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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
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COMMISSION FILE NUMBER: 333-37081
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DOSKOCIL MANUFACTURING COMPANY, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 75-1281683
(State of incorporation) (I.R.S. Employer
Identification No.)
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4209 Barnett Boulevard, Arlington, Texas 76017
(Address of principal executive offices)
(817) 467-5116
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 15(d) OF THE ACT:
TITLE OF EACH CLASS:
10 1/8% Senior Subordinated Notes due 2007
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]*
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. No [ ]*
* The Registrant is not subject to the reporting requirements of Item 405.
As of June 30, 2000 there were 3,143,644 shares outstanding of the
Registrant's no par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain of the documents required to be filed as exhibits in Part IV, Item
14, have been previously filed with the Securities and Exchange Commission and
are incorporated by reference to one of the following documents: (i) the
Company's Registration Statement on Form S-4 (Registration No. 333-37081) as
filed on October 2, 1997, (ii) the Company's Report on Form 10-Q for the Quarter
ended December 31, 1998 as filed February 16, 1999, (iii) the Company's Report
on Form 10-Q for the Quarter ended March 31, 1998, as filed May 17, 1999, (iv)
the Company's Report on Form 8-K as filed on September 24, 1999, (v) the
Company's Report on Form 10-K as filed on October 13, 1999, or (vi) the
Company's Report on Form 8-K as filed on July 13, 2000.
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INDEX
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PAGE
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1
Introduction and Note on Presentation.................................
PART I
ITEM 1. Business.................................................... 3
ITEM 2. Properties.................................................. 16
ITEM 3. Legal Proceedings........................................... 16
ITEM 4. Submission of Matters to a Vote of Securityholders.......... 16
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 17
ITEM 6. Selected Financial Data..................................... 17
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
ITEM 7a. Quantitative and Qualitative Disclosure About Market Risk... 27
ITEM 8. Financial Statements........................................ 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 27
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 28
ITEM 11. Executive Compensation...................................... 31
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 35
ITEM 13. Certain Relationships and Related Transactions.............. 37
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................. 38
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INTRODUCTION AND NOTE ON PRESENTATION
On September 19, 1997, Doskocil Manufacturing Company, Inc., and Dogloo,
Inc., entered into a merger agreement (the "Merger Agreement"), pursuant to
which Dogloo was merged with and into Doskocil (the "Merger") on that same date.
The Company (as defined below) is now controlled by an investor group (the
"Investor Group") consisting of various Westar Capital entities and certain of
their affiliates, including Westar Capital L.P., a California limited
partnership (Westar LP), Westar Capital II, L.L.C., a Delaware limited liability
company ("Westar LLC") and HBI Financial, Inc., a Washington corporation ("HBI")
(collectively, "Westar").
The term "Doskocil," as used herein, refers to Doskocil Manufacturing
Company, Inc., and Spectrum Polymers, Ltd., prior to giving effect to the
Merger. The term "Dogloo" refers to Dogloo, Inc., prior to giving effect to the
Merger and the term "Company" refers to the combined entity of Doskocil and
Dogloo. The term "combined Company" refers to a combined presentation of certain
historical results of Doskocil and Dogloo which has been shown for comparison
purposes only. Reference to "combined" results of the two companies indicate an
historical view of the combined companies and is presented for comparison
purposes only.
The Company was in default of certain financial covenants under its credit
facilities at June 30, 1999 and, in October 1999, completed an amendment to its
credit facilities and obtained waivers of all financial covenant defaults. In
October 1999, certain shareholders of the Company acquired $5.0 million of
Series D Preferred Stock from the Company and guaranteed an additional $15.0
million line of credit obtained by the Company from Bank of America, N.A. Also,
in June 2000 the Company completed an amendment to its credit facility which,
among other things, increased interest rates and modified the minimum fixed
charge coverage ratio. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" for a
description of the amendments made to the credit facilities.
The Company is among the leading plastic pet products companies in the
United States.
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FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. Such forward-looking statements are principally contained in the
sections on "Business" and "Management's Discussions and Analysis of Financial
Condition and Results of Operations" and include, without limitation, the
Company's expectation and estimates as to the Company's business operations
including, but not limited to, the Company's market position, product
introduction, raw material processing, brand strategy, information systems,
manufacturing integration, customer order fulfillment, demand forecasting,
production scheduling, SKU reduction, warehouse management, labor and freight
costs, and future financial performance, including growth in net sales and
earnings, cash flows from operations, capital expenditures and the sale of
assets. These statements typically contain words such as "anticipates,"
"believes," "estimates," "expects," "plans" or similar words indicating that
future outcomes are uncertain.
In accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all factors, that
could cause future outcomes to differ materially from those set forth in
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risks related to the business
described in this report. See "Business -- Risks Related to the Business." In
addition to factors that may be described in this report, the following factors,
among others, could cause the actual results to differ materially from those
expressed in any forward-looking statements made by the Company:
- failure to fulfill customer orders on a timely basis;
- changes in consumer preferences and the ability of the Company to
adequately anticipate such changes;
- difficulties or delays in developing and introducing products or failure
of customers to accept product offerings;
- the seasonal nature of the Company's operations;
- effects of and changes in general economic and business conditions;
- actions by competitors, including new product offerings and marketing and
business conditions;
- claims which might be made against the Company, including product
liability claims;
- the loss of significant suppliers or sponsors;
- changes in business strategy or new product lines;
- any inability of the Company to meet the financial covenants applicable
to the Company under its credit and debt agreements (See "Risks Related
to the Business -- Highly Leveraged" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources").
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those herein as anticipated, believed, estimated or expected.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is a Texas corporation. Executive offices are located at 4209
Barnett Boulevard, Arlington, TX 76017.
The Company is among the leading producers of plastic pet products in the
United States. The Company manufactures and markets a broad range of pet
products through multiple distribution channels. Key customers include PETsMART,
Wal-Mart, K-Mart, Petco, Sam's Club and Costco. As part of the Merger, Doskocil
brought to the combined Company its strength in the pet carrier category, along
with a broad range of products and manufacturing capabilities. Dogloo added its
strength in the pet shelter category, along with its demonstrated product
development and marketing abilities. Accordingly, the Merger created a Company
with complementary pet product lines, including both pet carriers and pet
shelters, complementary customer bases and substantial opportunities for cost
reductions. The combined net sales of Doskocil and Dogloo have increased from
$105.1 million in 1993 to $158.4 million for the fiscal year ended June 30,
2000.
The following table summarizes the combined net sales of Doskocil and
Dogloo by type for the periods presented:
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YEAR ENDED
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JUNE 30, JUNE 30, JUNE 30, JUNE 30, DECEMBER 30,
2000 1999 1998 1997 1996
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(IN THOUSANDS)
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Pet products.......................... $136,476 $140,022 $130,863 $126,776 $126,007
Sporting goods and other.............. 13,857 15,118 16,148 12,880 12,775
Furniture, custom molding, tackle and
hardware............................ -- 3,873 6,717 16,549 18,779
Outside resin sales................... 8,085 10,919 5,370 4,478 2,413
-------- -------- -------- -------- --------
Combined net sales.................... $158,418 $169,932 $159,098 $160,683 $159,974
======== ======== ======== ======== ========
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The Merger combined complementary product lines in several categories in
which both companies have traditionally had a smaller presence. Doskocil
produces a broad line of plastic products, including pet products such as pet
carriers, pet shelters, feeding and watering systems, cat products and pet
bedding, as well as sporting goods cases. Doskocil's Vari Kennel(R), Sky
Kennel(R), Pet Porter(R), Pet Taxi(R), and Kennel Cab(R) brand names for pet
carriers were widely known and have continued to enjoy increasing use in the
transportation and indoor training of pets. Doskocil's Gun Guard(R) brand
(firearms and archery cases) and Golf Guard(R) brand (golf travel cases) are
similarly well-recognized in the sporting goods market. Dogloo's product line
consists of plastic pet shelters, pet carriers, pet bedding and pet feeding and
watering products. Its numerous styles and sizes of pet shelters include the
Dogloo(R), Indigo(R), Ruff Hauz(R), Animal Hauz(R), Baux'r(R) and Brik Hauz(R).
These shelters are made from a structural foam plastic which provides
exceptional durability and insulation relative to other types of plastic or
wooden pet shelters. The Company believes the Dogloo(R), its igloo-shaped
best-selling pet shelter, is unique in style, wind resistant, easy to clean and
popular among breeders, kennel owners and general consumers. In the Merger, the
Company acquired Dogloo's federal configuration trademark on its igloo-shaped
pet shelters.
The Company's products are marketed under the Petmate(R) brand name
umbrella. This single branding strategy, adopted in fiscal 1999, facilitated
product line restructuring, rationalization and consolidation. Product line
restructuring reduced the Pet segment from a pre-Merger total of more than 1,100
SKUs to approximately 450 SKUs. This reduction in SKUs aided in the Company's
recovery from manufacturing and fulfillment difficulties in late calendar 1998
and has reduced the Company's operational complexity going forward. The Dogloo
branding was retired, although "Dogloo" still is used as the product branding to
describe igloo-shaped doghouses.
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As a result of the Merger, the Company has a substantially broadened
customer base and reduced customer concentration. Doskocil's principal products
were, and continue to be, sold to a wide variety of retailers including
specialty pet superstores such as PETsMART and Petco, mass merchandisers such as
Wal-Mart and K-Mart, food and drug stores, hardware stores and a number of
distributors that sell to independent pet stores. Dogloo's products were, and
continue to be, sold through a variety of similar retail channels, including
mass merchandisers such as Wal-Mart, wholesale clubs such as Sam's Club, home
centers such as Lowe's and Menards, pet specialty superstores such as PETsMART,
farm and agricultural stores such as Tractor Supply Company, and distributors
that sell to independent pet stores. No one customer accounted for more than
22.0% of the Company's total net revenues in fiscal 2000.
HISTORY OF DOSKOCIL AND DOGLOO
Doskocil
Doskocil began manufacturing wooden and wire pet carriers in the early
1960's. In 1972, Doskocil purchased its first injection molding machine and
began manufacturing plastic pet carriers, quickly becoming the primary supplier
to the domestic airline market. Subsequently, Doskocil expanded into the
portable firearms case market and became a principal supplier of both pet
carriers and firearms cases to the airline industry. Building on its success
with the airline industry (which is now a small component of the Company's
overall business) and using the flexibility of the injection molding
manufacturing process, Doskocil began to target the consumer market directly in
the mid-70's. In 1993, Doskocil acquired the pet products division (consisting
primarily of pet carriers and pet shelters) of Contico, Inc., through an asset
purchase. In 1994, Doskocil purchased the Woodstream product line, consisting
primarily of firearms cases and fishing products, from Ekco Canada, Inc., and
Ekco Group, Inc. As of May 1999, the Company sold its interest in the tackle box
and hardware products. This sale was made to permit the Company to sharpen its
focus on its remaining core business products.
Dogloo
Dogloo designed and produced the first igloo-shaped pet shelters in 1987,
initially marketing to local pet retailers in Southern California. Throughout
the next four years, Dogloo increased its product offerings by building various
sizes of the igloo-shaped pet shelter and adding designs to its product line.
Distribution was expanded in 1989 when the first sales were made to Sam's Club
and national distribution of Dogloo products began. Dogloo continued to focus on
new product development, using unaffiliated vendors to manufacture its products.
Prior to 1993, Dogloo offered only one line of pet shelters and outsourced all
production. Due to production supply problems experienced by Dogloo's suppliers
in 1992 and 1993, Dogloo management decided to begin manufacturing structural
foam products. Accordingly, Dogloo began to manufacture and distribute its own
products in 1994 in a new facility constructed in Indianapolis, Indiana. Dogloo
purchased five structural foam molding machines in order to commence
manufacturing operations. The distribution facility was later expanded with the
addition of approximately 108,000 square feet and a sixth structural foam
molding machine. The cumulative total investment in plant and equipment at the
Indianapolis facility at December 31, 1994 and 1995 was $12.0 million and $17.5
million, respectively. These investments were principally related to the
manufacturing of pet shelters, as Dogloo introduced a pet carrier line in 1994
for which production was outsourced.
