<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NO. 333-37081
DOSKOCIL MANUFACTURING COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 75-1281683
(State of Incorporation) (I.R.S. Employer Identification No.)
4209 BARNETT BOULEVARD
ARLINGTON, TEXAS 76017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (817)467-5116
- -------------------------------------------------------------------------------
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [ X ] NO [ ]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S NO PAR VALUE COMMON STOCK
AT SEPTEMBER 30, 1999, WAS 3,154,644.
1
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DOSKOCIL MANUFACTURING COMPANY, INC.
SEC FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations.......................................................... 3
Balance Sheets.................................................................... 4
Statements of Cash Flows.......................................................... 5
Notes to Financial Statements..................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................................ 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......................... 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................. 19
SIGNATURES....................................................................................... 20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
(In thousands, except per share amounts) 1999 1998
------------ ------------
<S> <C> <C>
Net sales .................................................. $ 37,200 $ 39,975
Cost of goods sold ......................................... 25,720 22,604
------------ ------------
GROSS PROFIT .......................................... 11,480 17,371
Selling, general and administrative expense ................ 12,685 11,025
------------ ------------
OPERATING (LOSS) INCOME ............................... (1,205) 6,346
Other (income) expense:
Net interest expense ................................... 4,677 4,205
Other, net ............................................ (433) 4
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ..................... (5,449) 2,137
Income tax provision ....................................... -- 915
------------ ------------
NET (LOSS) INCOME ..................................... (5,449) 1,222
Preferred stock dividends .................................. 229 229
------------ ------------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS ...... $ (5,678) $ 993
============ ============
NET (LOSS) INCOME PER COMMON SHARE (BASIC AND DILUTED) ..... $ (1.81) $ 0.32
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 3,139 3,104
============ ============
</TABLE>
See accompanying notes.
3
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DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30, September 30,
(Dollars in thousands) 1999 1999 1998
------------- ---------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ -- $ 114 $ 20
Accounts receivable, less allowance for doubtful accounts
of $1,129, $1,090 and $300 ....................................... 24,189 20,747 24,734
Inventories (Note 6) ................................................ 28,762 26,161 30,306
Other current assets (September and June 1999 includes $0.8 million
and September 1998 includes $.6 million from shareholders)...... 1,751 1,684 2,557
---------- ---------- ----------
Total current assets ........................................... 54,702 48,706 57,617
Property, plant and equipment, less accumulated depreciation of
$45,676, $43,667 and $46,311 ................................... 55,077 53,602 54,495
Fixed assets held for sale ............................................... -- 3,259 3,259
Goodwill ................................................................. 51,460 51,920 58,237
Debt issuance costs ...................................................... 4,205 4,390 4,913
Other assets ............................................................. 2,017 1,825 1,877
---------- ---------- ----------
Total assets ................................................... $ 167,461 $ 163,702 $ 180,398
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable .................................................... $ 8,621 $ 7,682 $ 10,663
Accrued liabilities (September and June 1999 includes $0.9 million
to shareholders) ............................................... 5,290 4,308 8,576
Current portion of long-term debt ................................... 12,228 8,514 5,375
Accrued interest .................................................... 1,608 3,169 334
Accrued taxes ....................................................... 784 573 522
Payroll and benefits payable ........................................ 3,562 3,359 3,376
Additional credit facility .......................................... 7,000 -- --
---------- ---------- ----------
Total current liabilities ...................................... 39,093 27,605 28,846
Line of credit ........................................................... 24,700 22,900 11,900
Long-term debt ........................................................... 66,296 70,381 76,750
Senior subordinated notes ................................................ 85,000 85,000 85,000
---------- ---------- ----------
Total liabilities ................................................ 215,089 205,886 202,496
Shareholders' (deficit) equity:
Series C preferred stock, no par value: authorized shares--
25,000,000, issued and outstanding--9,161,567 .................. 9,161 9,161 9,161
Common stock, no par value: authorized shares--15,000,000,
issued and outstanding--3,154,644 at September 30, 1999;
3,104,644 at June 30, 1999 and 3,103,144 at September 30,
1998 ........................................................... 34,288 34,283 34,262
Accumulated deficit ................................................. (91,077) (85,628) (65,521)
---------- ---------- ----------
Total shareholders' deficit .................................... (47,628) (42,184) (22,098)
---------- ---------- ----------
Total liabilities and shareholders' (deficit) equity ........... $ 167,461 $ 163,702 $ 180,398
========== ========== ==========
</TABLE>
See accompanying notes.
4
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DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
(Dollars in thousands) 1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income .............................................................. $ (5,449) $ 1,222
Adjustments to reconcile net (loss) income to net cash used in operating
activities ...................................................................
Depreciation and amortization .................................................. 2,616 2,779
Amortization of debt issuance costs ............................................ 184 245
Deferred income taxes .......................................................... -- 915
Gain on sale of assets ......................................................... (423) --
Changes in:
Receivables ................................................................ (3,442) (6,384)
Inventories ................................................................ (2,601) (8,891)
Payables ................................................................... 939 6,034
Accrued liabilities and other .............................................. (385) (4,530)
---------- ----------
Net cash used in operating activities ...................................... (8,561) (8,610)
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures ........................................................... (2,531) (5,061)
Increase in other assets ....................................................... (33) (25)
Net proceeds from sale of assets ............................................... 3,617 --
---------- ----------
Net cash provided by (used in) investing activities ........................ 1,053 (5,086)
---------- ----------
FINANCING ACTIVITIES:
Payments of long-term debt ..................................................... (1,344) (94)
Proceeds from revolving credit agreement ....................................... 1,800 11,900
Proceeds from additional credit facility ....................................... 7,000 --
Other debt payments ............................................................ (67) --
Proceeds from sale of common stock ............................................. 5 --
---------- ----------
Net cash provided by financing activities .................................. 7,394 11,806
Net decrease in cash and cash equivalents ...................................... (114) (1,890)
Cash and cash equivalents at beginning of period ............................... 114 1,910
---------- ----------
Cash and cash equivalents at end of period ..................................... $ -- $ 20
========== ==========
</TABLE>
See accompanying notes.
5
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, all normal recurring adjustments considered
necessary for a fair presentation of the results for the periods covered have
been included. Interim results are not based on physical counts of inventory and
therefore, include estimates to arrive at cost of goods sold for the period.
Operating results for the three month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2000. Due to the increased number of pet shelters sold during periods
of inclement weather, the Company typically earns a majority of its income from
operations during the first and second fiscal quarters. Additional information
is contained in the Company's Annual Report on Form 10-K for the year ended June
30, 1999.
Certain prior year amounts have been reclassified to conform to the fiscal
year 2000 presentation. The Company operates within a single reportable segment,
the manufacture and sale of molded consumer plastic products.
Since the Merger, the Company has experienced 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 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, June 1999 and September 1999 to meet the debt covenants required by the
Credit Facility (as defined in Note 5). In October 1999, the Company amended the
Credit Facility and entered into an additional revolving credit agreement (the
"Additional Credit Facility") which provides for borrowings up to $15.0 million
and matures on September 30, 2000. In connection with amending the Credit
Facility, certain shareholders purchased $5.0 million of 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 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. ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This new standard requires recognition of all new
derivatives as either assets or liabilities at fair value. The Company does not
anticipate the effect of the adoption to have a material impact on either
financial position or results of operations. The Company plans to adopt the
standard effective July 1, 2000, as required.
NOTE 3. RECAPITALIZATION
Effective July 1, 1997, the Corporation was recapitalized through the
following transactions: (1) 100% of the Spectrum partnership interest was sold
to a group of investors for $11.0 million; (2) after retirement of approximately
$1.0 million of Spectrum debt by the investors, the partnership interests were
exchanged for 798,612 shares of the Corporation's common stock; (3) the
Corporation's Articles of Incorporation were amended to establish the
Corporation as a C Corporation and authorized 15,000,000 shares of preferred
stock and 15,000,000 shares of common stock, each with no par value per share;
(4) certain investors purchased 199,654 shares of common stock for $3.0 million
and 1,530,674 shares of Series A Preferred Stock for $23.0 million; (5) all
outstanding balances under then existing lines of credit and long-term debt,
along with related accrued interest and pre-payment penalties, were paid in
full; and (6) the Corporation redeemed 5,666,145 shares of common stock from the
majority stockholder for approximately $87.4 million. The acquisition of
Spectrum has been accounted for as a combination of entities under common
control and, accordingly, the assets acquired were recorded at their historical
cost.
6
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 4. MERGER
On September 19, 1997, Doskocil consummated a merger with Dogloo, Inc. (the
"Merger"), wherein 1,400,603 of the Company's common shares were exchanged for
Dogloo equity in the approximate amount of $21.2 million and Dogloo was merged
with and into Doskocil. The Company is now controlled by an investor group (the
"Investor Group") consisting of various Westar Capital entities and certain of
their affiliates (collectively "Westar") and Enterprise entities ("Enterprise).
The Merger was accounted for as a purchase transaction under generally
accepted accounting principles and, accordingly, the purchase price was
allocated on the basis of the estimated fair value of the assets acquired. This
purchase price allocation resulted in goodwill of approximately $57.3 million
which is being amortized on the straight line basis over 30 years.
Concurrent with the consummation of the Merger, the Company issued 10 1/8%
Senior Subordinated Notes (the "Notes" ) due September 15, 2007, in the
aggregate principal amount of $85.0 million. The Notes were exchanged for
registered Notes (the "Subordinated Notes") pursuant to the Offer to Exchange
dated February 23, 1998 effective as of March 30, 1998. Discounts and
commissions aggregated 3% of the face amount of the Subordinated Notes and net
proceeds to the Company were $82.5 million. Interest on the Notes was, and on
the Subordinated Notes is, payable semi-annually on March 15 and September 15 of
each year commencing on March 15, 1998. The Subordinated Notes are a general,
unsecured obligation of the Company, subordinated in right of payment to all
senior debt of the Company. The Subordinated Notes are subject to certain
optional redemptions at declining premiums beginning in 2002 and continuing
through 2005. Until September 15, 2000, upon an initial public equity offering
of common stock for cash, up to 35% of the aggregate principal amount of the
Subordinated Notes originally outstanding may be redeemed at the option of the
Company at a redemption price stipulated in the indebtedness and other
restricted payments, as defined, and contains cross default provisions with the
Company's senior indebtedness. Debt issuance costs of $5.8 million will be
amortized over the term of the Subordinated Notes and the Credit Facility.
