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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
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COMMISSION FILE NUMBER: 333-37081
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DOSKOCIL MANUFACTURING COMPANY, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 75-1281683
(State of incorporation) (I.R.S. Employer
Identification No.)
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4209 BARNETT BOULEVARD, ARLINGTON, TEXAS 76017
(Address of principal executive offices)
(817) 467-5116
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 15(D) OF THE ACT:
TITLE OF EACH CLASS:
10 1/8% Senior Subordinated Notes due 2007
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]*
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]*
* The Registrant is not subject to the reporting requirements of Item 405.
As of June 30, 1999 there were 3,104,644 shares outstanding of the
Registrant's no par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain of the documents required to be filed as exhibits in Part IV, Item
14, have been previously filed with the Securities and Exchange Commission and
are incorporated by reference to one of the following documents: (i) the
Company's Registration Statement on Form S-4 (Registration No. 333-37081) as
filed on October 2, 1997, (ii) the Company's Report on Form 10-Q for the Quarter
ended December 31, 1998 as filed February 16, 1999, (iii) the Company's Report
on Form 10-Q for the Quarter ended March 31, 1998, as filed May 17, 1999 or (iv)
the Company's Report on Form 8-K as filed on September 24, 1999.
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INDEX
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PAGE
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Introduction and Note On Presentation.................................. 1
PART I
ITEM 1. Business.................................................... 3
ITEM 2. Properties.................................................. 16
ITEM 3. Legal Proceedings........................................... 16
ITEM 4. Submission of Matters to a Vote of Securityholders.......... 17
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 18
ITEM 6. Selected Financial Data..................................... 18
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
ITEM 7a. Quantitative and Qualitative Disclosure About Market Risk... 30
ITEM 8. Financial Statements........................................ 31
ITEM 9. Changes in and Disagreements With Accountants On Accounting
and Financial Disclosure.................................. 31
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 32
ITEM 11. Executive Compensation...................................... 34
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 37
ITEM 13. Certain Relationships and Related Transactions.............. 40
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and Reports On
Form 8-K.................................................. 42
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INTRODUCTION AND NOTE ON PRESENTATION
On September 19, 1997, Doskocil Manufacturing Company, Inc., and Dogloo,
Inc., entered into a merger agreement (the "Merger Agreement"), pursuant to
which Dogloo was merged with and into Doskocil (the "Merger") on that same date.
The Company (as defined below) 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, L.L.C., 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").
The term "Doskocil", as used herein, refers to Doskocil Manufacturing
Company, Inc., and Spectrum Polymers, Ltd., prior to giving effect to the
Merger. The term "Dogloo" refers to Dogloo, Inc., prior to giving effect to the
Merger and the term "Company" refers to the combined entity comprised of
Doskocil and Dogloo. The term "combined Company" refers to a combined
presentation of certain historical results of Doskocil and Dogloo which has been
shown for comparison purposes only.
Through 1996, both Doskocil's and Dogloo's fiscal years ended on or about
December 31. In order to match the combined Company's fiscal year reporting with
its seasonality, the Company changed its fiscal year end to June 30 in
connection with the Merger. Accordingly, reference to fiscal 1996 or prior years
means the years ended on or about December 31 of such year. Reference to fiscal
1997 means the six month period from December 29, 1996 through June 30, 1997.
Reference to fiscal 1998 and fiscal 1999 means the twelve month periods ended on
June 30, 1998 and 1999, respectively. Reference to "combined" results of the two
companies indicate an historical view of the combined companies and is presented
for comparison purposes only.
The Company was in default of certain financial covenants under its credit
facilities at June 30, 1999 and, in October 1999, completed an amendment to its
credit facilities and obtained waivers of all financial covenant defaults. Also
in October 1999, certain shareholders of the Company acquired $5.0 million of
Series D Preferred Stock from the Company and guaranteed an additional $15.0
million line of credit obtained by the Company from Bank of America, N.A. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a description of the amendments
made to the credit facilities.
The Company, created by the Merger of Dogloo and Doskocil, is among the
leading plastic pet products companies in the United States.
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FORWARD-LOOKING STATEMENTS
This report on Form 10-K 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 on "Business" and "Management's Discussions and Analysis of Financial
Condition and Results of Operations" and include, without limitation, the
Company's expectation and estimates as to the Company's business operations
including, but not limited to, the Company's market position, product
introduction, raw material processing, brand strategy, information systems,
manufacturing integration, customer order fulfillment, demand forecasting,
production scheduling, SKU reduction, warehouse management, labor and freight
costs, the ongoing integration of Dogloo's business with Doskocil's, and future
financial performance, including growth in net sales and earnings, cash flows
from operations, capital expenditures, and the sale of assets. These statements
typically contain words such as "anticipates," "believes," "estimates,"
"expects" or similar words indicating that future outcomes are uncertain.
In accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all factors, that
could cause future outcomes to differ materially from those set forth in
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 risks related to the business
described in this report. See "Business-Risks Related to the Business." In
addition to factors that may be described in this report, 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: (i) new or
continued difficulties or delays in completing the integration of Doskocil's and
Dogloo's product offerings, computer and information systems, and manufacturing;
(ii) failure to fulfill customer orders on a timely basis; (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 business conditions, (viii) claims which might be
made against the Company, including product liability claims (ix) the loss of an
significant suppliers or sponsors; (x) changes in business strategy or new
product lines; (xi) any inability of the Company to meet the financial covenants
applicable to the Company under its credit and debt agreements (See "Risks
Related to the Business--Highly Leveraged" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Liquidity and
Capital Resources"). Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those herein as anticipated, believed, estimated or
expected.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is a Texas corporation. Executive offices are located at 4209
Barnett Boulevard, Arlington, TX 76017.
The Company is among the leading plastic pet products companies in the
United States, manufacturing a broad range of plastic and other pet products
sold through a distribution network of more than 1,400 retailers, including
PETsMART, Wal-Mart, K-Mart, Petco, Sam's Club and Costco. As part of the Merger,
Doskocil brought to the combined Company its strength in the pet carrier
category, along with a broad range of products and manufacturing capabilities.
Dogloo added 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 combined net sales of Doskocil and Dogloo
have increased from $105.1 million in 1993 to $169.9 million for the fiscal year
ended June 30, 1999.
The following table summarizes the combined net sales of Doskocil and
Dogloo by type for the periods presented:
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ACTUAL
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, DECEMBER 28, DECEMBER 30,
1999 1998 1997 1996 1995
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(IN THOUSANDS)
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Pet products....................... $140,022 $130,863 $126,776 $126,007 $119,647
Sporting goods and other........... 18,991 22,490 22,758 21,950 23,591
Furniture and custom molding....... -- 375 6,671 9,604 5,184
Outside resin sales................ 10,919 5,370 4,478 2,413 594
-------- -------- -------- -------- --------
Combined net sales................. $169,932 $159,098 $160,683 $159,974 $149,016
======== ======== ======== ======== ========
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The Merger combined complementary product lines in several categories in
which both companies have traditionally had a smaller presence. Doskocil
produces a broad line of plastic products, including pet products such as pet
carriers, pet shelters, feeding and watering systems, cat products and pet
bedding, 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) brand names for pet carriers were widely known and have continued to
enjoy increasing use in the transportation and indoor training of pets.
Doskocil's Gun Guard(R) brand (firearms and archery cases) and Golf Guard(R)
brand (golf travel 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. Its 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, its
igloo-shaped best selling pet shelter, 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.
During fiscal 1998, the Company developed and initiated a strategy to
consolidate brands within the pet products area. Prior to the Merger, Doskocil
and Dogloo each differentiated its pet products into two broad groups: Pet
Specialty/Trade ("Pet Specialty") and Mass/Chain ("Mass"), with Pet Specialty
including independent pet stores and superstores and Mass including the balance
of accounts. This two-channel strategy was maintained, with two separate, but
related, umbrella brands. These were Petmate(R) for Mass accounts and
PetmatePro(TM) for Pet Specialty accounts. The Dogloo branding was retired,
although "Dogloo" still is used as the product branding to describe igloo-shaped
doghouses. The Company's brand strategy was formally launched at the APPMA trade
show in late June 1998, at which the Company presented completely revised
Petmate(R) and PetmatePro(TM) brand line-ups, along with consumer communications
designed to drive demand
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for both lines. During fiscal year 1999, the dual brand strategy was abandoned,
bringing the entire Pet business under the Petmate(R) umbrella. This branding
strategy facilitated product line restructuring, rationalization and
consolidation. Product line restructuring reduced the Pet segment from a
pre-Merger total of more than 1,100 SKU's to approximately 450 SKU's. This
reduction in SKU's aided in the Company's recovery from late-calendar 1998
manufacturing and fulfillment difficulties and has reduced the Company's
operational complexity going forward.
As a result of the Merger, the Company has a substantially broadened
customer base and reduced customer concentration. Doskocil's principal products
were, and continue to be, 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 were, and
continue to be, 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. No one customer accounted for more than
17.0% of the Company's total net revenues in fiscal 1999.
HISTORY OF DOSKOCIL AND DOGLOO
Doskocil
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-70's. 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. As of May
1999, the Company sold its interest in the tackle boxes. This sale was made to
permit the Company to sharpen its focus on its remaining core business products.
Dogloo
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 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 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 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 introduced a pet carrier line in 1994
for which production was 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 organization controls, (iv) increased
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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 a Dogloo lawsuit alleging violation by Doskocil of Dogloo's
configuration trademark relating to its igloo-shaped shelter, 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. Dogloo's operating results improved from an
operating loss of $4.3 million in 1995 to an 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 inbound freight costs, and (v) a shift in
product mix toward higher-margin products.
PET PRODUCTS INDUSTRY AND COMPETITION
The U.S. nonfood pet supplies industry was estimated in a study published
in 1998 by Packaged Facts to have generated approximately $4.0 billion in sales
in 1997, up from $3.0 billion in 1993, an increase of approximately $1.0 billion
over the four-year period or a 7.5% compound annual growth rate. The study
estimated that of the $4.0 billion in 1997 non-food pet supply sales, the dog
and cat segments represented approximately 63.0%. Packaged Facts attributed the
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 1990
to 1996, the total number of cats and dogs increased from 112.5 million to 120
million, growing at an approximate 1.8% compound annual rate over the period.
Packaged Facts attributed the growth in the pet supplies market to a number of
factors, including (i) the baby boomer generation purchasing pets for their
children, (ii) the increased senior citizen component of the population who
appreciate the companionship of pets, and (iii) the expansion of pet supply
outlets which 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
fiscal 1999 was approximately 1.5 million units. The Company believes that
important sources of ongoing pet shelter sales are the birth or purchase of new
dogs, the replacement of wooden shelters and family lifestyle changes such as a
new home or child, and the replacement of wooden shelters. The Company estimates
that 65% 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. The Company believes that demand for its plastic pet shelters
will increase over time as wood shelters currently in use are replaced with
plastics shelters.
The Company estimates that the total U.S. plastic pet carrier market for
fiscal 1999 was approximately 4.4 million units. An American Pet Products
Manufacturers Association ("APPMA") 1999/2000 study indicates that within the
pet carrier market, 29% of dog owners and 65% of cat owners in 1998, up from 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, 63% were made of plastic
in 1998. The Company believes that pet carrier purchase will continue to
increase due to increased market awareness of the need for pet carriers for
transportation and indoor training of dogs and consumer transition from wire to
plastic carriers.
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
Newell (formerly Rubbermaid, Inc.). Among the smaller companies against which
the Company competes in the pet shelter category are Handy Home, Blitz, TFH, Pet
Zone 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.
Sales of pet products can be
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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.
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 grow its business and maintain its competitive position by (1) building
brand recognition with consumers, (2) continuing new product innovation, (3)
becoming a low cost producer, (4) providing the best customer service and
fulfillment for its customers and (5) becoming a global manufacturer and
marketer in its core product lines. The Company remains committed to this
strategy for the long term. Over the short term, the Company will focus its
efforts on becoming the low cost producer and developing a world class customer
service and fulfillment capability. The Company will seek to leverage its
competitive strengths to accomplish the following objectives:
Capitalize on Brand Image. 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. The combined Company,
including prior to the Merger, Doskocil and Dogloo, launched a total of 57 new
products in calendar years 1996, 1997 and 1998. The Company launched a total of
22 additional new products in fiscal year 1999. The Company intends to focus
additional efforts in new product development and annual expenditures for this
area are estimated to be approximately $1.6 million for fiscal 2000, down from
$3.3 million in fiscal 1999 as the Company focuses on lowering costs and
improving fulfillment capabilities. There can be no assurance that these
additional expenditures will result in the successful introduction of new
products or in increased sales.
Low Cost Producer. Spectrum, the Company's vertically integrated plastic
resin compounding facility, together with the Company's resin compounding
experience, enables 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 uses a mixture of prime resins and recycled materials
to produce plastic resins.
The Company is investing in new molds and equipment that lower cycle times,
down time and costs. It is implementing the principles of lean manufacturing
which will lead to increased efficiency and lower working capital.
Build a world class customer service/fulfillment organization. The Company
believes that customer service has been a critical factor in the history of
Doskocil's success in the marketplace and its ability to compete against larger
competitors. During fiscal 1999, the Company experienced shipping and invoicing
problems. (See Management's Discussion and Analysis of Financial Condition and
Results of Operations, "Overview"). This will continue to be important in the
short term as well as the long term. The Company is committed to continuing the
development of its customer service and fulfillment operations. By enhancing its
talent base and training, and improving systems and processes, the Company
intends to develop the customer/fulfillment operation into a strategic
competitive advantage. The Company is investing in people and systems to
maintain its strength in the area.
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Part of customer service is providing superior order fulfillment
capabilities to its customers. The Company believes its investment in
fulfillment systems and facilities is a major barrier to entry to other
potential competitors. These capabilities include electronic data processing of
orders and invoices, advanced shipping notifications, cross docking and other
functions designed to provide low cost logistics services to its customers.
Exploit International Growth Opportunities. While international sales
represented approximately 6.3% of the combined Company's net sales in fiscal
1999, 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 1999 acquisition by Wal-Mart of 95 grocery stores in Germany and 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. During fiscal 1999, the Company began
limited manufacturing in Europe using a contract molder to run existing Company
molds.
PRODUCTS
The combination of Doskocil and Dogloo created a company with broad product
lines in many key segments of the pet supplies industry. Doskocil's historic
product line continues to be a leading industry participant in the business of
plastic pet carriers, while Dogloo's products continue to provide market
penetration for the Company in the plastic pet shelter segment. The Company
today also produces and markets numerous additional plastic pet products, such
as cat litter boxes, bowls, feeders, waterers and cat toys, as well as plastic
products for the sporting goods market.
Pet Carriers. (approximately 35% of fiscal year 1999 sales) The Company
currently produces approximately 100 SKUs of pet carriers ranging in domestic
retail price from approximately $10 to $200. Management believes the Company's
Vari Kennel(R), Pet Porter(R), Pet Taxi(R), 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 certain brand awareness
among consumers.
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.
Pet Shelters. (approximately 27% of fiscal year 1999 sales) The Company
produces numerous styles of pet shelters in various sizes, including the
Dogloo(R), Indigo(R), Ruff Hauz(R), Barney(R), Cape Cod(TM), Pet Barn(R) and
Brik Hauz(R). The Dogloo(R), the Company's best seller, is unique because of its
trademarked igloo shape and structural foam plastic construction, which
management believes offers significant advantages over wooden and other plastic
pet shelters. The Company currently manufactures approximately 35 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(R) to over $180 for
a Giant Dogloo(R).
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 1980's, and owns a configuration
trademark which protects certain aspects of its design from imitation by
competitors (See "Business -- 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
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the Company provide exceptional durability, insulation and comfort 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. (approximately 21% of fiscal year 1999 sales) The
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. (approximately 11% of fiscal year 1999
sales) The Company sells three sporting goods product lines with over 40
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, bow cases 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 airlines
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.
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 is 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) hardsided travel case
for golf clubs. Because of its rugged outer shell, management believes the Golf
Guard(R) travel case is superior to soft cases which can rip, stain, and show
dirt. In addition, the Golf Guard(R)case has built-in padlock tabs, bail latches
and dual wheels. During fiscal 1999, the Company sold its interest in the tackle
boxes.
Outside Resin Sales. (Approximately 6% of fiscal year 1999 combined sales)
The Company sells to outside customers its excess production capacity from its
Spectrum resin compounding facility.
NEW PRODUCT DEVELOPMENT
New products introduced within the past three calendar years accounted for
over 20% of the Company's fiscal year 1999 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. The Company launched a total of 22 new products in fiscal year
1999. The Company expects to launch a total of 26 new products in fiscal year
2000. The Company expects new product capital expenditures of approximately $1.6
million in fiscal 2000, down from $3.3 million in fiscal 1999. This decrease is
due to a focus on lowering costs and improving fulfillment capabilities.
The Company's philosophy on new product development is to focus on the
needs of the consumer while creating products which will enhance the interaction
of the pet with its owner and also the pet's care, comfort and lifestyle. The
Company evaluates ideas from multiple sources, both internal and external, and
tests such ideas against consumer reaction and market potential. After 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
over 10 new
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product industry awards during the past four years. The Company also seeks 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 through in-store merchandising, 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. During fiscal 1999, the Company revised its "umbrella"
strategy to consolidate brands within the pet products area. See
"Business -- General."
Domestically, the Company employs a direct sales force which is based near
key retail customers. The Company also uses 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, Japan, Australia and the Pacific Rim.
The Company has developed multilingual packaging and trade advertising
capabilities as it continues to expand international distribution. During fiscal
1999, the Company began limited manufacturing in Europe using a contract molder
to run existing Company molds that were available after domestic product line
consolidation. The Company believes foreign manufacturing avoids significant
shipping costs and import duty when selling to European markets. 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 Germany, 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.
CUSTOMERS
The Company distributes its products through nine distinct distribution
channels in the United States and to more than 1,400 retail customers worldwide,
with the largest customer accounting for 17.0% of combined fiscal 1999 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.
In the years ended June 30, 1999 and June 30, 1998, the six months ended
June 30, 1997, and the year ended December 28, 1996, the Company's largest
customer accounted for approximately 17.0%, 13.0%, 11.0% and 12.0%,
respectively, of the Company's combined sales. The Company's ten largest
customers accounted for, in the aggregate, approximately 52.5%, 42.0%, 36.0% and
40.0%, respectively, of net combined sales during such periods. In fiscal 1999
and 1998, sales to the Company's second largest customer accounted for
approximately 13.0% and 11.0%, respectively, of net combined sales. 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.
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.
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Because of operational problems encountered in fiscal 1999, one of the
Company's top twenty customers, with approximately $1.7 million annual sales,
and several smaller accounts, with total annual sales, of approximately $3.0
million, ceased doing business with the Company.
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 plastic resins used by the Company are produced
from petrochemical intermediates which are, in turn, derived from petroleum
extracts. The main resins historically utilized by the Company are high density
polyethylene ("HDPE"), which Dogloo has used to manufacture its line of pet
shelters, and polypropylene ("PP"), which Doskocil has used 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 nitrogen, impact modifiers, blowing agents, antioxidants
and ultraviolet stabilizers), carbon black, synthetic fibers, natural rubbers,
polyethylene, colorants, components of polyester/cotton fabrics, polyurethane
foam and PVC vinyl.
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.
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, the Company has had limited ability to
increase product pricing in response to plastic resin price increases. Any
material 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.
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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 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 generally expect 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. In
June of 1999, several large suppliers of petrochemicals announced a 5 cent per
pound increase for high-density polyethylene effective August 1999.
[CHART]
Based on data regarding high-density polyethylene and co-polymer
polypropylene from Chemical Data, Inc., May 1999 Edition.
PATENTS AND TRADEMARKS
Following the Merger, the Company operated using two distinct product brand
identifications used by the pre-Merger companies, Doskocil and Dogloo.
Trademarked brands marketed under the Doskocil name included Vari Kennel(R), Sky
Kennel(R), Petmate(R), Pet Taxi(R) and Kennel Cab(R) in pet products, as well as
Gun Guard(R) firearms and archery cases, Camera Guard(R) camera cases and Golf
Guard(R) golf travel cases. Brands marketed under the Dogloo name included
Furrarri(R) and Innovator(R) carriers as well as the Dog Kabin(R), Ruff Hauz(R),
Brik Hauz(R), Dogloo II(R), Indigo(R) and Barney(R) pet shelters.
During fiscal year 1998, the Company developed, as described above, and
initiated a strategy to consolidate brands within the pet products area. During
fiscal 1999, the dual-brand strategy was subsequently abandoned, bringing the
entire pet business under the Petmate(R) umbrella. This branding strategy
facilitated the Company's restructuring, rationalization and consolidation of
its product line. The Company also initiated a program to secure rights to the
Petmate(R) name in all significant foreign markets.
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
"Business -- Risks Related to the Business, Reliance on Trademark, Patent and
Proprietary Information."
SEASONALITY
The business and results of operations of the Company are seasonal. The
Company experiences increased sales of pet shelters during the third and fourth
calendar quarters of the year as retailers build inventories in
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<PAGE> 14
anticipation of periods of bad weather. With regard to other products, pet
carriers and firearms cases have usually been the sales leaders in its quarter
ended June, and sales of other pet products and firearms cases are normally
higher in the quarters ended September and December.
EMPLOYEES
The total number of active employees at June 30, 1999 was 1,066. The
Company hires a significant number of temporary employees to assist in
production during times of peak customer demands. None of the Company's
employees are represented by labor unions. The Company considers its
relationship with its employees to be good.
GOVERNMENT REGULATIONS
The Company is subject to numerous federal, state and local laws and
regulations relating to the protection of the environment. Management does not
expect environmental compliance to have a material adverse impact on the
Company's capital expenditures, earnings or competitive position in the
foreseeable future.
The Company is subject to laws governing its relationship with employees,
including minimum wage requirements, laws and regulations relating to overtime,
working safety conditions and citizenship requirements.
RISKS FACTORS RELATED TO THE BUSINESS
Highly Leveraged. The Company incurred substantial indebtedness in
connection with the consummation of the Merger and has remained highly leveraged
since that time. As of June 30, 1999, the Company had total indebtedness of
approximately $186.8 million. Subject to the restrictions in the Company's
Credit Facility dated September 19, 1997 with Bank of America, as administrative
agent, and other lending institutions party thereto (as amended, the "Credit
Facility") and the Indenture (the "Indenture") for the 10 1/8% Senior
Subordinated Notes (the "Subordinated Notes"), 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. On
August 12, 1999, the Company entered into an additional credit facility (as
amended on October 12, 1999, the "Additional Credit Facility") with Bank of
America, N.A. (the "Additional Lender") which permits the Company to borrow up
to $15.0 million due in September, 2000 and sold $5.0 million Series D Preferred
Stock. 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 Company's equity and debt holders, including: (i) the
limitation 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 Credit Facility and Additional 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; and (v) 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 Credit Facility and the Subordinated Notes are $26.3
million in fiscal 2000, $26.8 million in fiscal 2001, and $27.9 million in
fiscal 2002 which does not include the Additional Credit Facility. The Company's
ability to make scheduled payments of the principal of, or interest on, or to
refinance, its indebtedness 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 Credit Facility, the Additional Credit Facility or successor
facilities. However, based upon the current and anticipated level of operations,
the Company
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<PAGE> 15
believes that its cash flow from operations and the Additional Credit Facility,
together with amounts available under the amended Credit Facility, will be
adequate to meet its anticipated cash requirements for working capital, capital
expenditures, interest payments and scheduled principal payments. There can be
no assurance, however, that the Company's business will generate cash flow at or
above required 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 or to obtain additional financing
or to dispose of material assets or operations. The Credit Facility, the
Additional Credit Facility and the Subordinated Notes 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 Credit Facility, the
Additional Credit Facility and Indenture. The Credit Facility, the Additional
Credit Facility and the Subordinated Notes 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 Credit Facility and the Additional Credit Facility also
contain a number of financial covenants that require the Company to meet certain
financial ratios and tests, including minimum fixed coverage ratio, minimum
interest coverage ratio, maximum leverage ratio and a minimum EBITDA provision
and provide that a "change of control" will constitute an event of default. The
existing Credit Facility was amended in February 1999, May 1999, August 1999,
and October 1999 and, as part of the amendments in February, May, and October,
waivers of certain financial covenant defaults were granted.
The Company's continued ability to satisfy its financial covenants depends,
in part, on the ability of the Company to successfully integrate the product
production and offerings of the combined Company. As is normally the case in
credit relationships, a failure to comply with the covenants contained in the
Credit Facility, the Additional Credit Facility or the Subordinated Notes, if
not cured or waived, could permit acceleration of the related indebtedness and
acceleration of indebtedness under other instruments that contain
cross-acceleration or cross-default provisions. In addition, the obligations of
the Company under the Credit Facility are secured by substantially all of the
assets of the Company. Amounts outstanding under the Additional Credit Facility
are secured by liens in certain equipment and other property of the Company that
are junior in lien priority to the lien securing the Company's Credit Facility.
In the case of an event of default under the Credit Facility or the Additional
Credit Facility, the lenders under the Credit Facility and the Additional Credit
Facility would be 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 Credit Facility or the Subordinated
Notes.
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 is an ongoing process that
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 include the need to
consolidate manufacturing operations in Arlington, Texas, integrate personnel
and combine different corporate cultures. In addition in July 1999, the Company
commenced operation of the first phase of its new integrated management
information system. See "Problems with Implementation of Computer Systems."
The Company made substantial progress on the integration of Doskocil and
Dogloo in fiscal 1998 and fiscal 1999. During fiscal 1998, the Company closed
the Dogloo facilities in Corona, California and Indianapolis, Indiana, relocated
key management and machinery and equipment to Arlington, Texas,
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<PAGE> 16
consolidated ordering, inventory and shipping into a single location while
continuing to prepare to implement a new information system, accelerated new
product development, and adopted a new "umbrella" brand strategy for the
products of the combined Company. During fiscal 1999, the dual brand strategy
was abandoned to facilitate product line restructuring, rationalization and
consolidation. The Company sold the Dogloo facilities in Indianapolis, Indiana
during the first quarter of fiscal 2000.
Commencing with the fourth quarter of fiscal 1998 the Company has
experienced difficulty in fulfilling certain customer orders on a timely basis.
This difficulty is attributable to a number of factors, including problems
experienced in managing the combined product lines of Doskocil and Dogloo,
forecasting accurately customer demand, production scheduling, logistic
constraints and achieving planned production rates from certain equipment. The
Company has been taking short and long-term steps to address these matters,
including developing a more sophisticated sales forecast system, expanding
outsourcing of certain product production and shipping, developing a plan to
reduce SKUs, installing a warehouse management information system, and
implementing a new Company-wide information system. The Company's difficulty in
fulfilling certain customer orders and the associated short-term increased costs
incurred to address this difficulty, including increased labor and freight
costs, will unfavorably impact future results until the long-term corrective
steps satisfactorily address this matter.
Problems with Implementation of Computer Systems. In October 1998, the
Company experienced complications with and abandoned its attempted
implementation of a new manufacturing, distribution and financial hardware and
software system. This led, in part, to the Company's difficulties described
above in fulfilling certain customer orders on a timely basis. In July 1999, the
Company commenced the rapid implementation of a standard set up of an ERP
("enterprise resource planning") software system. The Company has experienced
some difficulty with this new system and has found it necessary to have the
standard set up modified to address Company's specific needs. The Company
expects that its new system with planned modifications will adequately serve its
needs. The Company expects, however, to incur additional expenses to implement
the planned modifications to that system and, until the modifications are
completed, may continue to experience operational and customer order fulfillment
difficulties. In addition, any failure of the system similar to the failure
experienced in 1998 could have an adverse effect on the Company's customer
relations and adversely affect the Company's financial position, results of
operations and cash flow.
Seasonality and Quarterly Fluctuations. The business and results of
operations of the Company are seasonal. The Company's business and results of
operations have historically been seasonal due to the increased number of pet
shelters sold during periods of inclement weather 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, the Company has utilized a
revolving line of credit. The outstanding balance on the revolving line of
credit has generally followed the seasonal cycle described above, increasing
until sales and the collection of receivables could be used to reduce the
outstanding balance on the line. 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 world
wide capacity and demand in these and other industries may cause significant
fluctuations in the prices of plastic resin. In the past, the Company and its
individual predecessors have had limited ability to increase product pricing in
response to plastic resin price increases. The Company has benefited during the
last two years from favorable resin prices. Any 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.
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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. The Company
purchases a significant amount of other raw materials from the Far East. 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 fiscal years ended June 30, 1999, June 30,
1998, December 28, 1996 and the six months ended June 30, 1997, the Company's
largest customer accounted for approximately 17.0%, 13.0%, 12.0% and 11.0%,
respective of net sales, and the Company's ten largest customers accounted for,
in the aggregate, approximately 52.5%, 42.0%, 40.0% and 36.0%, 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.
Because of operational problems encountered in fiscal 1999, one of the
Company's top twenty customers representing approximately $1.7 million annual
sales and several smaller accounts with total annual sales of approximately $3.0
million, ceased doing business with the Company.
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 arrangement. 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 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.
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 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 results 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 ability to expand production capacity and increase research and
development expenditures.
The market data contained in the Report on Form 10-K 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 to the unavailability of raw data in certain circumstances and the
voluntary nature of the
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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.
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 positions, business, operating results and cash flows.
Controlling Stockholder. Westar, without respect to warrants issued to it
on October 1999, owns approximately 68.9% of the outstanding shares of Company
Common Stock. 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.
ITEM 2. PROPERTIES
The location and general character of principal manufacturing facilities
are described below. The plants and facilities have been constructed or acquired
over a period of years and vary in age and operating efficiency.
The Company leases manufacturing facilities in Arlington, Texas, and
Mansfield, Texas; a fabric cut and sew facility in Arlington, Texas; and offices
and warehouse facilities in Arlington, Texas and Indianapolis, Indiana. From
time to time, the Company also leases other outside warehousing facilities
during seasonal demand and to meet certain customer demand. At June 30, 1999,
the Company had 292,000 of additional square footage leased. As of August 1999
the Company sold the facilities in Indianapolis, Indiana. The Company
consolidated its manufacturing operations previously conducted in its
Indianapolis facility by moving its equipment from that location to its
Arlington facilities.
The approximate size and location of the Company's significant facilities
are summarized below:
<TABLE>
<CAPTION>
SIZE NUMBER OF
MANUFACTURING, WAREHOUSE AND OFFICE: (SQ. FT.) OWNED/LEASED EMPLOYEES
- ------------------------------------ --------- ------------ ----------
<S> <C> <C> <C>
Arlington, Texas.................................. 1,180,250 Leased 970
Indianapolis, Indiana(1).......................... 188,000 Owned --
Corona, California(2)............................. 61,000 Leased --
Mansfield, Texas.................................. 52,000 Leased 96
</TABLE>
- ---------------
(1) This facility was sold in August 1999.
(2) This facility has been substantially subleased to third parties for the
remaining term of the lease.
The Company's manufacturing operations include structural foam machines and
injection molding machines ranging in size from 75 to 3,000 tons. With moderate
additional capital expenditures, management believes that the Company's
manufacturing facilities can accommodate a substantial increase in product
volume. The Company manufactures substantially its entire line of products, with
the current exception of aluminum firearm cases, which are manufactured by
contract suppliers. The Company contracts with other manufacturers, from time to
time, to address seasonal and other temporary peaks in customer demand. During
fiscal 1999, construction was completed on 277,000 square feet of manufacturing
and office facilities in Arlington that the Company leases from Mr. Doskocil, a
director.
ITEM 3. 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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<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matters were submitted to a vote of the Company's securityholders during
the fourth quarter of the fiscal year ended June 30, 1999.
17
<PAGE> 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, no par value, (the "Common Stock") is not
listed for trading on any national securities exchange and is not available for
quotation through the National Association of Securities Dealers Automated
Quotation System. During fiscal 1999, the Company sold an aggregate of 4,000
shares of its common stock to one person and repurchased 2,500 shares of its
common stock from one person for $15.03 per share. The foregoing transactions
did not involve any public offering, and the Company believes that each
transaction was exempt from the registration requirements of the Securities Act
of 1933 by virtue of Section 4(2) thereof. As of June 30, 1999, there were
approximately 16 holders of the Company's common stock. The Company has not
declared dividends on its common stock in either of the last three fiscal years,
and does not, at present, expect to pay dividends on its common stock in the
future. On October 12, 1999, the Company issued and sold an aggregate amount of
$5.0 million of Series D Preferred Stock along with related warrants to acquire
common stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
The Company does not intend to apply to list its outstanding 10 1/8% Senior
Subordinated 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 Subordinated Notes may be adversely
affected by general declines in the market of similar securities, regardless of
the Company's financial performance or prospects.
ITEM 6. SELECTED FINANCIAL DATA
The financial data for the periods presented prior to September 19, 1997,
reflect the combined historical financial position and results of operations for
Doskocil and Spectrum, as these entities were under common ownership. Beginning
September 19, 1997, the financial results of the Company, include the financial
position and results of operations for Dogloo, Inc. Pro forma net income per
common share (both basic and diluted) are based on the common shares outstanding
after the recapitalization of Doskocil in July 1997 (the "Recapitalization") and
the termination of Doskocil's "S" Corporation status occurred at the same time.
See "Notes to Financial Statements -- Note 3 and 4."
<TABLE>
<CAPTION>
YEAR YEAR YEAR ENDED SIX MONTHS
ENDED ENDED ------------------------------ ENDED
JUNE 30, JUNE 30, DEC. 28, DEC. 30, DEC. 31, JUNE 30,
1999 1998 1996 1995 1994 1997
-------- -------- -------- -------- -------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales.............................. $169,932 $147,156 $103,455 $97,496 $92,267 $51,756
Gross profit........................... 48,813 47,594 30,327 25,944 29,782 13,367
Selling, general and administrative.... 43,135 31,540 20,682 20,733 20,675 10,446
Impairment of long-lived assets........ 6,789 -- -- -- -- 3,846
Operating income (loss)................ (1,111) 16,054 7,615 3,105 4,729 (3,800)
Interest expense....................... 17,750 17,461 2,328 2,473 855 506
Net income (loss) before income
taxes................................ (18,885) (1,051) 4,743 1,190 3,951 (4,276)
Net income (loss)...................... (18,885) (2,920) 4,743 1,190 3,951 (4,276)
Net income (loss) attributable to
common shareholders.................. (19,801) (4,104) 4,743 1,190 3,951 (4,276)
Net income (loss) per share basic and
diluted.............................. (6.38) (1.50) -- -- -- --
Pro forma net income (loss)............ -- -- 2,988 750 2,371 (2,694)
Pro forma basic and diluted net income
per share............................ -- -- $ 2.25 $ .56 $ 1.78 $ (2.02)
======== ======== ======== ======= ======= =======
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
YEAR YEAR YEAR ENDED SIX MONTHS
ENDED ENDED ------------------------------ ENDED
JUNE 30, JUNE 30, DEC. 28, DEC. 30, DEC. 31, JUNE 30,
1999 1998 1996 1995 1994 1997
-------- -------- -------- -------- -------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET AND OTHER DATA:
Capital expenditures................... $ 14,988 $ 11,458 $ 4,129 $19,156 $11,474 $ 971
Total assets........................... 163,702 164,101 66,135 72,876 58,663 50,679
Capitalization
Total long-term debt................. $178,281 $163,094 $ 7,465 $19,678 $20,797 $ 6,590
Partners' equity..................... -- -- 4,278 5,297 3,129 3,808
Common stockholders' equity
(deficit)......................... (42,184) (23,320) 31,360 25,851 27,333 25,282
-------- -------- -------- ------- ------- -------
Total capitalization......... $136,097 $139,774 $ 43,103 $50,826 $51,259 $35,680
======== ======== ======== ======= ======= =======
</TABLE>
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Company's financial statements and related notes included
elsewhere in this report.