In 1995, Dogloo encountered growth-related financial difficulties caused
primarily by a combination of (i) start-up problems at the new Indianapolis
facility which caused unfavorable product cost variances, (ii) outsourced
manufacturing problems related to Dogloo's new pet carrier line, (iii) a
business which had grown beyond the capabilities of its then-existing
infrastructure and organization controls, (iv) increased service requirements on
debt, and (v) an increased number of unusual expenditures, including expansion
of the Indianapolis facility, installation of a new information system, and the
incurrence of significant legal fees associated with a Dogloo lawsuit alleging
violation by Doskocil of Dogloo's configuration trademark relating to its
igloo-shaped shelter, which was settled in 1995. In September 1995, Westar
acquired control of Dogloo through a recapitalization. Westar changed numerous
management procedures and practices, replaced or added two senior managers and
actively mentored Dogloo's co-founder and Chief Executive Officer. Dogloo's
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operating results improved from an operating loss of $4.3 million in 1995 to an
operating income of $6.6 million in 1996. Key elements of the improvement
included (i) the reduction and control of sales returns and allowances, (ii) the
elimination of excessive manufacturer's profit on outsourced pet carriers, (iii)
a substantial increase in manufacturing efficiency, (iv) a reduction in inbound
freight costs and (v) a shift in product mix toward higher-margin products.
PET PRODUCTS INDUSTRY AND COMPETITION
The U.S. nonfood pet supplies industry was estimated in a study published
in 1999 by Packaged Facts to have generated approximately $4.9 billion in sales
in 1999, up 8.0% from 1998. With annual sales growth projected to average
between 7.0% and 8.0% for the upcoming five-year period, the market should
approach the $7.0 billion mark by 2004. The study estimates that of the $4.9
billion in 1999 non-food pet supply sales, the dog and cat segments represented
approximately 67.0%. Packaged Facts attributed the growth in non-food pet supply
sales to both an increasing number of pets and an increasing annual expenditure
per pet. In 1999, Packaged Facts estimated a national pet population of around
237 million. According to a 1999/2000 National Pet Owners Survey, 61.0% of U.S.
households own some kind of pet, for a total of 61 million pet-owning
households. Packaged Facts attributed the growth in the pet supplies market to a
number of factors, including (i) the baby boomer generation purchasing pets for
their children, (ii) the increased senior citizen component of the population
that appreciates the companionship of pets, and (iii) the expansion of pet
supply outlets which stimulated consumer demand. Management believes that pet
superstores have stimulated retail sales by increasing product turnover through
advertising, promotions, and a larger selection of products. Management further
believes the Company is well-positioned to benefit from these retailers as they
continue to expand their store count, both domestically and internationally.
The Company estimates that the total U.S. plastic pet shelter market for
fiscal 2000 was approximately 1.5 million units. The Company believes that
important sources of ongoing pet shelter sales are the birth or purchase of new
dogs, the replacement of wooden shelters and family lifestyle changes such as a
new home or child, and the replacement of wooden shelters. The Company estimates
that 65.0% of the pet shelters in use are wooden. The Company's research also
indicates that plastic shelters have largely replaced wooden pet shelters in
retail stores. The Company believes that demand for its plastic pet shelters
will increase over time as wood shelters currently in use are replaced with
plastics shelters.
The Company estimates that the total U.S. plastic pet carrier market for
fiscal 2000 was approximately 4.4 million units. An American Pet Products
Manufacturers Association ("APPMA") study indicates that within the pet carrier
market, 29.0% of dog owners and 65.0% of cat owners in 1998, up from 56.0% of
cat owners in 1996, owned pet carriers. In addition, according to APPMA data, of
all cages or traveling crates owned by dog owners, 63.0% were made of plastic in
1998. The Company believes that pet carrier purchases will continue to increase
due to increased market awareness of the need for pet carriers for
transportation, indoor training of dogs and consumer transition from wire to
plastic carriers.
The market for the Company's products is highly competitive. The Company
competes with a number of smaller, privately held companies and certain public
companies, some of which have greater name/brand recognition, larger customer
bases and/or significantly greater financial resources than the Company. Among
the smaller companies against which the Company competes in the pet shelter
category are Stylette, Blitz, TFH, Pet Zone and Flowtron. The Company competes
in the pet carrier category against Stylette, Kennel Air, TFH, Marchioro, and
Blitz. There are no substantial regulatory or other barriers to entry of new
competitors into the Company's market. There can be no assurance that the
Company will be able to compete successfully against current and future sources
of competition or that the current and future competitive pressures faced by the
Company will not adversely affect its profitability or financial performance.
Sales of pet products can be dependent upon discretionary consumer spending,
which may be affected by general economic conditions, as well as continued
interest in pet ownership. A decrease in consumer spending on pet products or a
reduction in pet ownership could have an adverse effect on the Company's
financial position, business, operating results and cash flows.
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BUSINESS STRATEGY
The Company's strategic objectives are to further enhance its position
among the leading manufacturers and marketers of plastic pet products in the
United States and to continue its expansion internationally. The Company will
seek to grow its business and maintain its competitive position by (1) building
brand recognition with consumers, (2) continuing new product innovation, (3)
becoming a low cost producer, (4) providing the best customer service and
fulfillment for its customers and (5) becoming a global manufacturer and
marketer in its core product lines. The Company remains committed to this
strategy for the long-term. Over the short-term, the Company will focus its
efforts on growing sales, reducing fixed costs and improving manufacturing
productivity. The Company will seek to leverage its competitive strengths to
accomplish the following objectives:
Capitalize on Brand Image. The Company expects to strengthen its market
leading position by continuing to develop the Petmate(R), Gun Guard(R), and Golf
Guard(R) brands with both the retail trade and with consumers. Packaging and
merchandising, web based communications, sponsorship programs, public relations
and cross merchandising programs will be the focus during the next fiscal year.
Continue to Introduce New Products in Order to Fuel Growth. The Company is
committed to continued product development within its current product categories
and the creation of innovative new product categories. The Company is also
focused on searching the market for innovative products that can be licensed or
purchased and then marketed and distributed through the company's existing
infrastructure. The combined Company, including prior to the Merger, Doskocil
and Dogloo, launched a total of 79 new products in calendar years 1996 to 1999.
The Company launched a total of 16 additional new products in fiscal year 2000
and 22 in fiscal year 1999. The Company intends to focus additional efforts in
new product development. Licensing programs and outsourced products will help
the Company achieve this initiative. The annual expenditures for this area are
estimated to increase significantly for fiscal 2001, as the Company plans to
develop new products and strengthen its brand in the marketplace. Lower fiscal
2000 expenditures reflected the Company's focus on lowering costs and improving
fulfillment capabilities. There can be no assurance that these additional
expenditures will result in the successful introduction of new products or in
increased sales.
Low Cost Producer. Spectrum, the Company's vertically integrated plastic
resin compounding facility, together with the Company's resin compounding
experience, enables the Company to produce plastic resins using a significantly
reduced proportion of prime resins, while achieving raw material specifications
which meet or exceed the Company's product and manufacturing requirements. The
Company's principal raw materials are various plastic resins, which are either
"prime" resins purchased from petrochemical producers or blends of prime resins
and recycled materials purchased from third-party suppliers or produced by the
Company. Spectrum uses a mixture of prime resins and recycled materials to
produce plastic resins.
The Company is investing in new molds and equipment that lowers cycle
times, down time and costs. It is implementing the principles of lean
manufacturing which will lead to increased efficiency and lower working capital.
Build a world class customer service/fulfillment organization. The Company
believes customer service has been a critical factor in the history of
Doskocil's success in the marketplace and its ability to compete against larger
competitors. This will continue to be important in the short-term as well as the
long-term. The Company is committed to continuing the development of its
customer service and fulfillment operations. By enhancing its talent base and
training, and improving systems and processes, the Company intends to develop
the customer/fulfillment operation into a strategic competitive advantage. The
Company is investing in people and systems to maintain its strength in this
area. During fiscal 1999 and 2000, the Company experienced shipping and
invoicing problems. (See Management's Discussion and Analysis of Financial
Condition and Results of Operations, "Overview").
Part of customer service is providing superior order fulfillment
capabilities to its customers. The Company believes its investment in
fulfillment systems and facilities is a significant barrier to entry to other
potential competitors. These capabilities include electronic data interchanging
of orders and invoices,
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advanced shipping notifications and supporting cross docking and other functions
designed to provide low cost logistics services to its customers.
Exploit International Growth Opportunities. While international sales
represented approximately 7.6% of the Company's net sales in fiscal 2000,
management believes that the international markets, especially Europe, Japan and
Latin America represent a significant growth opportunity. The international
expansion of U.S. retailers is also expected to provide a significant
opportunity for the Company to increase international sales. Management is
currently evaluating the establishment of distribution facilities in continental
Europe. During fiscal 1999, the Company began limited manufacturing in Europe
using a contract molder to run existing Company molds. During fiscal 2000, the
Company expanded its production by sending additional molds to Europe.
PRODUCTS
The combination of Doskocil and Dogloo created a company with broad product
lines in many key segments of the pet supplies industry. Doskocil's historic
product line continues to be a leading industry participant in the business of
plastic pet carriers, while Dogloo's products continue to provide market
penetration for the Company in the plastic pet shelter segment. The Company
today also produces and markets numerous additional plastic pet products, such
as cat litter boxes, bowls, feeders, waterers and cat toys, as well as plastic
products for the sporting goods market.
Pet Carriers. The Company currently produces approximately 100 SKUs of pet
carriers ranging in domestic retail price from approximately $10 to $200.
Management believes the Company's Vari Kennel(R), Pet Porter(R), Pet Taxi(R),
and Furrarri(R) brand names are widely known among retail consumers as well as
pet product retailers and airlines. These pet carriers come in a variety of
colors and have an assortment of features such as quick-release latches, dual
door locks and snap-on waterer/feeder dishes. The Company's pet carriers have
been developed and refined over a 35-year period and have achieved certain brand
awareness among consumers and a reputation for quality.
The Company believes its plastic pet carriers are superior to cardboard and
wire carriers and have made wooden carriers practically obsolete. Plastic pet
carriers are durable, yet lightweight, and provide superior protection for the
animals while maintaining a clean environment outside of the carrier. In
addition to being used for transportation, pet carriers have enjoyed increasing
consumer acceptance for the indoor training of pets.
Pet Shelters. The Company produces numerous styles of pet shelters in
various sizes, including the Dogloo(R), Indigo(R), Ruff Hauz(R), Animal Hauz(R),
Baux'r(R), Pet Barn(R) and Brik Hauz(R). The Indigo(R), the Company's best
seller, is unique because of its trademarked igloo shape and structural foam
plastic construction, which management believes offers significant advantages
over wooden and other plastic pet shelters. The Company currently manufactures
approximately 35 different pet shelter SKUs providing retailers with the ability
to tailor their product offerings to their customer base. Domestic retail
pricing on the Company's pet shelters ranges from approximately $30 for a small
Ruff Hauz(R) to over $180 for a Giant Dogloo(R).
Management believes the Company's structural foam plastic pet shelters are
superior to wooden models or other non-structural foam plastic pet shelters on
the market. Dogloo pioneered the use of structural foam plastic in the
production of pet shelters in the late 1980's, and owns a configuration
trademark which protects certain aspects of its design from imitation by
competitors (see "Business -- Patents and Trademarks"). The insulating
qualities of structural foam and the igloo-shaped design are strong selling
features. Structural foam plastic is an extremely durable, lightweight, thermal
material which enables the Company's pet shelters to remain warmer in winter and
cooler in summer. The igloo-shaped structural foam shelters manufactured by the
Company provide exceptional durability, insulation and comfort compared to other
types of wooden homes and non-structural foam plastic shelters. Another
advantage of these shelters over wooden shelters is that structural foam is
non-porous, making them easy to clean with soap or disinfectants and dry quickly
and easily. The non-porous surface also prevents fleas and disease from living
in the material, as can occur with wood products.