NOTE 5. LONG TERM DEBT
Concurrent with the consummation of the Merger, the Company entered a
Credit Facility with a syndicate of lending institutions party thereto (the
"Lenders"), which agreement provides for an aggregate principal amount of loans
of up to $110 million. Loans under the Credit Facility consist of $82.5 million
in aggregate principal amount of term loans (the "Term Loan Facility"), which
facility includes a $45.0 million tranche A term loan subfacility, a $37.5
million tranche B term loan subfacility, and a $27.5 million revolving credit
facility which has been reduced to $24.7 million (the "Revolving Credit
Facility") and includes a subfacility for swingline borrowings and a sublimit
for letters of credit. As of September 30, 1999, the principal amount
outstanding on tranche A was $40.0 million, on tranche B was $36.8 million and
$24.7 million on the revolving credit facility. The Company used the Term Loan
Facility and a portion of the Revolving Credit Facility to provide a portion of
the funding necessary to consummate the Merger.
7
<PAGE> 8
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Indebtedness under the Term Loan Facility and the Revolving Credit Facility
initially bears interest at a rate based (at the Company's option) upon (i)
LIBOR for one, two, three or six months, plus 3.00% with respect to the tranche
A term loan facility and the Revolving Credit Facility or plus 3.50% with
respect to the tranche B term loan facility, or (ii) the Alternate Base Rate (as
defined in the Credit Facility) plus 1.50% with respect to the tranche A term
loan facility and the Revolving Credit Facility or plus 2.00% with respect to
the tranche B term loan facility; provided that, pursuant to the Second
Amendment (defined below), the interest rate margins described above have been
increased by 0.50% per annum from the date of the Second Amendment through and
including December 31, 1999; provided, however, the interest rates for the
Revolving Credit Facility and Tranche A Term Loan are subject to several quarter
point reductions in the event the Company meets certain performance targets.
The tranche B term loan facility matures on September 30, 2004. Tranche A
term loan facility and the Revolving Credit Facility mature on September 30,
2003. The Term Loan facility is subject to repayment according to quarterly
amortization of principal based upon the Scheduled Amortization (as defined in
the Credit Facility). The Credit Facility provides for mandatory prepayment of
the Term Loan Facility and the Revolving Credit Facility until certain financial
ratios are attained by the Company. Prepayments on the Term Loan Facility are
applied to reduce scheduled amortization payments as provided in the Credit
Facility. The mandatory prepayments defined in the Credit Facility include: (a)
100% of the net cash proceeds received by the Company, or any subsidiary from
asset sales (subject to de minimus baskets, certain other defined exceptions,
and reinvestment provisions), net of selling expenses and taxes to the extent
such taxes are paid; (b) 50% of excess cash flow pursuant to an annual cash
sweep arrangement; (c) up to 100% of the net cash proceeds of certain
indebtedness subject to certain exceptions and (d) 100% of the net cash proceeds
from the issuance of equity by the Company or any subsidiary subject to de
minimus baskets and certain exceptions. In addition, the Company may prepay the
Credit Facility in whole or in part at any time without penalty, subject to
reimbursement of certain costs of the Lenders.
The Company is required to pay to the Lenders in the aggregate a commitment
fee equal to 1/2% per annum on the committed undrawn amount of the Revolving
Credit Facility during the preceding quarter, provided that this fee may be
subject to reduction in the event the Company meets certain performance targets.
Amendments to the Credit Facility. At December 31, 1998 the Company was not
in compliance with certain financial covenants. The Company entered into an
amendment to the Credit Facility as of February 10, 1999 (the "First Amendment")
which provided, among other matters, for the waiver of such covenant defaults,
the revision of certain existing financial covenants, including the addition of
minimum EBITDA requirements in place of the maximum leverage ratio and interest
rate increases of approximately 0.75% per annum.
The Credit Facility, as amended in February, required the Company to meet
certain financial tests, including a minimum fixed charge coverage ratio,
minimum interest coverage ratio, a minimum EBITDA requirement and a maximum
leverage ratio. The Credit Facility also contains additional restrictions,
which, among other things, limit additional indebtedness, liens, sales of assets
and business combinations.
As of March 31, 1999 the Company was not in compliance with the interest
coverage ratio, the fixed charge coverage ratio and the minimum EBITDA
requirement. The Company entered into a second amendment to the Credit Facility
in May 1999 (the "Second Amendment"). The Second Amendment provided, among other
things, for the waiver of the March 31, 1999 defaults and lowered June 30 and
September 30 interest coverage ratios, fixed charge coverage ratios and minimum
EBITDA requirements and also provides for a 0.50% interest rate increase on all
loans outstanding under the Credit Facility from the date of the second
Amendment through and including December 31, 1999.
8
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DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
On August 12, 1999, the Company entered into an amendment to the Credit
Facility (the "Third Amendment") to permit, among other things, the Company to
enter into an additional credit facility (the "Additional Credit Facility") with
BankAmerica, N.A. (the "Additional Lender"). The Additional Credit Facility is a
senior revolving credit facility which the Company entered into on August 12,
1999. Amounts outstanding under the Additional Credit Facility are secured by
liens on certain equipment and other property of the Company that are junior in
lien priority to the lien securing the Company's existing Credit Facility.
Pursuant to an amendment to the Additional Credit Facility executed on October
12, 1999, the maturity of such facility was extended to September 30, 2000 and
the maximum amount of borrowings thereunder was increased from $10.0 million to
$15.0 million. Advances under the Additional Credit Facility may be made at the
option of the Company as a base rate advance or a LIBOR Advance. Base rate
advances bear interest at a per annum interest rate equal to the higher of (a)
the sum of (i) 0.50% plus (ii) the federal funds rate on the applicable day plus
(iii) an applicable base rate margin or (b) the sum of (i) the prime rate on
such date plus (ii) an applicable base rate margin. A LIBOR advance bears
interest at a rate based upon LIBOR plus 3.50 percent. The financial covenants
in the Company's existing Credit Facility, after giving effect to the Fourth
Amendment, are incorporated by reference into the Additional Credit Facility.
In order to induce the Additional Lender to provide the Additional Credit
Facility, Westar Capital LP and Westar Capital II LLC (together, the "Westar
Funds") have entered into a Continuing Guaranty dated as of August 12, 1999 (the
"Guaranty") and a Pledge Agreement dated as of August 12, 1999 (the "Pledge
Agreement") pursuant to which, from time to time in the discretion of the Westar
Funds, the Westar Funds may guarantee loans made by the Additional Lender under
the Additional Credit Facility and pursuant to which Westar Capital II LLC has
pledged $5 million to secure its obligations under the Guaranty. In addition,
Twelve D Limited, a limited partnership controlled by Benjamin L Doskocil, Sr.
("TDL"), has entered into a Reimbursement Agreement dated as of August 12, 1999
(the "Reimbursement Agreement") with the Westar Funds pursuant to which TDL has
agreed to reimburse the Westar Funds for payments made pursuant to the Guaranty
and the related pledge arrangements under the Pledge Agreement in an amount
proportional to its equity interests in the Company.
In order to induce the Westar Funds to continue the Guaranty and the Pledge
Agreement and, in the case of TDL, to continue its obligations under the
Reimbursement Agreement, the Company issued to Westar LP and an affiliate and
TDL collectively (the "Investors"), who directly or indirectly through the
Reimbursement Agreement guaranteed the Additional Credit Facility, 14.1 million
warrants to acquire common stock of the Company (the "Guaranty Warrants"). The
Guaranty Warrants were issued to each such Investor ratably based on the amount
of such Investor's liability under the Guaranty and Reimbursement Agreement and
are exercisable at an initial exercise price of $.01 per share. Of the Guaranty
Warrants, 4.1 million, are exercisable immediately and, 10.0 million are only
exercisable in the event of, and in proportion to, payments made by such
Investor under the Guaranty.
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.
9
<PAGE> 10
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The Company was not in compliance with certain financial covenants at June
30, 1999, including the interest coverage ratio, fixed charge coverage ratio,
and the minimum EBITDA requirements of the existing Credit Facility. On October
12, 1999, the Company entered into a fourth amendment to the Credit Facility
(the "Fourth Amendment"). The Fourth Amendment provides, among other things, for
the waiver of all financial covenant ratios for September 30, 1999 and all
fiscal quarters prior thereto, and, commencing with the fiscal quarter ending on
December 31, 1999, raises the maximum leverage ratio and lowers each of (i) the
minimum fixed charge coverage ratio, (ii) the interest coverage ratio and (iii)
the minimum EBITDA. Additionally, the Fourth Amendment (i) adds a covenant for
senior leverage commencing with the fiscal quarter ending on September 30, 2000,
(ii) adds a covenant prohibiting the principal amount of all loans outstanding
under the existing Credit Facility from exceeding (a) $96,000,000 as of the last
day of each fiscal quarter through June 30, 2000, and (b) thereafter, the lesser
of (x) $96,000,000 and (y) the Company's EBITDA for the four consecutive fiscal
quarters immediately preceding the date of calculation, times 3.0, and (iii)
reduces the maximum amount of the "Revolving Credit Commitment" to $24.7
million. At October 13, 1999, after giving effect to the Fourth Amendment, and
application of proceeds from the sale of Series D Preferred Stock, there is
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 the
revolving credit facility.
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.
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 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, the Additional
Credit Facility or the Subordinated Notes, if not cured or waived, could permit
acceleration of the related indebtedness and acceleration of indebtedness under
other instruments that contain cross-acceleration or cross-defaults. While
management expects to meet all covenants in the future, there is no assurance
the Company will do so.
