280 9,700 32,573,296 5,285 (17,455) (2,470)
Stock repurchased
(unaudited)........... -- -- -- -- (31,148) (35) -- (35)
Accretion of preferred
stock subject to
mandatory redemption
(unaudited)........... -- 1,109 -- -- -- -- (1,109) (1,109)
Net loss (unaudited)... -- -- -- -- -- -- (523) (523)
---------- ------- ---------- ------ ----------- ------ -------- -------
Balance at August 31,
1997 (unaudited)....... 10,660,000 $10,591 11,841,280 $9,700 32,542,148 $5,250 $(19,087) $(4,137)
========== ======= ========== ====== =========== ====== ======== =======
</TABLE>
See accompanying notes.
F-29
<PAGE>
DOGLOO, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED DECEMBER 31, AUGUST 31,
--------------------------- -----------------------
1994 1995 1996 1996 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......... $ 1,322 $ (9,603) $ 1,990 $ (355) $ (523)
Adjustments to reconcile
net income (loss) to net
cash used in operating
activities:
Depreciation and
amortization............ 1,059 2,303 3,067 1,991 2,311
Impairment of molds,
tools and dies.......... -- 1,891 -- -- --
Loss on disposal of
fixed assets............ -- 203 -- -- --
Provision for doubtful
accounts................ (18) 120 (39) 147 46
Deferred taxes........... -- (1,898) 1,015 (567) (356)
Changes in operating
assets and liabilities:
Accounts receivable.... 51 (1,511) 240 278 (136)
Other receivables...... (571) 257 195 187 72
Inventories............ (3,720) 1,348 1,604 (1,751) (2,975)
Prepaid expenses and
other................. (57) 96 31 149 (497)
Other assets........... (803) 378 (16) (11) (86)
Accounts payable....... (1,829) 1,118 (1,868) 630 1,961
Accrued expenses....... 1,677 (425) 878 1,782 (304)
Nondetachable warrants. 35 (35) -- -- --
------- -------- -------- ------- -------
Net cash provided by (used
in) operating activities. (2,854) (5,758) 7,097 2,480 (487)
INVESTING ACTIVITIES
Additions to patents and
trademarks............... (10) (1,269) (20) (9) (34)
Purchases of property,
plant and equipment...... (8,266) (6,630) (1,000) (451) (1,054)
------- -------- -------- ------- -------
Net cash used in investing
activities............... (8,276) (7,899) (1,020) (460) (1,088)
FINANCING ACTIVITIES
Net (payments) proceeds
from line of credit...... 3,485 200 (1,817) 778 3,530
Proceeds from long-term
debt..................... 8,312 20,133 9,441 -- 260
Loan origination costs.... -- (856) (162) -- --
Repayment of long-term
debt..................... (553) (11,554) (2,755) (2,798) (1,748)
Payment of capital lease
obligations.............. (609) (1,310) (10,581) -- --
Proceeds from sale of
stock.................... 425 14,518 -- -- --
Stock repurchase.......... (20) (3,444) (101) -- (35)
Dividends paid............ (1,231) (4,030) -- -- --
------- -------- -------- ------- -------
Net cash (used in)
provided by financing
activities............... 9,809 13,657 (5,975) (2,020) 2,007
------- -------- -------- ------- -------
Net increase (decrease) in
cash..................... (1,321) -- 102 -- 432
Cash at beginning of
period................... 1,321 -- -- -- 102
------- -------- -------- ------- -------
Cash at end of period..... $ -- $ -- $ 102 $ -- $ 534
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION
Cash paid during the year
for:
Interest................. $ 1,210 $ 2,928 $ 3,562 $ 2,360 $ 2,184
======= ======== ======== ======= =======
Income taxes............. $ 15 $ -- $ 80 $ -- $ --
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS
Capital lease obligations
incurred for the
acquisition of machinery
and equipment............ $ 8,355 $2,500 $ -- $ -- $ --
======= ======== ======== ======= =======
16,808,556 common shares
exchanged for 12,792,000
shares of Preferred
Stock, Series A.......... $ -- $ 610 $ -- $ -- $ --
======= ======== ======== ======= =======
Accretion of preferred
stock subject to
mandatory redemption and
accrual of dividends..... $ -- $7,030 $ 1,842 $ -- $ 1,109
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-30
<PAGE>
DOGLOO, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED)
1. DESCRIPTION OF BUSINESS
Dogloo, Inc. (the Company), a California corporation, is a manufacturer and
distributor of pet products and accessories to large retail chains and
distributors throughout the United States and foreign markets. The Company has
four main product lines--plastic dog houses, plastic pet carriers, pet bedding
and plastic pet bowls and crocks.