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Other Pet Products. The Company's other pet product lines include cat
litter boxes, feeding and watering systems, pet bowls, pet toys, pet furniture
and bedding. The Company's feeding and watering systems are among the fastest
growing segments of the Company's "other" pet products category, and offer
multiple day feeding and watering solutions for pets in the absence of their
owners. Management believes the breadth of the Company's entire pet product line
represents the most complete assortment of durable dog and cat products in the
industry.
Sporting Goods Cases. The Company sells three sporting goods product lines
with over 40 different SKUs, which gives the Company a significant presence in
this market. The Company is one of the leading manufacturers and suppliers of
hard-sided firearms cases, bow cases and golf cases in the United States and has
substantial market share in each of its product lines. In 1976, the Company
became the first manufacturer to sell hard-sided firearms cases to the airlines
industry and eventually to retail customers. Management believes the Company's
Gun Guard(R) cases are known for their high quality. The Company is the leading
producer of hard-sided firearms cases in the United States.
The Company also manufactures and supplies a line of photo/video camera
cases. The photo/video case product line is sold under the Camera Guard(R) name
and includes products such as the Seal-Tight(R), a water, dust and airtight case
with foam inside.
In 1994, through the acquisition of the assets of the Woodstream sporting
goods product line from Ekco Canada, Inc., and Ekco Group, Inc., the Company
entered the golf accessories market with the Golf Guard(R) hardsided travel case
for golf clubs. Because of its rugged outer shell, management believes the Golf
Guard(R) travel case is superior to soft cases which can rip, stain and show
dirt. In addition, the Golf Guard(R) case has built-in padlock tabs, bail
latches and dual wheels. During fiscal 1999, the Company sold its interest in
the tackle box and hardware products acquired as part of the Woodstream product
line.
Outside Resin Sales. The Company sells to outside customers its excess
production capacity from its Spectrum resin compounding facility.
NEW PRODUCT DEVELOPMENT
New products introduced within the past three calendar years accounted for
over 8.6% of the Company's fiscal year 2000 revenue. The Company is committed to
maintaining its reputation as an industry leader through continued product
development within its current product categories and the creation of innovative
new product categories. Management believes the Company has demonstrated the
ability to develop and market new products to both retail consumers and those
who influence the purchasing patterns of consumers such as breeders and
veterinarians. The Company launched a total of 16 new products in fiscal year
2000 and 22 in fiscal year 1999. The Company expects to launch a total of 13 new
products in fiscal year 2001. The Company expects new product capital
expenditures of $2.0-$4.0 million in fiscal 2001, up from $0.7 million in fiscal
2000. This increase reflects the Company's focus on developing new products and
strengthening its brand in the marketplace.
The Company's philosophy on new product development is to focus on the
needs of the consumer while creating products which will enhance the interaction
of the pet with its owner and also the pet's care, comfort and lifestyle. The
Company evaluates ideas from multiple sources, both internal and external, and
tests such ideas against consumer reaction and market potential. After a
promising product is identified through consumer and market research, the
Company employs a multifunctional team approach to accelerate the speed and
improve the effectiveness of new product introductions. The Company has won over
10 new product industry awards during the past five years. The Company also
seeks to acquire existing products that can be leveraged through its broad
distribution network.
SALES, MARKETING AND DISTRIBUTION
The Company's marketing strategy is to communicate directly with the
consumer through in-store merchandising, direct marketing, advertising and
promotional programs. The Company believes strong brand recognition and programs
which influence consumer purchase intentions provide the framework for
establish-
8
<PAGE> 11
ing effective merchandising presentations at point of sale. The Company has
tailored its products to nine distinct distribution channels (see
"Business -- Customers"). By focusing on multiple distribution channels, the
Company believes it is well positioned to meet the various needs and shopping
habits of consumers. During fiscal 1999, the Company revised its "umbrella"
strategy to consolidate brands within the pet products area (see
"Business -- General").
Domestically, the Company employs a direct sales force based near key
retail customers. The Company also uses manufacturer representatives to support
certain customers and to cover specific territories and channels of
distribution. The Company believes this approach, along with its proactive
customer service function, has allowed it to build important customer
partnerships and will serve as a significant competitive advantage in the
future.
The Company also markets its products internationally, with primary
emphasis on Europe, Canada, Latin America, Japan, Australia and the Pacific Rim.
The Company has developed multilingual packaging and trade advertising
capabilities and it continues to expand international distribution. During
fiscal 1999, the Company began limited manufacturing in Europe using a contract
molder to run existing Company molds that were available after domestic product
line consolidation. The Company believes foreign manufacturing avoids
significant shipping costs and import duty when selling to European markets.
With a base of foreign pet distributors in place to service the pet specialty
channel, the Company is focusing on mass merchandisers and home and garden
centers in Germany, Latin America, Canada, and the United Kingdom. The Company
primarily utilizes direct sales personnel, in cooperation with selected
distributors, to market internationally. The Company believes it is well
positioned to assist United States retailers expanding their operations abroad.
CUSTOMERS
The Company distributes its products through a broad distribution network
of retailers, with the largest customer accounting for 22.0% of fiscal 2000
revenues. The primary distribution channels include mass merchants, pet
superstores, hardware and home centers, warehouse clubs, distributors, farm and
agriculture, food and drug, co-ops, and catalogs.
In the years ended June 30, 2000, June 30, 1999 and June 30, 1998, the
Company's largest customer accounted for approximately 22.0%, 17.0% and 13.0%,
respectively, of the Company's combined sales. The Company's ten largest
customers accounted for, in the aggregate, approximately 57.0%, 53.0% and 42.0%,
respectively, of net combined sales during such periods. In fiscal 2000 and
1999, sales to the Company's second largest customer accounted for approximately
12.0% and 13.0%, respectively, of net sales. The loss of, or significant
reduction of orders from, any of the Company's major customers could have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
As management believes is typical in the pet and sporting goods industries,
the Company does not have long-term or exclusive contracts with any of its
customers. Sales to customers and purchases from suppliers are generally made
pursuant to purchase orders.
Because of operational problems encountered in fiscal 1999 and 2000, the
Company streamlined its customer base. The reduction in the number of direct
accounts allowed the Company to focus on larger customers and larger order
minimums. The streamlining program attempted to move certain smaller customers
to buy from the Company's distributor partners to ensure that they would be
serviced effectively. During fiscal 2000, the Company implemented a streamlining
strategy that significantly reduced both the direct customer base and SKUs by
approximately 55.0% and 20.0%, respectively.
RAW MATERIALS
The Company's principal raw materials are various plastic resins, which are
either "prime" resins purchased from petrochemical producers, or blends of prime
resins and recycled materials purchased from third-party suppliers or produced
by the Company. The plastic resins used by the Company are produced from
petrochemical intermediates, derived from petroleum extracts. The main resins
historically utilized by the Company are high density polyethylene ("HDPE"),
which Dogloo has used to manufacture its line of pet
9
<PAGE> 12
shelters, and polypropylene ("PP"), which Doskocil has used to manufacture its
pet carriers and other plastic products. In manufacturing many products,
including pet shelters, formulations of PP can be substituted for HDPE. To a
lesser extent, the Company utilizes other raw materials such as steel, specialty
chemicals (including nitrogen, impact modifiers, blowing agents, antioxidants
and ultraviolet stabilizers), carbon black, synthetic fibers, natural rubbers,
polyethylene, colorants, components of polyester/cotton fabrics, polyurethane
foam and PVC vinyl.
The Spectrum facility and the Company's resin compounding expertise enable
the Company to produce plastic resins using a significantly reduced proportion
of prime resins while achieving raw material specifications which meet or exceed
the Company's product and manufacturing specifications.
Plastic resin prices may fluctuate as a result of worldwide changes in
natural gas and crude oil prices and capacity, as well as changes in supply and
demand for resin and petrochemical intermediates from which they are produced.
Among other industries, the automotive and housing industries are significant
users of plastic resin. As a result, significant changes in worldwide capacity
and demand in these and other industries may cause significant fluctuations in
the prices of plastic resin. In the past, the Company has had limited ability to
increase product pricing in response to plastic resin price increases. Any
material increases in the prices of plastic resins could have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
Resin prices reached peaks in 1988 and 1995 and have declined significantly
in recent years (see chart below). As major petrochemical companies have built
polypropylene plants, hundreds of millions of pounds of resin capacity have been
added to the marketplace, driving down resin prices. Plastic resin prices can
vary from year to year and are very difficult to predict beyond a few months.
For calendar 2000, prices for HDPE and PP rose significantly in the first half
of the year with prices softening in the calendar third quarter. Prices for
natural gas and oil have risen significantly over the last year and have led
some producers to shut down production. This is expected to be a key factor in
causing resin prices to continue to increase.
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
HDPE * MARKET PRICE CO-PP * MARKET PRICE
------------------- --------------------
<S> <C> <C>
1979 0.30 0.29
1980 0.35 0.34
1981 0.37 0.39
1982 0.34 0.38
1983 0.33 0.36
1984 0.32 0.39
1985 0.26 0.35
1986 0.27 0.34
1987 0.32 0.41
1988 0.50 0.52
1989 0.46 0.45
1990 0.39 0.38
1991 0.31 0.36
1992 0.27 0.34
1993 0.28 0.30
1994 0.33 0.34
1995 0.43 0.50
1996 0.40 0.42
1997 0.40 0.42
1998 0.34 0.33
1999 0.34 0.30
2000 0.42 0.40
</TABLE>
Based on data regarding high-density polyethylene and co-polymer polypropylene
from Chemical Data, Inc., May 2000 Edition.
PATENTS AND TRADEMARKS
Following the Merger, the Company operated using two distinct product brand
identifications used by the pre-Merger companies, Doskocil and Dogloo.
Trademarked brands marketed under the Doskocil name included Vari Kennel(R), Sky
Kennel(R), Petmate(R), Pet Taxi(R) and Kennel Cab(R) in pet products, as well as
Gun Guard(R) firearms and archery cases, Camera Guard(R) camera cases and Golf
Guard(R) golf travel cases. Brands marketed under the Dogloo name included
Furrarri(R) and Innovator(R) carriers as well as the Ruff Hauz(R), Brik Hauz(R),
Dogloo II(R), Indigo(R) and Animal Hauz(R) pet shelters.
10
<PAGE> 13
During fiscal 1998, the Company developed and initiated a strategy to
consolidate brands within the pet products area. During fiscal 1999, the
dual-brand strategy was subsequently abandoned, bringing the entire pet business
under the Petmate(R) umbrella. This branding strategy facilitated the Company's
restructuring, rationalization and consolidation of its product line. The
Company also initiated a program to secure rights to the Petmate(R) name in all
significant foreign markets.
The current registrations of the Company's trademarks in the United States
and foreign countries are effective for varying periods of time, and may be
renewed periodically provided the Company, as the registered owner, and its
licensees, where applicable, comply with all applicable laws. The Company also
has several U.S. utility and design patents and several patent applications
pending. The Company is not aware of any material challenge to the ownership by
the Company of its major trademarks or patents. The Company believes it benefits
from its intellectual property and intends to defend its exclusive use of such
property against infringement by third parties, although the company cannot
predict success in defending its intellectual property rights (see
"Business -- Risks Related to the Business, Reliance on Trademark, Patent and
Proprietary Information").
SEASONALITY
The business and results of operations of the Company are seasonal. The
Company experiences increased sales of pet shelters during the third and fourth
calendar quarters of the year as retailers build inventories in anticipation of
periods of cold weather. With regard to other products, pet carriers and
firearms cases have usually been the sales leaders in its quarter ended June,
and sales of other pet products and firearms cases are normally promoted and are
higher in the quarters ending in September and December.
EMPLOYEES
The total number of active employees at June 30, 2000 was 945. The Company
hires a significant number of temporary employees to assist in production during
times of peak customer demand. None of the Company's employees are represented
by labor unions. The Company considers its relationship with its employees to be
good.