Through 1996, both Doskocil's and Dogloo's fiscal years ended on or about
December 31 of each year. In order to match the combined Company's fiscal year
reporting with its seasonality, the Company changed its fiscal year end to June
30 in connection with the Merger. Accordingly, reference to fiscal 1996 or prior
years means the years ended on or about December 31 of such year. Reference to
fiscal 1997 means the six month period from December 29, 1996 through June 30,
1997. Reference to fiscal 1999 and 1998 means the twelve month period ended on
June 30 of such year. Historical financial information for the combined Company
for the twelve month periods beginning on July 1, 1996 and July 1, 1997 are
presented later in this section under the caption "Summary Combined (Doskocil
and Dogloo) Historical Financial Information for the Twelve Months Ended June
30, 1998 and 1997."
RESULTS OF OPERATIONS
The following analysis is based on actual results of the Company which only
reflect Dogloo from the date of acquisition. Please refer to the section
"Summary Combined (Doskocil and Dogloo) Historical Financial Information" for an
analysis of combined results of the Doskocil and Dogloo on a combined basis for
the twelve month periods ended June 30, 1999, 1998, and 1997.
Net sales for each of the periods presented are summarized in the following
table:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 28, JUNE 30,
1999 1998 1996 1997
---------- ---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Pet products............................ $140,022 $118,027 $ 72,692 $35,838
Sporting goods and other................ 18,991 22,490 21,950 11,105
Furniture and custom molding............ -- 327 6,400 2,241
Outside resin sales..................... 10,919 6,312 2,413 2,572
-------- -------- -------- -------
Net sales............................... $169,932 $147,156 $103,455 $51,756
======== ======== ======== =======
</TABLE>
Overview
Fiscal 1999 saw strong demand and increased sales which were more than
offset by higher costs of production and higher operating expenses.
Consolidation problems, management changes and computer systems issues all
contributed to increased costs and larger losses.
Net sales increased 15.5% in 1999 primarily due to the inclusion of Dogloo
sales for the whole year, higher pet sales and increased outside resin sales.
This growth occurred in spite of the availability and delivery problems that
limited sales in the first two fiscal quarters of fiscal 1999. At one point in
the second quarter of
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<PAGE> 22
fiscal 1999, the Company's unfilled orders exceeded $20 million. The Company
incurred additional expenses in the second and third quarters of fiscal 1999 to
ensure the customer service level necessary to keep its customer base intact.
The Company ended the year with good relationships with its key customers.
Cost of goods sold was impacted by throughput problems, inefficiency in the
plant and warehouse and computer systems problems in fiscal 1999. Labor costs
rose above historical levels in the plant and warehouse. Equipment was operating
at 50% of capacity due to frequent changeovers, equipment failures, shortages of
raw materials and operating in temporary and inefficient facilities the first
half of the year. A significant portion of the structural foam production of dog
shelters was out-sourced, causing unplanned expense for outsourcing and freight.
Expensive outside warehousing was acquired to ease the shipping problems that
appeared in the fall. Difficulties in forecasting and production planning
contributed to higher inventory levels and poor customer service.
Key managers in manufacturing, shipping and finance were replaced late in
the second fiscal quarter of 1999. A new CEO with a strong operations and
control background was hired at the end of the fiscal year. The new
manufacturing facility became operational in January 1999, and should result in
improved efficiency. The Company leased three new 1,500 ton presses to add to
machine capacity and authorized the construction of additional on-campus
warehouse space that could be operated at significant savings. SKU
rationalization and the change to a single brand umbrella under the Petmate
label improved service and lowered costs.
The failed computer systems conversion in October 1998 intensified the
impact of production and order fulfillment problems during the fall of 1998. The
failed computer system made it difficult to take and track orders, maintain
accurate inventory records and ship and invoice correctly. The accuracy and
timeliness of financial information hampered management's ability to control
costs. The Company completed the re-implementation of its old Legacy computer
systems along with a physical inventory in March 1999. In July 1999, the Company
began a rapid implementation of ERP software and warehouse management software.
These systems became operational on July 5, 1999.
SG&A Expenses were also higher because of the customer service problems and
inefficiencies in operations described above. Freight and selling costs
increased as the Company reacted to product shortages and shipping problems. The
shipping and invoicing problems caused higher than historical levels of
deductions for shipping and billing errors. Selling expense was also higher due
to the launch of a consumer-advertising program to build brand awareness and
product demand. This program was terminated late in the fall of 1998. Freight
costs dropped off to expected levels in the second half of the fiscal year. Bad
debt expense was also high in fiscal 1999 compared with historical levels.
Impairment expense caused the largest increase in operating expenses as the
Company wrote off assets related to the first systems conversion, other non-core
business assets that were sold during the year and a charge to reflect
management's ongoing assessment of asset recoverability, including related
goodwill.
Outlook
The Company is focusing its efforts on reducing costs and improving order
fulfillment and customer service, placing less emphasis in the short term on
increasing sales, building brand recognition and launching new products. The
Company's objective is to become the low cost producer with a reputation for
quality and service as its key competitive advantage. The focus will continue to
be to simplify the business, including rationalization of customers and product
rationalization.
The Company has initiated specific programs to lower costs of sales. As an
example, the Company has renegotiated its insurance programs, lowering total
costs approximately $1.5 million. Spending will increase in areas such as
maintenance to increase machine reliability and throughput, thereby lowering
unit costs. Product development is focused on product reengineering to lower
costs. Specific capital spending on molds has been initiated to increase
machine/mold efficiency, in some cases redesigning products to lower costs. New
management and spending on computer controls has already lowered shipping and
material handling costs. Expensive forklift rentals have been replaced with
lower cost leased units. Expense for outside molding, warehousing and in-bound
freight is expected to be lower than fiscal 1999 but higher than historic levels
until the Company's new additional on-campus warehouse is built and throughput
improvement plans take hold.
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<PAGE> 23
The Company expects to realize further savings as it continues to rationalize
its product lines and customer base.
Prices for resin and packaging are expected to increase in fiscal 2000. The
Company has moved aggressively to negotiate price cuts and change to lower cost
resins to offset these cost increases. The Company is partially shielded from
the impact of higher resin prices because it maintains its own resin compounding
facility and utilizes lower cost scrap materials for much of its resin.
SG&A expense is expected to be lower in the next twelve months. The
elimination of consumer advertising in the near term will lower selling expense.
Bad debt expense is expected to be significantly lower than in fiscal 1999.
Variable selling expense and sales deductions are also expected to be lower than
in fiscal 1999 along with lower impairment expense. The Company plans to use
molds freed up by SKU rationalization to develop the Company's ability to
manufacture overseas. The Company paid minimal bonuses in fiscal 1999 and will
incur bonus expenses in fiscal 2000 if the Company achieves its operating plan
objectives.
The Company's implementation in July 1999 of the Oracle computer system has
led to somewhat higher costs during the implementation period. This could be a
negative factor in fiscal 2000 but the impact is expected to be significantly
less than the costs associated with the failed implementation last fall. See
"Risk Factors -- Problems in Implementation of Computer Systems."
Overall capital spending in fiscal 2000 will be much lower than in fiscal
1999 and focused on plant equipment and molds that will improve efficiency and
increase plant throughput. Other spending will relate to the new computer
systems with much less funding devoted to new products. There will be an
aggressive effort to reduce working capital, reducing inventories and
receivables while increasing payables.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Net sales increased to $169.9 million in fiscal 1999 from $147.2 million in
fiscal 1998, an increase of $22.7 million or 15.5%. The increase was primarily
due to the inclusion of Dogloo net sales for the period of July 1 through
September 19, 1998, whereas the same period of 1997 is not included, increased
pet sales and higher outside resin sales in fiscal 1999. These increases were
partially offset by a reduction in sporting goods sales decreased primarily due
to the loss of two customers and management's decision in the third quarter to
divest the Company of certain non-core business assets.
Gross profit increased to $48.8 million for fiscal 1999, up from $47.6
million in the prior year, an increase of $1.2 million. As a percentage of
sales, gross margin decreased to 28.7% for fiscal 1999 from 32.3% in the prior
year. The Company's gross profit as a percentage of net sales was unfavorably
affected by, among other things, a failure to manufacture sufficient inventory
during the second half of fiscal year 1998 and the inability to accurately
forecast demand in the first part of fiscal 1999. In addition, during the first
half of the fiscal year, the Company experienced a failed software system
conversion that hampered the Company's ability to manufacture, ship and invoice
during its second fiscal quarter. Margins for the year reflect the higher
associated costs including $1.4 million for outside storage, $1.6 million of
inbound freight and higher expenses for outside molders. The Company also
experienced higher costs for manufacturing direct labor and higher distribution
center and fulfillment costs.
Selling, general and administrative expenses increased to $43.1 million for
fiscal 1999 from $31.5 million in fiscal 1998, an increase of $11.6 million or
36.8%. The increase was the result of several factors, including higher expenses
as a result of the merger, higher freight costs, amortization of goodwill, bad
debt expenses and advertising and promotion expenses.
Impairment of long-lived assets in fiscal 1999 was $6.8 million. This
includes a $1.3 million charge due to the decision to divest the Company of
certain non-core business assets, a $2.3 million charge due to a failed system
conversion and management's assessment that the implementation costs have
minimal future benefit and a $3.2 million charge reflecting management's ongoing
review of recoverability of assets, including related goodwill.
21
<PAGE> 24
Interest expense increased to $17.8 in fiscal 1999, up from $17.5 million
in fiscal 1998. Interest expense in fiscal 1998 included amortization of fees
and expenses associated with the related bridge financing of $2.5 million and
$0.6 million related to the Credit Facility and Notes. These bridge financing
fees and expenses were charged to expense as a result of the refinancing of the
Company which was completed concurrent with the Merger.
Provision for income taxes for fiscal 1999 is zero due to the net operating
loss generated during the period for which a valuation allowance has been
provided for the resulting deferred tax asset.
Net Loss for fiscal 1999 was $18.9 million compared to a net loss in fiscal
1998 of $2.9 million. The changes in net income primarily reflect the factors
discussed above.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 28, 1996
Net sales increased to $147.2 million in fiscal 1998 from $103.5 million in
fiscal 1996, an increase of $43.7 million or 42.2%. The increase was the result
of the inclusion of Dogloo net sales of $45.7 million and a decrease in the net
sales of Doskocil of $2.0 million. This decrease in Doskocil's net sales was
primarily the result of the decision to discontinue the resin furniture and
custom molding business, which historically carried low gross profit margins.
Excluding the sales of the resin furniture and custom molding business, the
Company's net sales increased approximately 4.2% or $4.1 million. This increase
is primarily due to a $3.9 million increase in outside resin sales.
Gross profit increased to $47.6 million in fiscal 1998 from $30.3 in fiscal
1996, an increase of $17.3 million or 57.1%. As a percentage of net sales, gross
margin increased to 32.3% in 1998 from 29.3% in 1996. The Company's gross profit
was favorably affected by the inclusion of Dogloo results, lower plastic resin
material costs, reduction of operating lease payments related to equipment
repurchased as part of the Recapitalization and the discontinuation of the
custom molding and resin furniture products. This increase was offset partially
by lower factory utilization due to the merging of the two companies' facilities
during the last half of fiscal 1998.
Selling, general and administrative expenses increased to $31.5 million in
fiscal 1998 from $20.7 million in fiscal 1996, an increase of $10.8 million or
52.2%. The increase was the result of higher expenses due to the inclusion of
Dogloo expenses after the Merger and $1.5 million of goodwill amortization
associated with the Dogloo Merger. As a percentage of net sales, S,G&A spending
increased to 21.4% in 1998 from 20.0% in 1996.
Interest expense increased to $17.5 million for fiscal 1998 from $2.3
million in fiscal 1996, primarily due to additional debt incurred in conjunction
with the recapitalization and merger in the first quarter of fiscal 1998.
Interest expense in fiscal 1998 also consists of amortization of fees and
expenses associated with the related bridge financing of $2.5 million and $0.6
million related to the Credit Facility and the Notes. These bridge financing
fees and expenses were charged to expense as a result of the refinancing of the
Company which was completed concurrent with the Merger on September 19, 1997.
Provision for income taxes of $1.9 million for fiscal 1998 is composed of a
charge of $1.7 million for the change to a C Corporation status and a charge of
$0.2 million on the net loss for the year. No provision was recorded for fiscal
1996 due to the Company's S Corporation status.
Net loss for fiscal 1998 was $2.9 million compared to net income of $4.7
million in fiscal 1996. The change in net income primarily reflects the factors
discussed above.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
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. Excluding
custom molding, the Company's net sales in its core business
22
<PAGE> 25
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 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.
S,G&A remained essentially flat at $10.4 million for the period ended June
30, 1997. As a percentage of net sales, S,G&A increased to 20.2% from 20.1%.
Interest expense for the six months ended June 30, 1997 decreased $1.3
million from the comparable period of 1996. This was primarily the result of a
lower debt balance during the six months ended June 30, 1997.
Net Loss for the six months ended June 30, 1997 decreased from net income
of $1.3 million at June 30, 1996 to a loss of $4.3 million for the six months
ended June 30, 1997 due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Current assets increased $6.0 million from June 30, 1998 to June 30, 1999.
This increase primarily reflects higher receivables and inventories reflecting
management's intent to build inventory for fiscal 2000, somewhat offset by lower
cash and marketable securities.
Current liabilities increased $3.3 million from June 30, 1998 to June 30,
1999. This increase is due to an increase in the current portion of long-term
debt, and accounts payable, offset somewhat by lower accrued liabilities.
Accrued liabilities decreased $4.9 million primarily due to an adjustment to an
accrual related to the close-down of the Indianapolis facility.
Non-current assets decreased to $115.0 million at June 30, 1999, down from
$121.4 million at June 30, 1998. This decrease was the result of an adjustment
to goodwill related to an accrual related to the close-down of the Indianapolis
facility and impairment charges due to management's review of recoverability of
assets, including related goodwill. These decreases were partially offset by
capital expenditures. In August 1999, the Company sold its Indianapolis facility
for $3.6 million in net proceeds.
Long-term debt at June 30, 1999 was $178.3 million, up from $163.1 million
for the year ended June 30, 1998. The Company's long term debt consists of
Credit Facility borrowings and the 10 1/8% Senior Subordinated Notes. Total
debt, including the current portion, was $186.8 million at June 30, 1999 and
$167.2 million for the year ended June 30, 1998. Total debt at June 30, 1999,
including the unused portion of the revolver commitments was $191.4 million. As
of October 13, 1999, after giving effect to the Fourth Amendment described
below, total debt, excluding the Additional Credit Facility guaranteed by
certain shareholders and described below, was reduced to $186.4 million.
Credit Facility. The Credit Facility provides for an aggregate principal
amount of loans of up to $110 million. Loans under the Credit Facility consist
of $82.5 million in aggregate principal amount of term loans (the "Term Loan
Facility"), which facility includes a $45.0 million tranche A term loan
subfacility 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's Term Loan Facility and Revolving Credit
Facility require the Company to meet certain financial tests, including a
minimum fixed charge coverage ratio, minimum interest coverage ratio,
23
<PAGE> 26
minimum EBITDA and a maximum leverage ratio. The Credit Facility also contains
additional restrictions that, among other things, limit additional indebtedness,
liens, sale of assets and business combinations. The Company's obligations under
the Credit Facility are secured by a security interest in substantially all of
the Company's assets.
Amendments to the Credit Facility. The Company was not in compliance with
certain financial covenants at June 30, 1999, including the interest coverage
ratio, fixed charge coverage ratio, and the minimum EBITDA requirements of the
existing Credit Facility. On August 12, 1999, the Company entered into an
amendment to the Credit Facility (the "Third Amendment") to permit, among other
things, the Company to enter into the Additional Credit Facility. On October 12,
1999, the Company entered into a fourth amendment to the Credit Facility (the
"Fourth Amendment"). The Fourth Amendment provides, among other things, for the
waiver of all financial covenant ratios for the quarter ended September 30, 1999
and all fiscal quarters prior thereto, and, commencing with the fiscal quarter
ending on December 31, 1999, raises the maximum leverage ratio and lowers each
of (i) the minimum fixed charge coverage ratio, (ii) the interest coverage ratio
and (iii) the minimum EBITDA. Additionally, the Fourth Amendment (i) adds a
senior leverage ratio commencing with the fiscal quarter ending on September 30,
2000, (ii) adds a covenant prohibiting the principal amount of all loans
outstanding under the existing Credit Facility from exceeding (a) $96,000,000 as
of the last day of each fiscal quarter through June 30, 2000, and (b)
thereafter, the lesser of (x) $96,000,000 and (y) the Company's EBITDA for the
four consecutive fiscal quarters immediately preceding the date of calculation,
times 3.0, and (iii) reduces the maximum amount of the "Revolving Credit
Commitment" to $24.7 million. At October 13, 1999, after giving effect to the
Fourth Amendment, and application of proceeds from the sale of Series D
Preferred Stock, there will be outstanding $37.3 in principal amount of tranche
A term loans, $34.5 in principal amount of tranche B term loans and $24.7 in
principal amount of revolving credit borrowings.
The financial covenants in the Fourth Amendment were negotiated based on
the Company's projections for the next fifteen months. Although management
expects to meet its projections, there can be no assurance that the Company will
be able to meet its revised covenants or that it will be able to obtain waivers
if the Company is not in compliance in the future. In addition, there is no
assurance that future operations will generate sufficient liquidity to cover the
needs of the business.
The Fourth Amendment also includes a provision allowing (but not requiring)
Westar and certain existing shareholders the right to cure certain financial
covenant defaults within not more than 45 days after the end of the relevant
fiscal quarter by providing additional capital to the Company. Pursuant to this
provision, any such timely capital investment will be deemed under such
financial covenants to increase on a dollar-for-dollar basis the EBITDA (and
related definitions) of the Company as of the last day of such fiscal quarter
and, to the extent that the proceeds thereof are used to repay Credit Facility
loans, to reduce total debt and senior debt for purposes of such financial
covenants. There is no commitment or obligation on the part of Westar, TDL or
any other shareholder to provide additional capital to the Company.
The Additional Credit Facility. The Additional Credit Facility is a senior
revolving credit facility which the Company entered into on August 12, 1999.
Advances under the Additional Credit Facility may be made at the option of the
Company as a base rate advance or a LIBOR Advance. Base rate advances bear
interest at a per annum interest rate equal to the higher of (a) the sum of (i)
0.50% plus (ii) the federal funds rate on the applicable day plus (iii) an
applicable base rate margin or (b) the sum of (i) the prime rate on such date
plus (ii) an applicable base rate margin. A LIBOR advance bears interest at a
rate based upon LIBOR plus 3.50 percent. Amounts outstanding under the
Additional Credit Facility are secured by liens in certain equipment and other
property of the Company that are junior in lien priority to the lien securing
the Company's Credit Facility. Pursuant to an amendment to the Additional Credit
Facility executed on October 1999, the maturity of such facility was extended to
September 30, 2000 and the maximum amount of borrowings thereunder was increased
to $15.0 million. On October 13, 1999, $10.0 million was outstanding under the
Additional Credit Facility. The financial covenants in the Company's existing
Credit Facility, after giving effect to the Fourth Amendment, are incorporated
by reference into the Additional Credit Facility.
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<PAGE> 27
In order to induce the Additional Lender to provide the Additional Credit
Facility, Westar LP and Westar LLC (together, the "Westar Funds") have entered
into a Continuing Guaranty dated as of August 12, 1999 (the "Guaranty") and a
Pledge Agreement dated as of August 12, 1999 (the "Pledge Agreement") pursuant
to which, from time to time in their discretion, the Westar Funds may guaranty
loans made by the Additional Lender under the Additional Credit Facility and
pursuant to which Westar Capital LLC has pledged $5 million to secure its
obligations under the Guaranty. In addition, Twelve D Limited, a limited
partnership controlled by Benjamin L Doskocil, Sr. ("TDL"), has entered into a
Reimbursement Agreement dated as of August 12, 1999 (the "Reimbursement
Agreement") with the Westar Funds pursuant to which TDL has agreed to reimburse
the Westar Funds for payments made pursuant to the Guaranty and the related
pledge arrangements under the Pledge Agreement in an amount proportional to its
equity interests in the Company.
In connection with certain amendments to the Additional Credit Facility on
October 12, 1999, the Guaranty and Reimbursement Agreement was increased to
$15.0 million and was extended to September 30, 2000 and the Pledge Agreement
was revised to, among other things, require Westar LLC to pledge additional
collateral to the Additional Lender in the event that loans under the Additional
Credit Facility exceed $10.0 million.
In order to induce the Westar Funds to continue the Guaranty and the Pledge
Agreement and, in the case of TDL, to continue its obligations under the
Reimbursement Agreement, the Company issued to Westar LP and an affiliate and
TDL (the "Investor"), who directly or indirectly through the Reimbursement
Agreement guaranteed the Additional Credit Facility, 14.1 million warrants to
acquire common stock of the Company (the "Guaranty Warrants"). The Guaranty
Warrants were issued to each such Investor ratably based on the amount of such
Investor's liability under the Guaranty and Reimbursement Agreement, exercisable
at an initial exercise price of $.01 per share. Of the Guaranty Warrants, 4.1
million, are exercisable immediately, and 10.0 million are only exercisable in
the event of, and in proportion to, payments made by such Investor under the
Guaranty.
Sale of Series D Preferred Stock and Related Warrants. In connection with,
and as a condition of, the Fourth Amendment, the Company issued and sold to
certain of its current stockholders shares of a new series of Series D
Redeemable Preferred Stock, $100 stated value (the "Series D Preferred Stock")
in an aggregate amount of $5.0 million, along with related warrants to acquire
1.0 million shares of common stock of the Company (the "Related Warrants").
Proceeds from the sale of Series D Preferred Stock was applied against the
Credit Facility. Holders of the Series D Preferred Stock are entitled to receive
quarterly dividends at the Company's option either in cash or in additional
shares of Series D Preferred Stock at the annual dividend rate of 12% per annum.
The Series D Preferred Stock is senior to all other classes of equity securities
of the Company with respect to dividend rights and rights on bankruptcy,
liquidation, dissolution and winding-up. In the event of the liquidation,
dissolution or winding-up of the Company, the holders of the Series D Preferred
Stock are entitled to receive $100 per share plus any accrued and unpaid
dividends, before the distribution of any assets of the Company to holders of
any class or series of capital stock ranking junior to the Series D Preferred
Stock. The Series D Preferred Stock is, at the Company's election, subject to
optional redemption but has no right to convert into any other equity security
of the Company. The Related Warrants are exercisable at any time at an initial
price equal to $.01 per share.
Subordinated Notes. The Subordinated Notes are issued under the Indenture
dated as of September 19, 1997 and are senior, subordinated, unsecured general
obligations of the Company in the aggregate principal amount of $85.0 million.
The Subordinated Notes mature on September 15, 2007 and pay interest at the rate
of 10 1/8% per year, payable semi-annually on March 15 and September 15 of each
year. The Notes are redeemable under certain circumstances provided in the
Indenture and contain certain covenants and restrictions also provided in the
Indenture.
The Company's primary sources of liquidity are cash flow from operations
and borrowings under the $27.5 million Revolving Credit Facility, sale of
preferred stock and the Additional Credit Facility. At June 30, 1999, $22.9
million was outstanding under the Revolving Credit Facility and financing
available under the Revolving Credit Facility was approximately $25.4 million
based on a formula of eligible accounts receivable
25
<PAGE> 28
and inventory. The Company intends to use cash flow from operations and
borrowings under the Revolving Credit Facility and the Additional Credit
Facility to meet seasonal fluctuations in working capital requirements primarily
driven by changes in inventory, accounts receivable and trade payables. Working
capital needs typically reach their peak in the period from May through
September.
The Company believes cash provided by operations and available under
existing and additional Credit Facilities will be sufficient to fund working
capital and capital expenditure requirements during the next twelve months.
Net cash provided from operating activities was a negative $6.4 million for
the twelve months ended June 30, 1999, compared with a positive $14.6 million
and $16.8 million for the twelve months ended June 30, 1998 and December 28,
1996, respectively. The decrease in 1999 was primarily due to increased interest
payments based on the increased debt balance of the Company, higher working
capital and lower operating income. The decrease in 1998 was primarily due to
increased interest payments based on increased debt balance of Company, which
was partially offset by decreased working capital.
Capital expenditures were $15.0 million for the year ended June 30, 1999
compared with $11.5 million and $4.1 million in June 30, 1998 and December 28,
1996, respectively. Expenditures in fiscal year 1999 include amounts for
improvements to, and upgrades of, existing facilities, information system
upgrades and molds for new products.
Capital expenditures for fiscal 2000 are expected to be approximately $10.0
million related to upgraded machinery, tooling and information systems.
Management plans to fund these capital expenditures through cash flow from
operations and, if necessary, borrowings under the Revolving Credit Facilities
and the Additional Revolving Credit Facility. The capital requirements for
fiscal 2000 will be partially offset by cash proceeds from the sale of the
Indianapolis facility.
Cash from disposal of assets was $0.8 million for the year ended June 30,
1999 compared to $2.8 million in 1998. Proceeds in fiscal 1999 include $0.8
million received from the sale of certain sporting goods assets. Proceeds in
fiscal 1998 include $0.8 million related to the sale of equipment related to the
resin furniture business and $2.5 million received from the sale of Dogloo
equipment after the merger. Proceeds in 1996 primarily reflected proceeds
related to sale leaseback transactions for equipment. In August 1999, the
Company sold its Indianapolis facility for $3.6 million in net proceeds.
YEAR 2000
In the next three months, most large companies will face a potentially
serious information systems problem because many applications and operating
software programs written in the past may not properly recognize calendar dates
beginning in the year 2000. This problem could force information systems to
either shut down or provide incorrect data or information. The Company began the
process of identifying the necessary changes to its computer applications and
operating software programs as well as assessing the progress of its significant
vendors in their remediation efforts in 1997. The discussion below details the
Company's efforts to ensure Year 2000 compliance.
State of Readiness. In 1997, the Company began a project to upgrade
virtually all of its computer systems, including changes to address the Year
2000 problem. The systems upgrade program covered a wide array of computing
applications, including financial, manufacturing and distribution systems, as
well as ancillary systems such as factory control, electronic data interchange,
e-mail, and computer hardware. To date, the Company has replaced all aspects of
its information systems infrastructure, including computer room facilities such
as air conditioning and alarm systems, communications network facilities
(including data switches and telephone switches), desktop computers and servers,
ancillary business systems and the computerized process of scheduling systems
for production equipment. The Company is still in the process of completing a
comprehensive review of possible Year 2000 impacts on production and operational
support areas of the Company. To date, this review of all non-information
technology systems and equipment has revealed no material non-compliance
problems. All major molding equipment and control systems have no compliance
issues or their control system is not dependent on a microprocessor. The
continuing investigation is
26
<PAGE> 29
now focused on support equipment. The Company expects to complete this review
and have any necessary conversion plans completed by November 1, 1999.
In October 1998, the Company attempted to implement a new manufacturing,
distribution and financial hardware and software system to replace the Company's
financial and enterprise resource planning systems, which are not Year 2000
compliant. This attempted implementation encountered complications and the
decision was made to pursue other alternatives. In July 1999 the Company
commenced the implementation of Oracle financial, manufacturing and distribution
modules, which are Year 2000 compliant. The Company has experienced some
difficulty with this new system and has found it necessary to have the standard
set up modified to address Company's specific needs. The Company expects that
its new system with planned modifications will adequately serve its needs. The
Company expects, however, to incur additional expenses to implement the planned
modifications to that system and, until the modifications are completed, may
continue to experience operational and customer order fulfillment difficulties.
In addition, any failure of the system similar to the failure experienced in
1998 could have an adverse effect on the Company's customer relations and
adversely effect the Company's financial position, results of operations and
cash flow.
All of the Company's new equipment and software is Year 2000 compliant, and
the Company is obtaining certifications from the manufacturers and suppliers of
such software and equipment. The Company has relied on a strategy of replacement
rather than testing to verify that its critical systems are Year 2000 compliant.
Nature and Level of Importance of Third Parties. The Company's accounts
receivable system interfaces directly with significant third party vendors. The
Company is in the process of working with third party vendors to ensure that the
Company's systems that interface directly with third parties are Year 2000
compliant by December 31, 1999. The Company has completed its remediation
efforts on these systems. The Company understands that these key vendors are in
the process of making their payable systems Year 2000 compliant. Each vendor
queried believed that its payable system would be Year 2000 compliant by the end
of 1999.
The Company has queried its significant suppliers and subcontractors that
do not share information systems with the Company (external agents). To date,
the Company is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
Year 2000 Costs. The Company originally estimated the cost of its entire
information systems upgrade, including Year 2000 compliance, to be approximately
$3.6 million. Due to the complications encountered with the implementation, the
Company has increased its budget for the entire project to approximately $6.0
million. Most of the costs of the Company's information systems upgrade will be
capitalized and amortized over a period not to exceed five years. Over the last
two years, capital expenditures for this project were approximately $4.9
million, of which $2.3 million of these costs had minimal future benefit and
were charged to expense in fiscal 1999 as the result of the failed system
conversion. The remaining project costs will be financed through the cash flow
from operations and the Revolving Credit Facilities.
Year 2000 Risks. The Company is contacting certain of its material
suppliers and vendors to determine whether they are taking reasonable
precautions against potential Year 2000 problems and seeking to determine
whether any material delays or disruptions in their ability to supply goods and
services to the Company are likely to occur. Despite these efforts, the Company
cannot guarantee that it will not experience any problems in the year 2000.
Business operations depend largely upon daily interaction with numerous
third parties over which the Company exercises no control. The Company believes
third party compliance is its greatest risk in term of magnitude. The situation
presents a very large challenge for all businesses. Management believes the
Company is acting reasonably to meet that challenge. If there are infrastructure
failures such as disruptions in the supply of electricity, water or
communications services, or major institutions such as the government, or
27
<PAGE> 30
banking systems are unable to provide their services or support resulting in a
disruption in services or support to the Company, the Company may be unable to
operate for the duration of the disruption.
Contingency Plans. Based on the Company's implementation of new software on
July 1, 1999, the Company fully expects to be Year 2000 compliant. The Company's
contingency plan in the event it fails to complete its Year 2000 projects would
be to hire outside programmers to modify and make its Legacy computer programs
Year 2000 compliant. The Company will continue to monitor internal and external
progress.
INFLATION
The Company believes that the relatively moderate rates of inflation
experienced in recent years have not had a significant impact on its net sales
or profitability.
ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidelines for companies to capitalize or expense costs incurred to develop or
obtain internal-use software. This is effective for fiscal years beginning after
December 15, 1998. The Company is assessing the impact this statement will have
on its statement of financial position and the results of its operations.
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This new standard requires recognition of all new
derivatives as either assets or liabilities at fair value. The Company does not
anticipate the effect of the adoption to have a material impact on either
financial position or results of operations. The Company plans to adopt the
standard effective July 1, 2000, as required.
SUMMARY COMBINED (DOSKOCIL AND DOGLOO) HISTORICAL FINANCIAL INFORMATION FOR THE
TWELVE MONTHS ENDED JUNE 30, 1998 AND 1997
The following table sets forth summary historical financial information of
Doskocil and Dogloo on a combined basis for twelve month periods beginning on
July 1, 1996, July 1, 1997 and actual results for fiscal 1999.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JUNE 30,
(UNAUDITED)
---------------------------------
1999 1998 1997
-------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pet products........................................ $140,022 $130,863 $126,776
Sporting goods and other............................ 18,991 22,490 22,758
Furniture and custom molding........................ -- 375 6,671
Outside resin sales................................. 10,919 5,370 4,478
-------- -------- --------
Combined net sales................................ 169,932 159,098 160,683
Cost of sales....................................... 121,119 105,982 110,833
-------- -------- --------
Gross profit...................................... 48,813 53,116 49,850
Selling general and administrative expenses......... 43,135 35,626 34,858
Officer and retention bonus......................... -- -- 4,052
Impairment of long-lived assets..................... 6,789 -- 3,846
-------- -------- --------
Operating Income.................................. (1,111) 17,490 7,094
Adjustments:
Depreciation, amortization and impairment(1)........ 17,299 11,478 13,198
-------- -------- --------
EBITDA(2)......................................... $ 16,188 $ 28,968 $ 20,292
======== ======== ========
</TABLE>
28
<PAGE> 31
- ---------------
(1) 1999 includes a $0.1 million charge for write-down of inventory related to
the sale of the tackle business. In 1997, excludes depreciation associated
with equipment repurchased from operating leases. Also excludes goodwill
amortization ($0.4 in 1998 and $1.9 million in 1997) that would have been
incurred had pro forma effect been given to the Merger as of July 1, 1997
(see Note 4 to Financial Statements).
(2) The term EBITDA as used above means operating income plus depreciation,
amortization and asset impairments. EBITDA should not be construed as a
substitute for operating income or be considered a better indicator of
liquidity than cash flow from operating activities which is determined in
accordance with generally accepted accounting principles. EBITDA is included
herein to provide additional information with respect to the ability to the
Company to meet its future debt service, capital expenditures and working
capital requirements. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs. EBITDA, as adjusted, for Doskocil and Dogloo
on a combined basis for the twelve months ended June 30, 1997, as presented
in the Company's Offer to Exchange Prospectus dated February 23, 1998 was
$29.5 million as it included, in the aggregate, $13.1 million of additional
adjustments consisting of the following amounts: (i) $4.1 million
representing an officer's bonus paid to one of Doskocil 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 and a one-time retention bonus provided to Doskocil employees in
connection with the recapitalization of Doskocil in July 1997 (the
"Recapitalization"); (ii) $2.5 million representing the income and
depreciation effect of equipment repurchases from operating lessors for
$18.7 million as part of the Recapitalization (adjustments reflect this
transaction as if it has been affected at the beginning of the period by
adding back operating lease payments made and these payments have been
allocated between income and depreciation, as if the assets had been owned
by Doskocil and depreciated); (iii) $0.2 million representing management and
other fees paid to Westar ($0.7 million of management and other fees were
paid to Westar during the twelve months ended June 30, 1998); (iv) $0.1
million representing settlement costs related to the cessation of employment
of an executive; and (v) $2.3 million representing non-cash write-offs
reflecting adjustment recorded primarily to increase reserves for inventory
and workers' compensation liabilities. No calculation of an adjusted EBITDA
figure for the twelve month periods ended June 30, 1999 and 1998 have been
made.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO COMBINED JUNE 30, 1998
Net Sales increased from $159.1 million for the twelve months ended June
30, 1998 to $169.9 million for the twelve months ended June 30, 1999, an
increase of 6.8% This increase was due to an increase in outside resin sales and
pet products, partially offset by lower sporting goods sales. Sporting goods
sales were lower due to the loss of two customers and management's decision in
the third quarter to discontinue certain non-core product lines.
Gross Profit declined from $53.1 million for the twelve months ended June
30, 1998 to $48.8 million for the same period ended June 30, 1999, a decrease of
$4.3 million or 8.1%. Gross profit as a percent of net sales declined from 33.4%
for the twelve months ended June 30, 1998 to 28.7% for the same period of this
year. Gross margins declined even with lower resin costs. The lower margin is
due to three key areas. Low manufacturing throughput and inefficiency forced the
Company to go to outside molders to meet customer demand and increased costs
above historical levels. Difficulty in forecasting demand and planning
production also increased the need to use outside molders and maintain high
inventory levels. Secondly, systems and management problems related to shipping
increased costs to deliver products on a timely basis. Lastly, there were
significant additional costs incurred in the second and third fiscal quarters
related to a failed system conversion.