On September 22, 1995, the Company underwent a recapitalization whereby an
investor group acquired 65% of the Company. Since there was not a substantial
change in control as defined by generally accepted accounting principles, the
assets and liabilities of the Company were not adjusted to their fair market
values. (See Note 10)
2. SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM INFORMATION
In the opinion of management, the accompanying unaudited financial
statements contain all the adjustments necessary (all of which are normal
and/or recurring in nature) to present fairly the Company's financial position
at June 30, 1997 and results of operations and cash flows for the six month
periods ended June 30, 1996 and 1997. Due to the seasonality of the Company's
business, which peaks in the fourth quarter, the unaudited financial
statements for the six month periods ended June 30, 1996 and 1997, are not
necessarily indicative of the anticipated operating results for the year.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates the
first-in, first-out method (FIFO), or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost including capitalized
interest when appropriate. Depreciation and amortization are computed using
the straight-line method over their estimated service lives of 3 to 39 years.
(See Note 4)
PATENTS AND TRADEMARKS
The Company capitalizes the costs of acquiring patents and trademarks as
well as the legal costs of successfully defending its right to these assets.
Amortization is computed using the straight-line method over the estimated
useful lives which are ten years.
DEFERRED DEBT ISSUANCE COSTS
Direct costs incurred as a result of financing transactions are capitalized
and amortized over the terms of the applicable debt agreements.
REVENUES, NET
Revenues are recognized when products are shipped and are recorded at the
total invoice price. The Company allows customer credits for co-operative
advertising, cash discounts, volume rebates and certain other allowances and,
therefore, reports revenues in the financial statements net of these credits.
F-31
<PAGE>
DOGLOO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising and promotional costs are expensed as incurred. Co-op
advertising costs are recorded against sales.
INCOME TAXES
Deferred taxes are determined based on the difference between financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which temporary differences are expected to reverse.
Deferred tax expense (benefit) represents the change in the deferred tax asset
and liability balances.
USE OF ESTIMATES AND CONCENTRATION OF CREDIT RISK
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company is potentially subject to a concentration of credit risk for
trade receivables. Concentration of credit risk with respect to trade
receivables is limited to the dispersion of the Company's customers over
geographic locations, operating primarily in the retail industry. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential losses for
uncollectible accounts and such losses have been within managements
expectations.
The activity in the allowance for doubtful accounts was as follows for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
DEDUCTIONS
BEGINNING CHARGED TO FROM ENDING
BALANCE EXPENSE RESERVES BALANCE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1994................................. $109 $195 $213 $ 91
==== ==== ==== ====
1995................................. $ 91 $160 $ 40 $211
==== ==== ==== ====
1996................................. $211 $334 $373 $172
==== ==== ==== ====
</TABLE>
Sales to the Company's two largest customers approximated the following (in
thousands, except percentages):
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT NET REVENUES AMOUNT NET REVENUES AMOUNT NET REVENUES
<S> <C> <C> <C> <C> <C> <C>
Customer A... $ 6,548 14.8% $ 8,488 16.5% $ 8,277 14.6%
Customer B... 4,761 10.7 5,080 9.9 7,058 12.5
------- ---- ------- ---- ------- ----
Total........ $11,309 25.5% $13,568 26.4% $15,335 27.1%
======= ==== ======= ==== ======= ====
</TABLE>
3. INVENTORIES
Inventories (in thousands) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 AUGUST 31
------------- ---------
1995 1996 1997
<S> <C> <C> <C>
Finished goods....................................... $2,301 $2,278 $4,319
Work in progress..................................... 729 472 902
Raw materials........................................ 3,443 2,120 2,624
------ ------ ------
$6,473 $4,870 $7,845
====== ====== ======
</TABLE>
F-32
<PAGE>
DOGLOO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. IMPAIRMENT OF MOLDS, TOOLS AND DIES
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company elected to early adopt
SFAS No. 121 for the year ended December 31, 1995.