GOVERNMENT REGULATIONS
The Company is subject to numerous federal, state and local laws and
regulations relating to the protection of the environment. Management does not
expect environmental compliance to have a material adverse impact on the
Company's capital expenditures, earnings or competitive position in the
foreseeable future.
The Company is subject to laws governing its relationship with employees,
including minimum wage requirements, laws and regulations relating to overtime,
working safety conditions and citizenship requirements.
RISKS FACTORS RELATED TO THE BUSINESS
Highly Leveraged. The Company incurred substantial indebtedness in
connection with the consummation of the Merger and has remained highly leveraged
since that time. As of June 30, 2000, the Company had total indebtedness of
approximately $186.3 million. Subject to the restrictions in the Company's
Credit Facility dated September 19, 1997 with Bank of America, as administrative
agent, and other lending institutions party thereto (as amended, the "Credit
Facility") and the Indenture (the "Indenture") for the 10 1/8% Senior
Subordinated Notes (the "Subordinated Notes"), the Company and its subsidiaries
may incur additional indebtedness from time to time to finance capital
expenditures and acquisitions and for other general corporate purposes. On
August 12, 1999, the Company entered into an additional credit facility (as
amended on October 12, 1999, the "Additional Credit Facility") with Bank of
America, N.A. (the "Additional Lender") which permits the Company to borrow up
to $15.0 million due in September, 2000 and sold $5.0 million Series D Preferred
Stock (see "Management's Discussion and Analysis of Financial
11
<PAGE> 14
Condition and Results of Operations -- Liquidity and Capital Resources"). In
September 2000, the lenders amended the Additional Credit Facility to extend to
September 28, 2001.
The degree to which the Company is leveraged could have important
consequences to the Company's equity and debt holders, including:
- the limitation on the Company's ability to obtain additional financing
for working capital, product development, capital expenditures, debt
service requirements or other purposes;
- a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of the principal and interest on its
indebtedness, thereby reducing funds available for operations and capital
additions;
- certain of the Company's borrowings, primarily the borrowings under the
Credit Facility and Additional Credit Facility, will be at variable rates
of interest which could cause the Company to be vulnerable to increases
in interest rates;
- the Company may be more vulnerable to economic downturns and more limited
in its ability to withstand competitive pressures than its competitors
that are not as highly leveraged; and
- the Company's leveraged status may affect its ability to make
acquisitions in the future
The Company's scheduled payments of principal and interest on existing
borrowings under the Credit Facility and the Subordinated Notes are $27.3
million in fiscal 2001, $27.9 million in fiscal 2002, and $27.2 million in
fiscal 2003 excluding the Additional Credit Facility. The Company's ability to
make scheduled payments of principal or interest or refinance to its
indebtedness will depend on its future operating performance and cash flow,
which are subject to prevailing economic conditions, prevailing interest rate
levels, and financial, competitive, business and other factors, many of which
are beyond its control, as well as the availability of borrowings under the
amended Credit Facility, the amended Additional Credit Facility or successor
facilities. However, based upon the current and anticipated level of operations,
the Company believes that its cash flow from operations, together with amounts
available under the amended Credit Facility, the Additional Credit Facility and
equity infusions, if any, required under the Support Agreement, will be adequate
to meet its anticipated cash requirements for working capital, capital
expenditures, interest payments and scheduled principal payments. There can be
no assurance that the Company's business will generate cash flow at or above
required levels. If the Company is unable to generate sufficient cash flow from
operations in the future to service its indebtedness, it may be required to
refinance all or a portion of its indebtedness or to obtain additional financing
or to dispose of material assets or operations. In conjunction with the Fifth
Amendment to the Credit Facility, Westar Funds agreed to jointly and severally
provide capital to the Company in an amount that would meet financial covenants
for the nine months ended June 30, 2000 and the four quarters of fiscal 2001.
The amended Credit Facility, the amended Additional Credit Facility and the
Subordinated Notes restrict the Company's ability to sell assets and/or use the
proceeds therefrom. There can be no assurance any such refinancing or asset
sales would be possible under the Company's debt instruments existing at such
time, the proceeds which the Company could realize from such refinancing or
asset sales would be sufficient to meet the Company's obligations then due or
any additional financing could be obtained.
Restrictive Covenants and Asset Encumbrances Under the Credit Facility, the
Additional Credit Facility and Indenture. The Credit Facility, the Additional
Credit Facility and the Subordinated Notes contain numerous restrictive
covenants which limit the discretion of Company management with respect to
certain business matters. These covenants place significant restrictions on,
among other things, the ability of the Company to incur additional indebtedness,
to create liens or other encumbrances, to pay dividends or make other restricted
payments, to make investments, loans and guarantees and to sell or otherwise
dispose of a substantial portion of assets to, or merge or consolidate with,
another entity. The amended Credit Facility and the Additional Credit Facility
also contain a number of financial covenants that require the Company to meet
certain financial ratios and tests, including an amended minimum fixed coverage
ratio, a minimum interest coverage ratio, a maximum leverage ratio and a minimum
EBITDA provision and provide that a "change of
12
<PAGE> 15
control" will constitute an event of default. The existing Credit Facility was
amended in February 1999, May 1999, August 1999, October 1999 and June 2000, and
as part of the amendments in February, May, and October, waivers of certain
financial covenant defaults were granted.
The Company's continued ability to satisfy its financial covenants depends,
in part, on the ability of the Company to successfully integrate the production
and offerings of the combined Company. As is normally the case in credit
relationships, a failure to comply with the covenants contained in the amended
Credit Facility, the Additional Credit Facility or the Subordinated Notes, if
not cured or waived, could permit acceleration of the related indebtedness and
acceleration of indebtedness under other instruments that contain cross-
acceleration or cross-default provisions. In addition, the obligations of the
Company under the amended Credit Facility are secured by substantially all of
the assets of the Company. Amounts outstanding under the Additional Credit
Facility are secured by liens in certain equipment and other property of the
Company that are junior in lien priority to the lien securing the Company's
Credit Facility. In the case of an event of default under the amended Credit
Facility or the Additional Credit Facility, the lenders under the Credit
Facility and the Additional Credit Facility would be entitled to exercise the
remedies available to a secured lender under applicable law. If the Company were
obligated to repay all or a significant portion of its indebtedness, there can
be no assurance the Company would have sufficient cash to do so or the Company
could successfully refinance such indebtedness. Other indebtedness the Company
may incur in the future may contain financial or other covenants more
restrictive than those applicable to the Credit Facility or the Subordinated
Notes.
While the Company intends to increase its new product development efforts,
there can be no assurance these increased efforts will result in successful new
product introductions.
Risks Related to the Merger and Integration of Doskocil and Dogloo. The
Merger involved the combination of two companies that previously operated
independently. The assimilation of the companies is an ongoing process that
requires integration and coordination of the Company's product offerings,
management, systems, research and development, manufacturing and sales and
marketing efforts. The difficulties of such assimilation include the need to
consolidate manufacturing operations in Arlington, Texas, integrate personnel
and combine different corporate cultures. In addition, in the last half of
fiscal 2000 the Company engaged outside consultants to help streamline its
enterprise resource planning ("ERP") and warehousing management systems. The
decision was made to reconfigure the ERP system and also use the embedded
warehouse management function, dropping the acquired warehouse management system
(see "Problems with Implementation of Computer Systems").
The Company made substantial progress on the integration of Doskocil and
Dogloo in fiscal 1998, fiscal 1999 and fiscal 2000. During fiscal 1998, the
Company closed the Dogloo facilities in Corona, California and Indianapolis,
Indiana, relocated key management and machinery and equipment to Arlington,
Texas, consolidated ordering, inventory and shipping into a single location
while continuing to prepare to implement a new information system, accelerated
new product development, and adopted a new "umbrella" brand strategy for the
products of the combined Company. During fiscal 1999, the dual brand strategy
was abandoned to facilitate product line restructuring, rationalization and
consolidation. The Company sold the Dogloo facilities in Indianapolis, Indiana
during the first quarter of fiscal 2000.
Commencing with the fourth quarter of fiscal 1998, the Company experienced
difficulty in fulfilling certain customer orders on a timely basis. This
difficulty was attributable to a number of factors, including problems
experienced in managing the combined product lines of Doskocil and Dogloo,
forecasting accurately customer demand, production scheduling, logistic
constraints and achieving planned production rates from certain equipment. The
Company has taken short and long-term steps to address these matters, including
developing a more sophisticated sales forecast system, expanding outsourcing of
certain product production and shipping, developing and implementing a plan to
reduce SKUs, installing a warehouse management information system, and
implementing a new Company-wide information system. The Company's difficulty in
fulfilling certain customer orders and the associated short-term increased costs
incurred to address this difficulty, including increased labor and freight
costs, will unfavorably impact future results.
Problems with Implementation of Computer Systems. In October 1998, the
Company experienced complications with and abandoned its attempted
implementation of a new manufacturing, distribution and
13
<PAGE> 16
financial hardware and software system. This led, in part, to the Company's
difficulties described above in fulfilling certain customer orders on a timely
basis. In fiscal 1999 and in fiscal 2000, the Company experienced complications
with its computer systems. In March 1999, the Company commenced the rapid
implementation of a standard preconfigured ERP software system and a warehouse
management system which was installed in July 1999. The Company has experienced
problems with these new systems and has found it necessary to have the standard
set up modified to address the Company's specific needs. The Company believes
its new system with planned modifications will adequately serve its needs. The
Company incurred additional expenses to implement the planned modifications to
that system and, until the modifications are completed, may continue to
experience operational and customer order fulfillment difficulties. Certain
elements of these systems were reconfigured and re-launched in June 2000. In
addition, any failure of the system similar to the failures experienced in
fiscal 1999 and 2000 could have an adverse effect on the Company's customer
relations and adversely affect the Company's financial position, results of
operations and cash flow.
Seasonality and Quarterly Fluctuations. The business and results of
operations of the Company are seasonal. The Company's business and results of
operations have historically been seasonal due to the increased number of pet
shelters sold during periods of inclement weather and because of the increased
number of sporting goods and certain other products sold in anticipation of the
spring and fall selling seasons. In order to finance these seasonal variations
and resulting inventory and receivable levels, the Company has utilized a
revolving line of credit. The outstanding balance on the revolving line of
credit has generally followed the seasonal cycle described above, increasing
until sales and the collection of receivables could be used to reduce the
outstanding balance on the line. There can be no assurances that the Company
will be able to finance seasonal variations in its liquidity requirements.
Dependence on Raw Material Pricing and Availability. The major raw
materials used in the manufacturing of the Company's products are various
plastic resins and recycled plastic materials, including primarily polypropylene
and polyethylene and their derivatives. The plastic resins used by the Company
are produced from petrochemical intermediates which are, in turn, derived from
petroleum extracts. Plastic resin prices may fluctuate as a result of worldwide
changes in natural gas and crude oil prices and capacity, as well as changes in
supply and demand for resin and petrochemical intermediates from which they are
produced. Among other industries, the automotive and housing industries are
significant users of plastic resin. As a result, significant changes in world
wide capacity and demand in these and other industries may cause significant
fluctuations in the prices of plastic resin. In the past, the Company and its
individual predecessors have had limited ability to increase product pricing in
response to plastic resin price increases. In fiscal 1999 and 1998, the Company
has benefited from favorable resin prices. In fiscal 2000, the Company
experienced increasing resin prices. Continued increases in the prices of
plastic resins could have a material adverse effect on the Company's financial
position, results of operations and cash flows.
Significant increases in the prices of other raw materials used to
manufacture the Company's products could have a material adverse effect on the
Company's financial position, operating results, and cash flows. The Company
purchases certain other raw materials from the Far East. There can be no
assurance severe shortages of raw materials will not occur in the future that
could increase the cost or delay the shipment of the Company's products and have
a material adverse effect on the Company's financial position, operating results
and cash flows.