10
<PAGE> 11
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30, September 30,
(In thousands) 1999 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Finished Goods $ 19,197 $ 15,503 $ 15,579
Work-in-Process 1,768 1,291 2,170
Raw Materials 7,796 9,367 12,385
Supplies 1 -- 172
------------ ------------ ------------
Net inventories $ 28,762 $ 26,161 $ 30,306
============ ============ ============
</TABLE>
NOTE 7. INCOME TAXES
The effective tax rate for the three months ended September 30, 1999 was
0.0% due to the net operating loss generated for the period, for which a
valuation allowance has been provided. The estimated effective tax rate was 43%
for the three months ended September 30, 1998, which includes an adjustment for
the amortization of Dogloo goodwill that is not deductible for tax purposes. As
the net operating loss carry forward and net deductible temporary differences
which existed at the date of the Dogloo merger are realized, the associated tax
benefit will reduce goodwill. Realization of net operating losses and deductible
temporary differences generated subsequent to the date of the Dogloo merger will
be recognized as a reduction of income tax expense.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Various claims and lawsuits are pending against the Company. In the opinion
of the Company's management, the potential loss on all claims will not be
significant to the Company's financial position or results of operations.
The Company is 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.
NOTE 9. NET (LOSS) INCOME PER SHARE
Net (loss) income per share for the three months ended September 30, 1999
and 1998 are calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
(In thousands except per share data) 1999 1998
------------ ------------
<S> <C> <C>
Net (loss) income attributable to common stockholders $ (5,678) $ 993
Average shares outstanding during the period 3,139 3,104
Net (loss) income per share (basic and diluted) $ (1.81) $ .32
------------ ------------
</TABLE>
NOTE 10. COMPREHENSIVE INCOME
For the first and second quarter of fiscal 2000 and 1999, there were no
differences between comprehensive income and net income.
11
<PAGE> 12
DOSKOCIL MANUFACTURING COMPANY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Doskocil Manufacturing Company, Inc. (the "Company") is among the leading
plastic pet products companies in the United States, manufacturing a broad range
of plastic and other pet products sold through a distribution network of more
than 2,000 retailers. The following discussion should be read in conjunction
with the financial statements and notes for the quarter ended September 30, 1999
included in this report. Additional information is contained in the Company's
Annual Report on Form 10-K for the year ended June 30, 1999.
This quarterly report on Form 10-Q contains certain forward-looking
statements and information relating to the Company that are based on opinion of
management as well as assumptions made by an information currently available to
management. Such forward-looking statements typically contain words such as
"anticipates" "believes" "estimates" "expects" or similar words indicating that
future outcomes are uncertain. In accordance with "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, these and similar
statements are qualified by cautionary language identifying important factors,
though not necessarily all such factors, which could cause future outcome to
differ materially from those set forward in the forward-looking statements. In
addition to the factors that may be described in this report, the following
factors, among others, could cause the Company's actual results to differ
materially from those expressed in any forward-looking statements; (i) the
Company incurred substantial indebtedness in connection with the consummation of
the Merger and has remained highly leveraged, (ii) the Credit Facility, the
Additional Credit Facility, and the Subordinated Notes contain numerous
restrictive covenants which limit the discretion of the Company's management
with respect to certain business matters, (iii) the Company has and may continue
encounter continued difficulties or delays in completing the integration of
Doskocil's and Dogloo's product offerings, systems, and manufacturing; (iv) the
prices for the Company's principal raw material, plastic resin, may fluctuate as
a result of world wide changes in natural gas and crude oil prices; (v) a
relatively small number of customers account for a significant percentage of the
Company's business; (vi) the Company relies heavily on trademarks, patents and
licenses to protect the proprietary nature of its products; (vii) the Company
has experienced difficulty fulfilling customer orders on a timely basis and may
continue to experience such difficulties; (viii) consumer preferences may change
and the Company may fail to adequately anticipate such changes; (ix) the
Company's results of operations have historically been seasonal; (x) the Company
is highly susceptible to the effect of changes in general economic and business
conditions; (xi) the Company's competitors may be more successful in introducing
new product offerings, and (xii) claims or lawsuits may be brought against the
Company, including claims of product liability. The potential adverse impact on
the Company of these and other risks is discussed in more detail in the
Company's report on Form 10-K for the year ended June 30, 1999 and the risk
factors described there are incorporated herein by reference. The
forward-looking statements contained herein also include the statements made
under the captions "Outlook" and "Year 2000" regarding steps being taken by the
Company to improve its operations, as well as statements in "Liquidity and
Capital Resources." There is no assurance that the steps being taken will
adequately address the difficulties experienced or that delays will not occur in
implementation of the Company's corrective actions.
OVERVIEW - FIRST QUARTER
First quarter results were lower than the same period last year. Last
year's first quarter benefited from several non-recurring events, including
positive inventory adjustments and insurance proceeds, that improved results.
This year's results were unfavorably impacted by four factors discussed below
including lower sales, unfavorable inventory adjustments due to shipping
and receiving problems, higher labor costs and higher costs for inbound freight
and outside warehousing and fulfillment costs. These problems will continue to
unfavorably impact future results until and unless they are addressed
satisfactorily.
During July, 1999, the Company commenced implementation of a new financial,
manufacturing and distribution hardware and software system. The implementation
was accomplished with the assistance of vendor consultants under a fast track
methodology. This methodology required that the system be configured on a
standard basis and the Company's ability to configure the system to conform to
its procedures and methods of operation was strictly limited. The standard
configuration and the absence of sufficient time to effectively train the user
community have resulted in certain system-created impairments to efficient
operation of the system and other operational issues which are continuing. In
addition to the enterprise resource software, the Company installed and
implemented a warehouse management system at the same time. This system required
an interface to be created to operate the systems together. The interface
between the systems has been only marginally effective and has resulted in
inefficiencies in the processing of customer orders and the shipping and
invoicing of those orders. The Company believes it has identified the issues to
be addressed and is working with the software vendors and consultants to remedy
the ongoing system processing issues.
12
<PAGE> 13
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
In October 1999, the Company completed amendments to its bank debt. See
"Liquidity and Capital Resources."
RESULTS OF OPERATIONS
NET SALES decreased to $37.2 million in the first quarter of fiscal 2000
from $40.0 million in the comparable period of the prior year, a decrease of
$2.8 million. The decrease was primarily the result of lower pet product sales
of $1.1 million, lower sport sales of $1.1 million and lower outside resin
sales. The reduction in pet sales resulted from the impact of promotional
activity in June 1999. The decline in sport sales was primarily due to reduced
listings at two customers and lower sales due to the disposition of non-core
assets in the last half of fiscal 1999. In addition, the system implementation
discussed above resulted in an increase in the time required to process and ship
orders and has consequently caused an increase in the Company's sales backlog.
GROSS PROFIT decreased to $11.5 million in the first quarter of fiscal 2000
from $17.4 million in the comparable period of the prior year, a decrease of
$5.9 million. As a percentage of net sales, gross margin decreased to 30.9% in
the first quarter of fiscal 2000 from 43.5% in the comparable period of the
prior year. The Company's gross profit as a percentage of net sales was
negatively affected by inefficiencies in manufacturing and distribution
including unfavorable inventory adjustments due to shipping and receiving
problems and higher scrap. Spending levels for inbound freight, outside
warehousing and labor were higher than the comparable period of the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to $12.7 million in
the first quarter of fiscal 2000 from $11.0 million in the comparable period of
the prior year, an increase of $1.7 million or 15.5%. As a percentage of net
sales, S,G&A spending increased to 34.1% in the first fiscal quarter of fiscal
2000 from 27.6% in the comparable period of the prior year. The increase was the
result of several factors including $0.3 million of severance costs related to
the former CEO, $.8 million higher shipping costs and increased professional
fees and services related to the refinancing of the bank debt. These increases
were somewhat offset by lower freight, advertising and insurance costs.
OTHER INCOME for the first quarter of fiscal 2000 includes a $0.4 million
gain on the sale of the Indianapolis facility.
INTEREST EXPENSE increased to $4.7 million in the first quarter of fiscal
2000 from $4.2 million in the comparable period of the prior year. The increase
is primarily due to increased debt balance on both the Revolving Credit Facility
and the Additional Credit Facility.
PROVISION FOR INCOME TAXES the first quarter ended September 30, 1998 was
$0.9 million. The effective tax rate was 43%, primarily due to the amortization
of Dogloo goodwill which is not deductible for tax purposes. There was no
provision for income taxes for the quarter ended September 30, 1999 due to a net
operating loss generated during the period. The tax benefit associated with the
net operating loss has been offset by a valuation allowance. The balance sheet
dated June 30, 1999 and September 30, 1999 included a valuation allowance of
approximately $9.0 million and $10.9 million, respectively, for deferred tax
assets as of the purchase date and also includes deferred tax assets included in
the provision for income taxes.
13
<PAGE> 14
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
NET LOSS for the quarter ended September 30, 1999, was $5.4 million
compared to net income of $1.2 million for the comparable period of the prior
year, a decrease of $6.6 million. The change in net income primarily reflects
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Total debt outstanding on September 30, 1999 increased by $8.4 million from
June 30, 1999, due primarily to additional borrowings against the Company's
revolving credit agreements. Total outstanding debt is comprised of bank
borrowings of $108.5 million and Subordinated Notes of $85.0 million. At
September 30, 1999, the bank borrowings are comprised of a Term Loan Facility of
$76.8 million, a Revolving Credit Facility of $24.7 million, the maximum amount
allowable under the fourth amendment to the credit agreement and an Additional
Credit Facility of $10.0 million, of which $7.0 million was outstanding. The
Additional Credit Facility is guaranteed by certain shareholders. Note 4 to the
Financial Statements outlines the terms and conditions of the Subordinated
Notes. At September 30, 1999 the Company had $3.0 million of availability on the
Revolving Credit Facility and the Additional Credit Facility (together the
"Revolving Credit Facilities"). Proceeds from the sale of Series D Preferred
Stock was applied to the Term Loan Facility. In addition, the fourth amendment
to the credit agreement increased the maximum amount of borrowings under the
Additional Credit Facility to $15.0 million.
Because 50% of the Company's outstanding borrowings at September 30, 1999
and the additional availability from the Revolving Credit Facility and the
Additional Credit Facility are at floating interest rates, the Company is
subject to interest rate volatility. The weighted average interest rate on all
floating rate borrowings at September 30, 1999, was 9.0%.