Selling, general and administrative expenses increased from $35.6 million
in fiscal 1998 to $43.1 million in fiscal year 1999. This increase is primarily
related to higher advertising and rebate programs and increased bad debt
expenses.
Impairment of long-lived assets in fiscal 1999 was $6.8 million. This
includes a $1.3 million charge due to the decision to divest the Company of
certain non-core business assets, a $2.3 million charge due to a failed
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<PAGE> 32
system conversion and management's assessment that the related implementation
costs have minimal future benefit and a $3.2 million charge reflecting
management's ongoing review of recoverability of assets, including related
goodwill.
Operating income for fiscal 1999 decreased $18.6 million from fiscal 1998
primarily due to the factors discussed above.
EBITDA was $16.2 million for the twelve months ended June 30, 1999 compared
to $29.0 million in the same period of last year. EBITDA was negatively affected
by the factors discussed above.
COMBINED FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO COMBINED JUNE 30, 1997
Net Sales decreased from $160.7 million for the twelve months ended June
30, 1997 to $159.1 million for the twelve months ended June 30, 1998, a decrease
of 1.0%. This decrease was due principally to the Company's decision to exit the
furniture and custom molding businesses. Sporting goods sales remained flat from
year to year while the Company's core business, pet product sales, increased by
$4.1 million or 3.2%.
Gross Profit improved from $49.9 million for the twelve months ended June
30, 1997 to $53.1 million for the twelve months ended June 30, 1998, an increase
of $3.2 million or 6.5%. As a percentage of net sales, gross margin increased to
33.4% for the twelve months ended June 30, 1998 as compared to 31.0% for the
twelve months ended June 30, 1997. The combined Company's gross profit margin
was favorably affected by the discontinuation of lower margin products, lower
resin costs, the closure of duplicate facilities and lower lease expenses. These
savings were partially offset by increased manufacturing and distribution
overhead due to the consolidation of facilities.
EBITDA was $29.0 million for the twelve months ended June 30, 1998 as
compared to $20.3 million for the twelve months ended June 30, 1997, an increase
of 42.8%. This increase was due to savings resulting from the Merger achieved in
1998 as well as the exclusion of the 1997 non-recurring expenses for certain
bonuses, write down of equipment and inventories and other expenses associated
with the recapitalization and Merger. These savings were somewhat offset by
higher freight and operating costs in the last half of fiscal 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's interest expense is most sensitive to changes in the general
level of U.S. interest rates and London interbank offered rates ("LIBOR"). In
this regard, changes in these interest rates affect the interest paid on the
Company's debt.
The following table presents principal cash flows and related
weighted-average interest rates by expected maturity dates for the Company's
debt obligations.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY AT JUNE 30, 1999
AVERAGE INTEREST RATES
<TABLE>
<CAPTION>
ESTIMATED
FISCAL YEAR FAIR VALUE
--------------------------------------------- JUNE 30,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
------ ------ ------- ------- ------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt and
capital leases,
including current
portion:
Fixed rate........... $ 139 $ 156 $ 164 $ 161 $ 181 $85,000 $ 85,801 $ 44,151
Average interest
rate............... 10.1% 10.1% 10.1% 10.1% 10.1% 10.1%
Variable rate........ $8,375 $9,375 $10,875 $11,375 $52,181 $ 8,813 $100,994 $100,994
Average interest
rate............... 8.7% 8.7% 8.7% 8.8% 9.0% 9.0%
</TABLE>
30
<PAGE> 33
All of the Company's debt is U.S. dollar denominated and therefore, the
Company does not have any exposure to foreign currency denominated debt.
ITEM 8. FINANCIAL STATEMENTS
Financial Statements, including the index thereto, are presented starting
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 POSITION
- ---- --- --------
<S> <C> <C>
Larry E. Rembold....................... 58 President and Chief Executive Officer,
Director
Michael J. Farmer...................... 38 Executive Vice President of Sales &
Marketing
John J. Casey.......................... 51 Chief Financial Officer
Richard E. Allen....................... 55 Vice President of New Product
Development
Janet A. Dudsak........................ 52 Vice President of Human Resources
C. Raymond Thomas...................... 52 Vice President of Information Systems
George L. Argyros...................... 62 Director
John W. Clark.......................... 54 Director
Charles D. Martin...................... 62 Director
Benjamin L. Doskocil, Sr. ............. 61 Director
Michael P. Hoopis...................... 48 Director
</TABLE>
Larry E. Rembold was appointed President and Chief Executive Officer on
July 19, 1999. Mr. Rembold previously 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 review of Doskocil prior to the Recapitalization
(see Notes to Financial Statements -- Note 3), and from May to June of 1998,
worked with the Company in a consulting capacity. 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.
Michael J. Farmer has served as the Company's Executive 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 15 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 Manger and Industrial Engineering
Manager of the Coleman Company. Mr. Farmer earned his MBA in Marketing and
Management from Wichita State University.
John J. Casey joined the Company as Chief Financial Officer in September
1998. Mr. Casey has more than 25 years experience, mostly working for companies
in manufacturing and marketing branded consumer products. Recently he served as
Chief Financial Officer for Brierley & Partners in Dallas, Texas from 1997
through June 1998 and for Pioneer Flour Mills in San Antonio, Texas from 1988
through 1996. Mr. Casey's early experience includes various assignments with
PepsiCo International and Baxter Travenol. Mr. Casey earned his MBA in Finance
from Harvard Business School.
Richard E. (Dick) Allen joined Doskocil in July 1998 as Senior Vice
President, Product Development & Engineering. Immediately prior to joining
Doskocil, Mr. Allen was with Rubbermaid, Inc., for 12 years. Most recently he
was Vice President, Product Development for The Little Tykes Company, a division
of
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<PAGE> 35
Rubbermaid, Inc. Prior to that he was Vice President of Engineering and Product
Development for Rubbermaid Housewares for 11 years. Mr. Allen also owned his own
business, Mold Masters Systems, specializing in the design and fabrication of
mold components for manufacturers of molded plastic products.
C. Raymond (Ray) 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 28 years
experience in information systems management.
Janet A. Dudsak joined the Company as Vice President, Human Resources in
January 1998. Ms. Dudsak has more than 16 years of experience in administration
and human resource management. From 1996 to 1998, Ms. Dudsak was Division Human
Resource Manager for The Little Tikes Company, a division of Rubbermaid, Inc.
From 1994 to 1996, she held the position of Vice President, Human Resources for
Rubbermaid Healthcare Products. From 1990 to 1994, Ms. Dudsak was Corporate
Manager, Human Resource Systems and Administration for Rubbermaid, Inc. From
1982 through 1990, she held several corporate staff positions in training and
development at Rubbermaid. Prior to joining Rubbermaid, Ms. Dudsak was Director,
Office Operations for The Sherwin-Williams Company, Consumer Products division.
Benjamin L. Doskocil, Sr. has served as a director of the Company since
consummation of the Merger. Mr. Doskocil founded Doskocil in the early 1960's
and served as Doskocil's President and Chief Executive Officer from its
formation until the recapitalization of Doskocil in July 1997 (the
"Recapitalization"). 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 Company's Common Stock that was owned by them
immediately following consummation of the Recapitalization.
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, DST Systems, Inc. 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 Chairman 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 Westar since its formation in 1987. Mr. Martin has served on the board of
directors of 38 private and public companies.
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. Starting in September 1998, Mr. Hoopis has been President
and Chief Executive Officer of the consumer products segment of Allegheny
Teledyne, Inc. From July 1996, Mr. Hoopis served as President of Worldwide
Household Products, Black & Decker
33
<PAGE> 36
Corporation. From May 1992 to July 1996, Mr. Hoopis served as President of Price
Pfister, Inc., a division of Black & Decker Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has a Compensation Committee and an Audit
Committee. The members of both the Compensation Committee and the Audit
Committee are Messrs. Clark and Hoopis.
The Compensation Committee is responsible for policies, procedures and
other matters relating to employee benefits and compensation plans. The
Compensation committee is also responsible for administering and making awards
under the stock based compensation plans.
The Audit Committee is responsible for policies, procedures and other
matters relating to accounting, internal financial controls and financial
reporting, including the engagement of independent auditors. The Audit Committee
reviews with the auditors their report on the financial statements following
completion of each such audit.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended June 1999 and 1998,
the compensation paid or accrued by the Company to those persons who (i) served
as Chief Executive Officer and (ii) the other four most highly compensated
executive officers, "Named Executive Officers".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------- SECURITIES
NAME AND 12 MONTHS OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION(1) ENDED SALARY BONUS(4) COMPENSATION(2) OPTIONS/SARS(3)
- --------------------- --------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Gary E. Kleinjan......................... 6/30/98 $182,789 -- $109,316 93,500
President and Chief Executive Officer 6/30/99 $291,250 $110,000 $ 56,213 --
Michael J. Farmer........................ 6/30/98 $132,461 $100,000 $195,038 45,000
Executive Vice President, 6/30/99 $179,889 $138,475 -- --
Sales & Marketing
Richard E. Allen......................... 6/30/99 $171,634 $ 20,000 $104,631 30,000
Senior Vice President, Research and
Development
John J. Casey............................ 6/30/99 $141,923 $ -- $ 7,781 22,500
Chief Financial Officer
Anthony M. Orsini........................ 6/30/99 $107,115 $ 20,000 $ 67,159 22,500
Senior Vice President, Operations
</TABLE>
- ---------------
(1) Mr. Kleinjan left the Company in July 1999. Mr. Allen joined the Company in
July 1998. Mr. Casey joined the Company in September 1998. Mr. Orsini joined
the Company in November 1998 and has announced his resignation from the
Company effective October 1999. Accordingly, the compensation of each
Company named executive presented for the last fiscal year includes only the
amounts paid by the Company to each executive during such period. The
annualized compensation of Mr. Allen, Mr. Casey and Mr. Orsini were
$175,000, $180,000 and $150,000, respectively, during the past fiscal year.
(2) Consists solely of moving expenses plus reimbursement of federal taxes and
other adjustments in connection with the certain of the named executives'
move to Dallas, Texas area.
(3) These represent shares underlying options to purchase common stock. See the
following table for more detailed information on such options.
(4) Bonuses paid to Mr. Orsini and Mr. Allen represent signing bonuses.
34
<PAGE> 37
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 the Company whereby
he agreed to render certain consulting services. 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 Agreements. Larry E. Rembold is a party to an agreement with the
Company pursuant to which he is currently serving as the President and Chief
Executive Officer of the Company. Pursuant to this agreement, Mr. Rembold
receives a monthly base salary of $25,000, plus an annual bonus targeted at
sixty percent (60%) of his annual base salary if the Company meets certain
performance targets for fiscal 2000. Additionally, Mr. Rembold receives certain
perquisites under this agreement, including but not limited to the use of an
automobile and temporary housing and travel reimbursements pending his
relocation to the Dallas, Texas metropolitan area.
Mr. Michael J. Farmer is party to an employment agreement, pursuant to
which Mr. Farmer serves as Executive Vice President of Sales and Marketing of
the Company. Pursuant to this agreement, Mr. Farmer receives an annual base
salary of approximately $179,000, plus an annual bonus if he meets certain
performance targets agreed to by him and the Company 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.
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
the Company stock. The Company granted "base" options to certain employees
following the Merger at an exercise 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 the Company Common Stock. All "base" options to
purchase shares of the Company 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
the date of grant. 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 options should not
be accelerated or provides for a greater percentage to be accelerated, upon the
occurrence of certain corporate events involving the dissolution or liquidation
of the Company, merger or consolidation where less than 50% of the outstanding
voting securities of the surviving entity are owned by former shareholders of
the Company, or the sale of substantially all of the Company's business or
assets. All option holders who exercise such options will be required to execute
and thereby become a party to the Second Securityholders Agreement (see
"Stockholder 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 "performance" 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 grant date.
35
<PAGE> 38
OPTION GRANTS IN LAST FISCAL YEAR (A)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATE
OPTIONS OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(B)
STOCK IN FISCAL PRICE EXPIRATION ---------------------
NAME AND PRINCIPAL POSITION YEAR OPTIONS YEAR $/SH DATE 5%($) 10%($)
--------------------------- ---- ---------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Casey.................... 1999 15,000(c) 15.03 09/14/08
Chief Financial Officer 7,500(d) 15.03 09/14/08
------
Total................... 22,500 18.4% 212,676 538,964
Anthony M. Orsini................ 1999 15,000(c) 15.03 11/10/08
Senior Vice President, 7,500(d) 15.03 11/10/08
Operations 7,500(e)(f) 15.03 11/10/08
------
Total................... 22,500 18.4% 212,676 538,964
Richard E. Allen................. 1999 10,000(c) 15.03 07/01/08
Vice President, Research & 10,000(d) 15.03 07/01/08
Development 10,000(e) 15.03 07/01/08
------
Total................... 30,000 24.5% 283,569 718,618
</TABLE>
- ---------------
(a) No information is presented concerning SAR's because none have been granted
by the Company.
(b) Potential realizable value is presented net of the option exercise price,
but before any federal or state income taxes associated with exercise, and
is calculated assuming the fair market value on the date of the grant
appreciates at the indicated annual rate (set by the SEC), compounded
annually, for the term of the option. The 5% and 10% rates of appreciation
are mandated by the rules of the SEC and do not represent the Company's
estimate or projection of future increases in the value or price of the
Common Stock.
(c) Consists of "base" Incentive Stock Options granted in the last fiscal year
which become exercisable at the rate of 20% per year starting on the one
year anniversary of the grant date and continuing to vest at an annual rate
of 20% per year on the following four anniversaries of the grant date.
(d) Consists of "performance" Incentive Stock Options granted in the last
fiscal year, which become 100% exercisable on the sixth anniversary of the
grant date. The options contain a provision that would have accelerated the
exercisability of the options if the Company had achieved an EBITDA of
$36.0 million or more for fiscal 1999.
(e) Consists of special "performance" Incentive Stock Options granted in the
last fiscal year which become 100% exercisable on the sixth year
anniversary of the grant date, subject to immediate vesting if specific
performance measurements are achieved.
(f) The performance objectives established for Mr. Orsini were achieved and
7,500 options were fully vested on June 30, 1999.
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, date as of September 19, 1997, by and among
Enterprise, Westar, HBI, the Company and certain other security holders 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
36
<PAGE> 39
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").
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 LP, Westar LLC and HBI as signatories to
the Stockholders' Agreement. The First Amendment also reconciles certain
provision 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 security holders. Similarly, pursuant to the
First Amendment, Westar LP, Westar LLC and HBI 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.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of August 31, 1999 by (i) each person
who is known by the Company to own beneficially 5% or more of the outstanding
shares of 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 beneficially owned by them, subject to
community property laws where applicable, and are located at the Company's
principal offices at 4209 Barnett Boulevard, Arlington, Texas 76017. The table
set forth below does not give
37
<PAGE> 40
effect to warrants issued to certain shareholders in connection with the sale of
Series D Preferred Stock in October 1999 and the guaranty of the Company's
Additional Credit Facility.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AFTER THE TRANSACTIONS
--------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT(1)
- ------------------------------------- ----------- ------------
<S> <C> <C>
Westar Capital II, LLC,(2).................................. 434,333 13.8%
a Delaware limited liability company
Attn: John W. Clark
949 South Coast Drive, Suite 650
Costa Mesa, California 92626
Westar Capital, L.P.,(3).................................... 161,208 5.1%
a California limited partnership
Attn: John W. Clark
949 South Coast Drive, Suite 650
Costa Mesa, California 92626
HBI Financial Inc.,(4)...................................... 1,578,443 50.0%
a Washington corporation
Attn: Irwin Trigger
Boggle & Gates
601 Union Street, Suite 4700
Seattle, Washington 98101
Enterprise Partners III, L.P.,(5)........................... 322,347 10.2%
a Delaware limited Partnership
Attn: Charles D. Martin
5000 Birch Street, Suite 6200
Newport Beach, California 92660
Enterprise Partners IV, L.P.(4)(6).......................... 177,666 5.6%
a Delaware limited Partnership
Attn: Charles D. Martin
5000 Birch Street, Suite 6200
Newport Beach, California 92660
George L. Argyros(7)........................................ 2,173,984 68.9%
Benjamin L. Doskocil, Sr.(8)................................ 332,755 10.5%
John W. Clark(9)............................................ 595,541 18.9%
Charles D. Martin(10)....................................... 595,541 18.9%
Larry E. Rembold(11)........................................ 54,000 1.7%
Michael P. Hoopis(12)....................................... 4,000 *
Michael J. Farmer(13)....................................... 25,747 *
Richard Allen(14)........................................... 6,000 *
John Casey(15).............................................. 3,000 *
C. Raymond Thomas(16)....................................... 3,000 *
Janet A. Dudsak(17)......................................... 2,000 *
--------- ----
All directors and executive officers as a group (11
persons)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16)(17)......... 2,604,486 81.6%
</TABLE>
- ---------------
* Less than 1%
(1) Percentage of ownership is based on 3,154,644 shares of Common Stock
outstanding as of August 31, 1999. The number of shares of Common Stock
beneficially owned and calculation of percentage
38
<PAGE> 41
ownership, in each case, takes into account those shares underlying stock
options that are exercisable within 60 days after August 31, 1999
(excluding warrants issued to certain shareholders in connection with the
sale of Series D Preferred Stock in October 1999 and the guaranty of the
Company's Additional Credit Facility).
(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) Shares held of record by HBI Financial, Inc., a Washington Corporation
("HBI"), of which Mr. Argyros is the sole shareholder.
(5) Shares held of record by Enterprise Partners III, L.P., a Delaware limited
partnership ("EPIII"). The sole general partner of EPIII is Enterprise
Management Partners III, L.P., a Delaware limited partnership ("EMPIII").
Shares exclude: (i) 28,033 shares of Company Common Stock held by
Enterprise Partners IV Associates, a Delaware limited partnership ("EPIVA")
(approximately 0.9%) of which EMPIII is the sole general partner; (ii)
177,666 shares of Company Common Stock held by Enterprise Partners IV, L.P.
a Delaware limited partnership ("EPIV") (approximately 5.7%) of which
Enterprise Management Partners IV, L.P., a Delaware limited partnership
("EMPIV"), is the sole general partner; and (iii) 15,449 shares of Company
Common Stock held by Enterprise Partners IV, L.P. a Delaware limited
partnership ("EPIV") (approximately 0.5%) of which EMPIV is the sole
general partner.
(6) Shares held of record by EPIV (as defined above). The sole general partner
of EPIV is EMPIV. Shares exclude: (i) 322,347 shares of Company Common
Stock held by EPIII (approximately 10.4%) of which EMPIII is the sole
general partner; (ii) 28,033 shares of Company Common Stock held by EPIIIA
(approximately 0.9%) of which EMPIII is the sole general partner; and (iii)
15,449 shares of Doskocil Common Stock held by EPIVA (approximately 0.5%)
of which EMPIV is the sole general partner.
(7) Consists of 434,333 shares of 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 interest in Westar LLC,
Westar LP and HBI described above.
(8) Consists of 331,363 shares of 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.
(9) Consists of 434,333 shares of 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.
(10) Consists of 434,333 shares of 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. Mr. Martin disclaims
39
<PAGE> 42
beneficial ownership of the shares held by Westar LP except to the extent
of his interests described above.
(11) Includes 4,000 shares of Common Stock issuable pursuant to options held by
Mr. Rembold exercisable within 60 days of August 31, 1999. Mr. Rembold also
holds 50,000 shares of Common Stock pursuant to a Stock Purchase Agreement,
dated as of July 24, 1999 which contains certain vesting and redemption
provisions.
(12) Consists of 4,000 shares of Common Stock issuable to Mr. Hoopis pursuant to
options exercisable within 60 days of August 31, 1999.
(13) Includes approximately 19,747 shares of Common Stock issuable pursuant to
options held by Mr. Farmer exercisable with 60 days of August 31, 1999.
(14) Includes approximately 2,000 shares of Common Stock issuable pursuant to
options held by Mr. Allen exercisable within 60 days of August 31, 1999.
(15) Consists of 3,000 shares of Common Stock issuable pursuant to options held
by Mr. Casey exercisable within 60 days of August 31, 1999.
(16) Consists of 3,000 shares of Common Stock issuable pursuant to options held
by Mr. Thomas exercisable within 60 days of August 31, 1999.
(17) Includes approximately 1,000 shares of Common Stock issuable pursuant to
options held by Ms. Dudsak exercisable within 60 days of August 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 1, 1997, as part of the recapitalization ("Recapitalization") (see
"Notes to Financial Statements -- Note 3"), 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 the Company leases substantially all of
its Arlington, Texas facilities. The total payments to the Lessors by the
Company under the current lease agreements is approximately $278,000 per month.
In July 2002, the base rent for each of these leases is scheduled to increase by
ten percent (10%). Each 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. Additionally,
the Company currently leases a warehouse from Mr. Doskocil on a month-to-month
basis for $85,000 per month.
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 fiscal
1999 and 1998, the Company incurred $0.6 million and $0.6 million in management
fees to Westar, respectively.
Concurrent with the Merger, the Company used proceeds from the Subordinated
Notes and the 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.
In connection with and as a condition of, the Fourth Amendment to the
Credit Facility, the Company sold shares of Series D Preferred Stock to HBI,
Westar LLC and TDL, an entity controlled by Mr. Doskocil.
40
<PAGE> 43
In addition, those entities received warrants to purchase shares of the
Company's common stock for certain guaranties (or reimbursement arrangements
related thereto) of certain Company borrowings (See Management's Discussion and
Analysis of Financial Conditions and Results of Operations "Liquidity and
Capital Resources").
41
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. DOCUMENTS FILED AS PART OF THE REPORT
1. Financial Statements
Financial statements filed as part of this report are listed on the
Index to Financial Statements on page F-1.
2. Financial Statement Schedules and Supplementary Data
Financial statement schedules are omitted because they are not
applicable or the required information is contained in the applicable
financial statements or notes thereto.
B. REPORTS ON FORM 8-K
1. Form 8-K dated July 21, 1999 reported under Item 5, "Other Events", the
announcement of appointment of new President and Chief Executive Officer.
2. Form 8-K dated September 24, 1999 reported under Item 5 "Other Events,"
the announcement of an Additional Credit Facility and the disposition of the
Indianapolis facility.
C. EXHIBITS
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
3.1+ Amended and Restated Articles of Incorporation of Doskocil (a)
Manufacturing Corporation, Inc.
3.2+ Bylaws of Doskocil Manufacturing Corporation, Inc. (a)
4.1+ Indenture, dated as of September 19, 1997, between (a)
Doskocil Manufacturing Company, Inc., and First Trust
National Association.
10.1+ Recapitalization Agreement, dated July 1, 1997, among (a)
Enterprise Partners III, L.P., Enterprise Partners III
Associates, L.P., Enterprise Partners IV, L.P., Enterprise
Partners IV Associates, L.P., Enterprise Management
Partners Corporation, Enterprise Partners Texas Company,
LLC, Benjamin L. Doskocil, Sr., Mary Frances Doskocil, Bed
Rock International, Inc., Doskocil Manufacturing Company,
Inc. and Spectrum Polymers, Ltd.
10.2+ Merger Agreement, dated September 19, 1997, between (a)
Doskocil Manufacturing Company, Inc., and Dogloo, Inc.
10.3+ Stock Redemption Agreement, dated as of September 19, (a)
1997, among Enterprise Partners III. L.P., Enterprise
Partners III Associates, L.P., Enterprise Partners IV,
L.P., Enterprise Partners IV Associates, L.P., and
Enterprise Management Partners Corporation.
10.4+ Stock Redemption and Purchase Agreement, dated August 28, (a)
1997, among Aurelio F. Barreto, III, Doskocil
Manufacturing Company, Inc., and Westar Capital, L.P.
10.5+ Stock Redemption Agreement, dated as of September 15, (a)
1997, among Darrell R. Paxman, Doskocil Manufacturing
Company, Inc., and the other parties thereto.
10.6+ Purchase Agreement, dated September 11, 1997, among (a)
Doskocil Manufacturing Company, Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and NationsBanc Capital
Markets, Inc.
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.7*+ Registration Rights Agreement, dated as of September 19, (a)
1997, among Doskocil Manufacturing Company, Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and
NationsBanc Capital Markets, Inc.
10.8+ Confidentiality, Non-Competition Agreement and (a)
Non-Solicitation Agreement, dated as of July 1, 1997,
among Benjamin L. Doskocil, Sr., Mary Frances Doskocil and
Doskocil Manufacturing Company, Inc.
10.9*+ Letter/Consulting Agreement, dated as of July 1, 1997, (a)
between Doskocil Manufacturing Company, Inc., and Benjamin
L. Doskocil, Sr.
10.10+ Credit Agreement, dated September 19, 1997, among Doskocil (a)
Manufacturing Company, Inc. and NationsBank of Texas,
N.A., as administrative agent for certain lenders named
therein.
10.10.1+ First Amendment to Credit Agreement dated February 10, (b)
1999.
10.10.2+ Second Amendment to Credit Agreement dated May 14, 1999. (c)
10.10.3 Third Amendment to Credit Agreement dated August 12, 1999.
10.10.4 Fourth Amendment to Credit Agreement dated October 12,
1999.
10.11+ Commercial Industrial Lease Agreement, dated December 4, (a)
1996, between Doskocil Manufacturing Company, Inc. and COL
MET, INC. for property located at 4301 Kathey Drive,
Arlington, Texas 76017.
10.12*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4209 Barnett
Boulevard, Arlington, Texas 76017 and commonly referred to
as Building A.
10.13*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4300 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building B.
10.14*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for approximately
24,000 square feet of Building "C" located at 4408 Barnett
Boulevard, Arlington, Texas 76017 and commonly referred to
as Building C.
10.15*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4401 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building D.
10.16*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil,
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4208 Larry Lane,
Arlington, Texas 76017 and commonly referred to as
Building E.
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.17*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4207 Larry Lane,
Arlington, Texas 76017 and commonly referred to as
Building F.
10.18*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4209 Larry Lane,
Arlington, Texas 76017 and commonly referred to as
Building F Parking Lot.
10.19*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Marybe Investments, Ltd., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 800 Stephens, Arlington, Texas 76017 and
commonly referred to as Building G.
10.20*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4205 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building J.
10.21*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 720 and 722 West Interstate 20, Arlington,
Texas and commonly referred to as the Parking Facilities.
10.22*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the building(s) located at 600 Justice,
Mansfield, Texas and commonly referred to as Spectrum.
10.23*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the
building(s) located at 1708 and 1712 Peyco, Arlington,
Texas 76017 and commonly referred to as Peyco.
10.24+ Lease Agreement, dated January 1, 1997, between Belmont (a)
Warehousing Complex, Inc., as landlord, and Dogloo, Inc.,
as tenant, for the property located at 212 South Belmont,
Indianapolis, Indiana 46241.
10.25+ Lease, dated November 2, 1992, as amended by First (a)
Amendment to Lease, dated July 29, 1996, among Dogloo,
Inc., Patrician Associates, Inc., and Club Drive Partners,
also known as Old Temescal Road Project.
10.26*+ Form of Indemnification Agreement between Doskocil (a)
Manufacturing Company, Inc., and certain of its directors
and/or officers.
10.27*+ Doskocil Manufacturing Company, Inc., Stock Option Plan. (a)
10.28*+ Employment Agreement, dated as of November 1, 1996, (a)
between Michael J. Farmer and Dogloo, Inc.
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.29*+ Stockholders' Agreement, dated as of July 1, 1997, among (a)
Enterprise Partners III, L.P., Enterprise Partners III
Associates, L.P., Enterprise Partners IV, L.P., Enterprise
Partners IV Associates, L.P., Enterprise Management
Partners Corporation, Benjamin L. Doskocil, Sr., Mary
Frances Doskocil and Doskocil Manufacturing Company, Inc.
10.30*+ First Amendment to Stockholders' Agreement, dated as of (a)
September 19, 1997, among Enterprise Partners III, L.P.,
Enterprise Partners III Associates, L.P., Enterprise
Partners IV, L.P., Enterprise Partners IV Associates,
L.P., Enterprise Management Partners Corporation, Benjamin
L. Doskocil, Sr., Mary Frances Doskocil, Doskocil
Manufacturing Company, Inc., Westar Capital, L.P. and
Westar Capital II, LLC.
10.31*+ Amended and Restated Securityholders Agreement, dated (a)
September 19, 1997, among Doskocil Manufacturing Company,
Inc., Dogloo, Inc., Westar Capital, L.P., Westar Capital
II, LLC, HBI Financial Inc., Enterprise Partners III,
L.P., Enterprise Partners III Associates, L.P., Enterprise
Partners IV, L.P., Enterprise Partners IV Associates,
L.P., Aurelio F. Barreto III and other parties thereto.
10.32*+ Credit Agreement, dated as of August 12, 1999, among the (d)
Company, certain lenders named therein and Bank of
America, N.A., as administrative agent.
10.32.1 First Amendment to Credit Agreement, dated as of October
12, 1999, among the Company, certain lenders named therein
and Bank of America, N.A. as administrative agent.
10.33 Pledge Agreement as of August 12, 1999 by Westar Capital
II, LLC in favor of Bank of America, N.A.
10.34 Security Agreement as of August 12, 1999 between the
Company and Bank of America, N.A.
27.1 Financial Data Schedule.
99.1 Independent Auditors' Report of KPMG LLP, for the year
ended December 28, 1996.
</TABLE>
- ---------------
Notes to Exhibits:
* Indicates a contract or benefit plan under which one or more executive
officers or directors may receive benefits.
+ Indicates documents previously filed with the Securities and Exchange
Commission as set forth in the following table:
(a) Incorporated herein by reference to the Company's Registration Statement
on Form S-4 (Registration No. 333-37081) as filed on October 2, 1997.
(b) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Inc., Report on Form 10-Q for the quarter ended December 31, 1998.
(c) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc. Report on Form 10-Q for the quarter ended March 31, 1999.
(d) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc., Report on Form 8-K dated September 24, 1999.
45
<PAGE> 48
DOSKOCIL MANUFACTURING COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Report......................................... F-2
Report of Independent Auditors.............................. F-3
Audited Financial Statements
Statements of Operations.................................. F-4
Balance Sheets............................................ F-5
Statements of Shareholders' Equity(Deficit)............... F-6
Statements of Cash Flows.................................. F-7
Notes to Financial Statements............................. F-8
</TABLE>
F-1
<PAGE> 49
MANAGEMENT'S REPORT
The accompanying financial statements of Doskocil Manufacturing Company,
Inc. are the responsibility of and have been prepared by the Company in
conformity with generally accepted accounting principles. They necessarily
include some amounts that are based on management's judgments and estimates. The
financial information displayed in other sections of this report is consistent
with these financial statements.
Doskocil assures the objectivity and integrity of its financial records by
careful selection of its managers, by organizational arrangements that provide
an appropriate division of responsibility and by communications programs aimed
at assuring that its policies and methods are understood throughout the
organization.
Doskocil is committed to establishing a comprehensive formalized system of
internal accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable. Appropriate
management monitors the system for compliance.
Various lapses in the system of internal controls occurred during the year
due to merger related issues, systems limitations and the distraction of
converting to new software systems. Our auditors conducted an audit in
accordance with generally accepted auditing standards to obtain reasonable
assurance whether the financial statements are free of material misstatement.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal control through its Audit Committee. This committee,
composed solely of non-management directors, meets with the independent
accountants and management to monitor management's proper discharge by each of
its responsibilities relative to internal accounting controls and the financial
statements.
Larry E. Rembold
President and Chief Executive
Officer
John J. Casey
Chief Financial Officer
F-2
<PAGE> 50
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Doskocil Manufacturing Company, Inc.
We have audited the accompanying balance sheets of Doskocil Manufacturing
Company, Inc. as of June 30, 1999 and 1998 and the related statements of
operations, shareholders' equity (deficit), and cash flows for the years then
ended and the six months ended June 30, 1997. 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. The combined
statements of operations, equity, and cash flows of the companies listed in Note
1 for the year ended December 28, 1996 were audited by other auditors, whose
report dated March 12, 1997 expressed an unqualified opinion on those
statements.