Concentration of Customers. In fiscal years ended June 30, 2000, June 30,
1999 and June 30, 1998, the Company's largest customer accounted for
approximately 22.0%, 17.0% and 13.0%, respective of net sales, and the Company's
ten largest customers accounted for, in the aggregate, approximately 57.0%,
53.0% and 42.0%, respectively, of net sales (see "Business -- Customers"). The
loss of, or significant reduction of orders from, any of the Company's major
customers could have a material adverse effect on the Company's financial
position, results of operations and cash flows.
Because of operational problems encountered in fiscal 1999, one of the
Company's top twenty customers representing approximately $1.7 million annual
sales and several smaller accounts with total annual sales of approximately $3.0
million, ceased doing business with the Company.
14
<PAGE> 17
Reliance on Trademark, Patent and Proprietary Information. The Company's
continuing success depends in part on its ability to protect and maintain the
proprietary nature of its products through a combination of trademarks, patents,
licenses and other proprietary arrangement. The Company intends to protect
vigorously the proprietary nature of its products; however monitoring and
identifying unauthorized use of the Company's proprietary rights may prove
difficult. There can be no assurance the Company's pending trademark or patent
applications will issue or if issued, or licensed to the Company, they will be
enforceable or will provide substantial protection from competition or be of
commercial benefit to the Company, or the Company will possess the financial
resources necessary to enforce or defend any of its trademark and patent rights.
Neither can there be any assurances a third party will not violate, or attempt
to invalidate, the Company's proprietary rights, possibly forcing the Company to
expend substantial legal fees. Successful challenges to certain of the Company's
patents or trademarks, particularly the federal configuration trademark relating
to its igloo-shaped pet shelter, would materially adversely affect its financial
condition, business, operating results and cash flows. While Dogloo successfully
relied upon this configuration trademark in the past, there can be no assurance
the Company will again be successful in this regard. Further, there can be no
assurance actions taken by the Company to establish and protect its proprietary
rights would be adequate to prevent imitation of its products by others or to
prevent others from seeking to block sales of the Company's products as
violative of the proprietary rights of others. Moreover, there can be no
assurance third parties will not assert infringement claims against the Company
in the future. If any of the Company's products are found to infringe upon
patents or other third party rights, the Company could be required to obtain a
license to continue to manufacture or market such products. There can be no
assurance licenses to such patent rights would be made available to the Company
on commercially reasonable terms, if at all. If the Company does not obtain such
licenses, it could encounter delays while it attempts to redesign these products
to avoid infringement, or it could find the manufacture or marketing of these
products is not possible. In addition, the laws of certain foreign countries may
not protect proprietary rights to the same extent as do the laws of the United
States.
Competition, Limited Market Data and the Susceptibility to Changing
Economic Conditions. The Company's products are sold in highly competitive
markets. In each of its markets, the Company competes with significant number of
companies of varying sizes on the basis of quality, price, availability and
service. Competitive pressures or other factors could cause the Company to lose
market share or could result in significant price erosion, either of which could
have a material adverse effect upon the Company's financial position, results of
operations and cash flows. Some of the Company's competitors have greater
ability to expand production capacity and increase research and development
expenditures.
The market data contained in the Report on Form 10-K is based on
independent industry publications or the good faith belief of the Company's
management. However, such market data cannot be verified with certainty due in
part to the unavailability of raw data in certain circumstances and the
voluntary nature of the data-gathering process, and estimates may be incorrect,
possibly to a material degree. In particular, the Company is not aware of the
availability of reliable statistics with respect to specific pet and sporting
goods products. Therefore, management's estimates with respect to such specific
pet and sporting goods products are based only on the limited data in the public
domain and the Company's participation in the pet and sporting goods industries.
Accordingly, no assurance can be given as to the accuracy of management's
estimates.
Sales of pet products can be dependent upon discretionary consumer
spending, which may be affected by general economic conditions, as well as
continued interest in pet ownership. A decrease in consumer spending on pet
products or a reduction in pet ownership could have an adverse effect on the
Company's financial positions, business, operating results and cash flows.
Controlling Stockholder. Westar owns approximately 86.6% of the outstanding
shares of Company Common Stock. As a result, Westar has the ability to elect the
board of directors of the Company, to approve or disapprove of other matters
requiring stockholder approval and to effectively control the affairs and
policies of the Company.
15
<PAGE> 18
AVAILABLE INFORMATION
Doskocil Manufacturing Company, Inc., electronically files Form 10-K's,
Form 10-Q's and Form 8-K's with the Securities and Exchange Commission ("SEC").
This information may be read at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. The SEC also maintains an Internet site
which can be accessed at http://www.sec.gov. An interested party may also
receive a copy of such filings by contacting the Company's Chief Financial
Officer at 4209 Barnett Blvd., Arlington, Texas 76017.
ITEM 2. PROPERTIES
The location and general character of principal manufacturing facilities
are described below. The plants and facilities have been constructed or acquired
over a period of years and vary in age and operating efficiency.
The Company leases manufacturing facilities in Arlington, Texas, and
Mansfield, Texas; a fabric cut and sew facility in Arlington, Texas; and offices
and warehouse facilities in Arlington, Texas. From time to time, the Company
also leases other outside warehousing facilities during seasonal demand and to
meet certain customer demand. At June 30, 2000, the Company had 125,000 of
additional square footage leased.
The approximate size and location of the Company's significant facilities
are summarized below:
<TABLE>
<CAPTION>
SIZE NUMBER OF
MANUFACTURING, WAREHOUSE AND OFFICE: (SQ. FT.) OWNED/LEASED EMPLOYEES
------------------------------------ --------- ------------ ---------
<S> <C> <C> <C>
Arlington, Texas.................................. 1,343,250 Leased 866
Mansfield, Texas.................................. 52,000 Leased 79
</TABLE>
The Company's manufacturing operations include structural foam machines and
injection molding machines ranging in size from 75 to 3,000 tons. With moderate
additional capital expenditures, management believes that the Company's
manufacturing facilities can accommodate a substantial increase in product
volume. The Company manufactures substantially its entire line of products, with
the current exception of aluminum firearm cases, which are manufactured by
contract suppliers. The Company contracts with other manufacturers, from time to
time, to address seasonal and other temporary peaks in customer demand. During
fiscal 2000, construction was completed on 163,000 square feet of warehouse
facilities in Arlington that the Company leases from Mr. Doskocil, a director
(see "Certain Relationships and Related Transactions").
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has been involved in legal proceedings
arising in the ordinary course of business. None of the matters in which the
Company is currently involved are expected to have a material adverse effect on
the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matters were submitted to a vote of the Company's securityholders during
the fourth quarter of the fiscal year ended June 30, 2000.
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<PAGE> 19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, no par value, (the "Common Stock") is not
listed for trading on any national securities exchange and is not available for
quotation through the National Association of Securities Dealers Automated
Quotation System. During fiscal 2000, the Company sold an aggregate of 50,000
shares of its common stock to one person and retired 11,000 shares. During
fiscal 1999, the Company sold an aggregate of 4,000 shares of its common stock
to one person and repurchased 2,500 shares of its common stock from one person.
The foregoing transactions did not involve any public offering, and the Company
believes that each transaction was exempt from the registration requirements of
the Securities Act of 1933 by virtue of Section 4(2) thereof. As of June 30,
2000, there were approximately 14 holders of the Company's common stock. The
Company has not declared dividends on its common stock in the last four fiscal
years, and does not, at present, expect to pay dividends on its common stock in
the future. On October 12, 1999, the Company issued and sold an aggregate amount
of $5.0 million of Series D Preferred Stock along with related warrants to
acquire common stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company does not intend to apply to list its outstanding 10 1/8% Senior
Subordinated Notes on any securities exchange or for quotation through the
National Association of Securities Dealers Automated Quotation System. The
liquidity of, and trading market for, the Subordinated Notes may be adversely
affected by general declines in the market of similar securities, regardless of
the Company's financial performance or prospects.
ITEM 6. SELECTED FINANCIAL DATA
The financial data for the periods presented prior to September 19, 1997,
reflect the combined historical financial position and results of operations for
Doskocil and Spectrum, as these entities were under common ownership. Beginning
September 19, 1997, the financial results of the Company, include the financial
position and results of operations for Dogloo, Inc. Pro forma net income per
common share (both basic and diluted) are based on the common shares outstanding
after the recapitalization of Doskocil in July 1997 (the "Recapitalization") and
the termination of Doskocil's "S" Corporation status occurred at the same time.
See "Notes to Financial Statements -- Notes 3 and 18."
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS
------------------------------ ------------------- ENDED
JUNE 30, JUNE 30, JUNE 30, DEC. 28, DEC. 30, JUNE 30,
2000 1999 1998 1996 1995 1997
-------- -------- -------- -------- -------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $158,418 $169,932 $147,156 $103,455 $97,496 $51,756
Gross profit........................................ 52,059 58,937 52,400 33,781 28,638 15,024
Selling, general and administrative................. 47,816 53,259 36,346 24,136 23,427 12,103
Impairment of long-lived assets..................... 4,098 6,789 -- 2,030 -- 3,846
Operating income (loss)............................. 145 (1,111) 16,054 7,615 3,105 (3,800)
Interest expense.................................... 22,354 17,750 17,461 2,328 2,473 506
Net income (loss) before income taxes............... (21,467) (18,885) (1,051) 4,743 1,190 (4,276)
Net income (loss)................................... (21,467) (18,885) (2,920) 4,743 1,190 (4,276)
Net income (loss) attributable to common
shareholders...................................... (22,944) (19,801) (4,104) 4,743 1,190 (4,276)
Net income (loss) per share basic and diluted....... (7.28) (6.38) (1.50) -- -- --
Pro forma net income (loss)......................... -- -- -- 2,988 750 (2,694)
Pro forma basic and diluted net income per share.... -- -- -- $ 2.25 $ .56 $ (2.02)
BALANCE SHEET AND OTHER DATA:
Capital expenditures................................ $ 6,770 $ 14,988 $ 11,458 $ 4,129 $19,156 $ 971
Total assets........................................ 150,351 163,702 164,101 66,135 72,876 50,679
Capitalization
Total long-term debt.............................. $168,145 $178,281 $163,094 $ 7,465 $19,678 $ 6,590
Partners' equity.................................. -- -- -- 4,278 5,297 3,808
Common stockholders' equity (deficit)............. (53,921) (42,184) (23,320) 31,360 25,851 25,282
-------- -------- -------- -------- ------- -------
Total capitalization........................ $114,224 $136,097 $139,774 $ 43,103 $50,826 $35,680
======== ======== ======== ======== ======= =======
</TABLE>
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<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Company's financial statements and related notes included
elsewhere in this report.
Through 1996, both Doskocil's and Dogloo's fiscal years ended on or about
December 31 of each year. In order to match the combined Company's fiscal year
reporting with its seasonality, the Company changed its fiscal year end to June
30 in connection with the Merger. Reference to fiscal 2000, fiscal 1999 and
fiscal 1998 means the twelve month period ended June 30 of each year. Historical
financial information for the combined Company for the twelve month period
beginning on July 1, 1997 is presented later in this section under the caption
"Summary Combined (Doskocil and Dogloo) Historical Financial Information for the
Twelve Months Ended June 30, 1998."
RESULTS OF OPERATIONS
The following analysis is based on actual results of the Company which only
include Dogloo from the date of acquisition. Please refer to the section
"Summary Combined (Doskocil and Dogloo) Historical Financial Information" for an
analysis of combined results of Doskocil and Dogloo on a combined basis for the
twelve month periods ended June 30, 1999 and 1998.
Net sales for each of the periods presented are summarized in the following
table:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Pet products......................................... $136,476 $140,022 $118,027
Sporting goods and other............................. 13,857 15,118 16,148
Furniture and custom molding......................... -- 3,873 6,669
Outside resin sales.................................. 8,085 10,919 6,312
-------- -------- --------
Net sales............................................ $158,418 $169,932 $147,156
======== ======== ========
</TABLE>
Overview
The Company's results for fiscal 2000 were consistent with fiscal year
1999's results but well below fiscal year 1998's performance. Fiscal 2000 was
negatively impacted by lower sales and higher than expected costs for
manufacturing.