At December 31, 1995, the Company determined, based on an internal study,
that the carrying value of the tooling associated with the plastic pet bowls
had been impaired. The impairment is principally the result of competition in
the product line and high manufacturing costs. As a result, the Company has
recorded a provision of approximately $878,000 for the year ended December 31,
1995 to write down the carrying value of the impaired assets to their fair
value determined utilizing the discounted cash flow method.
In conjunction with bringing the Company's manufacturing facility into full
production and discontinuing the use of outside vendors for the production of
plastic dog houses, the Company identified tooling which are surplus to its
manufacturing requirements and which are not configured to operate within the
Company's manufacturing facility as well as tools for certain discontinued
products. Accordingly, the Company has concluded that these assets have been
impaired based on the absence of additional cash flows from these assets and a
provision of approximately $1,013,000 has been recorded at December 31, 1995.
5. LINE OF CREDIT
The Company has a $15,000,000 revolving line of credit agreement based on
qualifying inventory and accounts receivable balances with a Senior Lender, of
which $500,000 may be used for letters of credit. During May 1997, the Company
entered into an "Over-Advance" Agreement with the Senior Lender for $2,500,000
in additional borrowings above those normally available under the line of
credit agreement to assist the Company with its cash flow requirements during
its off-season months. The Over-Advance is being phased in three parts and
will be phased out by September 1997. As of June 30, 1997 (unaudited), the
Company had utilized approximately $800,000 of the Over-Advance and
approximately $1,200,000 was available for borrowing. No amounts are
outstanding under letters of credit. The line of credit bears interest at the
Senior Lender's base rate plus 1.5% (9.25% at June 30, 1997, unaudited) and is
collateralized by substantially all the assets of the Company.
During the year ended December 31, 1996, the approximate average borrowings
outstanding were $6,851,000 ($7,100,000 in 1995), the approximate weighted
average interest rate was 10.2% (10.1% in 1995), and the maximum amount of
month-end borrowings outstanding was $8,918,000 ($9,497,000 in 1995). The
averages were computed based on the borrowings outstanding at the end of each
month and the applicable interest rate.
The line expires September 1998 and requires the Company to maintain certain
current and fixed charge ratios, meet minimum earnings before interest
charges, limit preferred stock dividends and have $2,000,000 available for
borrowing after redeeming preferred stock or repaying subordinated debt. As of
June 30, 1997, the Company failed to meet its working capital covenant and
received a waiver from the Senior Lender.
F-33
<PAGE>
DOGLOO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Term loan payable to Senior Lender due in monthly principal
installments of $83,000 plus interest at Senior Lender's base
rate plus 1.5% (9.75% at December 31, 1996), with unpaid
principal balance due September 22, 1998. Loan is
collateralized by substantially all the assets of the Company
and is subject to the same financial covenants as the
revolving line of credit. (See Note 5)....................... $ 4,750 $ 3,750
Term loan payable to Senior Lender in monthly installments of
$107,729 plus interest at the Senior Lender's base rate plus
1.0% (9.25% at December 31, 1996), with unpaid principal due
September 22, 1998. Loan is collateralized by substantially
all of the assets of the Company and subject to the same
financial covenants as the revolving line of credit. (See
Note 5)...................................................... -- 8,942
Revolving equipment loan payable to Senior Lender up to
$5,000,000 for the purchase of specified capital equipment.
Each equipment purchase is evidenced by a separate note
payable and amounts repaid are eligible for reborrowing.
Amounts borrowed are collateralized by substantially all of
the assets of the Company. Each note is repayable over 60
months or at the expiration of the Loan and Security
Agreement with the Senior Lender on September 22, 1998, and
bears interest at the Senior Lender's base rate plus 1.5%
(9.75% at December 31, 1996). Monthly principal payments on
outstanding equipment notes aggregate $18,776. The loans are
subject to the same financial covenants as the revolving line
of credit. (See Note 5)...................................... 735 1,051
Mortgage loan payable to a bank in monthly installments of
$30,000 including interest at the bank's base rate plus 3.5%
(8.875% at December 31, 1996), due January 2011,
collateralized by real estate................................ 2,950 2,851
Subordinated debentures bearing interest at 16% with interest
only payable until balance is due September 1997. Debentures
are collateralized by substantially all the Company's assets.