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 financial statements referred to above present fairly,
in all material respects, the financial position of Doskocil Manufacturing
Company, Inc. at June 30, 1999 and 1998 and the results of its operations and
its cash flows for the years then ended and the six months ended June 30, 1997
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
September 7, 1999
Except for Notes 1 and 7 for which
the date is October 12, 1999
F-3
<PAGE> 51
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
---------------------------------- JUNE 30,
JUNE 30, JUNE 30, DECEMBER 28, ---------------------
1999 1998 1996 1997 1996
-------- -------- ------------ ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $169,932 $147,156 $103,455 $51,756 $51,737
Cost of goods sold..................... 121,119 99,562 73,128 38,389 37,345
-------- -------- -------- ------- -------
Gross profit........................... 48,813 47,594 30,327 13,367 14,392
Selling, general and administrative
expense.............................. 43,135 31,540 20,682 10,446 10,388
Officers' bonus (Note 18).............. -- -- 2,030 -- 853
Retention bonus (Note 14).............. -- -- -- 2,875 --
Impairment of long-lived assets (Note
6)................................... 6,789 -- -- 3,846 --
-------- -------- -------- ------- -------
Operating income (loss)................ (1,111) 16,054 7,615 (3,800) 3,151
Other (income) expense:
Interest expense and other financing
costs (Note 7).................... 17,750 17,461 2,328 506 1,770
Interest income...................... (34) (124) (152) (35) (20)
Other, net........................... 58 (232) 696 5 71
-------- -------- -------- ------- -------
Total other expense.......... 17,774 17,105 2,872 476 1,821
-------- -------- -------- ------- -------
Income (loss) before income taxes...... (18,885) (1,051) 4,743 (4,276) 1,330
Provision for income taxes (Note 8).... -- 1,869 -- -- --
-------- -------- -------- ------- -------
Net (loss) income...................... (18,885) (2,920) 4,743 (4,276) 1,330
Preferred stock dividends.............. 916 1,184 -- -- --
-------- -------- -------- ------- -------
Net (loss) income attributable to
common shareholders.................. $(19,801) $ (4,104) $ 4,743 $(4,276) $ 1,330
======== ======== ======== ======= =======
Net loss per common share (basic and
diluted)............................. $ (6.38) $ (1.50)
======== ========
Weighted average common shares
outstanding.......................... 3,105 2,740
======== ========
Pro forma provision (benefit) for
income tax (Note 8).................. 1,755 (1,582) 492
-------- ------- -------
Pro forma net income (loss)............ $ 2,988 $(2,694) $ 838
======== ======= =======
Pro forma net income (loss) per common
share (basic and diluted)............ $ 2.25 $ (2.02) $ 0.63
======== ======= =======
Pro forma weighted average common
shares outstanding................... 1,331 1,331 1,331
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 52
DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 114 $ 1,910
Receivables, less allowance for doubtful accounts of
$1,090 and $300........................................ 20,747 18,350
Inventories (Note 5)...................................... 26,161 21,415
Other current assets (1999 includes $0.8 million from
shareholders).......................................... 1,684 1,029
-------- --------
Total current assets.............................. 48,706 42,704
Property, plant and equipment, net (Note 6)................. 53,602 51,628
Fixed assets held for sale.................................. 3,259 3,259
Goodwill (Note 4)........................................... 51,920 59,725
Debt issuance costs......................................... 4,390 5,158
Other assets................................................ 1,825 1,627
-------- --------
Total assets...................................... $163,702 $164,101
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,682 $ 4,629
Accrued liabilities (1999 includes $0.9 million to
shareholders).......................................... 4,308 9,197
Accrued interest.......................................... 3,169 2,635
Accrued taxes............................................. 573 422
Payroll and benefits payable.............................. 3,359 3,319
Current portion of long-term debt (Note 7)................ 8,514 4,125
-------- --------
Total current liabilities......................... 27,605 24,327
Long-term debt (Note 7)..................................... 178,281 163,094
-------- --------
Total liabilities................................. 205,886 187,421
Commitments and contingencies (Note 17)
Shareholders' (deficit) equity:
Series C Preferred Stock (Note 9)
No par value: Authorized shares -- 25,0000,000, issued
and outstanding -- 9,161,567 at June 30, 1999 and
1998.................................................. 9,161 9,161
Common stock (Note 9)
No par value: Authorized shares -- 15,000,000; issued
and outstanding -- 3,104,644 at June 30, 1999;
3,103,144 at June 30, 1998............................ 34,283 34,262
Accumulated deficit....................................... (85,628) (66,743)
-------- --------
Total shareholders' deficit....................... (42,184) (23,320)
-------- --------
Total liabilities and shareholders' (deficit)
equity........................................... $163,702 $164,101
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 53
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
----------------------------------------- -----------------------------------------
SIX SIX
YEAR YEAR MONTHS YEAR YEAR YEAR MONTHS YEAR
JUNE 30, JUNE 30, JUNE 30, DEC. 28, JUNE 30, JUNE 30, JUNE 30, DEC. 28,
1999 1998 1997 1996 1999 1998 1997 1996
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED STOCKS:
Series A:
Outstanding at beginning of
period......................... -- -- -- -- $ -- $ -- $ -- $ --
Issued for cash.................. -- 1,531 -- -- -- 23,000 -- --
Redeemed......................... -- (466) -- -- -- (7,000) -- --
Conversion to common stocks...... -- (1,065) -- -- -- (16,000) -- --
----- ------- ----- ----- -------- -------- ------- -------
Outstanding at end of period..... -- -- -- -- -- -- -- --
Series B:
Outstanding at beginning of
period......................... -- -- -- -- -- -- -- --
Issued in Dogloo merger.......... -- 10,224 -- -- -- 10,224 -- --
Redeemed......................... -- (10,224) -- -- -- (10,224) -- --
----- ------- ----- ----- -------- -------- ------- -------
Outstanding at end of period..... -- -- -- -- -- -- -- --
Series C:
Outstanding at beginning of
period......................... 9,161 -- -- -- 9,161 -- -- --
Issued in Dogloo merger.......... -- 11,841 -- -- -- 11,841 -- --
Redeemed......................... -- (2,680) -- -- -- (2,680) -- --
----- ------- ----- ----- -------- -------- ------- -------
Outstanding at end of period..... 9,161 9,161 -- -- $ 9,161 $ 9,161 $ -- $ --
COMMON STOCKS:
Outstanding at beginning of
period......................... 3,103 5,999 5,999 5,999 $ 34,262 $ 24 $ 24 $ 24
Shares exchanged for partnership
interest in Spectrum........... -- 798 -- -- -- 4,804 -- --
Shares issued.................... 2 250 -- -- 21 3,682 -- --
Redeemed......................... -- (6,409) -- -- -- (11,458) -- --
Stock issued in Dogloo merger.... -- 1,400 -- -- -- 21,210 -- --
Conversion from preferred
stock.......................... -- 1,065 -- -- -- 16,000 -- --
----- ------- ----- ----- -------- -------- ------- -------
Outstanding at end of period..... 3,105 3,103 5,999 5,999 $ 34,283 $ 34,262 $ 24 $ 24
RETAINED EARNINGS (DEFICIT):
Balance at beginning of period... $(66,743) $ 25,258 $31,336 $25,827
Net income (loss)................ (18,885) (2,920) (4,242) 5,509
Distributions.................... -- -- (1,836) --
Redeemed common stock............ -- (87,377) -- --
Recapitalization costs........... -- (1,392) -- --
Dividends on Series A Preferred
Stock.......................... -- (469) -- --
Fair value of options assumed in
Dogloo merger.................. -- 157 -- --
-------- -------- ------- -------
Balance at end of period......... $(85,628) $(66,743) $25,258 $31,336
-------- -------- ------- -------
TOTAL SHAREHOLDERS' EQUITY
(DEFICIT):............... $(42,184) $(23,320) $25,258 $31,336
PARTNERS' EQUITY:
Balance at beginning of period... $ -- $ 3,808 $ 4,278 $ 5,297
Net loss......................... -- -- (34) (766)
Distributions.................... -- (3,808) (436) (253)
-------- -------- ------- -------
Balance at end of period......... $ -- $ -- $ 3,808 $ 4,278
-------- -------- ------- -------
TOTAL SHAREHOLDERS' AND
PARTNERS' EQUITY
(DEFICIT)................ $(42,184) $(23,320) $29,090 $35,638
======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE> 54
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
----------------------------------- JUNE 30,
JUNE 30, JUNE 30, DECEMBER 28, ---------------------
1999 1998 1996 1997 1996
-------- --------- ------------ ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income...................................... $(18,885) $ (2,920) $ 4,743 $(4,276) $ 1,330
Adjustments to reconcile net(loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization........................ 10,367 10,748 5,928 2,857 2,877
Amortization of debt issuance costs.................. 768 3,120 -- -- --
Deferred income taxes................................ -- 1,869 -- -- --
Impairment of long-lived assets...................... 6,789 -- -- 3,846 --
(Gain) loss on sale of assets........................ 48 (230) 9 (86) (39)
Changes in:
Receivables........................................ (2,397) 4,031 (1,314) 234 (1,539)
Receivables from affiliate......................... -- -- 4,008 427 4,008
Inventories........................................ (4,746) 4,981 1,068 2,784 (243)
Payables........................................... 3,053 (3,425) 489 (605) 408
Payable to affiliate............................... -- -- 1,523 (1,523) --
Accrued liabilities and other...................... (1,406) (3,591) 376 (892) 500
-------- --------- -------- ------- -------
Net cash (used in) provided by operating
activities................................... (6,409) 14,583 16,830 2,766 7,302
INVESTING ACTIVITIES:
Repurchase of leased assets............................ -- (18,724) -- -- --
Capital expenditures................................... (14,988) (11,458) (4,129) (971) (2,740)
Increase in other assets............................... (39) -- (61) (1) 49
Cash of acquired business.............................. -- 1,335 -- -- --
Proceeds from disposal of assets....................... 845 2,834 4,116 -- --
-------- --------- -------- ------- -------
Net cash used in investing activities.......... (14,182) (26,013) (74) (972) (2,691)
FINANCING ACTIVITIES:
Proceeds from long-term debt........................... -- 262,500 -- -- --
Payments of long-term debt............................. (4,126) (102,600) (1,534) (808) (754)
Payment of debt of acquired business................... -- (34,584) -- -- --
Net proceeds (payments) of revolving credit
agreement............................................ 22,900 (7,250) (12,252) (4,860) (4,253)
Proceeds from sale of common stock..................... 21 3,780 -- -- --
Redemption of common stock............................. -- (11,098) -- -- --
Proceeds from sale of preferred stock.................. -- 23,000 -- -- --
Redemption of preferred stock and accumulated
dividends............................................ -- (24,433) -- -- --
Cash distributions of capital.......................... -- -- (253) (1,035) (252)
Cash paid to stockholders from recapitalization........ -- (87,922) -- -- --
Debt issuance costs (including Bridge financing
costs)............................................... -- (8,257) -- -- --
Recapitalization costs................................. -- (1,393) -- -- --
Cash dividends......................................... -- (469) -- -- --
-------- --------- -------- ------- -------
Net cash provided by (used in) financing
activities................................... 18,795 11,274 (14,039) (6,703) (5,259)
-------- --------- -------- ------- -------
NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS.... (1,796) (156) 2,717 (4,909) (648)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 1,910 2,066 4,258 6,975 4,258
-------- --------- -------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 114 $ 1,910 $ 6,975 $ 2,066 $ 3,610
======== ========= ======== ======= =======
</TABLE>
See Note 16 for supplementary cash flow information.
The accompanying notes are an integral part of these financial statements
F-7
<PAGE> 55
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
On September 19, 1997, Dogloo, Inc. ("Dogloo"), was merged with and into
Doskocil Manufacturing Company, Inc. ("Doskocil"). The financial data for the
periods prior to September 19, 1997, reflect the combined historical results of
operations and cash flows for Doskocil Manufacturing Company Inc. (the
"Corporation") and Spectrum Polymers, Ltd. ("Spectrum"), as they were under
common ownership. Beginning September 19, 1997, the financial results of
Doskocil include the financial position, results of operations and cash flows
for Dogloo. The term "Doskocil" refers to Doskocil Manufacturing Company, Inc.
and Spectrum Polymers Ltd. prior to giving effect to the merger, "Dogloo" refers
to Dogloo, Inc. prior to giving effect to the merger and the term "Company"
refers to the combined entity comprised of Doskocil and Dogloo. Pro forma net
income per common share (both basic and diluted) are based on the common shares
outstanding after the recapitalization (see Note 3) and the termination of
Doskocil's "S" Corporation status.
Prior to July 1, 1997, the general partnership interest of Spectrum was
held by Bed Rock International, Inc., a Texas corporation wholly owned by
Benjamin L. Doskocil and Mary Francis Doskocil (the "Doskocils"). Both the
limited partnership interest of Spectrum and Doskocil were owned by the
Doskocils. Doskocil was a Texas corporation engaged in the manufacture and sale
of injection molded consumer plastic products primarily for the pet care,
hardware, sports and leisure markets, principally in the United States. Spectrum
was organized under the Texas Revised Limited Partnership Act and was engaged in
the purchasing, recycling and blending of plastic resin primarily for use by the
Corporation in injection molded consumer plastic products.
Since the Merger, the Company has experience difficulties related to the
integration of manufacturing and shipping operations along with management
turnover in key areas, a surge in customer demand, low machine efficiency and
the need to outsource certain production and a failed information systems
conversion. These difficulties have caused higher than expected operating costs,
working capital requirements and capital spending which resulted in increased
net losses and a liquidity shortage. In July 1999, the Company implemented a new
enterprise resource planning system to assist in alleviating some of these
difficulties.
The Company is highly leveraged and has relied upon debt financing to
provide for working capital and certain capital expenditures. Furthermore, as a
result of the above difficulties, the Company was unable in December 1998, March
1999 and June 1999 to meet the debt covenants required by the Credit Facility
(as defined in Note 7). In October 1999, the Company amended the Credit Facility
and entered into an additional revolving credit agreement (the "Additional
Credit Facility") which provides for borrowings up to $15.0 million and matures
on September 30, 2000. In connection with amending the Credit Facility, certain
shareholders purchased $5.0 million of preferred stock with detachable warrants
and guaranteed the Additional Credit Facility.
The Company's plan is to reduce fixed costs and slow sales growth to return
to profitability. The Company has programs in place to lower costs for
insurance, consumer advertising, shipping and outside manufacturing. It expects
to lower production costs with the purchase of new equipment and molds.
Construction has begun on a new warehouse that will cut costs for material
handling and outside warehousing. The Company has also negotiated price cuts in
non-resin raw materials. There is in progress a project to streamline the
Company, eliminating unprofitable customers and products and reducing selling,
general and administrative expense. Liquidity is expected to improve from
increased cash flow from operations, significantly lower projected capital
spending and efforts to reduce working capital.
The Credit Facility, as amended, waived all past covenant violations and
established new covenants. In connection with renegotiating its debt agreement,
the Company based on its operating plan and the Additional Credit Facility,
expects to be able to fund operations and comply with the revised covenants
through at least the first quarter of fiscal 2001. However, no assurance can be
given that the Company will achieve its operating plan and there can be no
assurance that factors or events currently known or unknown will not
F-8
<PAGE> 56
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
negatively impact the Company's ability to operate within its plan. As is
normally the case in credit relationships, a failure to comply with the
covenants contained in the Credit Facility, the Additional Credit Facility or
the Subordinated Notes, if not cured or waived, could permit acceleration of the
related indebtedness and acceleration of indebtedness under other instruments
that contain cross-acceleration or cross-default provisions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of combinations -- The accompanying combined financial
statements for the six months ended June 30, 1997 and 1996 and for the year
ended December 28, 1996 include the accounts of Doskocil. All significant
intercompany balances and transactions are eliminated. The financial statements
as of and for the years ended June 30, 1999 and 1998 consist of the financial
statements of the Company.
Fiscal years -- Doskocil changed its fiscal year end to June 30 beginning
in 1997. Prior to 1997, Doskocil 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 year ended December 28,
1996 consists of 52 weeks.
Cash and cash equivalents -- Cash and cash equivalents include cash on hand
and on deposit and highly liquid instruments with original maturities of three
months or less.
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 on the straight-line basis over the estimated useful
lives of the assets. Repairs and maintenance which do not extend the lives or
improve the assets are charged to expense.
Intangible assets -- The cost of intangible assets (patents, trademarks and
non-compete agreements) are being amortized on a straight-line basis over 7 - 16
years. The cost of such assets, net of related accumulated amortization, is
included in other assets in the accompanying financial statements. Accumulated
amortization at June 30, 1999 and 1998 was 1.7 million and $1.4 million,
respectively.
Goodwill -- Costs in excess of net assets of businesses acquired are
amortized on a straight line basis over 30 years and represent the excess of the
cost of acquired businesses over the fair value of net assets received at the
date of acquisition. Goodwill is presented net of accumulated amortization of
$3.5 million and $1.5 million at June 30, 1999 and 1998, respectively. See Note
4.
Impairment of long-lived assets and long-lived assets to be disposed
of -- The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may be impaired. 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. Goodwill associated with assets
acquired in a purchase business combination is included in impairment
evaluations when events or circumstances exist that indicate the carrying amount
of those assets may not be recoverable. See Note 6.
Risk concentration -- 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 and generally does
not require collateral.
F-9
<PAGE> 57
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended June 30, 1999, two customers accounted for
approximately 17% and 13% of total sales. During the year ended June 30, 1998,
two customers accounted for approximately 13% and 11% of total sales. During
1996, two customers accounted for approximately 10% and 11% of total sales.
During the six month period ended June 30, 1997, two customers accounted for
approximately 11% of total sales, respectively. Included in trade accounts
receivable is approximately $4.7 million and $2.8 million due from these
customers at June 30, 1999 and 1998, respectively.
Use of estimates -- Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
year-end and the reported amounts of revenues and expenses during the year.
Significant items subject to such estimates and assumptions include the carrying
value of long-lived assets and valuation of receivables, inventories and
deferred income tax assets. Actual results may differ from such estimates.
Revenue recognition -- Revenue is recognized when goods are shipped.
Advertising expense -- Advertising costs are expensed as incurred.
Advertising expense was approximately $7.3 million, $2.9 million, and $3.4
million for the years ended June 30, 1999 and 1998 and December 28, 1996,
respectively. For the six month period ended June 30, 1997 advertising expense
was $1.8 million.
Research and development -- Research and development costs are charged to
expense as incurred. Research and development expense for the years ending June
30, 1999 and 1998, December 28, 1996, and the six months ended June 30, 1997 was
$1.5 million, $0.9 million, $0.7 million and $0.2 million, respectively.
New accounting standards -- Effective July 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS No. 131), which establishes new
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
The most significant new requirement of this Standard is that reportable
operating segments be based on an enterprise's internally reported business
segments. See Note 12.
Effective July 1, 1998 the Company adopted the Financial Standards
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130).
This statement establishes standards for reporting and display of comprehensive
income and its components in the financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by and
distributions to owners. For all periods presented there was no difference
between the comprehensive income (loss) and net income (loss).
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This new standard requires recognition of all new
derivatives as either assets or liabilities at fair value. The Company does not
anticipate the effect of the adoption to have a material impact on either
financial position or results of operations. The Company plans to adopt the
standard effective July 1, 2000, as required.
NOTE 3. RECAPITALIZATION
Effective July 1, 1997, the Corporation was recapitalized through the
following transactions: (1) 100% of the Spectrum partnership interest was sold
to a group of investors for $11.0 million; (2) after retirement of approximately
$1.0 million of Spectrum debt by the investors, the partnership interests were
exchanged for 798,612 shares of the Corporation's common stock; (3) the
Corporation's Articles of Incorporation were amended to establish the
Corporation as a C Corporation and authorize 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
F-10
<PAGE> 58
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
199,654 shares of common stock for $3.0 million and 1,530,674 shares of Series A
Preferred Stock for $23.0 million; (5) all outstanding balances under then
existing lines of credit and long-term debt, along with related accrued interest
and pre-payment penalties, were paid in full; and (6) the Corporation redeemed
5,666,145 shares of common stock from the previous majority stockholder for
approximately $87.4 million. The acquisition of Spectrum has been accounted for
as a combination of entities under common control, and, accordingly, the assets
acquired were recorded at their historical cost.
NOTE 4. MERGER
On September 19, 1997, Doskocil consummated a merger with Dogloo, Inc.,
wherein 1,400,603 of the Company's common shares were exchanged for Dogloo
equity in the approximate amount of $21.2 million and Dogloo was merged with and
into Doskocil. The Company is now controlled by an investor group (the "Investor
Group") consisting of various Westar Capital entities and certain of their
affiliates (collectively "Westar") and Enterprise entities ("Enterprise").
Pursuant to the Merger Agreement, each issued and outstanding share of Dogloo
Series A Preferred Stock was converted into one share of the Company's Series B
Preferred Stock and each issued and outstanding share of Dogloo Series B
Preferred Stock was converted into one share of the Company's 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
the Company and thereby became options to purchase shares of the Company's
Common Stock, with adjustments to such options to reflect the ratio by which
shares of Dogloo Common Stock were converted into shares of the Company's Common
Stock.
In connection with the Merger, Doskocil purchased an aggregate of 249,703
shares of Dogloo Common Stock for an aggregate price of approximately $0.4
million 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 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 the Company's
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 the Company's Series A Preferred Stock were
converted into 1,064,816 shares of the Company's Common Stock.
Concurrent with the closing of the Merger, the Company used proceeds of a
Credit Facility (see Note 7) to redeem for $14.9 million (including dividends
accrued through September 19, 1997) 598,959 shares of the Company's Common Stock
and 359,376 shares of the Company's Series A Preferred Stock owned by
Enterprise, and to redeem for $3.6 million, 133,102 shares of the Company's
Common Stock and 106,482 shares of the Company's Series A Preferred Stock from
various Enterprise entities.
Immediately following the Merger, the Company also used proceeds from the
offering of 10 1/8% Senior Subordinated Notes and the Credit Facility to redeem
the following additional shares of Series B Preferred Stock and Series C
Preferred Stock: (i) 6,890,000 shares of 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 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 Series C Preferred Stock
held by Enterprise for $1.3 million (including dividends accrued through
September 19, 1997); and (iv) 2,141,260 shares of 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 Series C
Preferred Stock which remained outstanding. In connection with the conversion
and redemption of shares of Series A Preferred Stock, the Company borrowed $0.5
million under the Credit Facility to pay cumulative dividends on such shares of
Series A Preferred Stock as of the date of the Merger.
F-11
<PAGE> 59
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. The
purchase price allocation resulted in goodwill of approximately $57.3 million.
The Company issued 10 1/8% Senior Subordinated Notes (the "Notes") due
September 15, 2007, in the aggregate principal amount of $85.0 million. The
Notes were exchanged for registered Notes (the "Subordinated Notes") pursuant to
the Offer to Exchange dated February 23, 1998, effective as of March 30, 1998.
Discounts and commissions aggregated 3% of the face amount of the Subordinated
Notes and net proceeds to the Company were $82.5 million. Interest on the Notes
was, and on the Subordinated Notes is, payable semi-annually on March 15 and
September 15 of each year commencing on March 15, 1998. The Subordinated Notes
are a general, unsecured obligation of the Company, subordinated in right of
payment to all Senior Debt of the Company. The Subordinated Notes are subject to
certain optional redemptions at declining premiums beginning in 2002 and
continuing through 2005. Until September 15, 2000, upon an initial public equity
offering of common stock for cash, up to 35% of the aggregate principal amount
of the Subordinated Notes originally outstanding may be redeemed at the option
of the Company at a redemption price stipulated in the Subordinated Notes. The
Subordinated Notes limit, among other things, dividends, incurrence of
additional indebtedness and other restricted payments, as defined, and contain
cross default provisions with the Company's Senior Indebtedness. Debt issuance
costs of $5.8 million are being amortized over the respective terms of the
Subordinated Notes and the Credit Facility.
Management formulated a plan in 1997 to exit the Dogloo facilities and
merge operations into its Arlington facilities. Included in this plan was the
termination and relocation of employees and disposal of facilities. Expenses
accrued as part of the purchase price were associated with closing costs,
relocation, retention bonus, reserves and other identified items. Costs of $6.3
million was charged against the accrual for the year ended June 30, 1998 when
employees were terminated during the second and third fiscal quarters and
selected management was relocated. Costs of $2.4 million for the idle facility
carrying costs were charged against the accrual and $3.9 million was reversed
against goodwill during the year ended June 30, 1999. Final exit from the former
Indianapolis facility occurred in August 1999 resulting in net cash proceeds of
$3.6 million.
NOTE 5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $15,503 $11,794
Work-in-process............................................. 1,291 2,107
Raw materials............................................... 9,367 7,325
Supplies.................................................... -- 189
------- -------
Net inventories................................... $26,161 $21,415
======= =======
</TABLE>
As of June 30, 1999 and 1998, the Company had recorded valuation allowances
of $1.1 million and $1.2 million, respectively, for inventory obsolescence.
During 1996, Spectrum had a fire at its manufacturing facility, during
which approximately $1.3 million in raw material inventory was destroyed. Other
losses and expenses of approximately $0.1 million were also incurred related to
the fire. Spectrum recorded a receivable from the insurance carrier of $0.8
million relating to the loss. The resulting loss of $0.6 million is included in
other expense, net for the year ended December 28, 1996. The insurance proceeds
were received during 1997.
F-12
<PAGE> 60
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Machinery & equipment (20 years)............................ $55,264 $56,099
Molds (6-10 years).......................................... 27,196 31,783
Computer equipment (5 years)................................ 4,601 4,307
Leasehold improvements (5-10 years)......................... 8,448 2,178
Office furniture and equipment (5-10 years)................. 1,547 1,221
Other (5 years)............................................. 213 196
------- -------
Total............................................. 97,269 95,784
Less accumulated depreciation and amortization.............. 43,667 44,156
------- -------
Net............................................... $53,602 $51,628
======= =======
</TABLE>
During the year ended June 30, 1999, the Company recorded a $6.8 million
impairment charge of which $2.3 million relates to a failed system conversion
and management's assessment that the implementation costs have minimal future
benefit, a $1.3 million charge due to the decision to divest the Company of
non-core business assets which have been sold, and a $3.2 million charge
reflecting management's ongoing review of recoverability of assets, including
related goodwill.
During the six months ended June 30, 1997 the decision was made to dispose
of certain equipment which was deemed to be obsolete or in a line of products
which will no longer be manufactured. Accordingly, the assets were written down
to their net realizable value with a charge to operating income of $3.8 million.
Depreciation expense for the years ended June 30, 1999 and 1998, December
28, 1996 and the six months ended June 30, 1997 is $8.0 million, $9.0 million,
$5.8 million and $2.8 million, respectively.
NOTE 7. LONG TERM DEBT
Total long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Credit Facility Borrowings:
Variable secured notes (term loan Tranche A), due 2003.... $ 41,250 $ 45,000
Variable secured notes (term loan Tranche B), due 2004.... 36,844 37,219
Revolving credit facility, due 2003....................... 22,900 --
Senior subordinated notes:
Non-convertible 10.125% notes, due 2007................... 85,000 85,000
Capital leases............................................ 801 --
-------- --------
Total............................................. 186,795 167,219
Less: Current maturities.................................. 8,514 4,125
-------- --------
Total long-term debt.............................. $178,281 $163,094
======== ========
</TABLE>
Concurrent with the consummation of the Merger, the Company entered into a
Credit Facility agreement with a syndicate of lending institutions (the
"Lenders"), which agreement provides for an aggregate principal amount of loans
of up to $110.0 million. Loans under the Credit Facility consist of $82.5
million in aggregate principal amount of term loans ("Term Loan Facility"),
which facility includes a $45.0 million tranche A
F-13
<PAGE> 61
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
term loan subfacility, a $37.5 million tranche B term loan subfacility, and a
$27.5 million revolving credit facility ("Revolving Credit Facility"). The
Credit Facility includes a subfacility for swingline borrowings and a sublimit
for letters of credit. The Company's obligations under the Credit Facility are
secured by a security interest in substantially all of the Company's assets. The
Company used proceeds from the Term Loan Facility and a portion of the Revolving
Credit Facility to provide a portion of the funding necessary to consummate the
Merger. There was $22.9 million outstanding on the Revolving Credit Facility at
June 30, 1999 as compared with the approximately $25.4 million available based
on eligible accounts receivable and inventory. As of October 12, 1999, the
Revolving Credit Facility was reduced to $24.7 million.
As of June 30, 1999, future maturities of long-term debt were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000.................................................. $ 8,514
2001.................................................. 9,531
2002.................................................. 11,039
2003.................................................. 11,536
2004.................................................. 52,362
Later years........................................... 93,813
--------
$186,795
========
</TABLE>
The tranche B term loan facility matures on September 30, 2004. The tranche
A term loan facility and the Revolving Credit Facility mature on September 30,
2003. The Term Loan facility is subject to repayment according to quarterly
amortization of principal based upon the Scheduled Amortization (as defined in
the Credit Facility). The Credit Facility provides for mandatory prepayment of
the Term Loan Facility and the Revolving Credit Facility until certain financial
ratios are attained by the Company. Prepayments on the Term Loan Facility are
applied to reduce scheduled amortization payments as provided in the Credit
Facility. The mandatory prepayments defined in the Credit Facility include: (a)
100% of the net cash proceeds received by the Company, or any subsidiary from
asset sales (subject to de minimus baskets, certain other defined exceptions,
and reinvestment provisions), net of selling expenses and taxes to the extent
such taxes are paid; (b) 50% of excess cash flow pursuant to an annual cash
sweep arrangement; (c) up to 100% of the net cash proceeds of certain
indebtedness subject to certain exceptions and (d) 100% of the net cash proceeds
from the issuance of equity by the Company or any subsidiary subject to de
minimus baskets and certain exceptions. In addition, the Company may prepay the
Credit Facility in whole or in part at any time without penalty, subject to
reimbursement of certain costs of the Lenders.
Indebtedness under the Term Loan Facility and the Revolving Credit Facility
initially bears interest at a rate based (at the Company's option) upon (i)
LIBOR for one, two, three or six months, plus 3.00% with respect to the tranche
A term loan facility and the Revolving Credit Facility or plus 3.50% with
respect to the tranche B term loan facility, or (ii) the Alternate Base Rate (as
defined in the Credit Facility) plus 1.50% with respect to the tranche A term
loan facility and the Revolving Credit Facility or plus 2.00% with respect to
the tranche B term loan facility; provided that, pursuant to the Second
Amendment, the interest rate margins described above have been increased by
0.50% per annum from the date of the Second Amendment through and including
December 31, 1999; provided, however, the interest rates for the Revolving
Credit Facility and tranche A term loan are subject to several point reductions
in the event the Company meets certain performance targets.
Interest rates at June 30, 1999 were 8.5%, 9.0% and 8.5% on tranche A and
tranche B term loans and the Revolver, respectively.
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,
F-14
<PAGE> 62
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
provided that this fee may be subject to reduction in the event the Company
meets certain performance targets.
Amendments to the Credit Facility. At December 31, 1998 the Company was not
in compliance with certain financial covenants. The Company entered into an
amendment to the Credit Facility as of February 10, 1999 (the "First Amendment")
which provided, among other matters, for the waiver of such covenant defaults,
the revision of certain existing financial covenants, including the addition of
minimum EBITDA requirements in place of the maximum leverage ratio and interest
rate increases of approximately 0.75% per annum as described below.
The Credit Facility, as amended in February, required the Company to meet
certain financial tests, including a minimum fixed charge coverage ratio,
minimum interest coverage ratio, a minimum EBITDA requirement and a maximum
leverage ratio. The Credit Facility also contains additional restrictions,
which, among other things, limit additional indebtedness, liens, sales of assets
and business combinations. As of March 31, 1999 the Company was not in
compliance with the interest coverage ratio, fixed charge coverage ratio and the
minimum EBITDA requirement. The Company entered into a second amendment to the
Credit Facility in May 1999 (the "Second Amendment"). The Second Amendment
provided, among other things, for the waiver of the March 31, 1999 defaults and
lowered June 30 and September 30 interest coverage ratios, fixed charge coverage
ratios and minimum EBITDA requirements and also provides for a 0.50% interest
rate increase on all loans outstanding under the Credit Facility from the date
of the second Amendment through and including December 31, 1999.
Amendments to the Credit Facility Subsequent to June 30, 1999. The Company
was not in compliance with certain financial covenants at June 30, 1999,
including the interest coverage ratio, fixed charge coverage ratio, and the
minimum EBITDA requirements of the existing Credit Facility. On August 12, 1999,
the Company entered into an amendment to the Credit Facility (the "Third
Amendment") to permit, among other things, the Company to enter into an
additional credit facility (the "Additional Credit Facility") with BankAmerica,
N.A. (the "Additional Lender"), which is described below. On October 12, 1999,
the Company entered into a fourth amendment to the Credit Facility (the "Fourth
Amendment"). The Fourth Amendment provides, among other things, for the waiver
of all financial covenant ratios for September 30, 1999 and all fiscal quarters
prior thereto, and, commencing with the fiscal quarter ending on December 31,
1999, raises the maximum leverage ratio and lowers each of (i) the minimum fixed
charge coverage ratio, (ii) the interest coverage ratio and (iii) minimum
EBITDA. Additionally, the Fourth Amendment (i) adds a covenant for the senior
leverage commencing with the fiscal quarter ending on September 30, 2000, (ii)
adds a covenant prohibiting the principal amount of all loans outstanding under
the existing Credit Facility from exceeding (a) $96,000,000 as of the last day
of each fiscal quarter through June 30, 2000, and (b) thereafter, the lesser of
(x) $96,000,000 and (y) the Company's EBITDA for the four consecutive fiscal
quarters immediately preceding the date of calculation, times 3.0, and (iii)
reduces the maximum amount of the "Revolving Credit Commitment" to $24.7
million. At October 13, 1999, after giving effect to the Fourth Amendment, and
application of proceeds from the sale of Series D Preferred Stock, there will be
outstanding $37.3 in principal amount of tranche A term loans, $34.5 in
principal amount of tranche B term loans and $24.7 in principal amount of
revolving credit commitments.
The Fourth Amendment also includes a provision allowing (but not requiring)
Westar and certain existing shareholders the right to cure certain financial
covenant defaults within not more than 45 days after the end of the relevant
fiscal quarter by providing additional capital to the Company. Pursuant to this
provision, any such timely capital investment will be deemed under such
financial covenants to increase on a dollar-for-dollar basis the EBITDA (and
related definitions) of the Company as of the last day of such fiscal quarter
and, to the extent that the proceeds thereof are used to repay Credit Facility
loans, to reduce total debt and senior debt for purposes of such financial
covenants. There is no commitment or obligation on the part of Westar, TDL or
any other shareholder to provide additional capital to the Company.
F-15
<PAGE> 63
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Additional Credit Facility. The Additional Credit Facility is a senior
revolving credit facility which the Company entered into on August 12, 1999.
Amounts outstanding under the Additional Credit Facility are secured by liens on
certain equipment and other property of the Company that are junior in lien
priority to the lien securing the Company's existing Credit Facility. Pursuant
to an amendment to the Additional Credit Facility executed on October 12, 1999,
the maturity of such facility was extended to September 30, 2000 and the maximum
amount of borrowings thereunder was increased from $10.0 million to $15.0
million. Advances under the Additional Credit Facility may be made at the option
of the Company as a base rate advance or a LIBOR Advance. Base rate advances
bear interest at a per annum interest rate equal to the higher of (a) the sum of
(i) 0.50% plus (ii) the federal funds rate on the applicable day plus (iii) an
applicable base rate margin or (b) the sum of (i) the prime rate on such date
plus (ii) an applicable base rate margin. A LIBOR advance bears interest at a
rate based upon LIBOR plus 3.50 percent. The financial covenants in the
Company's existing Credit Facility, after giving effect to the Fourth Amendment,
are incorporated by reference into the Additional Credit Facility.
In order to induce the Additional Lender to provide the Additional Credit
Facility, Westar LP and Westar LLC (together, the "Westar Funds") have entered
into a Continuing Guaranty dated as of August 12, 1999 (the "Guaranty") and a
Pledge Agreement dated as of August 12, 1999 (the "Pledge Agreement") pursuant
to which, from time to time in the discretion of the Westar Funds, the Westar
Funds may guarantee loans made by the Additional Lender under the Additional
Credit Facility and pursuant to which Westar Capital LLC has pledged $5 million
to secure its obligations under the Guaranty. In addition, Twelve D Limited, a
limited partnership controlled by Benjamin L Doskocil, Sr. ("TDL"), has entered
into a Reimbursement Agreement dated as of August 12, 1999 (the "Reimbursement
Agreement") with the Westar Funds pursuant to which TDL has agreed to reimburse
the Westar Funds for payments made pursuant to the Guaranty and the related
pledge arrangements under the Pledge Agreement in an amount proportional to its
equity interests in the Company.
In connection with certain amendments to the Additional Credit Facility on
October 12, 1999, the Guaranty and Reimbursement Agreement was increased to $15
million and was extended to September 30, 2000 and the Pledge Agreement was
revised to, among other things, require Westar LLC to pledge additional
collateral to the Additional Lender in the event that loans under the Additional
Credit Facility exceed $10.0 million.
In order to induce the Westar Funds to continue the Guaranty and the Pledge
Agreement and, in the case of TDL, to continue its obligations under the
Reimbursement Agreement, the Company issued to Westar LP and an affiliate and
TDL collectively (the "Investors"), who directly or indirectly through the
Reimbursement Agreement guaranteed the Additional Credit Facility, 14.1 million
warrants to acquire common stock of the Company (the "Guaranty Warrants"). The
Guaranty Warrants were issued to each such Investor ratably based on the amount
of such Investor's liability under the Guaranty and Reimbursement Agreement and
are exercisable at an initial exercise price of $.01 per share. Of the Guaranty
Warrants, 4.1 million, are exercisable immediately and, 10.0 million are only
exercisable in the event of, and in proportion to, payments made by such
Investor under the Guaranty.
Sale of Series D Preferred Stock and Related Warrants. In connection with,
and as a condition of, the Fourth Amendment, the Company issued and sold to
certain of its current stockholders shares of a new series of Series D
Redeemable Preferred Stock, $100 stated value (the "Series D Preferred Stock")
in an aggregate amount of $5.0 million, along with related warrants to acquire
1.0 million shares of common stock of the Company (the "Related Warrants").
Proceeds from the sale of Series D Preferred Stock was applied against the
Credit Facility. Holders of the Series D Preferred Stock are entitled to receive
quarterly dividends at the Company's option either in cash or in additional
shares of Series D Preferred Stock at the annual dividend rate of 12% per annum.
The Series D Preferred Stock is senior to all other classes of equity securities
of the Company with respect to dividend rights and rights on bankruptcy,
liquidation, dissolution and winding-up. In
F-16
<PAGE> 64
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the event of the liquidation, dissolution or winding-up of the Company, the
holders of the Series D Preferred Stock are entitled to receive $100 per share
plus any accrued and unpaid dividends, before the distribution of any assets of
the Company to holders of any class or series of capital stock ranking junior to
the Series D Preferred Stock. The Series D Preferred Stock is, at the Company's
election, subject to optional redemption but has no right to convert into any
other equity security of the Company. The Related Warrants are exercisable into
common shares at any time at an initial price equal to $.01 per share. The
Related and Guaranty Warrants, to the extent exercisable and dilutive, may
affect future earnings per share calculations.