Net sales for fiscal 2000 were $158.4 million, down $11.5 million or 6.8%
from fiscal 1999. Some of this decrease was expected as the Company accelerated
sales into fiscal 1999 in an effort to facilitate the July 1999 enterprise
resource planning ("ERP") systems implementation. Fiscal 2000 included the
implementation of a streamlining strategy which reduced the Company's direct
customer base and SKUs by approximately 55.0% and 20.0% respectively. Fiscal
2000 sales also was affected by increased competition, decreased sales of pet
shelters due to relatively mild weather and high levels of customer backorders
in the first two fiscal quarters. Sales in fiscal 1999 include sales from a
non-core product line that was disposed of in the last half of fiscal 1999.
The systems implementation in fiscal 2000 also negatively affected results
as it did in fiscal 1999. The inability to issue accurate and timely invoices to
customers delayed invoicing sales and, in some instances, impacted the Company's
collections from customers leading to higher credit memo reserves in fiscal
2000. Manufacturing and sales lacked accurate inventory and sales detail, which
impacted sales forecasting, purchasing and production planning. For a second
consecutive year, the Company's inventories and backlog increased dramatically
in the fall, when the Company was not able to match production with customer
requirements.
Manufacturing costs were higher than expected in the first half of the year
due to the lower sales levels, ineffective cost controls, systems problems,
trying to meet customer demand by building to forecast and
18
<PAGE> 21
changes in product/customer mix. The resulting high inventory levels forced the
Company into expensive outside warehousing. Management issues and ineffective
cost controls led to historically high scrap costs in the first half of the
year, lower machine efficiency and low productivity on weekends. Direct and
indirect labor costs also increased. Systems implementation issues also
negatively impacted the Company's ability to manage material and finished goods
inventories, plan production and maintain customer service. The Company was
forced to use outside resources for production, although not to the extent
realized in fiscal 1999.
A national consulting firm was hired and new management added in the third
quarter to help streamline its ERP and warehousing management systems. The
decision was made to reconfigure the ERP system, using the imbedded warehouse
functions of the ERP system and dropping the warehouse management system that
had been installed in July 1999. The launch of the reconfiguration was
successful in June 2000. The Company has been operating this version of its
software successfully for the last four months. The system is providing accurate
information and processing for invoicing, inventory management, production
planning, sales and financial reporting.
A new manufacturing team was installed late in the second quarter with a
focus on lowering inventories while achieving high levels of customer service,
increasing machine and labor efficiency and minimizing outside production. A
monthly planning process was implemented in the last half of the year to
coordinate the needs and expectations of the sales team with the capability of
the manufacturing team to meet customer requirements. Production scheduling is
now tied more closely to firm demand rather than building only to forecast. This
requires more and faster mold and color changeovers but lowered inventory and
made more capacity available to meet customer demand. A decision was made in the
third quarter to lower finished goods inventories to improve customer service,
minimize investment in working capital and reduce operating costs. Lower
production levels in the last half of the year to work down excess inventory
levels lowered utilization of fixed resources and impacted profitability
negatively in the short term. An addition to the existing finished goods
warehouse was completed in May and is expected to lower outside storage costs in
fiscal 2001.
Equity infusions required by the Bank Agreements and the equity sponsor's
standby revolver credit facility combined with reductions in capital investment
and working capital provided sufficient liquidity to fund operations and
financing costs. During fiscal 2000, equity infusions included the sale in
October 1999 of $5.0 million of preferred stock (see "Liquidity and Capital
Resources"). An equity infusion of $1.4 million was received in May 2000 to meet
quarterly minimum EBITDA requirements for March 2000. In September 2000, an
equity infusion of $1.0 million was contributed for Series D Preferred Stock. Of
that additional investment, $0.1 million was required under the Support
Agreement between Westar and the lenders.
Outlook
Sales in fiscal 2001 are expected to be higher, helped by growth overseas,
better systems support and a new manufacturing management focusing on customer
service. The Company believes customer relations and service are very strong
going into the critical selling season. In the short term, shipments may be
affected negatively as customers draw down their safety stocks, based on their
renewed confidence in the Company's ability to ship on time. Weather may again
be a factor and competition is expected to have some impact on margins.
International sales are expected to be a positive source of increased sales in
fiscal 2001.
Certain costs, such as direct and indirect labor, continue to be lower than
fiscal 1999 and management expects that trend to continue. Machine efficiency
and the resulting increase in throughput should allow for somewhat lower cost of
sales in fiscal 2001. The new planning process and the new production planning
philosophy should allow much improved service while lowering inventories.
Resin material costs are expected to increase sharply with higher natural
gas and oil prices.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
Net sales decreased to $158.4 million in fiscal 2000 from $169.9 million in
fiscal 2000, a decrease of $11.5 million or 6.8%. The decrease was primarily due
to management's decision in the third quarter of fiscal 1999 to divest the
Company of certain non-core business assets and systems and operations systems
related
19
<PAGE> 22
problems that prevented the Company from meeting customer requirements in the
first half of the fiscal year. Pet sales also declined due to the SKU reduction,
customer consolidation programs, increased competition and mild weather in
fiscal 2000 which reduced demand for shelters.
Gross profit decreased to $52.1 million for fiscal 2000, down from $58.9
million in the prior year, a decrease of $6.8 million. As a percentage of sales,
gross margin decreased to 32.9% for fiscal 2000 from 34.7% in the prior year.
The Company's gross profit as a percentage of net sales was unfavorably affected
by, among other things, lower sales and lower plant utilization. Increased labor
and higher raw material costs also negatively affected gross profit. Margins for
the year reflect higher costs for direct and indirect labor of $2.4 million and
$0.5 million of inbound freight.
Selling, general and administrative expenses decreased to $47.8 million for
fiscal 2000 from $53.3 million in fiscal 1999, a decrease of $5.5 million or
10.3%. As a percentage of sales, SG&A spending decreased to 30.2% for fiscal
2000 from 31.3% in the prior year. The decrease was the result of several
factors, including lower expenses for advertising and promotions of $4.1
million, lower freight costs of $1.0 million and lower management fees.
Impairment of long-lived assets in fiscal 2000 was $4.1 million. This
charge includes a $1.2 million charge due to the SKU reduction, a $1.8 million
charge for costs relating to the fast-forward ERP and warehousing systems
management assessed have minimal future benefit and a $1.1 million charge
reflecting management's ongoing review of recoverability of assets, including
related goodwill. Fiscal 1999 included impairment charges of $6.8 million which
included $1.3 million due to the decision to divest the Company of certain
non-core business assets, a $2.3 million charge due to a failed system
conversion and management's assessment that the implementation costs had minimal
future benefit and a $3.2 million charge reflecting management's ongoing review
of recoverability of assets, including goodwill.
Interest expense increased to $22.4 million in fiscal 2000, up from $17.8
million in fiscal 1999. Interest expense in fiscal 2000 includes additional
amortization of $2.4 million of deferred financing costs related to the 4.1
million of guaranty warrants (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources"). Fiscal 2000 interest expense also includes $0.3 million in fees
related to the new credit agreement and the impact of higher interest rates and
increased debt balances.
Other income for fiscal 2000 includes a $0.4 million gain on the sale of
the Indianapolis facility.
Provision for income taxes for fiscal 2000 is zero due to the net operating
loss generated during the period for which a valuation allowance has been
provided for the resulting deferred tax asset.
Net Loss for fiscal 2000 was $21.5 million compared to a net loss in fiscal
1999 of $18.9 million. The changes in net income primarily reflect the factors
discussed above.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Net sales increased to $169.9 million in fiscal 1999 from $147.2 million in
fiscal 1998, an increase of $22.7 million or 15.4%. The increase was primarily
due to the inclusion of Dogloo net sales for the period of July 1 through
September 19, 1998, whereas the same period of 1997 is not included, increased
pet sales and higher outside resin sales in fiscal 1999. These increases were
partially offset by a reduction in sporting goods sales decreased primarily due
to the loss of two customers and management's decision in the third quarter to
divest the Company of certain non-core business assets.
Gross profit increased to $58.9 million for fiscal 1999, up from $52.4
million in the prior year, an increase of $6.5 million. As a percentage of
sales, gross profit decreased to 34.7% for fiscal 1999 from 35.6% in the prior
year. The Company's gross profit as a percentage of net sales was unfavorably
affected by, among other things, a failure to manufacture sufficient inventory
during the second half of fiscal year 1998 and the inability to accurately
forecast demand in the first part of fiscal 1999. In addition, during the first
half of the fiscal year, the Company experienced a failed software system
conversion that hampered the Company's ability to manufacture, ship and invoice
during its second fiscal quarter. Margins for the year reflect the higher
20
<PAGE> 23
associated costs including $1.6 million of inbound freight and higher expenses
for outside molders. The Company also experienced higher costs for manufacturing
direct labor and fulfillment costs.
Selling, general and administrative expenses increased to $53.3 million for
fiscal 1999 from $36.3 million in fiscal 1998, an increase of $17.0 million or
46.8%. The increase was the result of several factors, including higher expenses
as a result of the merger, higher outbound freight costs, amortization of
goodwill, bad debt expenses, advertising and promotion expenses and $1.4 million
for outside storage.
Impairment of long-lived assets in fiscal 1999 was $6.8 million. This
includes a $1.3 million charge due to the decision to divest the Company of
certain non-core business assets, a $2.3 million charge due to a failed system
conversion and management's assessment that the implementation costs have
minimal future benefit and a $3.2 million charge reflecting management's ongoing
review of recoverability of assets, including related goodwill.
Interest expense increased to $17.8 million in fiscal 1999, up from $17.5
million in fiscal 1998. Interest expense in fiscal 1998 included amortization of
fees and expenses associated with the related bridge financing of $2.5 million
and $0.6 million related to the Credit Facility and Notes. These bridge
financing fees and expenses were charged to expense as a result of the
refinancing of the Company which was completed concurrent with the Merger.
Provision for income taxes for fiscal 1999 is zero due to the net operating
loss generated during the period for which a valuation allowance has been
provided for the resulting deferred tax asset.
Net Loss for fiscal 1999 was $18.9 million compared to a net loss in fiscal
1998 of $2.9 million. The changes in net income primarily reflect the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Current assets decreased $3.3 million from June 30, 1999 to June 30, 2000.
This decrease primarily reflects lower receivables and management's strategy to
lower inventories, somewhat offset by higher cash and marketable securities.
Current liabilities increased $8.5 million from June 30, 1999 to June 30,
2000. This increase primarily reflects an increase in the current portion of
long-term debt and the Additional Credit Facility, offset by lower accounts
payable.
Non-current assets decreased to $105.0 million at June 30, 2000, down from
$115.0 million at June 30, 1999. This decrease is due to the sale of the
Indianapolis facility for $3.6 million in net proceeds and on-going amortization
of goodwill. Capital expenditures of $6.8 million were more than offset by
depreciation expense and impairment charges.
Long-term debt at June 30, 2000 was $168.1 million, down from $178.3
million for the year ended June 30, 1999. The Company's long term debt consists
of Credit Facility borrowings and the 10 1/8% Senior Subordinated Notes. Total
debt, including the current portion, was $186.3 million at June 30, 2000 and
$186.8 million for the year ended June 30, 1999. Total debt available at June
30, 2000, including the unused portion of the revolver commitments was $193.7
million.
Credit Facility. The Credit Facility provides for an aggregate principal
amount of loans of up to $110.0 million. Loans under the Credit Facility consist
of $82.5 million in aggregate principal amount of term loans (the "Term Loan
Facility"), which facility includes a $45.0 million tranche A term loan
subfacility and a $37.5 million tranche B term loan subfacility, and a $27.5
million revolving credit facility 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. The Company's Term Loan
Facility and Revolving Credit Facility, as amended, require the Company to meet
certain financial tests, including a minimum fixed charge coverage ratio,
minimum interest coverage ratio, minimum EBITDA and a maximum leverage ratio.