Management anticipates incurring capital expenditures for the fiscal year
ending June 30, 2000, of approximately $10.0 million relating 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.
The Company believes cash provided by operations, equipment leases and cash
available under existing credit facilities will be sufficient to fund working
capital and capital expenditure requirements during the next twelve months.
The Company's Term Loan Facility and Revolving Credit Facility, as amended,
contain a number of financial covenants that require the Company to meet certain
financial ratios and tests, including a minimum fixed charge coverage ratio,
minimum interest coverage ratio, minimum EBITDA and maximum senior debt and
total debt leverage ratios. On October 12, 1999 the Company entered into a
fourth amendment to the Credit Facility (the "Fourth Amendment"). The Fourth
Amendment provides, among other things, for the waiver of all financial covenant
ratios for the quarter ended September 30, 1999. (See Note 5 to the Financial
Statements for terms and conditions of new bank agreement.)
The Company's continued ability to satisfy its loan covenants depends, in
part, on the amount of time required to successfully address the difficulties
described above and below. (See also "Outlook") Until corrected, the impact of
these difficulties on the Company's financial performance will adversely affect
the Company's ability to satisfy its financial covenants. In the event the
Company is unable to meet certain of its financial covenants, the Company
anticipates requesting waivers and/or amendments to its Term Loan Facility,
Revolving Credit Facility and Additional Credit Facility and if necessary,
seeking additional equity. There is no certainty that waivers and/or amendments
to its loan agreements could be obtained or that the Company can raise
additional equity. There is no commitment or obligation on the part of any
shareholder of the Company to provide additional equity to the Company.
The Company and certain of its shareholders, including Westar Capital and
HBI Financial Inc., and partners, officers and affiliates of such shareholders
and the Company, may from time to time make open market and privately negotiated
purchases of the Subordinated Notes. The timing and amount of such purchases, if
any, will depend upon a variety of matters including, but not limited to, the
trading price of the Subordinated Notes and restrictions contained in the
Company's debt agreements.
14
<PAGE> 15
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
OUTLOOK
The Company believes that it is entering its second quarter with improved
operational capabilities from the prior year in several key areas. The Company's
largest customers have experienced improved customer service in the first
quarter and the first part of the second quarter. June promotional activity,
careful planning of production, the SKU reduction and higher inventory levels
have contributed to achieving higher service levels and to mitigating some of
the impact of the system conversion problems. Finished goods continue at higher
levels than last year, giving the Company the potential to achieve its sales
targets.
Operationally, the Company has moved into additional new plant facilities
and acquired new equipment to increase capacity. Its warehouse facilities,
systems and management are improved and capable of meeting increased sales
levels.
Costs have decreased in several areas, including advertising, insurance,
raw materials, equipment rentals and freight. The Company has initiated a
program to streamline and reduce costs by reducing SKUs and converting smaller
customers to distributors. The Company's finance and accounting management has
been strengthened.
There are several issues still facing the Company including below targeted
production levels, higher inventory and working capital demands and higher
warehousing and labor costs. Systems problems continue to distract management
and delay the implementation of cost cutting programs. Warm weather has slowed
consumer purchases of pet shelters which could impact the second quarter. The
price of oil continues to increase and could cause resin prices to be higher
than expected.
YEAR 2000
In the next three months, most large companies will face a potentially
serious information systems problem because many software applications and
operational 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 programs and
hardware 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 desktop computers. To date, the Company has replaced significant
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,
ancillary business systems and the computerized process of scheduling systems
for the production equipment and servers. The Company has completed a
comprehensive review of possible Year 2000 impacts on production and operational
support areas of the Company. 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.
15
<PAGE> 16
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
In October 1998, the Company attempted to implement a new manufacturing,
distribution and financial hardware and software system to replace the Company's
current mainframe system, which is not Year 2000 compliant. This attempted
implementation encountered complications and the decision was made to pursue
other alternatives and return to its previous system. In July 1999 the Company
commenced the implementation of financial, manufacturing and distribution
modules, which are Y2K compliant.
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 $6.5
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 and a half years, capital expenditures for this project were
approximately $6.5 million, of which $2.3 million of these costs had minimal
future benefit and were charged to expense in fiscal 1999 as 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 good sand
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 terms 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
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 current computer programs
Year 2000 compliant. The Company will continue to monitor internal and external
progress.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This new standard requires recognition
16
<PAGE> 17
DOSKOCIL MANUFACTURING COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
of all new derivatives as either assets or liabilities at fair value. The
Company does not anticipate the effect of the adoption to have a material impact
on either financial position or results of operations.
Comparison of first quarters' EBITDA.
The following table summarizes the first quarter of fiscal 1999 and 2000:
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------
(In thousands) 1999 1998
------------ ------------
<S> <C> <C>
Pet products ..................................... $ 31,248 $ 32,378
Sporting goods ................................... 4,126 5,219
Outside resin sales .............................. 1,826 2,378
------------ ------------
Net sales ................................... $ 37,200 $ 39,975
Cost of goods sold ............................... 25,720 22,604
------------ ------------
Gross profit ................................ $ 11,480 $ 17,371
Selling, general and administrative expense ...... 12,685 11,025
------------ ------------
Operating (loss) income...................... $ (1,205) $ 6,346
Adjustments:
Depreciation, amortization and impairment ........ 2,616 2,779
------------ ------------
EBITDA ...................................... $ 1,411 $ 9,125
</TABLE>
(1) The term EBITDA as used above means operating income plus depreciation,
amortization and asset impairments. EBITDA should not be construed as a
substitute for income from operations or be considered a better indicator
of liquidity or cash flow from operating activities which is determined in
accordance with generally accepted accounting principles. EBITDA is
included herein to provide additional information with respect to the
ability of the Company to meet its future debt service, capital
expenditures and working capital requirements. EBITDA is not necessarily a
measure of the Company's ability to fund its cash needs. See also Footnote
1 in the Notes to Financial Statements.
17
<PAGE> 18
DOSKOCIL MANUFACTURING COMPANY, INC.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There are no material changes to the disclosure on this matter made in the
Company's report on Form 10-K for the year ended June 30, 1999.
18
<PAGE> 19
DOSKOCIL MANUFACTURING COMPANY, INC.
PART II OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule (for electronic filing only)
10.35 Statement of Designation of Series D Preferred Stock
10.36 Guaranty Warrant Agreement
10.37 Preferred Stock and Warrant Purchase Agreement
(b) Reports on Form 8-K:
Form 8-K dated July 21, 1999 reported under Item 5, "Other Events," the
announcement of appointment of the Company's new President and Chief
Executive Officer.
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.
19
<PAGE> 20
DOSKOCIL MANUFACTURING COMPANY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOSKOCIL MANUFACTURING COMPANY, INC.
(Registrant)
Date: November 19, 1999 /s/ Larry E. Rembold
--------------------------------------
Larry E. Rembold
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 19, 1999 /s/ John J. Casey
--------------------------------------
John J. Casey
Chief Financial Officer
(Principal Accounting Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 - Financial Data Schedule (for electronic filing only)
10.35 Statement of Designation of Series D Preferred Stock
10.36 Guaranty Warrant Agreement
10.37 Preferred Stock and Warrant Purchase Agreement
</TABLE>
<PAGE> 1
EXHIBIT 10.35
DOSKOCIL MANUFACTURING COMPANY, INC.
A TEXAS CORPORATION
STATEMENT OF DESIGNATION
OF
SERIES D PREFERRED STOCK
The undersigned, Larry Rembold, President and Chief Executive
Officer of Doskocil Manufacturing Company, Inc., a corporation organized and
existing under and by virtue of the Texas Business Corporation Act, as amended
(the "TBCA"), hereby certifies as follows:
FIRST: The name of the corporation is Doskocil Manufacturing
Company, Inc. (the "CORPORATION").
SECOND: The Board of Directors of the Corporation duly adopted
a resolution as of October 12, 1999 adopting this Statement of Designation of
Series D Preferred Stock of the Corporation.
THIRD: The resolution adopting this Statement of Designation
of Series D Preferred Stock was duly adopted by all necessary action of the part
of the Corporation.
FOURTH: The following is a true and correct copy of the
preferences and relative and other rights, and the qualifications, limitations
or restrictions of the Series D Preferred Stock as approved pursuant to the
foregoing resolution:
The rights, preferences, privileges and restrictions granted
to and imposed upon the Series D Preferred Stock are as set forth below:
.1 Designation. The fourth series of the Corporation Preferred
Stock shall be designated "SERIES D PREFERRED STOCK."
.2 Number of Shares. The number of shares constituting the
Series D Preferred Stock shall be 500,000 shares.
.3 Dividend Provisions.
(a) Subject to (i) the rights of any series of Preferred
Stock, other than the Series C Preferred Stock, which may from time to time come
into existence, and (ii) any loan covenant or other provision for the benefit of
the holders of Senior Debt contained in any document or agreement evidencing
Senior Debt, the holders of shares of Series D Preferred Stock shall be entitled
to receive (i) cash dividends, out of any assets legally available therefor,
prior and in preference to any declaration or payment of any dividend on the
Common Stock or any Series C
<PAGE> 2
Preferred Stock, or (ii) additional fully-paid and non-assessable shares of
Series D Preferred Stock, at the annual dividend rate of 12% per annum, payable
quarterly in arrears on January 1, March 1, July 1 and September 1 of each year
beginning January 1, 2000. Such dividends shall accrue on each outstanding share
of Series D Preferred Stock commencing on the date of issuance thereof, whether
or not earned or declared. Such dividends shall be cumulative so that, if such
dividends in respect of any previous or current annual dividend period, at the
annual rate specified above, shall not have been paid, the deficiency shall,
subject to the rights of any series of Preferred Stock which may from time to
time come into existence, other than the Series C Preferred Stock, first be
fully paid before any dividend or other distribution shall be paid on or
declared and set apart for the Common Stock or the Series C Preferred Stock.
Except as provided in subsection (b) below, any accumulation of dividends on the
Series D Preferred Stock shall not bear interest.