The Credit Facility also contains additional restrictions which, among
other things, limit additional indebtedness, liens, sales of assets and business
combinations. There is no assurance that the Company will be able to comply with
the financial or other covenants set forth in the Credit Facility. A failure to
comply with the obligations contained in the Credit Facility or the Subordinated
Notes, if not cured or waived, could permit acceleration of the related
indebtedness and acceleration of indebtedness under other instruments that
contain cross-acceleration or cross-defaults. While management expects to meet
all covenants in the future, there is not assurance the Company will do so.
Bridge Financing. As part of the Recapitalization on July 1, 1997, Doskocil
Funding, Inc., and NationsBridge, LLC purchased an aggregate of $32.5 million of
senior subordinated increasing rate notes from Doskocil. The Notes repaid bore
interest initially at prime plus 3.5%, increasing on each rate determination
date, 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). Fees associated with obtaining the Bridge Note and other interim
financing were $2.5 million which were amortized over the life of the Bridge
Note and are included in interest expense for the twelve months ended June 30,
1998. The note was repaid in full on September 19, 1997.
Senior Subordinated Notes. On September 19, 1997, the Company obtained
financing through the issuance of $85 million in Senior Subordinated debt
("Subordinated Notes"). The Subordinated Notes will mature on September 15,
2007. Interest on the Subordinated Notes is payable in cash semi-annually on
March 15 and September 15 of each year, commencing on March 15, 1998. The
Subordinated 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 below, plus accrued and unpaid interest and liquidated damages, 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 Subordinated Notes with the net proceeds of an Initial Public
Equity offering 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, the Company will
have the option, at any time on or prior to September 15, 2002, to redeem the
Subordinated Notes in whole but not in part at a redemption price equal to 100%
of the principal amount thereof plus the applicable premium 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 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 the Subordinated Notes tendered, or that
restrictions in the Credit Facility or under the Company's debt instruments
existing at such time will allow the Company to make such required repurchases.
Fees associated with obtaining the Subordinated Notes and the tranche A and
tranche B term loans were $5.8 million, which are amortized over the terms of
the respective notes. Amortization expense of $0.8 million and $0.6 million
relating to such fees is included in interest expense for the years ended June
30, 1999 and 1998, respectively.
F-17
<PAGE> 65
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. INCOME TAXES
Effective January 1, 1988, the Corporation elected to be taxed as a
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 was 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 June 30, 1997 and June
30, 1996 or the twelve months ended December 1996; however, a pro forma income
tax provision at an effective rate of 37% is presented in the statement of
operations.
As a result of the Corporation's termination as an S Corporation on July 1,
1997, the Corporation 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>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current deferred tax assets:
Allowance for doubtful accounts........................... $ 92
Reserve for inventories................................... 298
Accrued expenses.......................................... 512
Other..................................................... 67
-------
Total current tax assets.......................... 969
Non-current deferred tax assets (liabilities):
Tax depreciation in excess of book........................ (4,062)
Reserve for equipment to be disposed...................... 1,423
-------
Net non-current deferred tax liability.................... (2,639)
-------
Net deferred tax liability at July 1, 1997.................. $(1,670)
=======
</TABLE>
Provisions for income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 YEAR ENDED JUNE 30, 1998
-------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ----- ------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal............................ $-- $-- $-- $-- $1,918 $1,918
State and local.................... -- -- -- -- (49) (49)
--- --- --- --- ------ ------
Total.................... $-- $-- $-- $-- $1,869 $1,869
--- --- --- --- ------ ------
</TABLE>
F-18
<PAGE> 66
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of federal statutory tax rate (35%) to total provisions
follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Tax expense(benefit) at federal statutory rate on pretax
loss...................................................... $(6,610) $ (357)
Add(deduct):
S Corporation status change............................... -- 1,670
Spectrum goodwill amortization............................ (194) (272)
Dogloo goodwill amortization.............................. 717 496
Write off of Dogloo goodwill.............................. 2,064 --
Change in valuation allowance for deferred tax assets..... 3,643 354
Other..................................................... 380 (22)
------- ------
Total tax expense................................. $ -- $1,869
======= ======
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts/credit memos.............. $ 690 $ 111
Reserve for inventories................................... 393 442
Accrued exit costs........................................ 121 2,321
Accrued expenses.......................................... 1,213 1,115
Other..................................................... 137 312
------- -------
Total current deferred tax assets................. 2,554 4,301
Non-current deferred tax assets(liabilities):
Tax depreciation in excess of book........................ (4,556) (5,754)
Reserve for fixed assets held for sale.................... 564 564
Net operating loss carry forwards......................... 9,825 6,501
Other..................................................... 609 (259)
------- -------
Net non-current deferred tax asset.......................... 6,442 1,052
Valuation allowance for deferred tax assets................. (8,996) (5,353)
------- -------
Net deferred tax asset...................................... $ -- $ --
======= =======
</TABLE>
At June 30, 1998, approximately $5.0 million of the change in valuation
allowance for deferred tax assets was included in the calculation of goodwill as
it related to deferred tax assets as of the purchase date. The remaining $0.4
million valuation allowance for deferred tax assets was included in the
provision for income taxes.
At June 30, 1999, the Company had net operating loss carry forwards
totaling approximately $26.6 million, which expire beginning in 2010 and ending
in 2020. The tax returns of Dogloo and Doskocil for the years 1996 and 1997 are
under various stages of audit and administrative review by the IRS. The company
believes it has made adequate provision for income taxes and interest which may
become payable for years not yet settled.
NOTE 9. COMMON AND PREFERRED STOCK
Holders of shares of the Company's Common Stock are entitled to one vote
per share on all matters to be voted on by shareholders. The holder of shares of
the Company's Common Stock are entitled to receive such
F-19
<PAGE> 67
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
dividends, if any, as may be declared from time to time by the board of
directors in its discretion from funds legally available therefore, and upon
liquidation or dissolution are entitled to receive all assets available for
distribution to the shareholders. Holders of the Company's Common Stock have no
preemptive or other subscription rights, except those provided for in the Second
Securityholders Agreement and there are no conversion rights or redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of the Company's Common Stock are fully paid and nonassessable.
At June 30, 1998, the Company was authorized to issue 25,000,000 shares of
preferred stock, no par value and 15,000,000 shares of common stock, no par
value. For the twelve months ended June 30, 1998, the Company paid cash
dividends upon the redemption of its Series A Preferred Stock in the aggregate
amount of $0.5 million. For the twelve months ended June 30, 1999 there were no
cash dividends paid.
The Company's board of directors has the authority, without further action
by the stockholders, to issue up to a total of 25,000,000 shares of the
Company's 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. The Company'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 accumulated, but not accrued or paid, at
June 30, 1999 and 1998 are $1.8 million and $.9 million, respectively.
Dividends are cumulative and accrue on each outstanding share of the
Company's Series C Preferred Stock whether or not earned or declared. The
Company's 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 of
common stock. Such redemption provisions have been removed by an amendment to
the designation of Series C Preferred Stock. Shares of the Company's Series C
Preferred Stock may also be redeemed by voluntary repurchase. Holders of the
Company's Series C Preferred Stock have a liquidation preference equal to the
redemption price. The Company's 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 the Company's Series C Preferred Stock or the
issuance of any equity security having a preference over, or being on parity
with, the Company's Series C Preferred Stock.
NOTE 10. STOCK BASED COMPENSATION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the fair value of the underlying stock on the date
of grant, no compensation expense is recognized. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
FASB Statement 123, the Company's net loss and net loss per share for the years
ended June 30, 1999 and 1998 would have been as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Pro forma net loss attributable to common shareholders..... $(20,175) $(4,404)
Pro forma loss per common share basic and diluted.......... $ (6.50) $ (1.60)
</TABLE>
F-20
<PAGE> 68
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's 1997 Stock Option Plan has authorized the grant of options to
management personnel for up to 625,000 shares of the Company's common stock.
Under the Incentive Stock Option Award (the "Base Award"), the Company grants
selected executives and other key employees stock option awards whose vesting is
20 percent per year, beginning one year after grant date. Under the Incentive
Performance Stock Option Award (the "Performance Award"), the Company grants
selected executives and other key employees stock option awards whose vesting
may be accelerated based upon certain Company performance measures. Options
under the Performance Award vest at the end of six years if the performance
measures have not been met. The exercise price of each option, which has a
10-year life, is equal to the fair value of the Company's stock on the date of
grant.
Pro forma information regarding net loss and loss per common share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes Minimum Value option model with the following
weighted-average assumptions for 1999: risk-free interest rates of 6.0%;
dividend yield of zero; volatility factors of the expected market price of the
Company's common stock of zero, as the Company's stock is not publicly traded;
and an expected life of 5 years.
The Minimum Value option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
------------------------ PERFORMANCE BASE
AVAILABLE OUTSTANDING AWARD AWARD
--------- ----------- ----------- -------
<S> <C> <C> <C> <C>
June 30, 1997.......................... -- -- -- --
Authorized............................. 625,000 -- -- --
Granted................................ (381,846) 381,846 122,500 259,346
Forfeited.............................. 34,896 (34,896) (6,750) (28,146)
-------- ------- ------- -------
June 30, 1998.......................... 278,050 346,950 115,750 231,200
Granted................................ (122,250) 122,250 37,250 85,000
Forfeited.............................. 45,900 (45,900) (14,500) (31,400)
-------- ------- ------- -------
June 30, 1999.......................... 201,700 423,300 138,500 284,800
======== ======= ======= =======
</TABLE>
Options of 59,460 and 21,952 were exercisable at June 30, 1999 and 1998,
respectively. The weighted average exercise price for all options granted during
the year ended and outstanding at June 30, 1999 and 1998, respectively, is
$15.03. The weighted average remaining contractual life at June 30, 1999 is
eight years, eight months. The weighted average fair value of options granted
during the year ended June 30, 1999 and 1998 is $3.90 and $3.84, respectively.
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. Cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities and variable rate debt are reflected in
the financial
F-21
<PAGE> 69
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
statements at fair value based on current market rates. The fair market value of
the Subordinated Notes is based on market trades of the Notes, at or near year
end, which are thinly traded.
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
---------------------- ----------------------
CARRYING CARRYING
FAIR VALUE AMOUNT FAIR VALUE AMOUNT
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Subordinated Notes................................ $43,350 $85,000 $89,463 $85,000
======= ======= ======= =======
</TABLE>
NOTE 12. SEGMENT INFORMATION
Effective for the year ended June 30, 1999 the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." In
accordance with SFAS No. 131, the Company operates within a single reportable
segment, the manufacture and sale of molded consumer plastic products. The
information provided to the Company's chief decision maker and the Board of
Directors includes the Company as a whole and, as such, the Company is
considered to operate in one segment. The nature of products, production
processes, types of customers and methods of distribution are consistent across
the Company.
The information below summarizes export sales from the United States to the
following geographic areas:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
------------------- YEAR ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 28, JUNE 30,
1999 1998 1996 1997
-------- -------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Far East.................................. $ 2,751 $ 2,861 $1,669 $ 612
Europe.................................... 5,844 5,775 2,588 1,252
Other..................................... 2,118 1,888 552 503
------- ------- ------ ------
Total........................... $10,713 $10,524 $4,809 $2,367
======= ======= ====== ======
</TABLE>
The information below summarizes sales by product line:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
------------------- YEAR ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 28, JUNE 30,
1999 1998 1996 1997
-------- -------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Pet..................................... $140,022 $118,027 $ 72,692 $35,838
Sport................................... 18,991 22,490 21,950 11,105
Furniture & custom molding.............. -- 327 6,400 2,241
Outside resin sales..................... 10,919 6,312 2,413 2,572
-------- -------- -------- -------
Total......................... $169,932 $147,156 $103,455 $51,756
======== ======== ======== =======
</TABLE>
F-22
<PAGE> 70
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. LEASES
Future minimum commitments for capital leases and for operating leases
having initial non-cancelable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
2000........................................................ $ 225 $ 4,012
2001........................................................ 225 3,881
2002........................................................ 214 3,778
2003........................................................ 192 3,905
2004........................................................ 192 3,543
Thereafter.................................................. -- 10,182
Sublease.................................................... -- (111)
------ -------
Total minimum lease payments...................... 1,048 $29,190
=======
Less imputed interest costs................................. 247
Less current portion........................................ 139
------
Present value of net minimum lease payments included in
long-term debt......................................... $ 662
======
</TABLE>
Operating lease rental expense from continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
------------------- YEAR ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 28, JUNE 30,
1999 1998 1996 1997
-------- -------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Rental expense.............................. $ 5,417 $ 4,157 $ 6,195 $3,334
======== ======== ============ ======
</TABLE>
The Company conducts the major part of its operations from leased
facilities which include its manufacturing plant, warehouses, and offices. The
majority of these facilities are leased under long-term non-cancelable operating
leases with the Chairman of the Board of Directors who was formerly the
Company's majority stockholder. Leases with terms in excess of five 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 $0.3 million. Additionally,
the Company rents a warehouse from Mr. Doskocil on a month-to-month basis for
$85,000 per month. Rent paid for all facilities to Mr. Doskocil $4.4 million,
$3.4 million, $3.4 million and $1.2 million for the years ended June 30, 1999
and 1998, December 28, 1996 and the six month period ended June 30, 1997,
respectively. The Company also leases a wide variety of equipment including
office, transportation and production equipment.
In 1995 and 1996, the Corporation 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 $18.0 million.
Ultimately, the transaction 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 $1.7 million
to $2.8 million annually.
Effective July 1, 1997, Doskocil repurchased the equipment previously sold
and leased back in 1995 and 1996, for approximately $18.7 million and canceled
the existing lease arrangements. The unamortized net deferred gain at June 30,
1997 of approximately $0.1 million was offset against the purchase price.
F-23
<PAGE> 71
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. SAVINGS PLAN
As of January 1, 1998, 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 completed three months of service may
elect to contribute to the Plan up to 15% 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. The Company may contribute an amount equal to 100% of the first 3% of
salary deferral and 50% of the next 4%-6%, up to a maximum of two thousand five
hundred dollars and subject to the limitations imposed by the Internal Revenue
Code. The Company's expenses related to the Plan, including contributions, were
$0.5 million and $0.3 million for the years ended June 30, 1999 and 1998,
respectively.
Prior to January 1, 1998, the Company had established an employee defined
contribution profit sharing plan. Contributions were at the discretion of the
Board of Directors. Eligible employees were those who had been employed for one
year or more and were currently employed on the admittance dates of January 1
and July 1 each year. Profit sharing plan expense was approximately $0.1
million, $1.0 million and $0 million in the years ended June 30, 1998 and
December 28, 1996, and the six months ended June 30, 1997, respectively.
Effective January 1, 1998 the profit sharing plan was merged into the 401(k)
Plan. The Company may continue to contribute to the profit sharing plan. For the
years ended June 30, 1999 and 1998, respectively, no contributions were made by
the Company.
In connection with the recapitalization of the Corporation, employees who
remained through the date of the recapitalization were eligible to receive a
bonus. Such bonuses amounted to $2.9 million for the six month period ended June
30, 1997.
NOTE 15. NET LOSS PER SHARE
Basic net loss per share is based on weighted average number of common
shares outstanding. Diluted net loss per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of stock
options, provided in each case, the effect is not anti-dilutive. At June 30,
1999 and 1998 respectively, options of 423,300 and 346,950 were not included in
their respective years per share calculations because their effect was
anti-dilutive.
Net loss per share for the years ended June 30, 1999 and 1998 are
calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1999 1998
---------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net loss attributable to common shareholders................ $(19,801) $(4,104)
Average shares outstanding during the period:
Basic and diluted......................................... 3,105 2,740
Net loss per common share:
Basic and diluted......................................... $ (6.38) $ (1.50)
======== =======
</TABLE>
F-24
<PAGE> 72
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. SUPPLEMENTAL CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED YEAR SIX MONTHS
------------------- ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 28, JUNE 30,
1999 1998 1996 1997
-------- -------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid........... $16,427 $14,251 $2,672 $633
Income taxes paid................................. -- $ 250 -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion of Dogloo Common Stock into the
Company's Common Stock......................... -- $21,210 -- --
Conversion of Dogloo Series B Preferred Stock for
Company's Series C Preferred Stock............. $ 9,161 -- --
Capital leases for equipment purchases.............. $ 801 -- -- --
</TABLE>
During the six months ended June 30, 1997, the Company made a non-cash
distribution of assets totaling $1.2 million. During 1996, the Company deferred
a gain of $0.2 million on a sale-leaseback transaction.
Bad debt expense for the years ended June 30, 1999 and 1998, December 28,
1996 and the six months ended June 30, 1997 is $1.0 million, $0, $0.2 million
and $0.1 million, respectively.
NOTE 17. CONTINGENCIES AND COMMITMENTS
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.
COMMITMENTS
The Company is self-insured for medical and dental benefits for its
employees and their covered dependents. Medical claims exceeding $0.1 million
per covered individual are covered through a private insurance carrier.
At June 30, 1999, contract commitments for capital expenditures for
property, plant and equipment totaled $4.0 million, all of which are due and
payable during fiscal year 2000.
The Company has commitments to certain members of management that require,
among other things, that if the employee is terminated without cause or resigns
for good reason (as defined by the commitments) the Company will continue to pay
certain salaries and benefits for a fixed period of time.
GUARANTEES
The Company has guaranteed loans made by a bank to employees to fund the
employee's purchase of common stock. These loans were made at market terms with
full recourse to the employees/borrowers. The outstanding balance of such loans
at June 30, 1999 is $0.4 million.
NOTE 18. RELATED PARTY TRANSACTIONS
During 1995, the Company advanced $4.4 million to Marybe, Ltd., a related
party. The balance at December 28, 1996, was $0.4 million, which was paid in
full during the six month period ended June 30, 1997.
F-25
<PAGE> 73
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company expensed $2.0 million in officer's bonus to the
former majority stockholder. 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.
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 in the
accompanying financial statements, were approximately $0.8 million at December
28, 1996. 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 $1.0 million to the stockholders and partners. In addition, the
Company distributed other assets of $1.2 million, which included an insurance
trust receivable, the cash surrender value of life insurance policies on the
stockholders, and property and equipment.
During 1999 and 1998, the Company expensed $0.6 million each year in
management fees charged by Westar. Fees and expenses of $0.2 million and $0.1
million were paid to directors for board meetings in 1999 and 1998,
respectively. At June 30, 1999, the Company has a receivable of $0.8 million
from the controlling stockholder. Also at June 30, 1999, the Company has payable
to other stockholders $0.9 million. In addition, the Company pays rent to a
stockholder, as disclosed in Footnote 13.
F-26
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on October 13, 1999.
DOSKOCIL MANUFACTURING COMPANY, INC.
By: /s/ LARRY E. REMBOLD
---------------------------------------
Larry E. Rembold
President and Chief Executive Officer
By: /s/ JOHN J. CASEY
---------------------------------------
John J. Casey
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE>
<S> <C> <C>
/s/ GEORGE L. ARGYROS Director October 13, 1999
- -----------------------------------------------------
George L. Argyros
/s/ JOHN W. CLARK Director October 13, 1999
- -----------------------------------------------------
John W. Clark
/s/ CHARLES D. MARTIN Director October 13, 1999
- -----------------------------------------------------
Charles D. Martin
/s/ BENJAMIN L. DOSKOCIL, SR. Director October 13, 1999
- -----------------------------------------------------
Benjamin L. Doskocil, Sr.
/s/ MICHAEL P. HOOPIS Director October 13, 1999
- -----------------------------------------------------
Michael P. Hoopis
</TABLE>
<PAGE> 75
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
3.1+ Amended and Restated Articles of Incorporation of Doskocil (a)
Manufacturing Corporation, Inc.
3.2+ Bylaws of Doskocil Manufacturing Corporation, Inc. (a)
4.1+ Indenture, dated as of September 19, 1997, between Doskocil (a)
Manufacturing Company, Inc., and First Trust National
Association.
10.1+ Recapitalization Agreement, dated July 1, 1997, among (a)
Enterprise Partners III, L.P., Enterprise Partners III
Associates, L.P., Enterprise Partners IV, L.P., Enterprise
Partners IV Associates, L.P., Enterprise Management Partners
Corporation, Enterprise Partners Texas Company, LLC,
Benjamin L. Doskocil, Sr., Mary Frances Doskocil, Bed Rock
International, Inc., Doskocil Manufacturing Company, Inc.
and Spectrum Polymers, Ltd.
10.2+ Merger Agreement, dated September 19, 1997, between Doskocil (a)
Manufacturing Company, Inc., and Dogloo, Inc.
10.3+ Stock Redemption Agreement, dated as of September 19, 1997, (a)
among Enterprise Partners III. L.P., Enterprise Partners III
Associates, L.P., Enterprise Partners IV, L.P., Enterprise
Partners IV Associates, L.P., and Enterprise Management
Partners Corporation.
10.4+ Stock Redemption and Purchase Agreement, dated August 28, (a)
1997, among Aurelio F. Barreto, III, Doskocil Manufacturing
Company, Inc., and Westar Capital, L.P.
10.5+ Stock Redemption Agreement, dated as of September 15, 1997, (a)
among Darrell R. Paxman, Doskocil Manufacturing Company,
Inc., and the other parties thereto.
10.6+ Purchase Agreement, dated September 11, 1997, among Doskocil (a)
Manufacturing Company, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and NationsBanc Capital Markets, Inc.
10.7*+ Registration Rights Agreement, dated as of September 19, (a)
1997, among Doskocil Manufacturing Company, Inc., Donaldson,
Lufkin & Jenrette Securities Corporation and NationsBanc
Capital Markets, Inc.
10.8+ Confidentiality, Non-Competition Agreement and (a)
Non-Solicitation Agreement, dated as of July 1, 1997, among
Benjamin L. Doskocil, Sr., Mary Frances Doskocil and
Doskocil Manufacturing Company, Inc.
10.9*+ Letter/Consulting Agreement, dated as of July 1, 1997, (a)
between Doskocil Manufacturing Company, Inc., and Benjamin
L. Doskocil, Sr.
10.10+ Credit Agreement, dated September 19, 1997, among Doskocil (a)
Manufacturing Company, Inc. and NationsBank of Texas, N.A.,
as administrative agent for certain lenders named therein.
10.10.1+ First Amendment to Credit Agreement dated February 10, 1999. (b)
10.10.2+ Second Amendment to Credit Agreement dated May 14, 1999. (c)
10.10.3 Third Amendment to Credit Agreement dated August 12, 1999.
10.10.4 Fourth Amendment to Credit Agreement dated October 12, 1999.
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.11+ Commercial Industrial Lease Agreement, dated December 4, (a)
1996, between Doskocil Manufacturing Company, Inc. and COL
MET, INC. for property located at 4301 Kathey Drive,
Arlington, Texas 76017.
10.12*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4209 Barnett Boulevard,
Arlington, Texas 76017 and commonly referred to as Building
A.
10.13*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4300 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building B.
10.14*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for approximately
24,000 square feet of Building "C" located at 4408 Barnett
Boulevard, Arlington, Texas 76017 and commonly referred to
as Building C.
10.15*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4401 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building D.
10.16*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil,
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4208 Larry Lane,
Arlington, Texas 76017 and commonly referred to as Building
E.
10.17*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4207 Larry Lane,
Arlington, Texas 76017 and commonly referred to as Building
F.
10.18*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4209 Larry Lane,
Arlington, Texas 76017 and commonly referred to as Building
F Parking Lot.
10.19*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Marybe Investments, Ltd., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 800 Stephens, Arlington, Texas 76017 and commonly
referred to as Building G.
10.20*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4205 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building J.
10.21*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 720 and 722 West Interstate 20, Arlington, Texas
and commonly referred to as the Parking Facilities.
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.22*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the building(s) located at 600 Justice,
Mansfield, Texas and commonly referred to as Spectrum.
10.23*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the building(s)
located at 1708 and 1712 Peyco, Arlington, Texas 76017 and
commonly referred to as Peyco.
10.24+ Lease Agreement, dated January 1, 1997, between Belmont (a)
Warehousing Complex, Inc., as landlord, and Dogloo, Inc., as
tenant, for the property located at 212 South Belmont,
Indianapolis, Indiana 46241.
10.25+ Lease, dated November 2, 1992, as amended by First Amendment (a)
to Lease, dated July 29, 1996, among Dogloo, Inc., Patrician
Associates, Inc., and Club Drive Partners, also known as Old
Temescal Road Project.
10.26*+ Form of Indemnification Agreement between Doskocil (a)
Manufacturing Company, Inc., and certain of its directors
and/or officers.
10.27*+ Doskocil Manufacturing Company, Inc., Stock Option Plan. (a)
10.28*+ Employment Agreement, dated as of November 1, 1996, between (a)
Michael J. Farmer and Dogloo, Inc.
10.29*+ Stockholders' Agreement, dated as of July 1, 1997, among (a)
Enterprise Partners III, L.P., Enterprise Partners III
Associates, L.P., Enterprise Partners IV, L.P., Enterprise
Partners IV Associates, L.P., Enterprise Management Partners
Corporation, Benjamin L. Doskocil, Sr., Mary Frances
Doskocil and Doskocil Manufacturing Company, Inc.
10.30*+ First Amendment to Stockholders' Agreement, dated as of (a)
September 19, 1997, among Enterprise Partners III, L.P.,
Enterprise Partners III Associates, L.P., Enterprise
Partners IV, L.P., Enterprise Partners IV Associates, L.P.,
Enterprise Management Partners Corporation, Benjamin L.
Doskocil, Sr., Mary Frances Doskocil, Doskocil Manufacturing
Company, Inc., Westar Capital, L.P. and Westar Capital II,
LLC.
10.31*+ Amended and Restated Securityholders Agreement, dated (a)
September 19, 1997, among Doskocil Manufacturing Company,
Inc., Dogloo, Inc., Westar Capital, L.P., Westar Capital II,
LLC, HBI Financial Inc., Enterprise Partners III, L.P.,
Enterprise Partners III Associates, L.P., Enterprise
Partners IV, L.P., Enterprise Partners IV Associates, L.P.,
Aurelio F. Barreto III and other parties thereto.
10.32*+ Credit Agreement, dated as of August 12, 1999, among the (d)
Company, certain lenders named therein and Bank of America,
N.A., as administrative agent.
10.32.1 First Amendment to Credit Agreement, dated as of October 12,
1999, among the Company, certain lenders named therein and
Bank of America, N.A. as administrative agent.
10.33 Pledge Agreement as of August 12, 1999 by Westar Capital II,
LLC in favor of Bank of America, N.A.
10.34 Security Agreement as of August 12, 1999 between the Company
and Bank of America, N.A.
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
27.1 Financial Data Schedule.
99.1 Independent Auditors' Report of KPMG LLP, for the year ended
December 28, 1996.
</TABLE>
- ---------------
Notes to Exhibits:
* Indicates a contract or benefit plan under which one or more executive
officers or directors may receive benefits.
+ Indicates documents previously filed with the Securities and Exchange
Commission as set forth in the following table:
(a) Incorporated herein by reference to the Company's Registration Statement
on Form S-4 (Registration No. 333-37081) as filed on October 2, 1997.
(b) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Inc., Report on Form 10-Q for the quarter ended December 31, 1998.
(c) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc. Report on Form 10-Q for the quarter ended March 31, 1999.
(d) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc., Report on Form 8-K dated September 24, 1999.
<PAGE> 1
EXHIBIT 10.10.3
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Third Amendment"),
dated as of August 12, 1999, is entered into among DOSKOCIL MANUFACTURING
COMPANY, a Texas corporation (the "Borrower"), the lenders listed on the
signature pages hereof (collectively, the "Lenders"), and BANK OF AMERICA, N.A.
(formerly known as Bank of America National Trust and Savings Association,
successor by merger to Bank of America, N.A., formerly known as NationsBank,
N.A., successor by merger to NationsBank of Texas, N.A.), as the Administrative
Agent (in said capacity, the "Administrative Agent").
A. The Borrower, the Lenders and the Administrative Agent are parties
to that certain Credit Agreement, dated as of September 19, 1997, as amended by
that certain First Amendment to Credit Agreement, dated as of February 10,
1999, an that certain Second Amendment to Credit Agreement, dated as of May 14,
1999 (the "Credit Agreement"; the terms defined in the Credit Agreement and not
otherwise defined herein shall be used herein as defined in the Credit
Agreement).
B. The Borrower, the Lenders and the Administrative Agent desire to
amend the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Borrower,
the Lenders and the Administrative Agent covenant and agree as follows:
1. AMENDMENTS TO CREDIT AGREEMENT.
(a) The definition of "Temporary Credit Facility" is hereby added to
Section 1.1 of the Credit Agreement in the proper alphabetical order to read as
follows:
"Temporary Credit Facility" means the $10,000,000 revolving
credit facility scheduled to mature on February 1, 2000, extended
pursuant to the terms of that certain Credit Agreement, dated as of
August 6, 1999, among the Borrower, Bank of America, N.A., as
administrative agent (the "Temporary Credit Facility Agent"), and the
lenders party thereto, as amended, modified or supplemented from time
to time, but in no event to be for a principal amount in excess of
$10,000,000.
(b) The definition of "Temporary Credit Facility Liens" is hereby
added to Section 1.1 of the Credit Agreement in proper alphabetical order to
read as follows:
"Temporary Credit Facility Liens" means the Liens granted in
favor of the Temporary Credit Facility Agent to secure the obligations
of the Borrower under the Temporary Credit Facility, which Liens shall
at all times be junior and second to any and all Liens granted
pursuant to the Credit Agreement.
<PAGE> 2
(c) The definition of "Permitted Liens" set forth in Section 1.1 of
the Credit Agreement is hereby amended by (i) deleting "and" at the end of
clause (m) thereof, (ii) re-lettering clause (n) thereof as "(o)" and (iii)
adding a new clause (n) thereto to read as follows:
"(n) The Temporary Credit Facility Lien; and"
(d) Section 7.1 of the Credit Agreement is hereby amended by (i)
deleting "and" at the end of clause (l) thereof, (ii) adding "and" at the end
of clause (m) thereof, and (iii) adding a new clause (n) thereto to read as
follows:
"(n) Indebtedness in respect of the Temporary Credit
Facility;"
2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT.
By its execution and delivery hereof, the Borrower represents and warrants
that, as of the date hereof and after giving effect to the amendments
contemplated by the foregoing Section 1:
(a) the representations and warranties contained in the Credit
Agreement are true and correct on and as of the date hereof as if made on and
as of such date;
(b) no event has occurred and is continuing which constitutes a
Default or an Event of Default except that the Borrower may be not be in
compliance with the financial covenants set forth in Sections 7.11, 7.12 and
7.13 of the Credit Agreement for the fiscal quarter ending June 30, 1999;
(c) the Borrower has full power and authority to execute and deliver
this Third Amendment, and this Third Amendment and the Credit Agreement, as
amended hereby, constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in accordance with their respective
terms, except as enforceability may be limited by applicable debtor relief laws
and by general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law) and except as rights to indemnity
may be limited by federal or state securities laws; and
(d) no authorization, approval, consent, or other action by, notice
to, or filing with, any governmental authority or other Person (including the
Board of Directors of the Borrower), is required that has not been obtained for
the execution, delivery or performance by the Borrower of this Third Amendment.
3. CONDITIONS OF EFFECTIVENESS. This Third Amendment shall be
effective as of August 12, 1999, subject to the following:
(a) the Administrative Agent shall have received a counterpart of this
Third Amendment executed by Lenders comprising the Determining Lenders;
-2-
<PAGE> 3
(b) the Administrative Agent shall have received counterparts of this
Third Amendment executed by the Borrower;
(c) the representations and warranties set forth in Section 5 of this
Third Amendment shall be true and correct; and
(d) the Administrative Agent and the Lenders shall have received in
form and substance satisfactory to the Administrative Agent and the Lenders,
such other documents and certificates as the Administrative Agent shall
require.
4. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this Third Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", or words of like import
shall mean and be a reference to the Credit Agreement, as affected and amended
by this Third Amendment.
(b) The Credit Agreement, as amended by this Third Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
reasonable costs and expenses of the Administrative Agent in connection with
the preparation, reproduction, execution and delivery of this Third Amendment,
and the other instruments and documents to be delivered hereunder (including
the reasonable fees and out-of-pocket expenses of counsel for the
Administrative Agent with respect thereto and with respect to advising the
Administrative Agent as to its rights and responsibilities under the Credit
Agreement, as amended by this Third Amendment).
6. EXECUTION IN COUNTERPARTS. This Third Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which when taken together shall constitute but one
and the same instrument.
7. GOVERNING LAW; BINDING EFFECT. This Third Amendment shall be
governed by and construed in accordance with the laws of the State of Texas and
shall be binding upon the Borrower and each Lender and their respective
successors and assigns.
8. HEADINGS. Section headings in this Third Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Third Amendment for any other purpose.
9. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS THIRD
AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AS TO THE SUBJECT MATTER
-3-
<PAGE> 4
THEREIN AND HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
================================================================================
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
================================================================================
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment as of the date first above written.
BORROWER: DOSKOCIL MANUFACTURING COMPANY
By:
----------------------------
Name:
----------------------
Title:
---------------------
-5-
<PAGE> 6
ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A. as the
Administrative Agent
By:
---------------------------
Name:
---------------------
Title:
--------------------
LENDERS: BANK OF AMERICA, N.A., as a Lender,
Swing Line Bank and Issuing Bank
By:
---------------------------
Name:
---------------------
Title:
--------------------
-6-
<PAGE> 7
ARCHIMEDES FUNDING, LLC
By: ING Capital Advisors, LLC
As Collateral Manager
By:
---------------------------
Name:
---------------------
Title:
--------------------
-7-
<PAGE> 8
COMERICA BANK-TEXAS
By:
---------------------------
Name:
---------------------
Title:
--------------------
-8-
<PAGE> 9
HSBC BANK USA
(formerly known as Marine Midland
Bank)
By:
---------------------------
Name:
---------------------
Title:
--------------------
-9-
<PAGE> 10
IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION
By:
---------------------------
Name:
---------------------
Title:
--------------------
-10-
<PAGE> 11
CREDITANSTALT CORPORATE FINANCE, INC.
By:
---------------------------
Name:
---------------------
Title:
--------------------
By:
---------------------------
Name:
---------------------
Title:
--------------------
-11-
<PAGE> 12
FLEET CAPITAL CORPORATION
By:
---------------------------
Name:
---------------------
Title:
--------------------
-12-
<PAGE> 13
MORGAN STANLEY DEAN WITTER PRIME
INCOME TRUST
By:
---------------------------
Name:
---------------------
Title:
--------------------
-13-
<PAGE> 14
KZH SOLEIL LLC
By:
---------------------------
Name:
---------------------
Title:
--------------------
-14-
<PAGE> 15
ML CLO XII PILGRIM AMERICA (CAYMAN)
LTD.
By: Pilgrim Investments, Inc., as
its Investment Manager
By:
---------------------------
Name:
---------------------
Title:
--------------------
-15-
<PAGE> 16
ML CBO IV (CAYMAN) LTD.
By: Highland Capital Management,
L.P., as Collateral Manager
By:
---------------------------
Name:
---------------------
Title:
--------------------
-16-
<PAGE> 1
EXHIBIT 10.10.4
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Fourth Amendment"),
dated as of October 12, 1999, is entered into among DOSKOCIL MANUFACTURING
COMPANY, a Texas corporation (the "Borrower"), the lenders listed on the
signature pages hereof (collectively, the "Lenders"), and BANK OF AMERICA, N.A.