Debentures are subject to the same financial covenants as
required by the Senior Lender and other financial covenants
including tangible net worth and debt to net worth ratios. At
December 31, 1996, the Company was in compliance with the
applicable covenants. (See Note 5)........................... 7,000 6,250
Subordinated notes payable to shareholders bearing interest at
10.25% payable as permitted by the Senior Lender and the
holders of the subordinated debentures. The outstanding
balance at December 31, 1996 is collateralized by a third
position on substantially all the assets of the Company...... 1,455 732
------- -------
16,890 23,576
Less current portion.......................................... 9,595 9,588
------- -------
$ 7,295 $13,988
======= =======
</TABLE>
F-34
<PAGE>
DOGLOO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt as of December 31, 1996 were as follows
(in thousands):
<TABLE>
<S> <C>
1997............................................................ $ 9,588
1998............................................................ 11,360
1999............................................................ 128
2000............................................................ 139
2001............................................................ 152
Thereafter...................................................... 2,209
-------
$23,576
=======
</TABLE>
In December 1996, the Company completed a refinancing of the capital lease
obligations outstanding at December 31, 1995 and entered into a term loan
agreement with its Senior Lender. As part of the refinancing, the Company's
subordinated debenture holders agreed to extend the due date from September
1996 to September 1997 and to increase the interest rate from 13% to 16%.
Included in interest expense are amounts paid to shareholders of
approximately $56,000, $129,000 and $59,000 for 1994, 1995 and 1996,
respectively.
7. CAPITAL LEASE OBLIGATIONS
At December 31, 1995, the Company had two lease financing facilities with a
bank (the Lessor). The combined facilities provide for the financing of
machinery and equipment up to $12,500,000. Borrowings were to bear interest at
9.6% to 10.4% and were payable in aggregate monthly installments of $213,000
with balances due from July 1999 through October 2002. These leases were
repaid in a refinancing agreement with the Company's Senior Lender in December
1996. (See Note 6)
Machinery and equipment under long-term capital lease obligations at
December 31, 1995 totaled $12,851,000, net of accumulated amortization.
Total interest expense under these lease facilities was approximately
$368,000, $960,000 and $1,011,000 for 1994, 1995 and 1996, respectively.
8. NONCANCELABLE OPERATING LEASE COMMITMENTS AND RELATED PARTY TRANSACTION
The Company leases a facility in Corona, California, under a noncancelable
operating lease expiring November 30, 1999 with an option to extend the lease
for an additional two-year term. The Company leased another facility in
Corona, California, from two major shareholders of the Company on a month-to-
month basis which expired November 1995.
The Company also leases various trucks and office equipment under
noncancelable operating leases expiring on various dates through January 2001.
Future minimum lease payments under these operating leases as of December 31,
1996 are $897,000, $733,000, $384,000, $94,000 and $38,000 for 1997, 1998,
1999, 2000, and 2001, respectively.
Total rental expense for the above leases amounted to $703,000, $516,000,
and $970,000 for 1994, 1995, and 1996, respectively. Included in rent expense
for 1994 and 1995 are amounts paid to shareholders of $120,000 and $108,000,
respectively.
F-35
<PAGE>
DOGLOO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
On September 22, 1995, the Company changed its income tax status from a
Subchapter S Corporation to a C Corporation. As an S Corporation, income or
losses pass through to the Company's shareholders and no provision for federal
income taxes is reflected in the accompanying financial statements for the
period the Company operated as an S Corporation. State income taxes have been
provided at a reduced rate applicable to S Corporations for the appropriate
period. As a C Corporation, income taxes and benefits are recognized at the
corporate level.
With its conversion to a C Corporation, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes."
SFAS No. 109 requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
financial statements and tax basis of assets and liabilities at the applicable
enacted tax rates. The effect on the accompanying statement of operations for
1995 of adopting SFAS No. 109 for the change in tax status was a tax benefit
of $1,858,700 which has been included as a component of income tax benefit.