"SENIOR DEBT" shall mean all principal of, premium and
interest (including, without limitation, any interest which accrues (or which
would accrue but for such case, proceeding or other action) after the
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of this corporation (whether or not such interest
is allowed or allowable as a claim in such case, proceeding or other action)) on
any indebtedness created, incurred, assumed or guaranteed by this corporation
and its subsidiaries (present or future), whether now existing or hereafter
arising, due or to become due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, under any working capital or other
credit agreement or facility with a lender, any debt issued to the public
pursuant to a private placement or registration statement filed with and
declared effective by the Securities and Exchange Commission, any debt incurred
in connection with any past or future acquisitions by this corporation and its
subsidiaries (present and future), and any sale/leaseback financing on equipment
or real property of this corporation or its subsidiaries (present and future).
(b) If, on any dividend payment date, the holders of Series D
Preferred Stock shall not have received the full quarterly dividend provided for
herein (the "UNPAID DIVIDEND"), then the holders of Series D Preferred Stock
shall also be entitled to additional dividends on such Unpaid Dividends
(collectively, the "ADDITIONAL DIVIDENDS"). Additional Dividends shall also be
cumulative and shall accrue at the same rate as dividends are then accruing on
the Series D Preferred Stock, whether or not declared, for each succeeding
dividend period during which accumulated annual dividends, or Additional
Dividends thereon, shall remain unpaid.
.4 Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of this corporation, either voluntary or involuntary, subject to (i) the rights
of any other series of Preferred Stock that may from time to time come into
existence, other than the Series C Preferred Stock and (ii) any loan covenant or
other provision for the benefit of the holders of Senior Debt contained in any
document or agreement evidencing Senior Debt, the holders of Series D Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets of this
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corporation to the holders of Common Stock and Series C Preferred Stock, an
amount per share equal to $100 per share of Series D Preferred Stock (as
adjusted for any stock dividends, subdivisions, combinations or
reclassifications with respect to such shares) plus all accrued but unpaid
dividends on such share (the "SERIES D LIQUIDATION PRICE"). If upon the
occurrence of such event and after payment in full of the liquidation preference
of any other series of Preferred Stock that may from time to time come into
existence, other than the Series C Preferred Stock, the assets and funds thus
distributed among the holders of the Series D Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, the entire assets and funds of this corporation
legally available for distribution after payment in full of the liquidation
preference of any other series of Preferred Stock that may from time to time
come into existence, other than the Series C Preferred Stock, shall be
distributed ratably among the holders of the Series D Preferred Stock in
proportion to the amount of such stock owned by each such holders.
(b) Upon the completion of (i) the distributions to the
holders of Series D Preferred Stock required by Section 3.4(a) and (ii) the
distributions to the holders of the Series C Preferred Stock required by Section
2.4(a) and (iii) any other distribution that may be required with respect to
series of Preferred Stock that may from time to time come into existence, if
assets remain in this corporation, the holders of the Common Stock of this
corporation (based on the number of shares of Common Stock held by each), shall
receive all of the remaining assets of this corporation.
.5 Exchange and Replacement of Certificates.
(a) This corporation shall keep at its principal office (or
such other place as this corporation reasonably designates) a register for the
registration of shares of Series D Preferred Stock. Upon the surrender of any
certificates representing shares of Series D Preferred Stock at such place, this
corporation shall, at the request of the registered holder of such certificate,
execute and deliver a new certificate or certificates in exchange therefor
representing in the aggregate the number of shares represented by the
surrendered certificate (and this corporation forthwith shall cancel such
surrendered certificate), subject to the requirements of all applicable
securities laws and the Securityholders Agreement. Each such new certificate
shall be registered in such name and shall represent such number of shares as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate. The issuance of
new certificates shall be made without charge to the holders of the surrendered
certificates or any issuance tax in respect thereof or other costs incurred by
this corporation in connection with such issuance; provided, that this
corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than that of the holder of the surrendered certificate.
(b) Upon receipt of evidence reasonably satisfactory to this
corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing one or more shares of Series D Preferred
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Stock and, in the case of any such loss, theft or destruction, upon receipt of
indemnity reasonably satisfactory to this corporation, or in the case of any
such mutilation, upon surrender of such certificate, this corporation shall
execute and deliver in lieu of such certificate a new certificate of like kind
representing the number of shares represented by such lost, stolen, destroyed or
mutilated certificate dated the date of such lost, stolen, destroyed or
mutilated certificate. The term "OUTSTANDING" when used in this Article is
referenced to shares of the Series D Preferred Stock as of any particular time
and shall not include any such shares represented by any certificate in lieu of
which a new certificate has been executed and delivered by this corporation in
accordance with this provision but shall include instead those shares
represented by such new certificate.
.6 Redemption.
(a) Subject to (i) the rights of series of Preferred Stock
which may from time to time come into existence, other than the Series C
Preferred Stock and (ii) any loan covenant or other provision for the benefit of
the holders of Senior Debt contained in any document or agreement evidencing
Senior Debt, this corporation may at any time it may lawfully do so, at the
option of the Board of Directors, redeem in whole or in part the Series D
Preferred Stock by paying in cash per share a sum equal to $100 per share of
Series D Preferred Stock (as adjusted for any subsequent stock dividends, stock
splits or recapitalizations of the Series D Preferred Stock) plus all accrued
but unpaid dividends, if any, on such shares (the "SERIES D REDEMPTION PRICE").
Any redemption effected pursuant to this subsection 3.6(a) shall be made on a
pro rata basis among the holders of the Series D Preferred Stock based upon the
number of shares of Series D Preferred Stock held by each such holder in
proportion to the total number of shares of Series D Preferred Stock then held
by all such holders. In the event of any redemption pursuant to this subsection
3.6(a), at least ten (10) but no more than sixty (60) days prior to any such
redemption, written notice (the "Series D Redemption Notice") shall be mailed,
first class postage prepaid, to each holder of record (at the close of business
on the business day next preceding the day on which notice is given) of the
Series D Preferred Stock to be redeemed, at the address last shown on the
records of this corporation for such holder, notifying such holder of the
redemption to be effected, specifying the number of shares to be redeemed from
such holder, the date such redemption is to occur, the Series D Redemption
Price, the place at which payment may be obtained and calling upon such holder
to surrender to this corporation, in the manner and at the place designated,
his, her or its certificate or certificates representing the shares to be
redeemed.
(b) Except as provided in this subsection 3.6(b), on or after
the date of any redemption pursuant to Section 3.6 hereof, each holder of Series
D Preferred Stock to be redeemed shall surrender to this corporation the
certificate or certificates representing such shares, and thereupon the Series D
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be cancelled. In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares. From and after the date of mailing
of the Series D Redemption Notice, unless there shall have been a default in
payment of the Series D Redemption Price, all rights of the holders of
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shares of Series D Preferred Stock designated for redemption (except the right
to receive the Series D Redemption Price upon surrender of their certificate or
certificates), including, without limitation, the right to receive dividends
thereon, shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of this corporation or be deemed to be
outstanding for any purpose whatsoever. Upon consummation of any redemption of
the Series D Preferred Stock, if the funds of this corporation legally available
for redemption of shares of Series D Preferred Stock on the date of mandatory
redemption under Section 3.6 are insufficient to redeem the total number of
shares of Series D Preferred Stock to be redeemed on such date, subject to the
rights of any series of Preferred Stock which may from time to time come into
existence, those funds which are legally available will be used to redeem the
maximum possible number of such shares ratably among the holders of such shares
to be redeemed based upon their holdings of Series D Preferred Stock. The shares
of Series D Preferred Stock not redeemed on the date of any mandatory redemption
shall remain outstanding and shall be entitled to all the rights and preferences
provided herein, including, without limitation, accrual of dividends pursuant to
Section 3.3. At any time thereafter when additional funds of this corporation
are legally available for the redemption of shares of Series D Preferred Stock,
subject to the rights of any series of Preferred Stock which may from time to
time come into existence in compliance herewith, other than the Series C
Preferred Stock, such funds will immediately be used to redeem the balance of
the shares which this corporation has become so obliged to redeem but which it
has not redeemed.
.7 Conversion. The Series D Preferred Stock shall have no
rights to convert into any other equity security of this corporation.
.8 Voting Rights. The Series D Preferred Stock shall have no
voting rights other than those provided by law or in the Protective Provisions
set forth below in Section 3.9.
.9 Protective Provisions.
(a) So long as any shares of Series D Preferred Stock are
outstanding, this corporation shall not, without first obtaining the approval
(by vote or written consent) of the holders of at least a majority of the then
outstanding shares of Series D Preferred Stock:
(i) amend this corporation's Articles of Incorporation
to, or otherwise, alter or change the rights, preferences, privileges or
restrictions of the shares of Series D Preferred Stock so as to affect adversely
such shares; or
(ii) authorize or issue, or obligate itself to issue, any
other equity security, including any other security convertible into or
exercisable for any equity security having a preference over, or being on a
parity with, the Series D Preferred Stock with respect to redemption, dividends
or liquidation payments; or
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(iii) redeem or purchase or otherwise acquire shares of
any class of stock of this corporation, directly or indirectly, other than (A)
redemptions of Series D Preferred Stock pursuant to the provisions of Section
3.6 or (B) repurchases of options or capital stock issued upon exercise of
options from employees, officers, directors or consultants; (in addition, if at
any time there shall be either (A) accrued and unpaid dividends on any shares of
Series D Preferred Stock then outstanding or (B) any redemption required by
Section 3.6 to be made of shares of Series D Preferred Stock then outstanding
which has not been made, no dividends whatsoever of any kind may be paid upon,
nor may any distribution of any kind be made upon any share of any class of
stock of this corporation other than the Series D Preferred Stock).
(b) If this corporation shall in any manner subdivide (by
stock-split, stock dividend or otherwise) or combine (by reverse stock-split or
otherwise) the outstanding shares of Series D Preferred Stock, the liquidation
payment per share, the redemption price per share and the number of shares
required to be redeemed shall be proportionately reduced or increased, as the
case may be.
IN WITNESS WHEREOF, this Statement of Designation has been
signed by the undersigned on October 12, 1999.