The Credit Facility also contains additional restrictions that, among other
things, limit additional indebtedness, liens, sale of assets and business
combinations. The Company's obligations under the Credit Facility are secured by
a security interest in substantially all of the Company's assets.
21
<PAGE> 24
As of June 30, 2000, the Company is in compliance with all financial
covenants including the interest coverage ratio, fixed charge coverage ratio,
total leverage ratio and the minimum EBITDA requirements of the existing amended
Credit Facility and the Additional Credit Facility. An equity infusion of $.1
million is required to meet the June 30, 2000 minimum EBITDA requirement.
Amendments to the Credit Facility. On August 12, 1999, the Company entered
into an amendment to the Credit Facility (the "Third Amendment") to permit,
among other things, the Company to enter into the Additional Credit Facility
(see "Additional Credit Facility").
On October 12, 1999, the Company entered into a fourth amendment to the
Credit Facility (the "Fourth Amendment"). The Fourth Amendment provides, among
other things, for the sale of $5.0 million of preferred stock to allow for
acceleration of certain payment amounts on Tranche A and Tranche B and reduces
the maximum amount of the "Revolving Credit Commitment" from $27.5 million to
$24.7 million. The Bank Group agreed to the waiver of all financial covenant
ratios for the quarter ended September 30, 1999, and all fiscal quarters prior
thereto. Commencing with the fiscal quarter ending on December 31, 1999, the
Amendment 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 adds a senior leverage ratio
commencing with the fiscal quarter ending on September 30, 2000. The Amendment
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.
The Fourth Amendment also includes a provision allowing (but not requiring)
Westar and certain existing shareholders the right to meet certain financial
covenants 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. Under this provision, certain existing shareholders provided
additional equity of $1.4 million to meet certain covenant requirements for the
two quarters ending in March 2000 and $.1 million to meet certain covenant
requirements for the three quarters ending in June 2000.
On June 30, 2000, the Bank Group and the Company amended the Credit
Facility for the fifth time (the "Fifth Amendment"). The Fifth Amendment
includes a Support Agreement with Westar Funds to provide the capital necessary
to meet the financial covenants for the quarter ending June 2000 and for the
four quarters of fiscal 2001. The Bank Group in turn agreed to remove the
minimum EBITDA requirement for fiscal 2001 and redefined the minimum fixed
charge coverage ratio. The Fifth Amendment also confirms an interest rate
increase negotiated as part of the Fourth Amendment, increases the borrowing
base for the Company until September 2000 to allow the Company to reduce its
inventories, at which time it will revert to the borrowing base in the Credit
Facility dated September 19, 1999 and also extends the period for the fourth
quarter for adding capital to meet financial covenants to ninety days so that
the Company's independent auditors have time to complete the annual audit.
In conjunction with the Fifth Amendment, the Westar Funds entered into a
Support Agreement dated June 30, 2000 with the Company and Bank of America,
N.A., as administrative agent for certain lenders named therein (the "Support
Agreement"). The Westar Funds agreed to jointly and severally provide capital to
the Company pursuant to the Support Agreement in an amount that would meet the
minimum EBITDA covenant of the Credit Facility that is applicable as of June 30,
2000. The Westar Funds also agreed to jointly and severally provide capital to
the Company pursuant to the Support Agreement in an amount necessary, when added
to EBITDA, to make EBITDA greater than the sum of the maintenance capital
expenditures plus scheduled payments of principal on indebtedness for borrowed
money and capital leases plus payments of cash interest of the previous nine
months ended June 30 and the previous twelve months ending on September 30,
2000, December 31, 2000, March 31, 2001 and June 30, 2001. All capital
contributions made
22
<PAGE> 25
under the Support Agreement will be included in EBITDA for purposes of
calculating certain financial covenants in the Credit Facility as further
provided in the Fifth Amendment.
The Additional Credit Facility. The Additional Credit Facility is a senior
revolving credit facility which the Company entered into on August 12, 1999.
Advances under the Additional Credit Facility may be made at the option of the
Company as a base rate advance or a LIBOR Advance. Base rate advances bear
interest at a per annum interest rate equal to the higher of (a) the sum of (i)
0.5% plus (ii) the federal funds rate on the applicable day plus (iii) an
applicable base rate margin or (b) the sum of (i) the prime rate on such date
plus (ii) an applicable base rate margin. A LIBOR advance bears interest at a
rate based upon LIBOR plus 3.50 percent. Amounts outstanding under the
Additional Credit Facility are secured by liens in certain equipment and other
property of the Company that are junior in lien priority to the lien securing
the Company's Credit Facility. Pursuant to an amendment to the Additional Credit
Facility executed on October 1999, the maturity of such facility was extended to
September 30, 2000 and the maximum amount of borrowings thereunder was increased
to $15.0 million. On June 30, 2000, $8.0 million was outstanding under the
Additional Credit Facility. In September 2000, the lenders amended the
Additional Credit Facility to extend the terms to September 28, 2001. The
financial covenants in the Company's existing Credit Facility, after giving
effect to the Fourth Amendment, are incorporated by reference into the
Additional Credit Facility.
In order to induce the Additional Lender to provide the Additional Credit
Facility, Westar LP and Westar LLC (together, the "Westar Funds") have entered
into a Continuing Guaranty dated as of August 12, 1999 (the "Guaranty") and a
Pledge Agreement dated as of August 12, 1999 (the "Pledge Agreement") pursuant
to which, from time to time in their discretion, the Westar Funds may guaranty
loans made by the Additional Lender under the Additional Credit Facility and
pursuant to which Westar Capital LLC has pledged $5 million to secure its
obligations under the Guaranty. In addition, Twelve D Limited, a limited
partnership controlled by Benjamin L Doskocil, Sr. ("TDL"), has entered into a
Reimbursement Agreement dated as of August 12, 1999 (the "Reimbursement
Agreement") with the Westar Funds pursuant to which TDL has agreed to reimburse
the Westar Funds for payments made pursuant to the Guaranty and the related
pledge arrangements under the Pledge Agreement in an amount proportional to its
equity interests in the Company.
In order to induce the Westar Funds to continue the Guaranty and the Pledge
Agreement and, in the case of TDL, to continue its obligations under the
Reimbursement Agreement, the Company issued to Westar LP and an affiliate and
TDL (the "Investor"), who directly or indirectly through the Reimbursement
Agreement guaranteed the Additional Credit Facility, 14.1 million warrants to
acquire common stock of the Company (the "Guaranty Warrants"). The Guaranty
Warrants were issued to each such Investor ratably based on the amount of such
Investor's liability under the Guaranty and Reimbursement Agreement, exercisable
at an initial exercise price of $.01 per share. Of the Guaranty Warrants, 4.1
million, are exercisable immediately, and 10.0 million are only exercisable in
the event of, and in proportion to, payments made by such Investor under the
Guaranty.
Sale of Series D Preferred Stock and Related Warrants. In connection with,
and as a condition of, the Fourth Amendment, the Company issued and sold to
certain of its current stockholders shares of a new series of Series D
Redeemable Preferred Stock, $100 stated value (the "Series D Preferred Stock")
in an aggregate amount of $5.0 million, along with related warrants to acquire
1.0 million shares of common stock of the Company (the "Related Warrants").
Proceeds from the sale of Series D Preferred Stock was applied against the
Credit Facility. Holders of the Series D Preferred Stock are entitled to receive
quarterly dividends at the Company's option either in cash or in additional
shares of Series D Preferred Stock at the annual dividend rate of 12.0% per
annum. The Series D Preferred Stock is senior to all other classes of equity
securities of the Company with respect to dividend rights and rights on
bankruptcy, liquidation, dissolution and winding-up. In the event of the
liquidation, dissolution or winding-up of the Company, the holders of the Series
D Preferred Stock are entitled to receive $100 per share plus any accrued and
unpaid dividends, before the distribution of any assets of the Company to
holders of any class or series of capital stock ranking junior to the Series D
Preferred Stock. The Series D Preferred Stock is, at the Company's election,
subject to optional redemption but has no right to convert into any other equity
security of the Company. The Related Warrants are exercisable at any time at an
initial price equal to $.01 per share.
23
<PAGE> 26
The Company issued and sold another $1.4 million in Series D Preferred
Stock to certain existing shareholders in May 2000 in order to meet certain
covenant requirements for the two quarters ending March 2000. In September 2000,
Westar contributed an additional $1.0 million for Series D Preferred Stock. Of
that additional investment, $0.1 million was required under the Support
Agreement between Westar and the lenders. In September 2000, the lenders also
amended the Additional Credit Facility to extend to September 28, 2001.
Subordinated Notes. The Subordinated Notes are issued under the Indenture
dated as of September 19, 1997 and are senior, subordinated, unsecured general
obligations of the Company in the aggregate principal amount of $85.0 million.
The Subordinated Notes mature on September 15, 2007 and pay interest at the rate
of 10 1/8% per year, payable semi-annually on March 15 and September 15 of each
year. The Notes are redeemable under certain circumstances provided in the
Indenture and contain certain covenants and restrictions also provided in the
Indenture.
The Company's primary sources of liquidity are cash flow from operations
and borrowings under the $24.7 million Revolving Credit Facility, sale of
preferred stock and the Additional Credit Facility and proceeds from the sale of
preferred stock to avoid covenant defaults. At June 30, 2000, $24.3 million was
outstanding under the Revolving Credit Facility and financing available under
the Revolving Credit Facility was approximately $24.7 million based on a formula
of eligible accounts receivable and inventory. The Company intends to use cash
flow from operations and borrowings under the Revolving Credit Facility and the
Additional Credit Facility to meet seasonal fluctuations in working capital
requirements primarily driven by changes in inventory, accounts receivable and
trade payables. Working capital needs typically reach their peak in the period
from May through September.
The Company believes cash provided by operations, available under existing
and additional Credit Facilities and capital infusions will be sufficient to
fund working capital and capital expenditure requirements during the next twelve
months.
Net cash provided from operating activities was a negative $0.3 million for
the twelve months ended June 30, 2000, compared with a negative $6.4 million and
a positive $14.6 million for the twelve months ended June 30, 1999 and June 30,
1998, respectively. The increase in 2000 was primarily due to favorable working
capital changes offset by increased interest payments based on the increased
debt balance of the Company and lower operating income. The decrease in 1999 was
primarily due to increased interest payments based on increased debt balance of
the Company, higher working capital, lower operating income and lower working
capital.
Capital expenditures were $6.8 million for the year ended June 30, 2000
compared with $15.0 million and $11.5 million in June 30, 1999 and June 30,
1998, respectively. Expenditures in fiscal year 2000 include amounts for
improvements to, and upgrades of, existing facilities, information system
upgrades and molds for new products.
Capital expenditures for fiscal 2001 are expected to be approximately $7.0
million related to upgraded machinery, tooling and information systems.
Management plans to fund these capital expenditures through cash flow from
operations and, if necessary, borrowings under the Revolving Credit Facilities
and the Additional Revolving Credit Facility.
Cash from disposal of assets was $3.6 million for the year ended June 30,
2000 compared to $0.8 million in 1999. Fiscal 2000 includes cash proceeds from
the sale of the Indianapolis facility. Proceeds in fiscal 1999 include $0.8
million received from the sale of certain sporting goods assets. Proceeds in
fiscal 1998 include $0.8 million from the sale of equipment related to the resin
furniture business and $2.5 million received from the sale of Dogloo equipment
after the merger.
INFLATION
The Company believes the relatively moderate rates of inflation experienced
in recent years have not had a significant impact on its net sales or
profitability.
24
<PAGE> 27
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 adopted
the standard effective July 1, 2000, as required. The effect of the adoption did
not have a material impact on either the financial position or results of
operations of the Company.