The components of income tax (benefit) expense consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- ------
<S> <C> <C> <C>
Current:
Federal............................................ -- -- $ 47
State.............................................. $34 $ 2 9
Deferred:
Federal............................................ -- (1,762) 861
State.............................................. -- (136) 154
------ ------- ------
Total income tax (benefit) expense............... $34 $(1,896) $1,071
====== ======= ======
</TABLE>
At December 31 the Company had net deferred tax assets as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Vacation accrual........................................... $ 63 $ 60
Allowances for bad debts, damages and discounts............ 234 182
Allowance for inventory obsolescence....................... 228 186
Uniform capitalization..................................... 213 161
------- -------
738 589
Net operating loss carryforwards........................... 2,657 2,152
Depreciation and amortization.............................. (1,537) (1,898)
------- -------
1,120 254
------- -------
$ 1,858 $ 843
======= =======
</TABLE>
Although there can be no assurances as to future taxable income of the
Company, the Company believes that its expectations of future taxable income,
when combined with the income taxes paid in prior years, will be adequate to
realize the deferred income tax assets.
At December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $5,914,000 expiring December 2010 and state net
operating loss carryforwards, for California and Indiana in the aggregate, of
approximately $4,268,000 expiring in December 2000.
F-36
<PAGE>
DOGLOO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the effective income tax rate to the federal statutory
rate, for financial reporting purposes, is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- ----
<S> <C> <C> <C>
Federal statutory rate................................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit...................... 3.0 3.0 3.0
Permanent differences.................................... -- (15.7) --
Subchapter S corporate rate differential................. (34.5) -- --
Other.................................................... -- (4.8) (2.0)
----- ----- ----
2.5% 16.5% 35.0%
===== ===== ====
</TABLE>
The effective tax rates for 1994 and 1995 are based on a full year and
partial year, respectively, at the rates in effect for a Subchapter S
Corporation as the Company changed its income tax status to C Corporation on
September 22, 1995 as discussed above.
10. SHAREHOLDERS' EQUITY
On September 22, 1995, two major shareholders exchanged 21,291,889 shares of
common stock for cash of $3,128,000 and 12,792,000 shares of Preferred Stock,
Series A. In addition, the Company purchased and retired 296,297 shares of its
common stock for $316,000. The Company then issued 21,536,186 shares of common
and 9,700,000 shares of Preferred Stock, Series B, to an investor group and
2,141,280 shares of Preferred Stock, Series B, to a major shareholder,
resulting in proceeds of $14,518,000. (See Note 1)
In connection with this transaction, the Company paid $4,030,000 to buy back
nondetachable stock purchase warrants issued in 1994 with its $7,000,000
debentures. The amount paid in excess of the prior year accrual ($35,000) has
been recorded as interest expense on the accompanying statement of operations
in 1995.
STOCK OPTION PLAN
In 1994, the Company adopted a nonqualified stock option plan. Under the
plan, options may be granted to key management employees to purchase the
Company's common stock at a price determined by the Board of Directors and not
less than the fair market value for incentive stock options. Options granted
become exercisable during a five-year period from the date of the grant and
expire ten years after the award date. As adopted, the plan calls for adequate
shares of common stock to be reserved for issuance upon exercise of options.
No compensation expense was incurred by the Company during 1994, 1995, 1996,
or the six months ended June 30, 1997 under the plan.
<TABLE>
<CAPTION>
OPTIONAL SHARES
OUTSTANDING
-----------------
SHARES PRICE
<S> <C> <C>
Balance at December 31, 1994............................... -- --
Options granted.......................................... 781,000 $0.23
--------- ------
Balance at December 31, 1995............................... 781,000 $0.23
Options expired.......................................... (245,000) $0.23
Options granted.......................................... 225,000 $0.23
--------- ------
Balance at December 31, 1996............................... 761,000 $0.23
========= ======
</TABLE>
F-37
<PAGE>
DOGLOO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
its plan. Had the Company adopted Statement on Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, the impact on net
income would have been immaterial.
PREFERRED STOCK, SERIES A
Series A shareholders are entitled to receive cash dividends of $.10 per
share annually, payable on March 1. Dividends accrue whether or not earned or
declared and are cumulative. If, on any dividend payment date, the holders of
Series A shares have not received the full annual dividend, then the holders
are entitled to additional dividends which are cumulative and accrue at the
same rate as the Series A dividends. No dividends have been declared by the
Board of Directors as of December 31, 1996. Dividends in arrears ratably
$295,000 and $1,400,000 at December 31, 1995 and 1996, respectively, and are
included in redeemable preferred stock on the balance sheet.