----------------------------------------------------
Larry Rembold, President and Chief Executive Officer
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EXHIBIT 10.36
PREFERRED WARRANT AGREEMENT
PREFERRED WARRANT AGREEMENT dated as of October 12, 1999,
between Doskocil Manufacturing Company, Inc., a Texas corporation (the
"COMPANY"), and the investors listed on Schedule A attached hereto
(individually, an "INITIAL HOLDER" and collectively, the "INITIAL HOLDERS").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Initial Holders
warrants ("WARRANTS") to purchase up to 1,013,974 shares (the "SHARES") of
common stock of the Company, no par value (the "COMMON STOCK"), in connection
with that certain Series D Preferred Stock and Warrant Purchase Agreement dated
as of October 12, 1999 between the Company and the Initial Holders (as amended,
supplemented or otherwise modified from time to time, the "PURCHASE AGREEMENT")
pursuant to which the Initial Holders will receive 50,000 shares of Series D
Preferred Stock (the "SERIES D PREFERRED STOCK") and the Warrants in exchange
for five million dollars ($5,000,000) in cash;
WHEREAS, the Warrants and the Shares will be subject to
certain provisions in the Amended and Restated Securityholders Agreement dated
as of September 19, 1999 among the Company, the Initial Holders and the other
persons party thereto, as amended by the First Amendment to Amended and Restated
Securityholders Agreement dated as of September 28, 1999 (the "Securityholders
Agreement").
NOW, THEREFORE, in consideration of the agreements herein set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Grant.
The Initial Holders or their designated affiliates are hereby
granted the right to purchase, at any time from and after the date hereof, until
5:00 P.M., Pacific Standard Time, on September 30, 2007 (subject to Section 16
hereof, the "Warrant Exercise Term"), up to 1,013,974 Shares at an initial
exercise price (subject to adjustment as provided in Article 7 hereof) of $.01
per Share. Concurrently with the delivery of this Warrant and the Series D
Preferred Stock, the Initial Holders have paid $5,000,000 to the Company and the
Company hereby acknowledges receipt of such payment.
2. Warrant Certificates.
The warrant certificates (the "Warrant Certificates")
delivered and to be delivered pursuant to this Agreement shall be in the form
set forth as Exhibit A, attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
<PAGE> 2
3. Exercise of Warrants.
The Warrants initially are exercisable at a price of $.01,
subject to adjustment as provided in Article 7 hereof, per Share. Upon surrender
of a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price for the Shares purchased,
at the Company's principal offices (located at 4209 Barnett Boulevard,
Arlington, Texas 76017) the registered holder of a Warrant Certificate ("Holder"
or "Holders") shall be entitled to receive a certificate or certificates for the
Shares so purchased. Payment of the Exercise Price may be made, at the option of
the Holder: (a) by cash, money order, certified or bank cashier's check or wire
transfer, (b) the surrender to the Company of securities of the Company having a
value equal to the aggregate Exercise Price, as determined in good faith by the
Company's board of directors, or (c) the delivery of a notice to the Company
that the Holder is exercising this Warrant by authorizing the Company to reduce
the number of shares of Common Stock subject to this Warrant by the number of
shares having an aggregate value equal to the aggregate Exercise Price, as
determined in good faith by the Company's board of directors. The purchase
rights represented by each Warrant Certificate are exercisable at the option of
the Holder thereof, in whole or in part (but not as to fractional shares of the
Common Stock). In the case of the purchase of less than all the Shares
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the Shares purchasable
thereunder.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of
certificates for the Shares shall be made forthwith (and in any event within ten
business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Article 5
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
Shares shall be executed on behalf of the Company by the manual or facsimile
signature of duly authorized officers of the Company. Warrant Certificates shall
be dated the date of execution by the Company upon initial issuance, division,
exchange, substitution or transfer.
The Warrant Certificates and, upon exercise of the Warrants,
in part or in whole, certificates representing the Shares shall bear a legend
substantially similar to the following:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT
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BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER SAID
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION OR
NO-ACTION LETTER ISSUED BY THE SECURITIES AND EXCHANGE COMMISSION THAT
SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144
OF SUCH ACT. THIS SECURITY IS ALSO SUBJECT TO ADDITIONAL RESTRICTIONS
ON TRANSFER AS SET FORTH IN THE SECURITYHOLDERS AGREEMENT, COPIES OF
WHICH MAY BE OBTAINED UPON REQUEST FROM DOSKOCIL MANUFACTURING
COMPANY, INC. AND ANY SUCCESSOR THERETO."
If any Warrant Certificates or the certificates representing
the Shares cease to be subject to any and all restrictions on transfer set forth
in the Securityholders Agreement, the Company shall, upon the written request of
the holder thereof, issue to such holder without charging therefor a new
certificate evidencing such Warrant Certificates or the certificates
representing the Shares of the Company without the second sentence of the legend
required by the above legend endorsed thereon.
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by its acceptance
thereof, covenants and agrees that the Warrants are being acquired as an
investment and not with a view to the distribution thereof, and that neither the
Warrants nor the shares of Common Stock issuable upon exercise hereof may be
sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or
in part, unless and until:
(a) There is then in effect a registration statement under the
Securities Act of 1933, as amended (the "Act"), covering such proposed
disposition and such disposition is made in accordance with such registration
statement; or
(b) (i) The Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition, and (ii) the Holder
shall have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will not require registration
of such shares under the Act. The Company agrees that it will not require
opinions of counsel for transactions made pursuant to Rule 144.
(c) Notwithstanding the provisions of subsections (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by a Holder that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, if the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he or she were the original Holder of the transferred
Warrant Certificate. The foregoing provisions of this subsection (c) shall apply
to Holders which
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are limited liability companies and their members, as if the term "partner" was
replaced by the term "member" and the term "partnership" was replaced with the
term "limited liability company" in each instance.
(d) Notwithstanding anything herein to the contrary, the
Warrants and any Shares issued upon exercise of the Warrants shall constitute
Equity Securities under the Securityholders Agreement and the Holder thereof
shall be subject to the terms of the Securityholders Agreement, including the
restrictions on the transfer thereof set forth in the Securityholders Agreement.
6. Price.
6.1 Initial and Adjusted Exercise Price. The initial exercise
price of each Warrant shall be $.01 per Share. The adjusted exercise price shall
be the price which shall result from time to time from any and all adjustments
of the initial exercise price in accordance with the provisions of Article 7
hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
7. Registration Rights.
7.1 Registration under the Securities Act of 1933. The
Warrants and the Shares have not been registered for purposes of public
distribution under the Act.
7.2 Registrable Stock. As used herein the term "Registrable
Stock" shall have the meaning set forth in the Securityholders Agreement.
7.3 Registration Rights. Each Holder of Shares received in
connection with the exercise of the Warrants hereunder shall have the
registration rights set forth in Article VI of the Securityholders Agreement,
which by this reference is incorporated by reference herein.
8. Adjustment of Exercise Price and Number of Shares.
The number and kind of securities issuable upon exercise of this Warrant
and the Exercise Price therefor shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
8.1 Stock Splits and Combinations. If the Company at any time
or from time to time after the date hereof effects a subdivision of the
outstanding Common Stock pursuant to a stock split or similar event, the
Exercise Price of this Warrant shall be proportionately decreased, and
conversely, if the Company at any time or from time to time after the date
hereof combines the outstanding shares of Common Stock into a smaller number of
shares in a reverse stock split or similar event, the Exercise Price of this
Warrant shall be proportionately increased. Upon the adjustment of the Exercise
Price pursuant to the foregoing provisions, the number of shares of Common Stock
subject to the exercise of this Warrant shall be adjusted to the nearest full
share by multiplying the number of shares subject to this Warrant by a fraction,
the numerator of which is the Exercise Price immediately prior to such
adjustment and the denominator of which is the
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Exercise Price immediately after such adjustment. Any adjustment under this
Section 8.1 shall be effective at the close of business on the date the
subdivision or combination becomes effective.
8.2 Adjustment for Reorganization, Consolidation, Merger. In
any reorganization of the Company (or any other corporation stock or other
securities of which are at the time receivable upon exercise of this Warrant)
after the date hereof, or in case, after such date, the Company (or any such
other corporation) shall merge into or with or consolidate with another
corporation or sell or convey all or substantially all of its assets to another
corporation, then and in each such case, Holder, upon exercise of this Warrant
at any time after the consummation of such reorganization, consolidation,
merger, sale or conveyance, shall be entitled to receive, in lieu of the stock
or other securities and property to which such Holder would be entitled had it
exercised this Warrant immediately prior thereto, such stock, securities or
other property which such Holder would have received had it exercised this
Warrant immediately prior to such reorganization, merger, consolidation or sale
of assets, all subject to further adjustment as provided in this Article 8.
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense, upon
the surrender thereof by the registered Holder at the principal executive office
of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of Shares in
such denominations as shall be designated by the Holder thereof at the time of
such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it and its counsel of the loss, theft, destruction or mutilation
of any Warrant Certificate, and, in case of loss, theft or destruction, of
reasonable indemnity (which in the case of an institutional Holder shall be an
unsecured indemnity agreement) and, in case of mutilation, upon surrender and
cancellation of the Warrant Certificate, the Company will execute and deliver,
in lieu thereof, a new Warrant Certificate of like tenor representing the same
rights as the lost, stolen, destroyed or mutilated Warrant Certificate.
10. Elimination of Fractional Interests.
The Company shall not be required to issue certificates
representing fractions of shares of Common Stock and shall not be required to
issue scrip or pay cash in lieu of fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated by rounding any
fraction to the nearest whole number of shares of Common Stock.
11. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants, such number of shares of Common Stock as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock issuable upon such exercise shall be duly and validly
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issued, fully paid, non-assessable and not subject to the preemptive rights of
any shareholder. As long as the Warrants shall be outstanding, from and after
the date on which the Company's Common Stock is listed on or quoted by NASDAQ or
listed on a national securities exchange the Company shall use its best efforts
to cause all shares of Common Stock issuable upon the exercise of the Warrants
to be listed on or quoted by NASDAQ or listed on such national securities
exchanges as the Company's Common Stock is then listed.