(formerly known as Bank of America National Trust and Savings Association,
successor by merger to Bank of America, N.A., formerly known as NationsBank,
N.A., successor by merger to NationsBank of Texas, N.A.), as the Administrative
Agent (in said capacity, the "Administrative Agent").
A. The Borrower, the Lenders and the Administrative Agent are parties
to that certain Credit Agreement, dated as of September 19, 1997, as amended by
that certain First Amendment to Credit Agreement, dated as of February 10, 1999,
that certain Second Amendment to Credit Agreement, dated as of May 14, 1999, and
that certain Third Amendment to Credit Agreement, dated as of August 12, 1999
(the "Credit Agreement"; the terms defined in the Credit Agreement and not
otherwise defined herein shall be used herein as defined in the Credit
Agreement).
B. The Borrower, the Lenders and the Administrative Agent desire to
amend the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Borrower, the
Lenders and the Administrative Agent covenant and agree as follows:
1. AMENDMENTS TO CREDIT AGREEMENT.
(a) The definition of "EBIT" set forth in Section 1.1 of the Credit
Agreement is hereby amended to read as follows:
"EBIT" means, for any period, determined in accordance with
GAAP on a consolidated basis for the Borrower and its Subsidiaries, the
sum of (a) Pretax Net Income (excluding therefrom, to the extent
included in determining Pretax Net Income, any items of extraordinary
gain, including net gains on the sale of assets other than asset sales
in the ordinary course of business, and adding thereto, to the extent
included in determining Pretax Net Income, any items of extraordinary
loss, including net losses on the sale of assets other than asset sales
in the ordinary course of business), plus (b) interest expense
(including interest expense pursuant to Capitalized Lease Obligations).
(b) The definition of "EBITDA" set forth in Section 1.1 of the Credit
Agreement is hereby amended to read as follows:
<PAGE> 2
"EBITDA" means, for any period, determined in accordance with
GAAP on a consolidated basis for the Borrower and its Subsidiaries, the
sum of (a) EBIT plus (b) depreciation, amortization and other non-cash
charges (to the extent included in determining EBIT), plus (c)
management fees in favor of Westar Capital L.L.C. and bonuses accrued
but not paid during such period, minus (d) management fees in favor of
Westar Capital L.L.C. and bonuses paid but not accrued during such
period.
(c) The definition of "Eligible Accounts" set forth in Section 1.1 of
the Credit Agreement is hereby amended by amending clause (g) thereof to read as
follows:
"(g) Such Account has not been due and payable for more than
90 days from the invoice date; provided, that no Accounts from an
account debtor shall constitute Eligible Accounts if a Responsible
Officer of the Borrower or any Subsidiary of the Borrower has knowledge
that 15% or more of the aggregate dollar amount of all Accounts
(excluding the Kmart Receivable) owed to the Borrower or any Subsidiary
of the Borrower by such account debtor have been due and payable for 90
days or more from their respective invoice dates unless the payments of
such Accounts are insured in a manner satisfactory to the
Administrative Agent;"
(d) The definition of "Fixed Charges" set forth in Section 1.1 of the
Credit Agreement is hereby amended to read as follows:
"Fixed Charges" means, for any date of calculation, calculated
for the Borrower and its Subsidiaries on a consolidated basis, the sum
of, without duplication, (a) scheduled principal payments in respect of
Indebtedness (after giving effect to the reduction of scheduled
principal payments as a result of the prepayment of Loans pursuant to
Section 3(b) of the Fourth Amendment or Section 8.3 hereof), plus (b)
cash interest expense paid by the Borrower or its Subsidiaries
(including interest expense pursuant to Capitalized Lease Obligations),
but not including any amortized closing fees or closing costs, plus (c)
lease expense pursuant to Operating Leases (excluding lease expense
pursuant to outside warehousing).
(e) The definition of "Fixed Charge Coverage Ratio" set forth in
Section 1.1 of the Credit Agreement is hereby amended to read as follows:
"Fixed Charge Coverage Ratio" means the ratio of EBITDAR
(excluding lease expense pursuant to outside warehousing and including
any capital contribution pursuant to Section 8.3 hereof) to Fixed
Charges, calculated for (a) December 31, 1999, from and including
October 1, 1999 to and including December 31, 1999, (b) March 31, 2000,
from and including October 1, 1999 to and including March 31, 2000, (c)
June 30, 2000, from and including October 1, 1999 to and including June
30, 2000, and each fiscal quarter thereafter, for the four consecutive
fiscal quarters immediately preceding the date of such calculation.
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<PAGE> 3
(f) The definition of "Fourth Amendment" is hereby added to Section 1.1
of the Credit Agreement in the proper alphabetical order to read as follows:
"Fourth Amendment" means the Fourth Amendment to Credit
Agreement dated as of October 13, 1999 among the Borrower, the
Administrative Agent and the Determining Lenders.
(g) The definition of "Interest Coverage Ratio" set forth in Section
1.1 of the Credit Agreement is hereby amended to read as follows:
"Interest Coverage Ratio" means the ratio of (a) EBITDA
(including any capital contribution pursuant to Section 8.3 hereof) to
(b) cash interest expense of Borrower and its Subsidiaries (including
cash interest expense pursuant to Capitalized Lease Obligations, but
excluding any amortized closing fees or closing costs), calculated for
the four consecutive fiscal quarters immediately preceding the date of
calculation; provided, however, notwithstanding the above, the Interest
Coverage Ratio as of December 31, 1999 shall be calculated for the one
fiscal quarter period ending on December 31, 1999, the Interest
Coverage Ratio as of March 31, 2000 shall be calculated for the two
fiscal quarter period ending on March 31, 2000 and the Interest
Coverage Ratio as of June 30, 2000 shall be calculated for the three
fiscal quarter period ending on June 30, 2000.
(h) The definition of "Leverage Ratio" set forth in Section 1.1 of the
Credit Agreement is hereby amended to read as follows:
"Leverage Ratio" means, for any date of calculation, the ratio
of Total Debt minus Indebtedness of the Borrower pursuant to the
Temporary Credit Facility as of the date of determination to EBITDA
calculated for the four consecutive fiscal quarters immediately
preceding the date of calculation; provided, however, notwithstanding
the above, for purposes of determination of the Leverage Ratio for (a)
the four consecutive fiscal quarters ending December 31, 1999, March
30, 2000 and June 30, 2000, the EBITDA component thereof shall be
deemed to be $31,000,000 and (b) for each fiscal quarter thereafter,
shall be the actual EBITDA for the four consecutive fiscal quarters
immediately preceding such date of calculation. For purposes of
calculation of the Leverage Ratio on and after September 30, 2000, with
respect to assets not owned at all times during the fiscal quarter or
quarters included within the calculation of EBITDA, there shall be (i)
included in EBITDA the pro forma EBITDA of any assets acquired during
any such fiscal quarter or quarters for the quarter or quarters
preceding the date of calculation and (ii) excluded from EBITDA the
EBITDA of any assets disposed of during any of such quarter or quarters
for the quarter or quarters preceding the date of calculation and
included within the calculation.
(i) The definition of "Maximum Borrowing Amount" is hereby added to
Section 1.1 of the Credit Agreement in the proper alphabetical order to read as
follows:
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<PAGE> 4
"Maximum Borrowing Amount" means, (a) through and including
September 30, 2000, $96,000,000, and (b) thereafter, the lesser of (i)
$96,000,000 and (ii) EBITDA for the four consecutive fiscal quarters
immediately preceding the date of calculation times 3.00.
(j) The definition of "Revolving Credit Commitment" set forth in
Section 1.1 of the Credit Agreement is hereby amended to read as follows:
"Revolving Credit Commitment" means $24,700,000, as reduced
pursuant to Section 2.6.
(k) The definition of "Senior Debt" is hereby added to Section 1.1 of
the Credit Agreement in the proper alphabetical order to read as follows:
"Senior Debt" means the remainder of (a) Total Debt minus (b)
Subordinated Debt, Capitalized Lease Obligations and Indebtedness of
the Borrower pursuant to the Temporary Credit Facility.
(l) The definition of "Senior Leverage Ratio" is hereby added to
Section 1.1 of the Credit Agreement in the proper alphabetical order to read as
follows:
"Senior Leverage Ratio" means, for any date of calculation,
the ratio of Senior Debt as of the date of determination to EBITDA
calculated for the four consecutive fiscal quarters immediately
preceding the date of calculation. For purposes of calculation of the
Senior Leverage Ratio, with respect to assets not owned at all times
during the fiscal quarter or quarters included within the calculation
of EBITDA, there shall be (i) included in EBITDA the pro forma EBITDA
of any assets acquired during any such fiscal quarter or quarters for
the quarter or quarters preceding the date of calculation and (ii)
excluded from EBITDA the EBITDA of any assets disposed of during any of
such quarter or quarters for the quarter or quarters preceding the date
of calculation and included within the calculation.
(m) The definition of "Specified Investor Preferred Stock" is hereby
added to Section 1.1 of the Credit Agreement in the proper alphabetical order to
read as follows:
"Specified Investor Preferred Stock" means the payment-in-kind
preferred stock of the Borrower sold to one or more of the Specified
Investors on or about October 13, 1999, in form and substance
satisfactory to the Administrative Agent.
(n) The definition of "Temporary Credit Facility" set forth in Section
1.1 of the Credit Agreement is hereby amended as follows:
"Temporary Credit Facility" means the $15,000,000 revolving
credit facility scheduled to mature on September 30, 2000, extended
pursuant to the terms of that certain Credit Agreement, dated as of
August 6, 1999, among the Borrower, Bank of America, N.A., as
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<PAGE> 5
administrative agent (the "Temporary Credit Facility Agent"), and the
lenders party thereto, as amended, modified or supplemented from time
to time, but in no event to be for a principal amount in excess of
$15,000,000.
(o) Section 2.1 of the Credit Agreement is hereby amended by adding a
clause (f) thereto to read as follows:
"(f) Notwithstanding any provision in any Loan Document to the
contrary, in no event shall the sum of the principal amount of all
Revolving Credit Advances, Facility A Term Loan Advances, Facility B
Term Loan Advances, Swing Line Advances and Reimbursement Obligations
outstanding on the last day of each fiscal quarter exceed the Maximum
Borrowing Amount."
(p) Section 2.5(b) of the Credit Agreement is hereby amended by adding
the following sentence to the end thereof:
"To the extent that at any time the aggregate principal amount
of Revolving Credit Advances, Facility A Term Loan Advances, Facility B
Term Loan Advances and Reimbursement Obligations exceeds the Maximum
Borrowing Amount as provided in Section 2.1(f) hereof, the Borrower
shall immediately repay Revolving Credit Advances in an amount equal to
such excess."
(q) Section 2.5(e) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Concurrently with receipt of Net Cash Proceeds from the sale
or disposition by the Borrower to any Person of any Equity after the
Agreement Date (other than (i) such sales or dispositions the aggregate
amount of Net Cash Proceeds of which during any fiscal year do not
exceed $1,000,000, (ii) sales or dispositions of Equity of the Borrower
to the Specified Investors and to other shareholders of the Borrower as
of the Agreement Date that are concurrently applied to consummate an
Acquisition permitted by this Agreement, (iii) the sale of the
Specified Investor Preferred Stock on or about October 13, 1999, (iv)
the sale of equity to the Specified Investors pursuant to Section 8.3
hereof, or (v) the sale of equity to the Specified Investors the Net
Cash Proceeds of which are used to repay the Temporary Credit
Facility), the Borrower shall prepay the Facility A Term Loan Advances
and the Facility B Term Loan Advances in an amount equal to the lesser
of (a) 50% of such Net Cash Proceeds or (b) an amount, if any, which
would result in the Leverage Ratio being less than 3.00 to 1 after such
prepayment. Except for the Net Cash Proceeds from the sale of the
Specified Investor Preferred Stock, each such prepayment of the
Facility A Term Loan Advances and the Facility B Term Loan Advances
shall be applied pro rata to all of the unpaid scheduled installment
payments of the Facility A Term Loan Advances and the Facility B Term
Loan Advances, in each case pro rata based upon the respective
principal amounts of such installment payments then unpaid. The Net
Cash Proceeds from the sale of the Specified
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<PAGE> 6
Investor Preferred Stock shall be applied pro rata based upon the
respective principal amounts of the Facility A Term Loan Advances and
the Facility B Term Loan Advances then unpaid. All Net Cash Proceeds
from the Specified Investor Preferred Stock applied to repay the
Facility A Term Loan Advances shall be applied in forward order of
maturity and all such Net Cash Proceeds applied to repay the Facility B
Term Loan Advances shall be so applied pro rata based upon the
respective principal amount of such installment payments of the
Facility B Term Loan Advances then unpaid."
(r) Section 7.8 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Section 7.8 Restricted Payments. The Borrower shall not, and
shall not permit any Subsidiary of the Borrower to, directly or
indirectly, pay or make any Restricted Payments except (a) Dividends
payable by a Subsidiary to the Borrower, (b) purchases, redemptions,
retirements or acquisitions of shares of capital stock of the Borrower
(other than the Specified Investor Preferred Stock), or options or
warrants to purchase shares of such capital stock, held by officers,
directors or employees of the Borrower or any of its Subsidiaries
pursuant to a compensation plan or arrangement in connection with the
death, disability or termination of employment of any such officer,
director or employee in all such cases taken as a whole for aggregate
cash payments not in excess of $2,500,000, (c) payments for the purpose
of and in an amount equal to the amount required to redeem or
repurchase Equity Interests of the Borrower from certain stockholders
of the Borrower as required pursuant to the Second Amended and Restated
Securityholders Agreement in aggregate amount not to exceed $250,000,
(d) the Dogloo Transaction Restricted Payments, (e) additional
redemptions of capital stock of the Borrower (other than the Specified
Investor Preferred Stock) not to exceed $2,400,000 in aggregate
principal amount, (f) advisory fees to the Specified Investors not to
exceed an aggregate amount of $600,000 for each fiscal year, so long as
the EBITDA for the four fiscal quarters prior to such payment exceeds
$32,000,000, and (g) redemptions of the Specified Investor Preferred
Stock (i) prior to September 15, 2007, if EBITDA for two consecutive
fiscal quarters (calculated for the four fiscal quarters ending as of
the last date of each such two fiscal quarters) exceeds $32,000,000, or
(ii) on or after September 15, 2007, at any time; provided, however,
the Borrower shall not pay or make any Restricted Payments permitted by
this Section 7.8 unless there shall exist no Default or Event of
Default prior to or after giving effect to any such proposed Restricted
Payment."
(s) Section 7.11 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Section 7.11 Maximum Leverage Ratio. At the end of each
fiscal quarter occurring during the term of this Agreement commencing
with the fiscal quarter ending on December 31, 1999, the Borrower shall
not permit the Leverage Ratio to be greater than 6.00 to 1."
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<PAGE> 7
(t) Section 7.12 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Section 7.12 Minimum Fixed Charge Coverage Ratio. The
Borrower shall not permit the Fixed Charge Coverage Ratio to be less
than 1.10 to 1 for any fiscal quarter during the term of this
Agreement, commencing with the fiscal quarter ending on December 31,
1999."
(u) Section 7.13 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Section 7.13 Interest Coverage Ratio. At the end of each
fiscal quarter commencing with the fiscal quarter ending on December
31, 1999, the Borrower shall not permit the Interest Coverage Ratio to
be less than 1.50 to 1."
(v) Section 7.19 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Section 7.19 Minimum EBITDA. The Borrower shall not permit
EBITDA to be less than (a) $8,465,000 for the fiscal quarter ending
December 31, 1999, (b) $14,984,000 for the two consecutive fiscal
quarters ending March 31, 2000, (c) $22,754,000 for the three
consecutive fiscal quarters ending June 30, 2000, (d) $30,423,000 for
the four consecutive fiscal quarters ending September 30, 2000, and (e)
$32,000,000 for any period of four fiscal quarters thereafter."
(w) Article 7 of the Credit Agreement is hereby amended by adding a new
Section 7.21 thereto to read as follows:
"Section 7.21 Senior Leverage Ratio. At the end of each fiscal
quarter during the term of this Agreement, commencing with the fiscal
quarter ending on September 30, 2000, the Borrower shall not permit the
Senior Leverage Ratio to be greater than 3.00 to 1."
(x) Section 8.1(c) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"(c) The Borrower or any Subsidiary shall default in the
performance or observance of any agreement or covenant contained in
Section 5.1(a) hereof or in Article 7 (other than Section 7.10) hereof,
unless such default is cured pursuant to Section 8.3 hereof."
(y) Article 8 of the Credit Agreement is hereby amended by adding a new
Section 8.3 thereto to read as follows:
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<PAGE> 8
"Section 8.3 Cure. Upon the earlier of (a) the receipt of
knowledge by any Responsible Officer of the Borrower of a default by
the Borrower or any Subsidiary of any covenant contained in Section
7.11, 7.12, 7.13 or 7.21 hereof, or (b) 45 days after the end of any
fiscal quarter following any such default, the Borrower shall give
notice to the Specified Investors of the occurrence of such default,
and within two Business Days of receiving notice of such default, one
or more of the Specified Investors may give the Administrative Agent
irrevocable written notice of their intent to cure such default by the
investment of additional capital in the Borrower (whether through the
contribution of cash, the purchase of equity or otherwise) in an amount
not less than the amount set forth in such notice. If one or more of
the Specified Investors send such notice to the Administrative Agent,
the Specified Investors shall have fifteen days from the receipt of
such notice by the Administrative Agent to provide the Borrower with
the amount of capital set forth in such notice, it being understood
that such capital investment shall be deemed to increase the (and shall
be considered as) (without duplication) EBIT, Pretax Net Income, EBITDA
and EBITDAR of the Borrower as of the last day of the previous fiscal
quarter by the amount thereof for all purposes of this Agreement and to
the extent any such proceeds are applied to repay any Advances, such
proceeds shall be deemed for all purposes to have reduced the Total
Debt and the Senior Debt, as applicable, or other Indebtedness that
constitutes Total Debt or Senior Debt, as the case may be, of the
Borrower as of the last day of the previous fiscal quarter; provided,
however, in no event shall the grace period provided by this Section
8.3 extend more than 45 days beyond the date of any fiscal quarter in
which compliance with any such covenant was not satisfied."
(z) Exhibit F to the Credit Agreement is hereby amended to be in the
form of Exhibit F to this Fourth Amendment.
2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
execution and delivery hereof, the Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendments contemplated by the
foregoing Section 1:
(a) the representations and warranties contained in the Credit
Agreement are true and correct on and as of the date hereof as if made on and as
of such date; except as otherwise expressly provided in Section 4.2 of the
Credit Agreement;
(b) no event has occurred and is continuing which constitutes a Default
or an Event of Default, it being understood that by execution of a counterpart
hereof, each Lender waives all Defaults or Events of Default arising under
Sections 7.11, 7.12, 7.13 and 7.19 as of September 30, 1999 or for any date or
period prior to such date and under Section 6.1(a) with respect to the monthly
statements for the months of July, 1999 and August, 1999;
(c) the Borrower has full power and authority to execute and deliver
this Fourth Amendment, and this Fourth Amendment and the Credit Agreement, as
amended hereby, constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in
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<PAGE> 9
accordance with their respective terms, except as enforceability may be limited
by applicable debtor relief laws and by general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law) and except
as rights to indemnity may be limited by federal or state securities laws; and
(d) no authorization, approval, consent, or other action by, notice to,
or filing with, any governmental authority or other Person (including the Board
of Directors of the Borrower), is required that has not been obtained for the
execution, delivery or performance by the Borrower of this Fourth Amendment.
3. CONDITIONS OF EFFECTIVENESS. This Fourth Amendment shall be
effective as of October 12, 1999, subject to the following:
(a) the Administrative Agent shall have received a counterpart of this
Fourth Amendment executed by Lenders comprising the Determining Lenders;
(b) the Administrative Agent shall have received counterparts of this
Fourth Amendment executed by the Borrower;
(c) the representations and warranties set forth in Section 5 of this
Fourth Amendment shall be true and correct, except as otherwise expressly
provided in Section 4.2 of the Credit Agreement;
(d) the Administrative Agent shall have received a structuring fee in
an amount agreed to by the Administrative Agent and the Borrower;
(e) the Specified Investor Preferred Stock shall have been issued and
$5,000,000 in Net Cash Proceeds thereof shall have been applied as permitted in
Section 2.5(e) of the Credit Agreement, as amended by this Fourth Amendment; and
(f) the Administrative Agent and the Determining Lenders shall have
received in form and substance satisfactory to the Administrative Agent and the
Determining Lenders, such other documents and certificates as the Administrative
Agent shall require.
4. AMENDMENT FEE. The Borrower covenants and agrees to pay an amendment
fee to the Lenders which execute and deliver this Fourth Amendment to the
Administrative Agent (or its counsel) not later than 5:00 p.m., Dallas time,
October 12, 1999 in an amount equal to the product of (a) 0.50% multiplied by
(b)(i) with respect to each Lender having a portion of the Revolving Credit
Commitment, an amount equal to such Lender's portion of the Revolving Credit
Commitment (after giving effect to this Amendment) and (ii) with respect to each
Lender which is owed Facility A Term Loan Advances or Facility B Term Loan
Advances, the aggregate principal amount of Facility A Term Loan Advances and
Facility B Term Loan Advances owed to such Lender (after giving effect to this
Amendment). Such amendment fee shall be paid in immediately available funds and
shall be
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<PAGE> 10
due and payable to each Lender eligible for payment pursuant to the preceding
sentence no later than one Business Day after the date which this Fourth
Amendment becomes effective. The Borrower agrees that the failure to pay the
amendment fee provided in this Section 4 shall be an Event of Default under
Section 8.1(b)(ii) of the Credit Agreement.
5. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this Fourth Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", or words of like import
shall mean and be a reference to the Credit Agreement, as affected and amended
by this Fourth Amendment.
(b) The Credit Agreement, as amended by this Fourth Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
6. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
reasonable costs and expenses of the Administrative Agent in connection with the
preparation, reproduction, execution and delivery of this Fourth Amendment, and
the other instruments and documents to be delivered hereunder (including the
reasonable fees and out-of-pocket expenses of counsel for the Administrative
Agent with respect thereto and with respect to advising the Administrative Agent
as to its rights and responsibilities under the Credit Agreement, as amended by
this Fourth Amendment).
7. EXECUTION IN COUNTERPARTS. This Fourth Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which when taken together shall constitute but one and
the same instrument.
8. GOVERNING LAW; BINDING EFFECT. This Fourth Amendment shall be
governed by and construed in accordance with the laws of the State of Texas and
shall be binding upon the Borrower and each Lender and their respective
successors and assigns.
9. HEADINGS. Section headings in this Fourth Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Fourth Amendment for any other purpose.
10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FOURTH
AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AS TO THE SUBJECT MATTER THEREIN AND HEREIN AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF
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<PAGE> 11
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN
THE PARTIES.
================================================================================
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
================================================================================
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment as of the date first above written.
BORROWER: DOSKOCIL MANUFACTURING COMPANY
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 13
ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A. as the
Administrative Agent
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
LENDERS: BANK OF AMERICA, N.A., as a Lender,
Swing Line Bank and Issuing Bank
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 14
ARCHIMEDES FUNDING, LLC
By: ING Capital Advisors, LLC
As Collateral Manager
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 15
COMERICA BANK-TEXAS
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 16
HSBC BANK USA
(formerly known as Marine Midland
Bank)
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 17
IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 18
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 19
FLEET CAPITAL CORPORATION
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 20
MORGAN STANLEY DEAN WITTER PRIME
INCOME TRUST
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
- 20 -
<PAGE> 21
KZH SOLEIL LLC
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 22
ML CLO XII PILGRIM AMERICA (CAYMAN)
LTD.
By: Pilgrim Investments, Inc., as
its Investment Manager
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 23
TRI-LINKS INVESTMENT TRUST
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
- 23 -
<PAGE> 1
EXHIBIT 10.32.1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment"),
dated as of October 12, 1999, is entered into among DOSKOCIL MANUFACTURING
COMPANY, a Texas corporation (the "Borrower"), the lenders listed on the
signature pages hereof (collectively, the "Lenders"), and BANK OF AMERICA, N.A.
(formerly known as Bank of America National Trust and Savings Association,
successor by merger to Bank of America, N.A., formerly known as NationsBank,
N.A., successor by merger to NationsBank of Texas, N.A.), as the Administrative
Agent (in said capacity, the "Administrative Agent").
A. The Borrower, the Lenders and the Administrative Agent are parties
to that certain Credit Agreement, dated as of August 12, 1999 (the "Credit
Agreement"; the terms defined in the Credit Agreement and not otherwise defined
herein shall be used herein as defined in the Credit Agreement).
B. The Borrower, the Lenders and the Administrative Agent desire to
amend the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Borrower, the
Lenders and the Administrative Agent covenant and agree as follows:
1. AMENDMENTS TO CREDIT AGREEMENT.
(a) The definition of "Revolving Commitment Maturity Date" in Section
1.1 of the Credit Agreement is hereby amended by deleting the date "February 1,
2000" therein and inserting the date "September 30, 2000" in lieu thereof.
(b) The definition of "Revolving Credit Commitment" in Section 1.1 of
the Credit Agreement is hereby amended to read as follows:
"Revolving Credit Commitment" means $15,000,000, as reduced
pursuant to Section 2.6.
(c) Section 2.4 of the Credit Agreement is hereby amended by deleting
"0.25%" on the third line thereof and inserting "0.17%" in lieu thereof.
(d) Section 2.6(b) of the Credit Agreement is hereby amended by
deleting the second sentence of Section 2.6(b).
<PAGE> 2
(e) Section 3.2 of the Credit Agreement is hereby amended deleting the
word "and" at the end of clause (h) thereof, and inserting a new clause (j) and
(k) at the end of said Section to read as follows:
"(j) If after giving effect to the making of such Advances the
aggregate principal amount of Advances outstanding under this Agreement
would exceed $10,000,000, Westar shall, prior to the making of any such
Advance that would cause the aggregate principal amount of Advances to
exceed $10,000,000, have deposited with the Administrative Agent
pursuant to the Pledge Agreement additional Collateral in form and
substance satisfactory to the Administrative Agent in an amount equal
to the sum of (i) $5,000,000 and (ii) the amount that the aggregate
principal amount of Advances (after giving effect to such requested
Advance) exceeds $10,000,000, it being understood that portions of such
Collateral shall be released to Westar upon the written request of
Westar in the event Advances are repaid to the extent provided in the
Pledge Agreement; and
(k) If the amount of Collateral pledged by Westar pursuant to
the Pledge Agreement is less than $5,000,000 and, after giving effect
to the making of such Advances the aggregate principal amount of
Advances outstanding under this Agreement would exceed the amount of
such Collateral, Westar shall, prior to the making of any such Advance,
have deposited with the Administrative Agent pursuant to the Pledge
Agreement additional Collateral in form and substance satisfactory to
the Administrative Agent so that the amount of the Collateral pledged
pursuant to the Pledge Agreement is not less than the lesser of (i) the
amount of all outstanding Advances (including such requested Advance)
and (ii) $5,000,000 (unless the aggregate amount of outstanding
Advances (including such requested Advance) is greater than
$10,000,000, in which case the Collateral pledged under the Pledge
Agreement shall be in an amount equal to $5,000,000 plus the amount by
which the outstanding Advances (including such requested Advance)
exceeds $10,000,000), it being understood that portions of such
Collateral may be released to Westar upon the written request of Westar
in the event Advances are repaid to the extent provided in the Pledge
Agreement."
(f) Article 6 of the Credit Agreement is hereby amended by deleting
references therein to "September 30, 1999" and substituting "December 31, 1999"
therefor.
(g) Section 7.1(c) of the Credit Agreement is hereby amended by adding
the following phrase to the end thereof to read as follows:
"provided, however, that a cure of such default pursuant to
Section 8.3 of the Existing Credit Agreement shall cure such default
under this Agreement;"
(h) Section 7.1 of the Credit Agreement is hereby amended by (i)
deleting the word "or" at the end of clause (i) thereof, (ii) deleting "." at
the end of clause (j) thereof and inserting "; or" in lieu thereof, and (iii)
inserting a new clause (k) at the end of said Section to read as follows:
- 2 -
<PAGE> 3
"(k) The aggregate principal amount of Advances shall not be
zero for a period of at least 15 consecutive days during the term of
this Agreement."
2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
execution and delivery hereof, the Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendments contemplated by the
foregoing Section 1:
(a) the representations and warranties contained in the Credit
Agreement are true and correct on and as of the date hereof as if made on and as
of such date, except as otherwise expressly provided in said Section 4.2 of the
Credit Agreement;
(b) no event has occurred and is continuing which constitutes a Default
or an Event of Default;
(c) the Borrower has full power and authority to execute and deliver
this First Amendment and the New Revolving Credit Note (as defined in Section
3(b) below), and this First Amendment, the New Revolving Credit Note, and the
Credit Agreement, as amended hereby, constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms, except as enforceability may be limited by applicable
debtor relief laws and by general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law) and except as rights
to indemnity may be limited by federal or state securities laws; and
(d) no authorization, approval, consent, or other action by, notice to,
or filing with, any governmental authority or other Person (including the Board
of Directors of the Borrower), is required that has not been obtained for the
execution, delivery or performance by the Borrower of this First Amendment and
the Revolving Credit Note.
3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be effective
as of October 12, 1999, subject to the following:
(a) the Administrative Agent shall have received a counterpart of this
First Amendment executed by the Administrative Agent and each Lender;
(b) the Administrative Agent shall have received counterparts of this
First Amendment executed by the Borrower and a new Revolving Credit Note
executed by the Borrower in substantially the form of Exhibit A annexed to the
Credit Agreement except that the principal amount of such Revolving Credit Note
shall be $15,000,000 (the "New Revolving Credit Note");
(c) the representations and warranties set forth in Section 2 of this
First Amendment shall be true and correct;
- 3 -
<PAGE> 4
(d) the Administrative Agent shall have received in form and substance
satisfactory to the Administrative Agent, an Amendment to Pledge Agreement and
an Amendment to the Westar Guaranty executed by Westar;
(e) the Administrative Agent and the Lenders shall have received in
form and substance satisfactory to the Administrative Agent and the Lenders,
such other documents and certificates as the Administrative Agent shall require;
and
(f) the Lender shall have returned to the Borrower the Revolving Credit
Note it received in connection with the closing of the Credit Agreement in
August, 1999 for cancellation.
4. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this First Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", or words of like import
shall mean and be a reference to the Credit Agreement, as affected and amended
by this First Amendment.
(b) The Credit Agreement, as amended by this First Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
5. GUARANTOR ACKNOWLEDGMENT. By signing below, Westar (a) acknowledges,
consents and agrees to the execution, delivery and performance by the Borrower
of this First Amendment, and (b) acknowledges and agrees that its obligations in
respect of its Continuing Guaranty or any other Loan Documents executed by it
are (i) not released, diminished, waived, modified, impaired or affected in any
manner by this First Amendment, (ii) hereby ratified and confirmed and (iii) not
subject to any claims, offsets, defenses or counterclaims.
6. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
reasonable costs and expenses of the Administrative Agent in connection with the
preparation, reproduction, execution and delivery of this First Amendment, and
the other instruments and documents to be delivered hereunder (including the
reasonable fees and out-of-pocket expenses of counsel for the Administrative
Agent with respect thereto and with respect to advising the Administrative Agent
as to its rights and responsibilities under the Credit Agreement, as amended by
this First Amendment).
7. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which when taken together shall constitute but one and
the same instrument.
8. GOVERNING LAW; BINDING EFFECT. This First Amendment shall be
governed by and construed in accordance with the laws of the State of Texas and
shall be binding upon the Borrower and each Lender and their respective
successors and assigns.
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<PAGE> 5
9. HEADINGS. Section headings in this First Amendment are included
herein for convenience of reference only and shall not constitute a part of this
First Amendment for any other purpose.
10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FIRST
AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AS TO THE SUBJECT MATTER THEREIN AND HEREIN AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS BETWEEN THE PARTIES.
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- 5 -
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the date first above written.
BORROWER: DOSKOCIL MANUFACTURING COMPANY
By:
-----------------------------
Name:
------------------------
Title:
-----------------------
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<PAGE> 7
ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A. as the Administrative
Agent
By:
-----------------------------
Name:
------------------------
Title:
-----------------------
LENDERS: BANK OF AMERICA, N.A., as a Lender
By:
-----------------------------
Name:
------------------------
Title:
-----------------------
- 7 -
<PAGE> 8
GUARANTOR ACKNOWLEDGMENT:
WESTAR CAPITAL II, LLC
By: Westar Capital Associates II, LLC, its manager
By:
-----------------------------
Name:
------------------------
Title:
-----------------------
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<PAGE> 1
EXHIBIT 10.33
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT is made as of August 12, 1999, by WESTAR CAPITAL
II, LLC, a Delaware limited liability company (the "Pledgor"), in favor of Bank
of America, N.A., a national banking association, as Administrative Lender (the
"Administrative Lender") for Bank of America, N.A., and each other lender a
party to the Credit Agreement described below (singly, a "Secured Party" and
collectively, the "Secured Parties").
A. AGREEMENT
1. Pledge. Upon the terms hereof, for value received, the Pledgor
hereby irrevocably and unconditionally pledges, assigns, hypothecates and
transfers to the Administrative Lender, for the ratable benefit of the
Administrative Lender and Secured Parties, a first and prior pledge and
security interest in that certain certificate of deposit in the original amount
of $5,000,000 issued by Bank of America, N.A. to the Pledgor, dated on or about
August 13, 1999, and all renewals, extensions, amendments, modifications and
replacements thereof and thereto, including any additional certificates of
deposit pledged and delivered by the Pledgor pursuant to Section F.8. hereof
(collectively, the "Certificate of Deposit"), together with all interest, cash,
proceeds, increases, profits, instruments, distributions and other property
from time to time distributed in respect thereof (collectively, "Collateral").
Unless otherwise defined in this agreement, terms used herein shall have the
meanings set forth in the Credit Agreement, dated as of August 12, 1999, among
Doskocil Manufacturing Company, Inc., a Texas corporation (the "Borrower"), the
Administrative Lender, and the Secured Parties (as amended, modified,
supplemented, renewed or extended from time to time, "Credit Agreement").
B. OBLIGATION
1. Description of Obligation. All debt, obligations, liabilities and
agreements of Westar under the Westar Guaranty (collectively, "Guaranty
Obligation") are secured by this agreement.
C. COVENANTS, REPRESENTATIONS AND WARRANTIES
1. Representations and Warranties. The Pledgor represents and warrants
that (a) it has full power, authority and legal right to execute, deliver and
perform this agreement; (b) pledge, assignment and delivery of the Collateral
create a valid, so long as the Administrative Lender retains physical
possession of the Collateral, first and prior perfected security interest in
the Collateral, and no other security agreement covering the Collateral, or any
part thereof, has been made, and no pledge or security interest, other than the
one herein created, has attached or been perfected in the Collateral or in any
part thereof, provided that additional action may be required with respect to
the perfection of proceeds of the Collateral; and (c) Pledgor has no knowledge
of any dispute, right of setoff, counterclaim or defense exists with respect to
any part of the Collateral. The delivery at any time by the Pledgor to the
Administrative Lender of Collateral shall constitute a representation and
<PAGE> 2
warranty by the Pledgor under this agreement that, with respect to such
Collateral, and each item thereof, the Pledgor is the sole legal and beneficial
owner of, with good title to, the Collateral; and the matters warranted in this
paragraph are true and correct.