Series A shares are subject to mandatory redemption in five annual
installments beginning March 1, 1997 until March 1, 2001 whereupon the
remaining shares outstanding shall be redeemed. On each of the first four
redemption dates, 16 2/3% of the shares originally issued are to be redeemed
at $1 per share plus any unpaid dividends. The March 1, 1997 redemption was
conditioned upon the Company meeting a specified earnings level for the year
ended December 31, 1995, which it did not meet, and resulted in a permanent
forfeiture of this redemption aggregating 2,132,000 shares as of December 31,
1995. Such shares were subsequently canceled.
Series A shares are convertible at the option of the holder into
subordinated debt which would accrue interest at 10% per year. In the event of
any liquidation, Series A shares receive preference over common stock and any
other series of preferred stock and are entitled to distribution amounts equal
to the redemption amounts defined above. Series A shares have no other
conversion or voting rights.
PREFERRED STOCK, SERIES B
Series B shareholders are entitled to receive cash dividends of $.10 per
share annually, payable on March 1. Dividends accrue whether or not earned or
declared and are cumulative. Series B shares are convertible at the option of
the holder into subordinated debt which would accrue interest at 10% per year.
In the event of any liquidation, Series B shares are entitled to distribution
amounts equal to $1 per share plus any unpaid dividends. Series B shares have
no other conversion or voting rights. No dividends have been declared by the
Board of Directors as of December 31, 1996. Dividends in arrears ratably were
$328,000 and $1,512,000 at December 31, 1995 and 1996, respectively.
COMMON STOCK
Dividends are payable when declared. Each common share has the right to one
vote. At December 31, 1996, 1,300,000 shares were reserved for the Company's
stock option plan.
11. CONTINGENCIES
The Company is involved in various legal actions and claims arising in the
ordinary course of business. It is the opinion of management that such
litigation will be resolved without material effect on the Company's financial
position.
F-38
<PAGE>
DOGLOO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. RELATED PARTY TRANSACTION
The Company has a management agreement with one of its shareholders. Fees
paid under this agreement were approximately $50,000, $200,000, and $150,000
in 1995, 1996, and the six months ended June 30, 1997 (unaudited),
respectively, and none in 1994.
13. SAVINGS PLAN
The Company sponsors a 401(k) savings plan (the Plan) for its employees. The
Plan is a defined contribution plan covering all eligible employees. All
employees who have a minimum of three months of service may elect to
contribute to the Plan up to 18% of their compensation to the annual maximum
limit established by the Internal Revenue Service. The Company may make
matching contributions to the Plan at its discretion which are allocated to
participants in proportion to salary deferral amounts for the applicable plan
year, not to exceed 4% of a participant's salary and subject to limitations
imposed by the Internal Revenue Code. The Company made contributions to the
Plan totaling approximately $14,000 for the year ended December 31, 1996. The
Company did not make any contributions to the Plan for the year ended 1995.
14. SUBSEQUENT EVENT
During July 1997, the Company had entered into an agreement to be merged
with and into Doskocil Manufacturing Company (Doskocil). As a result of the
impending transaction, certain financial amounts for all periods presented
have been reclassified to conform to Doskocil's financial statement
presentation and certain additional disclosure has been presented.
F-39
<PAGE>
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ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF TRANSMITTAL AND OTHER
RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS:
BY MAIL:
FIRST TRUST NATIONAL ASSOCIATION
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ATTN.: SPECIALIZED FINANCE DEPARTMENT
CINDY DEVALK
TELEPHONE NUMBER:
(612) 244-1215
FACSIMILE NUMBER
(612) 244-1537
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY BY
HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL.)
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
NOTES OFFERED HEREBY, TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------
UNTIL MAY 25, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
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OFFER TO EXCHANGE ALL OUTSTANDING 10 1/8% SENIOR SUBORDINATED NOTES DUE 2007
FOR 10 1/8% SENIOR SUBORDINATED NOTES DUE 2007.
$85,000,000
[LOGO of DOSKOCIL] [LOGO of DOGLOO]
DOSKOCIL MANUFACTURING COMPANY, INC.
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007
--------------------------------
PROSPECTUS
--------------------------------
FEBRUARY 23, 1998
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