12. Notices to Warrant Holders.
Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a dividend
or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; or
(d) reclassification or change of the outstanding shares of
Common Stock (other than a change in par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination),
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation and which does not result in any reclassification or
change of the outstanding shares of Common Stock, except a change as a result of
a subdivision or combination of such shares or a change in par value, as
aforesaid), or a sale or conveyance to another corporation of the property of
the Company as an entirety is proposed; or
(e) The Company or an affiliate of the Company shall propose
to issue any rights to subscribe for shares of Common Stock or any other
securities of the Company or of such affiliate to all the shareholders of the
Company;
then, in any one or more of said events, the Company shall give written notice
of such event at least ten (10) days prior to the date fixed as a record date or
the date of closing the transfer books for the determination of the shareholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, options or warrants, or entitled to vote on such
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proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend or distribution, or the issuance of any convertible or exchangeable
securities or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the address
of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
of this Agreement or to such other address as the Company may designate by
notice to the Holders.
14. Waiver; Amendments.
Neither this Warrant nor any term hereof may be changed,
waived, discharged or terminated orally but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
15. Successors.
All the covenants and provisions of this Agreement by or for
the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
16. Notice of Expiration.
The Company will give the holders of the Warrants no less than
ninety (90) days notice of the expiration of the right to exercise the Warrant.
The right to exercise the Warrant shall expire at the termination of the Warrant
Exercise Term unless the Company shall fail to give such notice as aforesaid, in
which event the right to exercise the Warrants shall not expire until 5:00 p.m.,
Texas Time, on a date thirty (30) days after the date on which the Company shall
give the holder notice of the expiration of the right to exercise these
Warrants.
17. Governing Law.
This Agreement and each Warrant Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of Texas and
for all purposes shall be construed in accordance with the laws of said State.
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18. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the registered holder or
holders of the Warrant Certificates, Warrants or the Shares any legal or
equitable right, remedy or claim under this Agreement; and this Agreement shall
be for the sole and exclusive benefit of the Company and the holders of the
Warrant Certificates, Warrants or the Shares.
19. Counterparts.
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
"THE COMPANY"
DOSKOCIL MANUFACTURING COMPANY, INC.,
a Texas corporation
By:
------------------------------------
Name:
------------------------------------
Its:
------------------------------------
S-1
<PAGE> 10
WESTAR CAPITAL II, LLC
By: Westar Capital Associates II, LLC
By:
--------------------------------
Name: Alan B. Sellers
--------------------------------
Its: Member
--------------------------------
S-2
<PAGE> 11
HBI FINANCIAL INC.
By:
--------------------------------------
Name: George L. Argyros
--------------------------------------
Its: Chairman of the Board and President
--------------------------------------
S-3
<PAGE> 12
TWELVE D LIMITED, A TEXAS LIMITED
PARTNERSHIP
By: Cyclone Tours, Inc.
Its: General Partner
By:
--------------------------------
Name: Benjamin L. Doskocil, Sr.
--------------------------------
Its: President
--------------------------------
S-4
<PAGE> 13
Schedule A
----------
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Westar Capital II, LLC 949 South Coast Drive
Suite 650
Costa Mesa, CA 92626
HBI Financial Inc. c/o Dorsey & Whitney LLP
U.S. Bank Center, Suite 400
1120 Fifth Avenue
Seattle, Washington 98101
Facsimile No.:
Twelve D Limited 5306 Mansfield Road
Arlington, Texas 76017
Facsimile No.: 817-784-0703
</TABLE>
Schedule A-1
<PAGE> 14
EXHIBIT A
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER SAID
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION OR NO-ACTION LETTER
ISSUED BY THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT
REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. THIS SECURITY IS ALSO
SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE
SECURITYHOLDERS AGREEMENT, COPIES OF WHICH MAY BE OBTAINED UPON REQUEST FROM
DOSKOCIL MANUFACTURING COMPANY, INC. AND ANY SUCCESSOR THERETO.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., PACIFIC STANDARD TIME, SEPTEMBER 30, 2007
No. ______ [________] Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ___________________ or
registered assigns, is the registered holder of [___________] Warrants to
purchase, at any time from and after October 12, 1999 until 5:00 P.M. Pacific
Standard Time on September 30, 2007 ("Expiration Date"), up to [___________]
shares ("Shares") of fully-paid and non-assessable common stock, no par value
("Common Stock"), of Doskocil Manufacturing Company, Inc., a Texas corporation
(the "Company"), at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $.01 per Share upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the Warrant
Agreement dated as of October 13, 1999 between the Company and the initial
holders party thereto (the "Warrant Agreement"). This Warrant shall be
exercisable for a number of shares of Common Stock and at the Exercise Price set
forth in the Warrant Agreement. Payment of the Exercise Price may be made in
cash, or by certified or official bank check payable to the order of the
Company, or any combination of cash or check, or in any of the other means set
forth in the Warrant Agreement.
No Warrant may be exercised after 5:00 P.M., Pacific Standard
Time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
1
<PAGE> 15
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meaning assigned to them in the Warrant
Agreement. All rights evidenced by this Warrant Certificate are subject to the
terms and conditions of the Warrant Agreement. In the event of any conflict
between the terms and conditions of the Warrant Agreement and the terms and
conditions of this Warrant Certificate, the terms and conditions of the Warrant
Agreement shall govern and control.
2
<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: October 12, 1999 DOSKOCIL MANUFACTURING COMPANY, INC.
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
Attest:
- ----------------------------
Secretary
3
<PAGE> 17
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase ________ Shares and
herewith tenders in payment for such Shares cash or a certified or official bank
check payable to the order of Doskocil Manufacturing Company, Inc. in the amount
of $______________, all in accordance with the terms hereof. [Alternative
instructions may be provided in the event of a cashless exercise in accordance
with Article 3 of the Warrant Agreement.] The undersigned requests that a
certificate for such Shares be registered in the name of
_________________________, whose address is _________________
______________________, and that such Certificate be delivered to
______________________,whose address is ______________________________________.
Dated: Signature:
--------------------- -------------------------
(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant
Certificate.)
- ----------------------------------
- ----------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
4
<PAGE> 18
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificate.)
FOR VALUE RECEIVED ____________________________________ hereby
sells, assigns and transfers unto ________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _________________________,
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of Substitution.
Dated: Signature:
-------------------- -------------------------
(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant
Certificate.)
- --------------------------------
- --------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
5
<PAGE> 1
EXHIBIT 10.37
PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
This Preferred Stock and Warrant Purchase Agreement (this
"AGREEMENT"), dated as of October 12, 1999, is made and entered into by and
between Doskocil Manufacturing Company, Inc., a Texas corporation (the
"COMPANY"), and the purchasers listed on the attached Schedule A (each a
"PURCHASER").
R E C I T A L S
WHEREAS, the Company proposes to issue and sell to Purchaser
shares of its Series D Redeemable Preferred Stock, $100 stated value per share
(the "PREFERRED STOCK") and its warrants to acquire common stock (the
"WARRANTS") to be sold in accordance with and subject to the terms and
conditions set forth in this Agreement, in the case of the Preferred Stock, the
Statement of Designation of Series D Preferred Stock in substantially the form
of Exhibit A annexed hereto (the "Statement of Designation") and, in the case of
the Warrants, the Preferred Warrant Agreement dated as of the date hereof among
the Company and the Purchasers in substantially the form of Exhibit B annexed
hereto (the "Preferred Warrant Agreement").
NOW, THEREFORE, in consideration of the above premises and the
representations, warranties, covenants and agreements contained in this
Agreement, and for other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF PREFERRED STOCK.
1.1 THE PREFERRED STOCK. Upon the terms and conditions
contained herein, the Company agrees to sell and issue to each Purchaser, and
each Purchaser severally agrees to purchase from the Company, at a purchase
price with respect to each Purchaser designated on Schedule A annexed hereto,
the number of shares of Preferred Stock and Warrants specified opposite such
Purchaser's name on Schedule A annexed hereto.
1.2 PAYMENT AND DELIVERY. The Company shall deliver to each
Purchaser a stock certificate and warrant certificate representing the Preferred
Stock and Warrants acquired by such Purchaser against delivery to the Company by
such Purchaser of the purchase price specified opposite such Purchaser's name on
Schedule A annexed hereto (the "PURCHASE PRICE"), such Purchase Price to be paid
by check or wire transfer to the Company.
1.3 AGREEMENT TO BE BOUND BY FIRST AMENDMENT TO AMENDED AND
RESTATED SECURITYHOLDERS AGREEMENT. Each Purchaser agrees to be bound by that
certain Amended and Restated Securityholders Agreement, as amended by the First
Amendment thereto (the "SECURITYHOLDERS AGREEMENT"), by and among certain
holders of the Company's Common and preferred stock annexed hereto as Exhibit C.
<PAGE> 2
SECTION 2. CLOSING DATE. The consummation of the purchase and sale transaction
described herein (the "Closing") shall occur concurrently with the execution and
delivery of this Agreement and the payments required hereunder.
SECTION 3. COMPANY REPRESENTATIONS. The Company represents and warrants to each
Purchaser that:
(a) Organization, Standing and Qualification. The
Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Texas and has all the requisite
power and authority to own or lease and operate its properties and to
carry on its business as now conducted and as proposed to be conducted.
(b) Authorization and Enforceability. The Company has
all requisite corporate power and authority to enter into and perform
all its obligations under this Agreement and the Securityholders
Agreement, to issue the Preferred Stock and the Warrants and to carry
out the transactions contemplated hereby and thereby. The Company has
duly and properly taken all actions necessary to authorize it to enter
into and perform its obligations under this Agreement and the
Securityholders Agreement, and to consummate the transactions
contemplated hereby and thereby. This Agreement and the Securityholders
Agreement are legal, valid and binding obligations of the Company,
enforceable in accordance with their respective terms, except for the
effect upon such agreements of bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting the rights
of creditors generally and of general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law).