2. Covenants.
a. Affirmative Covenants. The Pledgor covenants and agrees
(i) promptly to deliver to the Administrative Lender all instruments,
certificates, documents or agreements evidencing any of the
Collateral; (ii) from time to time promptly to execute and deliver to
the Administrative Lender all such other assignments, certificates,
supplemental writings and financing statements, and do all other acts
or things, as the Administrative Lender or any Secured Party may
reasonably request in order more fully to evidence and perfect the
security interest and pledge herein created or to effect the purposes
of this agreement; (iii) promptly to furnish the Administrative Lender
with any information or writings which the Administrative Lender or
any Secured Party may reasonably request concerning the Pledgor or the
Collateral; (iv) promptly to notify the Administrative Lender of any
claim, action or proceeding materially adversely affecting title to
the Collateral, or any part thereof, or the security interest therein,
and, at the request of the Administrative Lender, appear and defend,
at the Pledgor's expense, any such action or proceeding; and (v)
promptly to pay to the Administrative Lender the amount of all
reasonable costs and attorneys' fees incurred by the Administrative
Lender and each Secured Party hereunder or in connection with the
enforcement hereof.
b. Negative Covenants. The Pledgor covenants and agrees that
the Pledgor will not (i) sell, assign or transfer any of the Pledgor's
rights in the Collateral; or (ii) create any other security interest
or pledge in, mortgage or otherwise encumber the Collateral or any
part thereof.
D. RIGHTS OF SECURED PARTIES
1. Rights to Dividends, Distributions, and Payments. The
Administrative Lender shall have the authority, following an Event of Default
and upon written notice to the Pledgor to do so, to have the Collateral
registered either in the Administrative Lender's name or in the name of a
nominee. Until an Event of Default shall have occurred, the Pledgor shall be
entitled to receive all cash distributions paid in respect of the Collateral.
After the occurrence of an Event of Default, the Administrative Lender shall be
entitled to all cash distributions. After an Event of Default, all sums of
money and property so paid or distributed in respect of the Collateral which
are received by the Pledgor shall, until paid or delivered to the
Administrative Lender, be held by the Pledgor in trust as additional Collateral
for the Guaranty Obligation.
2. Preservation of Collateral. Neither the Administrative Lender nor
any Secured Party shall have any duty to fix or preserve rights against prior
parties to the Collateral, nor be liable for any delay in the collection of, or
failure to use diligence to collect on, the Guaranty Obligation or any amount
payable in respect of the Collateral.
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<PAGE> 3
3. POWER OF ATTORNEY. THE PLEDGOR HEREBY IRREVOCABLY APPOINTS THE
ADMINISTRATIVE LENDER PLEDGOR'S ATTORNEY-IN-FACT TO PERFORM ALL OBLIGATIONS OF
PLEDGOR UNDER THIS AGREEMENT AND TO EXERCISE ALL OF THE ADMINISTRATIVE LENDER'S
RIGHTS HEREUNDER. THE POWER OF ATTORNEY HEREIN GRANTED IS COUPLED WITH AN
INTEREST AND IS IRREVOCABLE PRIOR TO FINAL PAYMENT IN FULL OF THE OBLIGATIONS.
E. DEFAULT
1. Rights and Remedies. On and after the date which is 90 days after
demand for payment under the Westar Guaranty is made by the Administrative
Lender (the "Collateral Realization Date"), in addition to any and all other
rights and remedies which the Administrative Lender or any Secured Party may
then have hereunder, under any other Loan Documents, under Applicable Law or
otherwise, the Administrative Lender at its option may, subject to any
limitation or restriction imposed by any applicable bankruptcy, insolvency or
other law, including any law relating to the relief of debtors, (a) take
control of funds generated by the Collateral and any other proceeds and
exercise all other rights which an owner of such Collateral may exercise; (b)
reduce its claim to judgment, foreclose or otherwise enforce its security
interest in all or any part of the Collateral by any available judicial
procedure; (c) after notification, if any, provided for in this agreement or
any other Loan Documents, sell or otherwise dispose of, at the office of the
Administrative Lender, all or any part of the Collateral, and any such sale or
other disposition shall be in accordance with Applicable Law, by public or
private proceedings, and by way of one or more contracts (it being agreed that
the sale of any part of the Collateral shall not exhaust the Administrative
Lender's power of sale, but sales may be made from time to time until all of
the Collateral has been sold or until the Guaranty Obligation has been paid in
full), and at any such sale it shall not be necessary to exhibit the
Collateral; (d) at its discretion, retain the Collateral in satisfaction of the
Guaranty Obligation whenever the circumstances are such that the Administrative
Lender is entitled to do so under Applicable Law; (e) apply by appropriate
judicial proceedings for appointment of a receiver for the Collateral, or any
part hereof, and the Pledgor hereby consents to any appointment; (f) buy the
Collateral at any public sale; and (g) buy the Collateral at any private sale,
subject to any restrictions imposed by Applicable Law. Any Secured Party may
buy the Collateral at any public sale and buy the Collateral at any private
sale, subject to the restrictions imposed by Applicable Law. Pledgor agrees
that, if notice is required to be given by Applicable Law, (a) 10 days' advance
written notice shall constitute reasonable notice and (b) such notice may be
given prior to the Collateral Realization Date. The Administrative Lender shall
apply the proceeds of any collection, sale, disposition or other realization
upon any Collateral as follows:
First, to the payment of the reasonable costs and expenses of
such collection, sale, disposition, or other realization, including
reasonable out-of-pocket costs and expenses of the Administrative
Lender and the reasonable fees and expenses of its agents and counsel;
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<PAGE> 4
Next, to the payment of the Guaranty Obligation, equally and
ratably to each Secured Party in accordance with the respective
amounts thereof due and owing to each Secured Party; and
Finally, to the payment to the Pledgor, or its successors or
assigns, or as a court of competent jurisdiction may direct, of any
surplus then remaining.
If the proceeds of collection, sale, disposition, or other realization are
insufficient to cover the costs and expenses of such realization and the
payment in full of the Guaranty Obligation, the Pledgor shall remain liable for
any deficiency.
2. Notice. Notification of the time and place of any public sale of
the Collateral, or reasonable notification of the time after which any private
sale or other intended disposition of the Collateral is to be made, shall be
sent to the Pledgor and to any other Person entitled under Applicable Law to
notice.
F. GENERAL
1. Administrative Lender's Duties. The Secured Parties hereby appoint
Bank of America, N.A. as Administrative Lender to act as their agent as
provided herein. In the event the Administrative Lender is replaced pursuant to
Section 9.1(b) of the Credit Agreement, the successor Administrative Lender
appointed in accordance with Section 9.1(b) of the Credit Agreement shall be
the Administrative Lender hereunder. The powers conferred on the Administrative
Lender hereunder are solely to protect the Secured Parties' interest in the
Collateral and shall not impose any duty upon it to exercise any such powers.
Except for the safe custody of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, the Administrative
Lender shall have no duty as to any Collateral, as to ascertaining or taking
action with respect to calls, conversions, exchanges, maturities, tenders, or
other matters relative to any Collateral, whether or not the Administrative
Lender or any Secured Party has or is deemed to have knowledge of such matters,
or as to the taking of any necessary steps to preserve rights against prior
parties or any other rights pertaining to any reasonable care in the custody
and preservation of any Collateral in its possession if such Collateral is
accorded treatment substantially equal to that which the Administrative Lender
accords its own property. Except as set forth herein the Administrative Lender
shall not have any duty or liability to protect or preserve any Collateral or
to preserve rights pertaining thereto. Nothing contained in this agreement
shall be construed as requiring or obligating the Administrative Lender, and
the Administrative Lender shall not be required or obligated, (a) to present or
file any claim or notice or take any action, with respect to any Collateral or
in connection therewith or (b) to notify the Pledgor of any decline in the
value of any Collateral.
2. Cumulative Rights. All rights and remedies of the Administrative
Lender and the Secured Parties hereunder are cumulative of each other and of
every other right or remedy which the Administrative Lender or the Secured
Parties may otherwise have at law or in equity or under any other contract or
other writing for the enforcement of the security interest herein or the
collection of
- 4 -
<PAGE> 5
the Guaranty Obligation, and the exercise of one or more rights or remedies
shall not prejudice or impair the concurrent or subsequent exercise of other
rights or remedies.
3. Waiver. Should any part of the Obligations be payable in
installments, the acceptance by any Secured Party at any time and from time to
time of partial payment of the aggregate amount of all installments then
matured shall not be deemed as a waiver of any Event of Default then existing.
No waiver by the Administrative Lender or any Secured Party of any Event of
Default shall be deemed to be a waiver of any other subsequent Event of
Default, nor shall any such waiver by the Administrative Lender or any Secured
Party be deemed to be a continuing waiver. No delay or omission by the
Administrative Lender or any Secured Party in exercising any right or power
hereunder, or under any other Loan Documents, shall impair any such right or
power or be construed as a waiver thereof or an acquiescence therein, nor shall
any single or partial exercise of any such right or power preclude other or
further exercise thereof, or the exercise of any other right or power of the
Administrative Lender or any Secured Party hereunder or under such other
writings.
4. Interest; Limitation of Law. No provision herein or in any other
Loan Documents shall require the payment or permit the collection of interest
in excess of the maximum permitted by Applicable Law.
5. Parties Bound. This agreement shall be binding on the Pledgor and
its successors, assigns, administrators and legal representatives, and shall
inure to the benefit of the Administrative Lender and the Secured Parties, and
their successors, permitted assigns and legal representatives; provided,
however, that the Pledgor may not assign its rights or obligations hereunder
without the prior written consent of the Administrative Lender. The rights,
powers and interests held by the Administrative Lender hereunder may be
transferred and assigned by the Administrative Lender, in whole or in part, at
such time and upon such terms as permitted by the Credit Agreement.
6. Notice; Waivers by Pledgor. Notice shall be deemed reasonable if
sent by telex or telegraph, or certified mail return receipt requested, postage
prepaid, or by a reputable commercial overnight delivery service, at least five
days before the related action (or if Applicable Law specifies a longer period,
such longer period) to the address of the Pledgor given below. The Pledgor
waives notices of the creation, advance, increase, existence, extension or
renewal of, and of any indulgence with respect to, the Obligations; waives
presentment, demand, notice of dishonor and protest; waives notice of the
amount of the Obligations outstanding at any time, notice of any change in
financial condition of any Person liable for the Obligations or any part
thereof, notice of any Event of Default and all other notices respecting the
Obligations; waives all rights of redemption, appraisal, or valuation; and
agrees that maturity of the Obligations and any part thereof may be
accelerated, increased, extended or renewed one or more times by the Secured
Parties in their discretion, without notice to the Pledgor.
7. Modifications. No provision hereof shall be modified or limited
except by a written agreement expressly referring hereto and to the provisions
so modified or limited and signed by the Administrative Lender, nor by course
of conduct, usage of trade or mercantile law.
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<PAGE> 6
8. Additional Certificate of Deposit. The Pledgor acknowledges that
the Commitment will be automatically adjusted on October 15, 1999 to the
greater of (a) the aggregate principal amount of Revolving Credit Advances
outstanding on such date (not to exceed the amount of the Revolving Credit
Commitment in effect immediately prior to such adjustment) and (b) the value of
all Collateral pledged hereunder. Accordingly, the Pledgor, on or before
October 15, 1999, shall have the option to pledge an additional Certificate of
Deposit hereunder in such amount elected by the Pledgor, in which case, the
Pledgor shall cause such Certificate of Deposit, together with related bond
power, to be delivered to the Administrative Agent.
9. Rebate of Interest. Upon payment in full of the Obligations
pursuant to the terms of the Credit Agreement, the Administrative Agent shall
promptly pay to the Pledgor an amount equal to the remainder of (a) the product
of (i) the Applicable LIBOR Rate Margin multiplied by (ii) the aggregate
principal amount of LIBOR Advances outstanding on each day (but not in excess
of the value of all Collateral pledged hereunder on such day) minus (b) the
product of (i) 1.00% multiplied by the aggregate principal amount of LIBOR
Advances outstanding on such day (but not in excess of the value of all
Collateral pledged hereunder on such day).
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS) AND THE UNITED STATES OF AMERICA. WITHOUT EXCLUDING ANY
OTHER JURISDICTION, THE PLEDGOR AGREES THAT THE STATE AND FEDERAL COURTS OF
TEXAS LOCATED IN DALLAS, TEXAS SHALL HAVE JURISDICTION OVER PROCEEDINGS IN
CONNECTION HEREWITH.
11. WAIVER OF JURY TRIAL. THE PLEDGOR AND THE ADMINISTRATIVE LENDER
HEREBY KNOWINGLY, VOLUNTARILY, IRREVOCABLY AND INTENTIONALLY WAIVE, TO THE
MAXIMUM EXTENT PERMITTED BY LAW, ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR CLAIM ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE
LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. THIS PROVISION IS A
MATERIAL INDUCEMENT TO EACH LENDER ENTERING INTO THE CREDIT AGREEMENT.
12. ENTIRE AGREEMENT. THIS AGREEMENT, TOGETHER WITH THE OTHER LOAN
DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.
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<PAGE> 7
IN WITNESS WHEREOF, the Pledgor has executed this Pledge Agreement as
of August ___, 1999
WESTAR CAPITAL II, LLC
By: Westar Capital Associates II, LLC, its
manager
Address for Pledgor:
949 South Coast Drive, Suite 650
Costa Mesa, California 92626
By:
--------------------------------------
Name:
---------------------------------
Title:
--------------------------------
- 7 -
<PAGE> 1
EXHIBIBI 10.34
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITY AGREEMENT
Between
DOSKOCIL MANUFACTURING COMPANY, INC.
as Debtor
and
BANK OF AMERICA, N.A.
as Administrative Agent
August 12, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
I. GRANT
<S> <C> <C>
1.1. Assignment and Grant of Security........................................1
1.2. Description of Obligations..............................................4
1.3. Debtor Remains Liable...................................................5
1.4. Delivery of Security and Instrument Collateral..........................5
II. REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties..........................................6
III. COVENANTS
3.1. Further Assurances......................................................7
3.2. Equipment, Fixtures and Inventory.......................................8
3.3. Insurance...............................................................9
3.4. Place of Perfection; Records; Collection of Receivables,
Chattel Paper and Instruments..........................................10
3.5. Transfers and Other Liens..............................................11
3.6. Rights to Dividends and Distributions..................................11
3.7. Right of Administrative Agent to Notify Issuers........................12
3.8. Administrative Agent Appointed Attorney-in-Fact........................12
IV. RIGHTS AND POWERS OF ADMINISTRATIVE AGENT
4.1. Administrative Agent May Perform.......................................13
4.2. Administrative Agent's Duties..........................................13
4.3. Remedies...............................................................13
4.4. Further Approvals Required.............................................16
4.5. Indemnity and Expenses.................................................16
V. MISCELLANEOUS
5.1. Cumulative Rights......................................................17
5.2. Modifications; Amendments; Etc.........................................17
5.3. Continuing Security Interest...........................................17
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
5.4. GOVERNING LAW; TERMS...............................................17
5.5. WAIVER OF JURY TRIAL...............................................18
5.6. Administrative Agent's Right to Use Agents.........................18
5.7. No Interference, Compensation or Expense...........................18
5.8. Waivers of Rights Inhibiting Enforcement...........................18
5.9. Notices and Deliveries.............................................18
(a) Manner of Delivery........................................18
(b) Addresses.................................................19
(c) Effectiveness.............................................20
5.10. Successors and Assigns.............................................20
5.11. Loan Document......................................................20
5.12. Consent to Jurisdiction; Waiver of Immunities......................20
5.13. Severability.......................................................20
5.14. Obligations Not Affected...........................................21
5.15. Counterparts.......................................................21
5.16. Junior Lien........................................................21
5.17. ENTIRE AGREEMENT...................................................21
</TABLE>
- ii -
<PAGE> 4
SCHEDULES:
Schedule 1 - Equipment, and Inventory Locations
Schedule 2 - Trade Names
Schedule 3 - Restricted Accounts
Schedule 4 - Rolling Stock
- iii -
<PAGE> 5
SECURITY AGREEMENT
SECURITY AGREEMENT (this "Agreement"), dated as of August 12, 1999,
made by Doskocil Manufacturing Company, Inc., a Texas corporation ("Debtor"), in
favor of Bank of America, N.A., a national banking association, as
Administrative Agent ("Administrative Agent") for itself and each other lender a
party to the Credit Agreement described below (singly, a "Secured Party", and
collectively, the "Secured Parties").
BACKGROUND:
(1) Debtor, Administrative Agent and Secured Parties have entered or
will enter into the Credit Agreement dated as of August 12, 1999 (as the same
may hereafter be supplemented, amended, modified and restated from time to time,
being the "Credit Agreement"; the terms defined therein and not otherwise
defined herein being used herein as therein defined).
(2) It is the intention of the parties hereto that this Agreement
create a security interest securing the payment of the obligations set forth in
Section 1.2 hereof, subject only to Permitted Collateral Liens (which includes
the Liens designated in Section 1.2 hereof as senior and superior to the Lien
granted herein) as provided in the Loan Documents.
(3) It is a condition precedent to the obligation of the Secured
Parties to make the Advances under the Credit Agreement that Debtor shall have
executed and delivered this Agreement.
AGREEMENT.
NOW, THEREFORE, in consideration of the premises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, and in order to induce Secured Parties to make the
Advances under the Credit Agreement, Debtor hereby agrees with Administrative
Agent for its benefit and the ratable benefit of Secured Parties, as hereinafter
set forth.
I. GRANT
1.1. Assignment and Grant of Security. Debtor hereby assigns, pledges,
hypothecates and transfers to Administrative Agent, for its benefit and the
ratable benefit of Secured Parties, and hereby grants to Administrative Agent,
for its benefit and the ratable benefit of Secured Parties, a security interest
in, the entire right, title and interest of Debtor, in and to the following
assets of Debtor, whether now owned or hereafter acquired ("Collateral"):
<PAGE> 6
(a) all writings which evidence both a monetary obligation and a
security interest in or a lease of specific goods ("Chattel Paper");
(b) all documents, warehouse receipts, bills of lading, including,
without limitation, documents of title (as defined in the UCC) or other receipts
covering, evidencing or representing collateral ("Documents");
(c) all equipment (as defined in the UCC), and (whether or not included
in such definition) all vehicles, tractors, trailers, rolling stock, machinery,
chattels, tools, parts, furniture, furnishings, and supplies, of every nature,
wherever located, all additions, accessories and improvements thereto and
substitutions therefor and all accessories, parts and equipment which may be
attached to or which are necessary for the operation and use of such personal
property, whether or not the same shall be deemed to be affixed to real
property, together with all accessions thereto, and all rights under or arising
out of present or future contracts relating to the foregoing, excluding,
however, any such Equipment or other property which is financed with
Indebtedness permitted to be incurred pursuant to Sections 7.1(c) and 7.1(h) of
the Existing Credit Agreement ("Equipment");
(d) all equipment, fixtures and articles of personal property now or
hereafter attached to or used in or about any building or buildings now erected
or hereafter to be erected on any real property now or hereafter owned or leased
by Debtor (the "Property"), which are necessary to the complete and comfortable
use and occupancy of such building or buildings for the purposes for which they
were or are to be erected; all materials to be delivered to the Property and
used or to be used in connection with the construction of any building to be
constructed on the Property, including, but not limited to, all masonry, siding,
roof shingles, flooring, doors, windows, tile, shutters, stoves, ovens, awnings,
screens, cabinets, shades, blinds, carpets, draperies, furniture, furnishings,
plumbing, heating, air conditioning, lighting, ventilating, refrigerating,
cooking, laundry and incinerating equipment and all fixtures and appurtenances
thereto, and such other goods and chattels and personal property as are ever
used or furnished in operating such buildings or the activities conducted
therein, and all building materials and equipment now or hereafter delivered to
the Property and intended to be installed thereon ("Fixtures");
(e) all general intangibles (as defined in the UCC), and (whether or
not included in such definition) all contract rights; all trade secrets,
inventions, processes, production methods, proprietary information and know-how;
and all licenses or other agreements granted to Debtor with respect to any of
the foregoing (excluding, however, any such licenses or agreements which
prohibit the assignment thereof or the granting of a security interest therein
or are otherwise terminated or rendered void as a result thereof); all
information, advertising lists, customer lists, identification of suppliers,
data, plans, blueprints, specifications, designs, drawings, recorded knowledge,
surveys, engineering reports, test reports, manuals, materials standards,
processing standards, performance standards, telephone numbers and telephone
listings, catalogs, books, records, computer and automatic machinery software
and programs, and the like pertaining to operations by or the business of
Debtor; all field accounting information and all media in which or on which any
of the information or knowledge or data or records may be recorded or stored and
all computer programs used for the
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compilation or printout of such information, knowledge, records or data; all
licenses, consents, permits, variances, certifications and approvals of all
Tribunals now or hereafter held by Debtor pertaining to operations or business
now or hereafter conducted; all rights to receive return of deposits and trust
payments; all rights to payment under letters of credit and similar agreements;
and all causes of action, rights, claims and warranties now or hereafter owned
or acquired by Debtor ("General Intangibles");
(f) all instruments and letters of credit (each as defined in the UCC,
and (whether or not included in such definitions) all promissory notes, drafts,
bills of exchange and trade acceptances ("Instruments");
(g) all inventory in all of its forms, wherever located, now or
hereafter existing, including, but not limited to, (i) all raw materials and
work in process therefor, finished goods thereof, and materials used or consumed
in the manufacture or production thereof, (ii) goods in which Debtor has an
interest in mass or a joint or other interest or right of any kind (including,
without limitation, goods in which Debtor has an interest or right as consignee
but only to the extent of Debtor's interest therein), and (iii) goods which are
returned to or repossessed by Debtor, and all accessions thereto and products
thereof and documents therefor (any and all such inventory, accessions, products
and documents being the "Inventory");
(h) all accounts, contract rights, chattel paper, documents,
instruments, deposit accounts, general intangibles, tax refunds (including,
without limitation, all federal and state income tax refunds and benefits of net
operating loss carry forwards) and other obligations of any kind owing to
Debtor, now or hereafter existing, whether or not arising out of or in
connection with the sale or lease of goods or the rendering of services, and all
rights now or hereafter existing in and to all security agreements, leases, and
other contracts securing or otherwise relating to any such accounts, contract
rights, chattel paper, documents, instruments, deposit accounts, general
intangibles or obligations (any and all such accounts, contract rights, chattel
paper, documents, instruments, deposit accounts, general intangibles and
obligations being the "Receivables");
(i) all agreements with each manufacturer, vendor, sales agent, sales
representative and each other Person pursuant to which Debtor receives,
maintains, sells, leases or otherwise disposes of Inventory, including all
agreements permitting the use of each such Person's name, logo, trademarks,
tradenames and advertising ("Vendor Agreements");
(j) all right, title and interest of Debtor in, to and under each
contract and other agreement relating to the lease, sale or other disposition of
Collateral;
(k) all rights, claims and benefits of Debtor against any Person
arising out of, relating to or in connection with Collateral purchased by
Debtor, including, without limitation, any such rights, claims or benefits
against any Person storing or transporting such Collateral;
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<PAGE> 8
(l) the balance of every deposit account of Debtor under control of
Administrative Agent and each other Secured Party and each of their respective
Affiliates and any other claim of Debtor against Administrative Agent and each
other Secured Party, now or hereafter existing, liquidated or unliquidated, and
all money, instruments, securities, documents, chattel paper, credits, claims,
demands, income, and any other property, rights and interests of Debtor which at
any time shall come into the possession or custody or under the control of
Administrative Agent or any Secured Party or any of its agents, affiliates or
correspondents, for any purpose, and the proceeds of any thereof (Administrative
Agent and each other Secured Party shall be deemed to have possession of any of
the Collateral in transit to or set apart for it or any of its agents,
affiliates or correspondents).
(m) 100% of the issued and outstanding capital stock of each Domestic
Subsidiary of Debtor, together with all Dividends, cash, proceeds, profits,
instruments, distributions and other property from time to time distributed in
respect thereof, and any subscription rights or warrants to acquire any interest
in such Subsidiary;
(n) 65% of the issued and outstanding capital stock of each Foreign
Subsidiary of Debtor, together with all Dividends, cash, proceeds, profits,
instruments, distributions and other property from time to time distributed in
respect thereof and any subscription rights or warrants to acquire any interest
in such Subsidiary;
(o) all insurance policies and bonds and claims and payments under any
Collateral;
(p) all property similar to the above hereafter acquired by Debtor; and
(q) all accessions to, substitutions for and replacements, proceeds and
products of any and all of the foregoing Collateral (including, without
limitation, proceeds which constitute property of the types described in this
Section 1.1) and, to the extent not otherwise included, all (i) payments under
insurance (whether or not Administrative Agent is the loss payee thereof), or
any indemnity, warranty or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing Collateral and (ii) cash.
1.2. Description of Obligations. This Agreement creates a security
interest in the Collateral, subject only to Permitted Collateral Liens (it being
acknowledged and agreed that Bank of America, N.A. as administrative agent under
the Existing Credit Agreement (in such capacity, the "Existing Credit Agreement
Administrative Agent") has a Lien in the Collateral which is and will be at all
times senior and superior to the Lien granted in the Collateral hereunder) as
provided in the Loan Documents, to secure the payment and performance of any and
all obligations now or hereafter existing of Debtor, each other Obligor and any
other Person under the Credit Agreement and the other Loan Documents, including
any extensions, modifications, substitutions, amendments and renewals thereof,
whether for principal, interest, fees, premium, expenses, indemnification or
otherwise (all such obligations of Debtor, each other Obligor and each other
Person being the "Obligations"); provided, however, notwithstanding the
foregoing or anything else herein to the contrary, Purchase Money Advances shall
only be secured by the Equipment, Inventory or other
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<PAGE> 9
tangible personal property which is financed or purchased with the proceeds of
Purchase Money Advances as reasonably determined by Debtor in accordance with
the requirements of the Indenture. Without limiting the generality of the
foregoing, this Agreement secures the payment of all amounts which constitute
part of the Obligations and would be owed by Debtor, each other Obligor and any
other Person to Administrative Agent or any Secured Party under any Loan
Document, but for the fact that they are unenforceable or not allowable due to
the existence of a bankruptcy, reorganization or similar proceeding under any
Debtor Relief Law involving Debtor, any other Obligor or any other Person
(including all such amounts which would become due or would be secured but for
the filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding of Debtor, any other Obligor or any other
Person under any Debtor Relief Law). Notwithstanding anything herein to the
contrary, the Obligations secured hereby shall be limited to an aggregate amount
which is equal to the largest amount that would not render the Lien granted
herein subject to avoidance under Section 548 of the Bankruptcy Code or any
applicable provisions of comparable state law.
1.3. Debtor Remains Liable. Anything herein to the contrary
notwithstanding, (a) Debtor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein to perform
all of its duties and obligations thereunder to the same extent as if this
Agreement had not been executed, (b) the exercise by Administrative Agent of any
of the rights hereunder shall not release Debtor from any of its duties or
obligations under the contracts and agreements included in the Collateral, and
(c) neither Administrative Agent nor any Secured Party shall have any obligation
or liability under the contracts and agreements included in the Collateral by
reason of this Agreement, nor shall Administrative Agent or any Secured Party be
obligated to perform any of the obligations or duties of Debtor thereunder or to
take any action to collect or enforce any claim for payment assigned hereunder.
1.4. Delivery of Security and Instrument Collateral. To the extent not
required to be delivered to the Existing Credit Agreement Administrative Agent,
all certificates (except certificates of title with respect to motor vehicles
shall only be required to be delivered upon request of Administrative Agent) or
instruments representing or evidencing the Collateral shall be delivered to and
held by or on behalf of Administrative Agent pursuant hereto and shall be in
suitable form for transfer by delivery, or shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to Administrative Agent. Administrative Agent, subject to the
rights of the Existing Credit Agreement Administrative Agent, shall have the
right, as provided in Section 3.6, after the occurrence, and during the
continuance, of an Event of Default, but without any requirement for prior
written notice to Debtor, to transfer to or to register in the name of
Administrative Agent or any of its nominees any or all of such Collateral. In
addition, Administrative Agent, subject to the rights of the Existing Credit
Agreement Administrative Agent, shall have the right at any time after the
occurrence, and during the continuance, of an Event of Default to exchange
certificates or instruments representing or evidencing Collateral for
certificates or instruments of smaller or larger denominations.
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<PAGE> 10
II. REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties. Debtor represents and warrants to
Administrative Agent and each Secured Party, with respect to itself and the
Collateral, as follows:
(a) All of the Equipment, Fixtures and Inventory pledged by Debtor
hereunder are located at the places specified on Schedule 1 hereto (as
supplemented from time to time by Debtor by written notice to Administrative
Agent) or in transit to a place specified on Schedule 1 hereto (as supplemented
from time to time by Debtor by written notice to Administrative Agent) or in
transit for sale to a third-party purchaser that upon such sale will become the
obligor under a Receivable or promptly pay for such Equipment, Fixtures and
Inventory. The chief place of business and chief executive office of Debtor and
the office where Debtor keeps all of its records concerning the Receivables, are
located at the place specified on Schedule 1 hereto. Schedule 1 is a complete
and correct list of, as to any leased property on which any Collateral is
located, the lease or other agreement (and all amendments thereto) pursuant to
which Debtor has use of such property (complete and correct copies of which have
been provided to Administrative Agent), the lessor pursuant to such agreement,
the recording information for such agreement, the description of such property
sufficient for recording and the name of the record owner of such property.
(b) Debtor is the legal and beneficial owner of the Collateral pledged
by it free and clear of any Lien, security interest, option or other charge or
encumbrance except for Permitted Liens. No effective financing statement or
other similar document used to perfect and preserve a security interest under
the laws of any jurisdiction covering all or any part of the Collateral is on
file in any recording office, except such as may have been filed in favor of
Administrative Agent relating to this Agreement and with respect to any
Permitted Lien. As of the date hereof, Debtor has the trade names set forth on
Schedule 2 (and no others). To the best of Debtor's knowledge, Debtor (including
any corporate or partnership predecessor) has not existed or operated under any
name other than as stated on Schedule 2 since the date three years preceding the
date of this Agreement.
(c) This Agreement and the pledge of the Collateral pursuant hereto,
together with the filing of financing statements containing the description of
the Collateral in the jurisdictions set forth on Schedule 1, which will be made
immediately following the date of closing, creates a valid and perfected
security interest in the Collateral in which a security interest can be
perfected by filing a UCC financing statement, securing the payment of the
Obligations; provided that additional actions may be required with respect to
the perfection of proceeds of the Collateral; further provided that Secured
Party retains physical possession of any Collateral, the possession of which is
required for perfection.
(d) No consent of any Person that has not been obtained and no
authorization, approval or other action by, and no notice to or filing with, any
Tribunal is required (i) for the pledge by Debtor of the Collateral pledged by
it hereunder, for the grant by Debtor of the security interest granted hereby or
for the execution, delivery or performance of this Agreement by Debtor, (ii) for
the perfection or maintenance of the pledge, assignment and security interest
created hereby (except
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<PAGE> 11
for the filing of financing and continuation statements under the UCC, fixture
filings and filings with the United States Patent and Trademark Office) or (iii)
for the exercise by Administrative Agent of the rights provided for in this
Agreement (except for consents of landlords pursuant to the Landlords' Waivers
and as otherwise required by law, including pursuant to Section 4.4 of this
Agreement).
(e) None of the Collateral described in Sections 1.1(m) and 1.1(n)
("Securities Collateral") is subject to any unpaid capital call or dispute, any
buy-sell, voting trust, transfer restriction, preferential right to purchase or
similar agreement or any option, warrant, put or call or similar agreement
except to the extent permitted by the Credit Agreement. All of the Securities
Collateral are duly authorized, validly issued and non-assessable and were not
issued in violation of the Rights of any Person.
(f) All Inventory produced in the United States of America has been
produced in substantial compliance with the Fair Labor Standards Act.
III. COVENANTS
3.1. Further Assurances.
(a) Debtor agrees that where any agreement existing as of the date
hereof or hereafter to which Debtor is a party contains any restriction that
could reasonably be expected to prohibit Debtor from granting any security
interest under this Agreement, at Administrative Agent's request, Debtor will
use its best efforts to obtain the necessary consent to or waiver of such
restriction from any Person so as to enable Debtor to effectively grant to
Administrative Agent such security interest under this Agreement.
(b) Debtor agrees that from time to time, at the expense of Debtor, at
Administrative Agent's request, Debtor will promptly execute and deliver all
further instruments and documents (including supplements to all schedules), and
take all further action, that may be necessary or desirable, and that
Administrative Agent may reasonably request, in order to perfect and protect any
pledge, assignment or security interest granted or purported to be granted
hereby, and the priority thereof, or to enable Administrative Agent to exercise
and enforce its rights and remedies hereunder with respect to any Collateral.
Without limiting the generality of the foregoing, upon reasonable written
request by Administrative Agent, Debtor will: (i) mark conspicuously each
Chattel Paper included in Receivables, and, at the reasonable request of
Administrative Agent, each of its records pertaining to the Collateral with the
following legend:
THIS INSTRUMENT IS SUBJECT TO A SECURITY INTEREST AND LIEN
PURSUANT TO A SECURITY AGREEMENT DATED AUGUST 12, 1999 (AS
THE SAME HAS BEEN AND MAY HEREAFTER BE AMENDED,
MODIFIED OR RESTATED) MADE BY DOSKOCIL MANUFACTURING
COMPANY, INC. IN FAVOR OF BANK OF AMERICA, N.A., AS
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<PAGE> 12
ADMINISTRATIVE AGENT FOR CERTAIN LENDERS, AND PURSUANT
TO A CREDIT AGREEMENT DATED AS OF AUGUST 12, 1999 (AS THE
SAME HAS BEEN AND MAY HEREAFTER BE AMENDED, MODIFIED OR
RESTATED)
or such other legend, in form and substance reasonably satisfactory to and as
specified by Administrative Agent, indicating that such Chattel Paper or
Collateral is subject to the pledge, assignment and security interest granted
hereby; (ii) if any Collateral shall be evidenced by a promissory note or other
instrument or be Chattel Paper, to the extent not required to be delivered to
the Existing Credit Agreement Administrative Agent, deliver and pledge to
Administrative Agent hereunder such note, instrument or Chattel Paper duly
indorsed and accompanied by duly executed instruments of transfer or assignment,
all in form and substance reasonably satisfactory to Administrative Agent; and
(iii) execute and file such financing or continuation statements, or amendments
thereto, and such other instruments or notices, as may be necessary or
desirable, or as Administrative Agent may reasonably request, in order to
perfect and preserve the pledge, assignment and security interest granted or
purported to be granted hereby.
(c) In addition to such other information as shall be specifically
provided for herein, Debtor will furnish to Secured Party from time to time
statements and schedules further identifying and describing the Collateral and
such other lists, documents, reports, and product, service and sales documents
in connection with the Collateral as Secured Party may reasonably request, all
in reasonable detail. In connection with its enforcement of the security
interest, Administrative Agent may use such information or transfer it to any
assignee permitted hereunder for such assignee's use.
(d) Debtor hereby authorizes Administrative Agent to file one or more
financing or continuation statements relating to all or any part of the
Collateral without the signature of Debtor where permitted by law provided
Administrative Agent shall give reasonably prompt notice of any such filings to
Debtor. A photocopy or other reproduction of this Agreement or any financing
statement covering the Collateral or any part thereof shall be sufficient as a
financing statement where permitted by law.
(e) Debtor will not, and will not permit any Person to, materially
revise, modify, amend or restate the articles of incorporation of any
corporation the stock or other interest in which is Collateral or the
partnership, joint venture or other organizational document of any partnership
or joint venture any interest in which is Collateral or terminate, cancel or
dissolve any such Person, except as permitted under the Credit Agreement.