(c) Capitalization. The authorized capital stock of
the Company consists of 15,000,000 shares of Common Stock and
25,000,000 shares of preferred stock, of which 50,000 shares have been
designated as the Preferred Stock. Of such shares, 3,104,644 shares of
Common Stock and 9,161,567 shares of Series C Preferred Stock will be
issued and outstanding immediately prior to the Closing. The Preferred
Stock and the Warrants are duly authorized and, when issued and paid
for pursuant to the terms of this Agreement, will be validly issued,
fully paid and nonassessable. There are no outstanding subscriptions,
rights, warrants, options, calls, convertible securities, commitments
of sale or liens granted or issued by the Company or any of its
subsidiaries relating to or entitling any person to purchase or
otherwise to acquire any shares of the capital stock of the Company,
except as otherwise disclosed on Schedule B annexed hereto.
(d) Non-Contravention by Company. Neither the
execution and delivery of this Agreement or the Securityholders
Agreement nor the issuance, sale or delivery of the Preferred Stock and
the Warrants by the Company, nor the performance of the obligations of
the Company and its securityholders hereunder or thereunder, nor any
action by the Company contemplated hereunder or thereunder, violates
any provisions of the Articles of Incorporation or Bylaws of the
Company, or violates or constitutes a breach of or a default under, or
would result in the acceleration of or entitle any party to
2
<PAGE> 3
accelerate (whether after the giving of notice or lapse of time or
both) any material obligation under, or result in the creation or
imposition of any lien, charge, pledge, security interest or other
encumbrance of any kind upon the property or assets (real, personal or
mixed, tangible or intangible) of the Company pursuant to any
provision of any material promissory note, security interest, bond,
mortgage, indenture, lien, claim, charge, right, option, lease,
agreement, license, pledge, encumbrance, instrument, commitment, law,
ordinance, regulation, order, arbitration award, judgment or decree to
which the Company is a party or by which it or any of its properties
or assets (real, personal or mixed, tangible or intangible) are bound
which would have a material adverse effect on the Company.
(e) Private Offering. The Company agrees that neither
it, nor anyone acting on its behalf, will offer the Preferred Stock and
the Warrants so as to bring the issuance and sale of such securities
within the provisions of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act"), nor offer any similar securities for
issuance or sale to, or solicit any offer to acquire any of the same
from, or otherwise approach or negotiate with respect thereto with,
anyone if the sale of the Preferred Stock and the Warrants and any such
securities would be integrated as a single offering for the purposes of
the Securities Act, including, without limitation, Regulation D
thereunder.
(f) Brokers. The Company has not retained, directly
or indirectly, any broker or finder or incurred any liability or
obligation for any brokerage fees or finder's fees with respect to this
Agreement or the transactions contemplated hereby.
(g) Survival of Representations and Warranties. All
the Company's representations and warranties herein shall survive the
execution and delivery of this Agreement, any investigation by the
Purchasers and the issuance of the Preferred Stock and the Warrants.
SECTION 4. INVESTMENT REPRESENTATIONS. Each Purchaser acknowledges that the
Preferred Stock and the Warrants are not being registered under the Act, based,
in part, on reliance that the issuance of the Preferred Stock and the Warrants
are exempt from registration under Section 4(2) of the Act as not involving any
public offering. Each Purchaser further acknowledges that the Company's reliance
on such exemption is predicated, in part, on the several representations set
forth below made by each Purchaser to the Company.
(a) Such Purchaser is acquiring the Shares solely for
such Purchaser's own account, for investment purposes only, and not
with an intent to sell, or for resale in connection with any
distribution of all or any portion of the Preferred Stock and the
Warrants within the meaning of the Act;
(b) In evaluating the merits and risks of an
investment in the Preferred Stock and the Warrants, such Purchaser has
relied upon the advice of such Purchaser's legal counsel, tax advisors,
and/or investment advisors;
3
<PAGE> 4
(c) Such Purchaser is experienced in evaluating and
investing in companies such as the Company. In addition, such Purchaser
has a preexisting business relationship with the Company. As a result
of such relationship, such Purchaser has access on a regular basis to
the Company's financial statements and other records and information
material to the Company's financial condition, operations and
prospects. Such Purchaser has been given access to all books, records
and other information of the Company which such Purchaser has desired
to review and analyze in connection with such Purchaser's purchase of
the Preferred Stock and the Warrants hereunder.
(d) Such Purchaser is aware that an investment in
securities of a closely held corporation such as the Company is not
liquid and will require such Purchaser's capital to be invested for an
indefinite period of time, possibly without return. Such Purchaser has
no need for liquidity in this investment, has the ability to bear the
economic risk of this investment, and can afford a complete loss of the
Purchase Price;
(e) Such Purchaser understands that the Preferred
Stock and the Warrants being purchased hereunder are characterized as
"restricted securities" under the federal securities laws since the
Preferred Stock and the Warrants are being acquired from the Company in
a transaction not involving a public offering and that under such laws
and applicable regulations such securities may be resold without
registration under the Act only in certain limited circumstances. Such
Purchaser represents that such Purchaser is familiar with Rule 144
promulgated under the Act, as presently in effect, and understands the
resale limitations imposed thereby and by the Act;
(f) At no time was an oral representation made to
such Purchaser relating to the purchase or was such Purchaser presented
with or solicited by any leaflet, public or promotional meeting,
newspaper or magazine article, radio or television advertisement or any
other form of general advertising relating to the purchase hereunder;
and
(g) Such Purchaser has read and understands the
restrictions set forth in the Securityholders Agreement.
SECTION 5. STOCK CERTIFICATE LEGEND. Each Purchaser understands and acknowledges
that the certificate evidencing the Preferred Stock purchased by such Purchaser
hereunder (or evidencing any other securities issued with respect thereto
pursuant to any stock split, stock dividend, merger or other form of
reorganization or recapitalization) shall bear, in addition to any other legends
which may be required by this Agreement or applicable state securities laws, the
following legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER SAID ACT OR AN
OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION OR NO-ACTION LETTER
ISSUED BY THE SECURITIES AND
4
<PAGE> 5
EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS
SOLD PURSUANT TO RULE 144 OF SUCH ACT. THIS SECURITY IS ALSO SUBJECT
TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE
SECURITYHOLDERS AGREEMENT, COPIES OF WHICH MAY BE OBTAINED UPON
REQUEST FROM THE CORPORATION AND ANY SUCCESSOR THERETO."
SECTION 6. MISCELLANEOUS.
6.1 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be an original, and all of which together
shall constitute one and the same agreement.
6.2 NOTICES. Any notice, demand, request or other
communication herein requested or permitted to be given shall be in writing and
may be personally served, telecopied, telexed or sent by courier service or
United States mail and shall be deemed to have been given when delivered in
person or by courier service, upon receipt of a telecopy or telex or four
business days after deposit in the United States mail (registered or certified,
with postage prepaid and properly addressed). For purposes hereof, the addresses
of the parties hereto (until notice of a change thereof is delivered as provided
in this Section 6.2) shall be as follows:
If to the Company: Doskocil Manufacturing Company, Inc.
4209 Barnett
Arlington, Texas 76017
Attention: President
If to Purchaser: At the address specified on Schedule A
6.3 GOVERNING LAW. This Agreement shall be governed by the
laws of the State of Texas.
6.4 ASSIGNMENTS. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by
either party without the prior written consent of the other.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first written above.
"THE COMPANY"
DOSKOCIL MANUFACTURING COMPANY, INC.,
a Texas corporation
By:
-----------------------------
Name:
-----------------------------
Its:
-----------------------------
S-1
<PAGE> 7
WESTAR CAPITAL II, LLC
By: Westar Capital Associates II, LLC
By:
---------------------------------
Name: Alan B. Sellers
Its: Member
S-2
<PAGE> 8
HBI FINANCIAL INC.
By:
------------------------------------------
Name: George L. Argyros
Its: Chairman of the Board and President
S-3
<PAGE> 9
TWELVE D LIMITED, A TEXAS LIMITED
PARTNERSHIP
By: Cyclone Tours, Inc.
Its: General Partner
By:
--------------------------------
Name: Benjamin L. Doskocil, Sr.
Its: President
S-4
<PAGE> 10
Schedule A
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Westar Capital II, LLC 949 South Coast Drive
Suite 650
Costa Mesa, CA 92626
HBI Financial Inc. c/o Dorsey & Whitney LLP
U.S. Bank Center, Suite 400
1120 Fifth Avenue
Seattle, Washington 98101
Facsimile No.:
Twelve D Limited 5306 Mansfield Road
Arlington, Texas 76017
Facsimile No.: 817-784-0703
</TABLE>
Schedule A-1
<PAGE> 11
Schedule A
(Shows number of Series D Preferred Stock in proportion to number of shares of
common stock held adjusted to total 100% assuming no other shareholders
participate)
<TABLE>
<CAPTION>
Name of Purchaser Number of Series D Number of Warrants to Aggregate Purchase
Preferred Stock be Purchased Price
to be Purchased
<S> <C> <C> <C>
HBI Financial Inc. 32,415 657,365 $3,241,531
Westar Capital II LLC 12,230 248,022 $1,223,019
Twelve D Limited 5,355 108,587 $535,450
Total: 50,000 1,013,974 5,000,000
</TABLE>
Schedule A-2
<PAGE> 12
Exhibit C
FIRST AMENDMENT TO AMENDED AND RESTATED SECURITYHOLDERS AGREEMENT
Exhibit C-1
<PAGE> 13
Schedule B
Schedule B-1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 25,318
<ALLOWANCES> 1,129
<INVENTORY> 28,762
<CURRENT-ASSETS> 54,702
<PP&E> 100,753
<DEPRECIATION> (45,676)
<TOTAL-ASSETS> 167,461
<CURRENT-LIABILITIES> 39,093
<BONDS> 175,996
0
9,161
<COMMON> 34,288
<OTHER-SE> (91,077)
<TOTAL-LIABILITY-AND-EQUITY> 167,461
<SALES> 37,200
<TOTAL-REVENUES> 37,200
<CGS> 25,720
<TOTAL-COSTS> 25,720
<OTHER-EXPENSES> 12,640
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 4,677
<INCOME-PRETAX> (5,449)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,449)
<EPS-BASIC> (1.81)
<EPS-DILUTED> (1.81)
</TABLE>