3.2. Equipment, Fixtures and Inventory.
(a) Debtor shall not keep the Equipment, Fixtures and Inventory pledged
by it hereunder (other than Inventory sold in the ordinary course of business)
in any location other than the places specified in Schedule 1 unless the Debtor
has delivered to Administrative Agent a financing statement for such Equipment,
Fixtures and Inventory kept by Debtor at such location or such other
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<PAGE> 13
documentation in the opinion of Administrative Agent which is necessary to
properly perfect or maintain the perfection of the security interest granted
herein in such Collateral.
(b) Debtor shall cause the Equipment and Fixtures pledged by it
hereunder that are necessary for Debtor's business to be maintained and
preserved in the same condition, repair and working order as when purchased,
ordinary wear and tear excepted in accordance with Debtor's past practices, and
shall forthwith, or in the case of any material loss or damage to any of the
Equipment or Fixtures as quickly as practicable after the occurrence thereof,
make or cause to be made all reasonable repairs, replacements, and other
improvements in connection therewith which are necessary or desirable to such
end. Debtor shall promptly furnish to Administrative Agent a statement
respecting any loss or damage which singly or in the aggregate equals or exceeds
$150,000 for any fiscal year to any of the Equipment pledged by it hereunder.
Debtor shall promptly furnish to Administrative Agent a statement respecting any
loss or damage which singly or in the aggregate equals or exceeds $150,000 for
any fiscal year to any of the Inventory pledged by it hereunder.
(c) Debtor shall comply with all requirements of the Fair Labor
Standards Act.
3.3. Insurance. Debtor shall, at its own expense, maintain insurance
with respect to the Collateral in accordance with the terms set forth in Section
5.5 of the Existing Credit Agreement. Debtor further covenants and agrees to
keep the Collateral which is Inventory, Equipment, Fixtures and other tangible
personal property insured in such amounts, against such risks and with such
insurers as is consistent with customary industry practice, provided that none
of such insurance shall be in amounts less than the greater of (i) the
replacement value and (ii) the original cost of the covered property (less any
deduction standard in the industry for such type of property), subject in the
case of any property damage insurance to normal and customary rights granted in
the ordinary course of business to (A) any landlord (with respect to the
property covered by any lease), (B) in the case of any equipment financing, to
any equipment lessor or lender (with respect to the equipment covered thereby),
or (C) mortgagees of any real property. All such policies of insurance shall be
written for the benefit of Administrative Agent and Debtor, as their interests
may appear, and shall provide for at least thirty days' prior written notice of
cancellation or change of coverage to Administrative Agent. Debtor shall
promptly furnish to Administrative Agent evidence of such insurance in form and
content satisfactory to Administrative Agent. If Debtor fails to maintain the
insurance it is required to maintain with respect to the Collateral in
accordance with this Section 3.3, upon notice to Debtor, Administrative Agent
may at its own option obtain insurance on only Administrative Agent's interest
in such Collateral, any premium thereby paid by Administrative Agent to become
part of the Obligations, bear interest prior to the existence of an Event of
Default, at the then applicable Base Rate Basis, and during the existence of an
Event of Default, at the Default Rate. In the event Administrative Agent
maintains such substitute insurance, the additional premium for such insurance
shall be due on demand and payable by Debtor to Administrative Agent in
accordance with any notice delivered to Debtor by Administrative Agent. Debtor
hereby grants Administrative Agent a security interest in any refunds of
unearned premiums in connection with any cancellation, adjustment or termination
of any policy of insurance required by Administrative Agent and in all proceeds
of such insurance and hereby appoints Administrative Agent its attorney-in-fact
(exercisable
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<PAGE> 14
from and after the occurrence of an Event of Default which is continuing) to
endorse any check or draft that may be payable to Debtor in order to collect
such refunds or proceeds. To the extent not required to be applied in accordance
with the General Security Agreement (as defined in the Existing Credit Agreement
and used herein), proceeds of insurance shall be applied as follows: first, to
reimburse Administrative Agent for all costs and expenses, if any, including
reasonable attorneys' fees, incurred in connection with the collection of such
proceeds; second, if an Event of Default has not occurred and is continuing or
the amount of proceeds in respect of any one loss or damage does not exceed
$750,000, the proceeds shall be used to repair or replace the Collateral and
Debtor shall provide Administrative Agent with evidence satisfactory to
Administrative Agent of such use; and third, if an Event of Default has occurred
and is continuing or the proceeds in respect of any one loss or damage is equal
to or greater than $750,000, the proceeds shall, at Administrative Agent's
direction, be used to repair or replace the Collateral or applied to the
Obligations as provided in the Credit Agreement.
3.4. Place of Perfection; Records; Collection of Receivables, Chattel
Paper and Instruments.
(a) Debtor shall keep its chief place of business and chief executive
office and the office where it keeps its records concerning the Receivables, and
the originals of all Chattel Paper and Instruments, at the location therefor
specified in Section 2.1(a), in each case which may be changed upon written
notice to the Administrative Agent at least 30 days prior to such change. Debtor
will hold and preserve such records and Chattel Paper and Instruments and will
permit representatives of Administrative Agent at any time during normal
business hours and after reasonable notice to inspect and make abstracts from
and copies of such records and Chattel Paper and Instruments.
(b) Except as otherwise provided in this Section 3.4(b), Debtor shall
continue to collect, at its own expense, all amounts due or to become due Debtor
under the Receivables, Chattel Paper and Instruments. In connection with such
collections, Debtor may take (and, upon the occurrence and during the
continuance of an Event of Default at Administrative Agent's direction, but
subject to the rights of the Existing Credit Agreement Administrative Agent,
shall take) such action as Debtor or, after the occurrence and during the
continuance of an Event of Default, Administrative Agent, may deem necessary or
advisable to enforce collection of the Receivables, Chattel Paper and
Instruments; provided, however, but subject to the rights of the Existing Credit
Agreement Administrative Agent, that Administrative Agent shall have the right
(upon an Event of Default which has occurred and is continuing and upon notice
to Debtor) to notify the account debtors or obligors under any Receivables,
Chattel Paper and Instruments of the assignment of such Receivables, Chattel
Paper and Instruments to Administrative Agent and to direct such account debtors
or obligors to make payment of all amounts due or to become due to Debtor
thereunder directly to Administrative Agent and, upon such notification at the
expense of Debtor, to enforce collection of any such Receivables, Chattel Paper
and Instruments, and to adjust, settle or compromise the amount or payment
thereof, in the same manner and to the same extent as Debtor might have done or
as Administrative Agent deems appropriate. To the extent not required to be
delivered pursuant to the Existing Credit Agreement Administrative Agent, upon
the occurrence and during the continuance
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<PAGE> 15
of an Event of Default, all amounts and proceeds (including Instruments)
received by Debtor in respect of the Receivables, Chattel Paper and Instruments
shall be received in trust for the benefit of Administrative Agent hereunder,
shall be segregated from other funds of Debtor and, after receipt of notice from
Administrative Agent, shall be forthwith paid over to Administrative Agent in
the same form as so received (with any necessary indorsement) to be applied as
provided in the Credit Agreement. Upon the occurrence and during the
continuation of an Event of Default, Debtor shall not adjust, settle or
compromise the amount or payment of any Receivable, Chattel Paper or Instrument,
release wholly or partly any account debtor or obligor thereof, or allow any
credit or discount thereon other than those made in the ordinary course of
business.
3.5. Transfers and Other Liens. Debtor shall not (i) sell, assign (by
operation of law or otherwise) or otherwise dispose of, or grant any option with
respect to, any of the Collateral, except as permitted under the Credit
Agreement, or (ii) create or permit to exist any Lien, security interest, option
or other charge or encumbrance upon or with respect to any of the Collateral,
except for the security interest under this Agreement (and except as provided
for in the Credit Agreement).
3.6. Rights to Dividends and Distributions. With respect to any
certificates, bonds, or other instruments or securities constituting a part of
the Collateral, Administrative Agent, but shall subject to the rights of the
Existing Credit Agreement Administrative Agent, shall have authority during the
continuance of an Event of Default, either to have the same registered in
Administrative Agent's name or in the name of a nominee, and, with or without
such registration, upon such notification to demand of the issuer thereof, and
to receive and receipt for, any and all Dividends (including any stock or
similar dividend or distribution) payable in respect thereof, whether they be
ordinary or extraordinary. If Debtor shall become entitled to receive or shall
receive any interest in or certificate (including, without limitation, any
interest in or certificate representing a Dividend or a distribution in
connection with any reclassification, increase, or reduction of capital, or
issued in connection with any reorganization), or any option or rights arising
from or relating to any of the Collateral that is evidenced by a certificate or
other instrument or security, whether as an addition to, in substitution of, as
a conversion of, or in exchange for any of the Collateral, or otherwise, Debtor
agrees to accept the same as Administrative Agent's agent and to hold the same
in trust on behalf of and for the benefit of Administrative Agent, and, to the
extent not required to be delivered pursuant to the Existing Credit Agreement
Agent, to deliver the same immediately to Administrative Agent in the exact form
received, with appropriate undated stock or similar powers, duly executed in
blank, to be held by Administrative Agent, subject to the terms hereof, as
Collateral. Unless an Event of Default is in existence, Debtor shall be entitled
to receive all cash Dividends paid in respect of any of the Collateral (subject
to the restrictions of any other Loan Document). Upon the occurrence and during
the continuance of an Event of Default, Administrative Agent, but shall subject
to the rights of the Existing Credit Agreement Administrative Agent, shall be
entitled to all Dividends, and to any sums paid upon or in respect of any
Collateral, and to any additional securities issued in respect of the Securities
Collateral, upon the liquidation, dissolution, or reorganization of the issuer
thereof, all of which shall be paid to Administrative Agent to be held by it as
additional collateral security for the Obligations and application to the
Obligations at the discretion of Administrative Agent. Subject to the rights of
the Existing Credit Agreement Agent, all Dividends paid or distributed in
respect of the
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Collateral which are received by Debtor in violation of this Agreement shall,
until paid or delivered to Administrative Agent, be held by Debtor in trust as
additional Collateral for the Obligations.
3.7. Right of Administrative Agent to Notify Issuers. At any time
during the continuance of an Event of Default, Administrative Agent, subject to
the rights of the Existing Credit Agreement Agent, may notify issuers of the
Securities Collateral to make payments of all Dividends directly to
Administrative Agent and Administrative Agent, subject to the rights of the
Existing Credit Agreement Agent, may take control of all proceeds of any
Securities Collateral. Until Administrative Agent elects to exercise such
rights, during the continuance of an Event of Default, Debtor, as agent of
Administrative Agent, shall collect and segregate all Dividends and other
amounts paid or distributed with respect to the Securities Collateral. To the
extent that Administrative Agent has notified any issuer of Securities
Collateral of an Event of Default and such Event of Default is cured or
otherwise waived, Administrative Agent shall promptly notify such issuer of such
fact.
3.8. Administrative Agent Appointed Attorney-in-Fact. Debtor hereby
irrevocably appoints Administrative Agent Debtor's attorney-in-fact (exercisable
from and after the occurrence of an Event of Default which is continuing), with
full authority in the place and stead of Debtor and in the name of Debtor or
otherwise, but subject to the rights of the Existing Credit Agreement Agent, to
take any action and to execute any instrument which Administrative Agent may
deem necessary or advisable to accomplish the purposes of this Agreement,
including, without limitation:
(a) to obtain and adjust insurance required to be paid to
Administrative Agent in accordance with Section 3.3,
(b) to ask for, demand, collect, sue for, recover, compromise, receive
and give acquittance and receipts for moneys due and to become due under or in
connection with the Collateral,
(c) to receive, indorse, and collect any drafts or other Instruments,
documents and Chattel Paper, in connection with clauses (a) or (b) above, and
(d) to file any claims or take any action or institute any proceedings
which Administrative Agent may deem necessary or desirable for the collection of
any of the Collateral or otherwise to enforce compliance with the terms and
conditions of any Collateral or the rights of Administrative Agent with respect
to any of the Collateral. DEBTOR HEREBY IRREVOCABLY GRANTS TO ADMINISTRATIVE
AGENT DEBTOR'S PROXY (EXERCISABLE FROM AND AFTER THE OCCURRENCE OF AN EVENT OF
DEFAULT WHICH IS CONTINUING) TO, SUBJECT TO THE RIGHTS OF THE EXISTING CREDIT
AGREEMENT AGENT, VOTE ANY SECURITIES COLLATERAL AND APPOINTS ADMINISTRATIVE
AGENT DEBTOR'S ATTORNEY-IN-FACT (EXERCISABLE FROM AND AFTER THE OCCURRENCE OF AN
EVENT OF DEFAULT WHICH IS CONTINUING) TO PERFORM, SUBJECT TO THE RIGHTS OF THE
EXISTING CREDIT AGREEMENT AGENT, ALL OBLIGATIONS OF DEBTOR UNDER THIS AGREEMENT
AND TO EXERCISE ALL OF ADMINISTRATIVE AGENT'S RIGHTS HEREUNDER. THE PROXY AND
EACH
- 12 -
<PAGE> 17
POWER OF ATTORNEY HEREIN GRANTED ARE COUPLED WITH AN INTEREST AND ARE
IRREVOCABLE PRIOR TO FINAL PAYMENT IN FULL OF THE OBLIGATIONS.
Secured Party shall not exercise any powers granted pursuant to this
appointment as attorney-in-fact at any time that Debtor is fully performing its
obligations hereunder or without the consent of the Existing Credit Agreement
Agent. This appointment as attorney-in-fact shall terminate upon the termination
of this Agreement pursuant to Section 5.3 hereof.
IV. RIGHTS AND POWERS OF ADMINISTRATIVE AGENT
4.1. Administrative Agent May Perform. If Debtor fails to perform any
agreement contained herein, Administrative Agent may itself perform, or cause
performance of, such agreement, and the reasonable expenses of Administrative
Agent incurred in connection therewith shall be payable by Debtor under Section
4.5.
4.2. Administrative Agent's Duties. The powers conferred on
Administrative Agent hereunder are solely to protect its interest in the
Collateral and shall not impose any duty upon it to exercise any such powers.
Except for the duty to exercise reasonable care in respect of any Collateral in
its possession and the accounting for moneys actually received by it hereunder,
Administrative Agent shall have no duty as to any Collateral, as to ascertaining
or taking action with respect to calls, conversions, exchanges, maturities,
tenders or other matters relative to any Collateral, whether or not
Administrative Agent has or is deemed to have knowledge of such matters, or as
to the taking of any necessary steps to preserve rights against prior parties.
The Administrative Agent shall be deemed to have exercised reasonable care in
the custody and preservation of any Collateral in its possession if such
Collateral is accorded treatment substantially equal to that which
Administrative Agent accords its own property, except to the extent of any gross
negligence or willful misconduct of the Administrative Agent. Except as provided
in this Section 4.2, Administrative Agent shall not have any duty or liability
to protect or preserve any Collateral or to preserve rights pertaining thereto.
Nothing contained in this Agreement shall be construed as requiring or
obligating Administrative Agent, and Administrative Agent shall not be required
or obligated, to (i) present or file any claim or notice or take any action,
with respect to any Collateral or in connection therewith or (ii) notify Debtor
of any decline in the value of any Collateral.
4.3. Remedies. If any Event of Default shall have occurred and be
continuing:
(a) Subject to the rights of the Existing Credit Agreement
Administrative Agent, Administrative Agent may exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party on
default under the Uniform Commercial Code in effect in the State of Texas at
that time (the "UCC") (whether or not the UCC applies to the affected
Collateral), and also may (i) require Debtor to, and Debtor hereby agrees that
it will at its expense and upon request of Administrative Agent
- 13 -
<PAGE> 18
forthwith, assemble all or part of the Collateral which is capable of being
assembled as directed by Administrative Agent and make it available to
Administrative Agent at a place to be designated by Administrative Agent which
is reasonably convenient to both parties or (ii) without notice, except as
specified below, sell the Collateral or any portion thereof in one or more
parcels at public or private sale, at any of Administrative Agent's offices or
elsewhere, for cash, on credit or for future delivery, and upon such other terms
as Administrative Agent may deem commercially reasonable. Debtor agrees that, to
the extent notice of sale shall be required by law, ten days' written notice to
Debtor of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification.
Administrative Agent shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. Administrative Agent may adjourn
any public or private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be made at the
time and place to which it was so adjourned.
(b) All cash proceeds received by Administrative Agent upon any sale
of, collection of, or other realization upon, all or any part of the Collateral
shall be applied as follows:
First: To the payment of all reasonable out-of-pocket costs and
expenses incurred in connection with the sale of, collection of or
other realization upon Collateral, including reasonable attorneys' fees
and disbursements;
Second: To the payment of the Obligations as provided in the Credit
Agreement and in such order and in such manner consistent with
Applicable Laws as Administrative Agent in its discretion shall decide
(with Debtor remaining liable for any deficiency); and
Third: To the extent of the balance (if any) of such proceeds, to
Debtor or other Person legally entitled thereto.
(c) Subject to the rights of the Existing Credit Agreement
Administrative Agent, all payments received by Debtor under or in connection
with any Collateral shall be received in trust for the benefit of Administrative
Agent, shall be segregated from other funds of Debtor and shall be forthwith
paid over to Administrative Agent in the same form as so received (with any
necessary indorsement).
(d) Because of the Securities Act of 1933, as amended ("Securities
Act"), and other laws, including without limitation state "blue sky" laws, or
contractual restrictions or agreements, there may be legal restrictions or
limitations affecting Administrative Agent in any attempts to dispose of the
Collateral and the enforcement of its rights hereunder. For these reasons,
subject to the rights of the Existing Credit Agreement Administrative Agent,
Administrative Agent is hereby authorized by Debtor, but not obligated, during
the continuance of any Event of Default, to sell or otherwise dispose of any of
the Collateral at private sale, subject to an investment letter, or in any other
manner which will not require the Collateral, or any part thereof, to be
registered in accordance with the Securities Act, or the rules and regulations
promulgated thereunder, or any other law. Debtor clearly understands that
Administrative Agent may in its discretion approach a restricted number of
potential
- 14 -
<PAGE> 19
purchasers and that a sale under such circumstances may yield a lower price for
the Collateral than would otherwise be obtainable if same were registered and
sold in the open market. No sale so made in good faith by Administrative Agent
shall be deemed to be not "commercially reasonable" because so made. Debtor
agrees that in the event Administrative Agent shall, during the continuance of
an Event of Default, sell the Collateral or any portion thereof at any private
sale or sales, Administrative Agent shall have the right to rely upon the advice
and opinion of appraisers and other Persons, which appraisers and other Persons
are acceptable to Administrative Agent, as to the best price reasonably
obtainable upon such a private sale thereof. In the absence of actual fraud,
such reliance shall be conclusive evidence that Administrative Agent handled
such matter in a commercially reasonable manner under Applicable Law.
(e) Subject to the rights of the Existing Credit Agreement Agent, if
Administrative Agent shall determine to exercise its right to sell any or all of
the Collateral, and if in the opinion of counsel for Administrative Agent it is
necessary, or if in the opinion of Administrative Agent it is advisable, to have
the Collateral or that portion thereof to be sold, registered under the
provisions of the Securities Act, Debtor will, to the fullest extent it has the
capability to do so, cause the issuers of the Collateral contemplated to be sold
to execute and deliver, and cause the directors and officers of each thereof to
execute and deliver, all at Debtor's expense, all such instruments and
documents, and to do or cause to be done all such other acts and things, as may
be necessary or, in the opinion of Administrative Agent, advisable to register
the Collateral or that portion thereof to be sold, under the provisions of the
Securities Act and to cause the registration statement relating thereto to
become effective and to remain effective for such period as Administrative Agent
may deem appropriate to facilitate the sale or other disposition of such
Collateral from the date of the first public offering of the Collateral or that
portion thereof to be sold, and to make all amendments thereto and/or to the
related prospectus which, in the opinion of Administrative Agent, are necessary
or advisable, all in conformity with the requirements of the Securities Act.
Debtor shall use its reasonable best efforts to cause each issuer of Collateral
to comply with the provisions of the securities or "blue sky" laws of any
jurisdiction which Administrative Agent shall designate and to cause each Issuer
to make available to its security holders, as soon as practicable, an earnings
statement which will satisfy the provisions of the Securities Act and applicable
"blue sky" laws.
(f)
(i) To the extent not required under the General Security
Agreement, Debtor will maintain the accounts listed as restricted and
blocked accounts on Schedule 3 (the "Restricted Accounts") with
Administrative Agent, in the name of Debtor, but such Restricted
Accounts shall be under the sole control and dominion of Administrative
Agent.
(ii) It shall be a term and condition of each Restricted
Account, notwithstanding any term or condition to the contrary in any
other agreement relating to such Restricted Account, that no amount
(including interest and other proceeds of the cash and other property
in the Restricted Account) shall be paid or released to or for the
account of, or withdrawn by or for the account of, Debtor or any other
Person from such Restricted Account.
- 15 -
<PAGE> 20
(iii) After the occurrence and continuance of an Event of
Default, Debtor will promptly instruct each account debtor in respect
of Receivables arising from any sale of Inventory in the ordinary
course of business to make payment to the Restricted Accounts.
Debtor understands and acknowledges that Administrative Agent may and permits
Administrative Agent to remove amounts from the Restricted Accounts from time to
time and use the amounts to reduce the Obligations.
4.4. Further Approvals Required.
(a) In connection with the exercise by Administrative Agent of its
rights hereunder that effects the disposition of or use of any Collateral, it
may be necessary to obtain the prior consent or approval of Tribunals and other
Persons to a transfer or assignment of Collateral.
(b) Debtor hereby agrees, during the continuance of an Event of
Default, to execute, deliver, and file, and hereby appoints Administrative Agent
as its attorney-in-fact, during the continuance of an Event of Default, to
execute, deliver, and file on Debtor's behalf and in Debtor's name, all
applications, certificates, filings, instruments, and other documents (including
without limitation any application for an assignment or transfer of control or
ownership) that may be necessary or appropriate, in Administrative Agent's
opinion, to obtain such consents, waivers, or approvals. Upon request by
Administrative Agent, Debtor further agrees to use its reasonable best efforts
to obtain the foregoing consents, waivers, and approvals, including receipt of
consents, waivers, and approvals under applicable agreements prior to a Default
or Event of Default. Debtor acknowledges that there is no adequate remedy at law
for failure by it to comply with the provisions of this Section 4.4 and that
such failure would not be adequately compensable in damages, and therefore
agrees that this Section 4.4 may be specifically enforced. This appointment as
attorney-in-fact shall terminate upon the termination of this Agreement pursuant
to Section 5.3 hereof.
4.5. Indemnity and Expenses.
(a) Debtor agrees to indemnify Administrative Agent and each Secured
Party from and against any and all claims, losses and liabilities (including
reasonable attorneys' fees) growing out of or resulting from this Agreement
(including, without limitation, enforcement of this Agreement), expressly
including such claims, losses or liabilities arising out of mere negligence of
Administrative Agent or any Secured Party, except claims, losses or liabilities
as finally judicially determined by a court of competent jurisdiction to have
resulted from Administrative Agent's or any Secured Party's gross negligence or
willful misconduct.
(b) Debtor will upon demand pay to Administrative Agent the amount of
any and all reasonable expenses, including the reasonable fees and expenses of
its counsel and of any experts and agents, which Administrative Agent may incur
in connection with (i) the administration of this Agreement, (ii) the custody,
preservation, use or operation of, or the sale of, collection from or other
- 16 -
<PAGE> 21
realization upon, any of the Collateral, (iii) the exercise or enforcement of
any of the rights of Administrative Agent hereunder or (iv) the failure by
Debtor to perform or observe any of the provisions hereof.
V. MISCELLANEOUS
5.1. Cumulative Rights. All rights of Administrative Agent and each
other Secured Party under the Loan Documents are cumulative of each other and of
every other right which Administrative Agent and each other Secured Party may
otherwise have at law or in equity or under any other contract or other writing
for the enforcement of the security interest herein or the collection of the
Obligations. The exercise of one or more rights shall not prejudice or impair
the concurrent or subsequent exercise of other rights.
5.2. Modifications; Amendments; Etc. No amendment or waiver of any
provision of this Agreement, and no consent to any departure by Debtor here
from, shall in any event be effective unless the same shall be in writing and
signed by Administrative Agent (and Debtor, in case of amendment), and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
5.3. Continuing Security Interest. This Agreement shall create a
continuing security interest in the Collateral and shall (a) remain in full
force and effect until the later of (i) the final payment in full of the
Obligations and all amounts payable under this Agreement and (ii) the expiration
or termination of the obligation of all Secured Parties to extend credit to
Debtor, (b) be binding upon Debtor, its successors and assigns, and (c) inure to
the benefit of, and be enforceable by, Administrative Agent and its successors,
transferees and assigns. Upon any such termination, Administrative Agent will,
at Debtor's expense, execute and deliver to Debtor such documents as Debtor
shall reasonably request to evidence such termination. Debtor agrees that to the
extent that Administrative Agent or any Secured Party receives any payment or
benefit and such payment or benefit, or any part thereof, is subsequently
invalidated, declared to be fraudulent or preferential, set aside or is required
to be repaid to a trustee, receiver, or any other party under any Debtor Relief
Law, common law or equitable cause, then to the extent of such payment or
benefit, the Obligations or part thereof intended to be satisfied shall be
revived and continued in full force and effect as if such payment or benefit had
not been made and, further, any such repayment by Administrative Agent or any
Secured Party, to the extent that Administrative Agent or any Secured Party did
not directly receive a corresponding cash payment, shall be added to and be
additional Obligations payable upon demand by Administrative Agent or any
Secured Party and secured hereby, and, if the lien and security interest hereof
shall have been released, such lien and security interest shall be reinstated
with the same effect and priority as on the date of execution hereof all as if
no release of such lien or security interest had ever occurred.
5.4. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
- 17 -
<PAGE> 22
TEXAS (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW), EXCEPT TO THE EXTENT
THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF TEXAS. UNLESS OTHERWISE DEFINED HEREIN OR
IN THE CREDIT AGREEMENT, TERMS USED IN ARTICLE 9 OF THE UCC ARE USED HEREIN AS
THEREIN DEFINED.
5.5. WAIVER OF JURY TRIAL. ADMINISTRATIVE AGENT AND DEBTOR HEREBY WAIVE
TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGS INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED
HEREUNDER.
5.6. Administrative Agent's Right to Use Agents. Administrative Agent
may exercise its rights under this Agreement through an agent or other designee.
5.7. No Interference, Compensation or Expense. Administrative Agent may
exercise its rights under this Agreement (a) without resistance or interference
by Debtor and (b) without payment of any rent, license fee or compensation of
any kind to Debtor.
5.8. Waivers of Rights Inhibiting Enforcement. To the extent not
prohibited by Applicable Law, Debtor waives (a) any claim that, as to any part
of the Collateral, a public sale, should Administrative Agent elect so to
proceed, is, in and of itself, not a commercially reasonable method of sale for
such Collateral, (b) except as otherwise provided in this Agreement, NOTICE OR
JUDICIAL HEARING IN CONNECTION WITH ADMINISTRATIVE AGENT'S DISPOSITION OF ANY OF
THE COLLATERAL INCLUDING ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY
PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT DEBTOR WOULD OTHERWISE
HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE,
AND ALL OTHER REQUIREMENTS AS TO THE TIME, PLACE AND TERMS OF SALE OR OTHER
REQUIREMENTS WITH RESPECT TO THE ENFORCEMENT OF ADMINISTRATIVE AGENT'S RIGHTS
HEREUNDER and (c) all rights of redemption, appraisal, valuation or to the
marshaling of assets.
5.9. Notices and Deliveries.
(a) Manner of Delivery. All notices and other communications provided
for hereunder shall be in writing and mailed, telecopied or delivered by
reputable overnight delivery service or by hand, if to the Debtor, addressed to
it at its address specified on the signature pages hereof, if to the
Administrative Agent, addressed to it at its address specified in the Credit
Agreement, or, as to each party, at such other address as shall be designated by
such party in a written notice to each other party complying as to delivery with
the terms of this Section 5.9. All such notices and other
- 18 -
<PAGE> 23
communications shall, when mailed, telecopied, or delivered, be effective three
days after being deposited in the mails, when telecopied with confirmation of
receipt, or when delivered by reputable overnight delivery service or by hand to
the addressee or its agent, respectively.
(b) Addresses. All notices, communications and materials to be given or
delivered pursuant to this Agreement shall be given or delivered at the
following respective addresses and telecopier and telephone numbers and to the
attention of the following individuals or departments:
(i) if to Debtor, to it at:
Doskocil Manufacturing Company, Inc.
4209 Barnett
Arlington, Texas 76017
Telephone No.: (817) 467-5116
Telecopier No.: (817) 472-9810
Attention: John Casey
Chief Financial Officer
with a copy to:
Westar Capital II LLC
949 South Coast Drive, Suite 650
Costa Mesa, California 92626
Telephone No.: (714) 481-5161
Telecopier No.: (714) 481-5166
Attention: Alan Sellers
(ii) if to Administrative Agent, to it at:
Bank of America, N.A.
100 North Tryon Street
Charlotte, North Carolina 28225
Telephone No.: (704) 388-5045
Telecopier No.: (704) 386-9607
Attention: John J. O'Neill
or at such other address or, telecopier or telephone number or to the attention
of such other individual or department as the party to which such information
pertains may hereafter specify for the purpose in a notice to the other
specifically captioned "Notice of Change of Address".
- 19 -
<PAGE> 24
(c) Effectiveness. Each notice, communication and any material to be
given or delivered to Administrative Agent or Debtor pursuant to this Agreement
shall be effective or deemed delivered or furnished (i) if sent by mail, on the
fifth Business Day after such notice, communication or material is deposited in
the mail, addressed as above provided, (ii) if sent by telecopier, when such
notice, communication or material is transmitted to the appropriate number
determined as above provided in this Section 5.9 and the appropriate receipt is
received or otherwise acknowledged and (iii) if sent by hand delivery or
overnight courier, when left at the address of the addressee addressed as above
provided.
5.10. Successors and Assigns. All of the provisions of this Agreement
shall be binding and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
5.11. Loan Document. This Agreement is a Loan Document executed
pursuant to the Credit Agreement and shall (unless otherwise expressly indicated
herein) be construed, administered and applied in accordance with the terms and
provisions thereof.
5.12. Consent to Jurisdiction; Waiver of Immunities.
(a) Debtor hereby irrevocably submits to the non-exclusive jurisdiction
of any United States Federal or Texas State courts sitting in Dallas, Texas in
any action or proceeding arising out of or relating to this Agreement, and
Debtor hereby irrevocably waives any objection it may now or hereafter have as
to the venue of any such suit, action or proceeding brought in such court or
that such court is an inconvenient forum.
(b) Nothing in this section shall limit the right of Administrative
Agent or any Secured Party to bring any action or proceeding against Debtor or
its property in the courts of any other jurisdictions.
(c) Any judicial proceeding by Debtor against Administrative Agent or
any Secured Party involving, directly or indirectly, any matter in any way
arising out of, related to, or connected with this Agreement shall be brought
only in a court in Dallas, Texas to the extent that jurisdiction may be effected
against such Person in Dallas, Texas.
5.13. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws during the term
thereof, such provision shall be fully severable, this Agreement shall be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof, and the remaining provisions hereof shall
remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom. Furthermore,
in lieu of such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Agreement a legal, valid, and enforceable
provision as similar in terms to the illegal, invalid, or unenforceable
provision as may be possible.
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<PAGE> 25
5.14. Obligations Not Affected. To the fullest extent permitted by
Applicable Law, the obligations of Debtor under this Agreement shall remain in
full force and effect without regard to, and shall not be impaired or affected
by:
(a) any amendment or modification or addition or supplement to any
other Loan Document, any instrument delivered in connection therewith or any
assignment or transfer thereof;
(b) any exercise, non-exercise, or waiver by Administrative Agent or
any Secured Party of any right, remedy, power or privilege under or in respect
of, or any release of any guaranty, any collateral or the Collateral or any part
thereof provided pursuant to, this Agreement or any other Loan Document;
(c) any waiver, consent, extension, indulgence or other action or
inaction in respect of this Agreement or any other Loan Document or any
assignment or transfer of any thereof; or
(d) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or the like of Debtor, any other Obligor
or any other Person, whether or not Debtor shall have notice or knowledge of any
of the foregoing.
5.15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument.
5.16. Junior Lien. The Lien granted in the Collateral herein shall at
all times be junior and second to the Lien granted in the Collateral pursuant to
the General Security Agreement. Said priority shall be applicable irrespective
of the time or order of attachment or perfection of any Lien or the time or
order of filing of any financing statements or other documents, or any statutes,
rules or law, or court decisions to the contrary. Notwithstanding anything
herein to the contrary, until the Obligations (as defined in the Existing Credit
Agreement) have been paid and performed in full and all commitments to lend
thereunder have terminated, the Administrative Agent shall not collect, take
possession of, foreclose upon, or exercise any other rights or remedies with
respect to, the Collateral, judicially or non-judicially, or attempt to do any
of the foregoing unless such rights or remedies have been or are being exercised
with respect to the General Security Agreement and are exercised hereunder in a
manner that is not inconsistent with the status of the junior and second Liens
granted hereunder.
5.17. ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER
LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE
PARTIES.
- 21 -
<PAGE> 26
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- 22 -
<PAGE> 27
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their respective duly authorized officers as of the
date first above written.
DEBTOR:
DOSKOCIL MANUFACTURING COMPANY, INC.
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
ADMINISTRATIVE AGENT:
BANK OF AMERICA, N.A.
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
- 23 -
<PAGE> 28
Schedule 1
Equipment and Inventory Locations
Chief Place of Business, Chief Executive Office and
Location of Books and Records
*To Be Provided By Debtor*
================================================================================
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
================================================================================
<PAGE> 29
Schedule 2
Trade Names
*To Be Provided By Debtor*
================================================================================
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
================================================================================
<PAGE> 30
Schedule 3
Restricted Accounts
*To Be Provided By Debtor*
================================================================================
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================================================================================
<PAGE> 31
Schedule 4
Rolling Stock
*To Be Provided By Debtor*
================================================================================
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 114
<SECURITIES> 0
<RECEIVABLES> 21,837
<ALLOWANCES> 1,090
<INVENTORY> 26,161
<CURRENT-ASSETS> 48,706
<PP&E> 97,269
<DEPRECIATION> (43,667)
<TOTAL-ASSETS> 163,702
<CURRENT-LIABILITIES> 27,605
<BONDS> 178,281
0
9,161
<COMMON> 34,283
<OTHER-SE> (85,628)
<TOTAL-LIABILITY-AND-EQUITY> 163,702
<SALES> 169,932
<TOTAL-REVENUES> 169,932
<CGS> 121,119
<TOTAL-COSTS> 164,254
<OTHER-EXPENSES> 6,789
<LOSS-PROVISION> 1,025
<INTEREST-EXPENSE> 17,750
<INCOME-PRETAX> (18,885)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,885)
<EPS-BASIC> (6.38)
<EPS-DILUTED> (6.38)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Doskocil Manufacturing Company, Inc. and Spectrum Polymers, Ltd.:
We have audited the accompanying combined statements of operations,
equity and cash flows of Doskocil Manufacturing, Inc. and Spectrum Polymers,
Ltd., for the year ended December 28, 1996. 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 results of operations and the cash
flows of Doskocil Manufacturing Company, Inc. and Spectrum Polymers, Ltd. for
the year ended December 28, 1996, in conformity with generally accepted
accounting principles.
KPMG LLP
Fort Worth, Texas
March 12, 1997