SUMMARY COMBINED (DOSKOCIL AND DOGLOO) HISTORICAL FINANCIAL INFORMATION FOR THE
TWELVE MONTHS ENDED JUNE 30, 1998
The following table sets forth summary historical financial information of
Doskocil and Dogloo on a combined basis for the twelve month period ended June
30, 1998 and actual results for fiscal 1999 and fiscal 2000.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JUNE 30,
(UNAUDITED)
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pet products......................................... $136,476 $140,022 $130,863
Sporting goods and other............................. 13,857 15,118 16,148
Furniture, custom molding, tackle and hardware....... -- 3,873 6,717
Outside resin sales.................................. 8,085 10,919 5,370
-------- -------- --------
Combined net sales.............................. 158,418 169,932 159,098
Cost of sales........................................ 106,359 110,995 100,958
-------- -------- --------
Gross profit.................................... 52,059 58,937 58,140
Selling general and administrative expenses.......... 47,816 53,259 40,650
Impairment of long-lived assets...................... 4,098 6,789 --
-------- -------- --------
Operating Income................................ 145 (1,111) 17,490
Adjustments:
Depreciation, amortization and impairment(1)....... 15,110 17,299 11,478
-------- -------- --------
EBITDA(2).................................. $ 15,255 $ 16,188 $ 28,968
======== ======== ========
</TABLE>
---------------
(1) 1999 includes a $0.1 million charge for write-down of inventory related to
the sale of the tackle business. Excluded is goodwill amortization ($0.4
million in 1998) that would have been incurred had pro forma effect been
given to the Merger as of July 1, 1997 (see Note 3 to Financial Statements).
(2) The term EBITDA as used above means operating income plus depreciation,
amortization and asset impairments. EBITDA should not be construed as a
substitute for operating income or be considered a better indicator of
liquidity than cash flow from operating activities which is determined in
accordance with generally accepted accounting principles. EBITDA is included
herein to provide additional information with respect to the ability to the
Company to meet its future debt service, capital expenditures and working
capital requirements. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
Please see "Results of Operations."
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO COMBINED JUNE 30, 1998
Net Sales increased from $159.1 million for the twelve months ended June
30, 1998 to $169.9 million for the twelve months ended June 30, 1999, an
increase of 6.8% This increase was due to an increase in outside resin sales and
pet products, partially offset by lower sporting goods sales. Sporting goods
sales were lower due
25
<PAGE> 28
to the loss of two customers and management's decision in the third quarter to
discontinue certain non-core product lines.
Gross Profit was $58.9 million for the twelve months ended June 30, 1999,
up from $58.1 million for the same period ended June 30, 1998. Gross profit as a
percent of net sales declined from 36.5% for the twelve months ended June 30,
1998 to 34.7% for the same period of fiscal 1999. Gross margins declined even
with lower resin costs. The lower margin is due to three key areas. Low
manufacturing throughput and inefficiency forced the Company to go to outside
molders to meet customer demand and increased costs above historical levels.
Difficulty in forecasting demand and planning production also increased the need
to use outside molders and maintain high inventory levels. Secondly, systems and
management problems related to shipping increased costs to deliver products on a
timely basis. Lastly, there were significant additional costs incurred in the
second and third fiscal quarters related to a failed system conversion.
Selling, general and administrative expenses increased from $40.7 million
in fiscal 1998 to $53.3 million in fiscal year 1999. This increase is primarily
related to higher advertising and rebate programs and increased bad debt
expenses. Systems and management problems related to shipping, increased costs
to deliver products on a timely basis.
Impairment of long-lived assets in fiscal 1999 was $6.8 million. This
includes a $1.3 million charge due to the decision to divest the Company of
certain non-core business assets, a $2.3 million charge due to a failed system
conversion and management's assessment that the related implementation costs
have minimal future benefit and a $3.2 million charge reflecting management's
ongoing review of recoverability of assets, including related goodwill.
Operating income for fiscal 1999 decreased $18.6 million from fiscal 1998
primarily due to the factors discussed above.
EBITDA was $16.2 million for the twelve months ended June 30, 1999 compared
to $29.0 million in the same period of the prior year. EBITDA was negatively
affected by the factors discussed above.
26
<PAGE> 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's interest expense is most sensitive to changes in the general
level of U.S. interest rates and London interbank offered rates ("LIBOR"). In
this regard, changes in these interest rates affect the interest paid on the
Company's debt.
The following table presents principal cash flows and related
weighted-average interest rates by expected maturity dates for the Company's
debt obligations.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY AT JUNE 30, 2000
AVERAGE INTEREST RATES
<TABLE>
<CAPTION>
ESTIMATED
FISCAL YEAR FAIR VALUE
-------------------------------------------------- JUNE 30,
2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000
------- ------- ----------- ------- ------ ---------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt and capital
leases, including current
portion:
Fixed rate.................... $ 725 $ 351 $ 231 $ 181 $ -- $85,000 $86,488 $31,238
Average interest rate......... 10.1% 10.1% 10.1% 10.1% -- 10.1% -- --
Variable rate................. $17,391 $10,814 $11,351 $51,961 $8,256 $ -- $99,773 $99,773
Average interest rate......... 10.7% 11.0% 11.0% 11.2% 11.2% -- -- --
</TABLE>
All of the Company's debt is U.S. dollar denominated and therefore, the
Company does not have any exposure to foreign currency denominated debt.
ITEM 8. FINANCIAL STATEMENTS
Financial Statements, including the index thereto, are presented starting
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of the
individuals who serve as directors and executive officers of the Company. Each
director will hold office until the next annual meeting of stockholders or until
his successor has been duly qualified and elected. Officers of the Company are
elected by, and serve at the discretion of, the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry E. Rembold.......................... 59 President and Chief Executive Officer,
Director
Michael J. Farmer......................... 39 Executive Vice President of Sales &
Marketing
Richard F. Daugherty...................... 40 Executive Vice President of Operations
John J. Casey............................. 52 Chief Financial Officer
Richard E. Allen.......................... 56 Senior Vice President of Process
Technology
Janet A. Dudsak........................... 53 Vice President of Human Resources
Timmothy J. Elrod......................... 37 Vice President of Business Technology
George L. Argyros......................... 63 Director
John W. Clark............................. 55 Director
Charles D. Martin......................... 63 Director
Benjamin L. Doskocil, Sr. ................ 62 Director
Michael P. Hoopis......................... 49 Director
Thomas J. Albani.......................... 58 Director
Elizabeth A. Wolszon...................... 46 Director
</TABLE>
Larry E. Rembold was appointed President and Chief Executive Officer on
July 19, 1999. Mr. Rembold previously served as the Company's Interim President
and Chief Executive Officer from July 1997 to October 1997 and has served on the
Company's board since July 1997. During 1998, he consulted to Westar Capital in
the diligence review of Harper Leather Goods, Inc., and served as that company's
Interim President and Chief Executive Officer from January 1999 to July 1999.
From March 1996 to June 1997, Mr. Rembold worked on several consulting
engagements for companies with an emphasis on lender relations and acquisition
evaluations. Mr. Rembold was a consultant to Enterprise in its due diligence
review of Doskocil prior to the Recapitalization and from May to June of 1998,
worked with the Company in a consulting capacity. From April 1989 to March 1996,
Mr. Rembold served as President and Chief Executive Officer of Dolco Packaging
Corporation ("Dolco"), a plastics company whose shares were traded publicly
until February 1996, at which time Dolco was sold and taken private.
Michael J. Farmer has served as the Company's Executive Vice President of
Sales and Marketing since consummation of the Merger, prior to which he had
served as Executive Vice President and General Manager of Dogloo since May 1997.
From April 1994 to May 1997, Mr. Farmer served as Vice President, Sales and
Marketing, of Dogloo. Mr. Farmer has 15 years of experience in the durable
consumer products business. From 1989 to 1994, Mr. Farmer served as Director of
Marketing and New Product Development of the Coleman Company. From 1983 to 1989,
Mr. Farmer served in several positions including Director of Engineering and
Materials Management, Factory Operations Manager and Industrial Engineering
Manager of the Coleman Company. Mr. Farmer earned his MBA in Marketing and
Management from Wichita State University.
Richard F. Daugherty has recently joined Doskocil as Executive Vice
President of Operations, having responsibility for all manufacturing,
fulfillment, purchasing, and planning. Mr. Daugherty has 15 years of operational
experience, most recently as the Operations Manager of a large Newell-Rubbermaid
facility in Greenville, Texas. Mr. Daugherty has held several operations
management positions for Rubbermaid, Stanley Door, Federal Mogul and Magnavox.
Mr. Daugherty has practical experience in the aspects of JIT and pull
manufacturing as well as a demonstrated ability in streamlining and increasing
through-put and productivity. Mr. Daugherty is a graduate of Purdue University
with a degree in Industrial Engineering.
28
<PAGE> 31
John J. Casey joined the Company as Chief Financial Officer in September
1998. Mr. Casey has more than 25 years experience, mostly working for companies
manufacturing and marketing branded consumer products. Recently he served as
Chief Financial Officer for Brierley & Partners in Dallas, Texas from 1997
through June 1998 and for Pioneer Flour Mills in San Antonio, Texas from 1988
through 1996. Mr. Casey's early experience includes various assignments with
PepsiCo International and Baxter Travenol. Mr. Casey earned his BA from
Georgetown University and earned his MBA in Finance and International Marketing
from Harvard Business School.
Richard E. Allen joined Doskocil in July 1998 as Senior Vice President,
Process Technology. Immediately prior to joining Doskocil, Mr. Allen was with
Rubbermaid, Inc., for 12 years. Most recently he was Vice President, Product
Development for The Little Tykes Company, a division of Rubbermaid, Inc. Prior
to that he was Vice President of Engineering and Product Development for
Rubbermaid Housewares for 11 years. Mr. Allen also owned his own business, Mold
Masters Systems, specializing in the design and fabrication of mold components
for manufacturers of molded plastic products.
Timmothy J. Elrod was appointed Vice President, Business Technology on
January 24, 2000. Mr. Elrod joined Doskocil in June of 1994 and has served in
several roles in Operations and Information Systems. Mr. Elrod has over 12 years
experience in manufacturing and systems development. Prior to joining Doskocil,
Mr. Elrod served in technology and process management roles for Seagate
Technology, developing Just-In-Time ("JIT") and cost management systems. He also
developed JIT and EDI systems for Control Data Corporation. Mr. Elrod holds a BA
from the University of Oklahoma and recently earned his MBA in Management and MS
in Information Systems from the University of Texas at Arlington.
Janet A. Dudsak joined the Company as Vice President of Human Resources in
January 1998. Ms. Dudsak has more than 16 years of experience in administration
and human resource management. From 1996 to 1998, Ms. Dudsak was Division Human
Resource Manager for The Little Tikes Company, a division of Rubbermaid, Inc.
From 1994 to 1996, she held the position of Vice President, Human Resources for
Rubbermaid Healthcare Products. From 1990 to 1994, Ms. Dudsak was Corporate
Manager, Human Resource Systems and Administration for Rubbermaid, Inc. From
1982 through 1990, she held several corporate staff positions in training and
development at Rubbermaid. Prior to joining Rubbermaid, Ms. Dudsak was Director,
Office Operations for The Sherwin-Williams Company, Consumer Products division.
Benjamin L. Doskocil, Sr. has served as a Director of the Company since
consummation of the Merger. Mr. Doskocil founded Doskocil in the early 1960's
and served as Doskocil's President and Chief Executive Officer from its
formation until the recapitalization of Doskocil in July 1997 (the
"Recapitalization"). Pursuant to the Stockholders' Agreement (as defined below),
Benjamin L. Doskocil, Sr., or his son, Edward J. Doskocil, have the right to a
board seat so long as Benjamin L. Doskocil, Sr. and his spouse own at least
fifty percent (50.0%) of the Company's Common Stock that was owned by them
immediately following consummation of the Recapitalization.
George L. Argyros has served as a Director of the Company since
consummation of the Merger, prior to which he served as a director of Dogloo
since September 1995. Mr. Argyros has been a General Partner of Westar since its
formation in 1987. Mr. Argyros has also served as Chairman and Chief Executive
Officer of Arnel & Affiliates, a West Coast diversified investment company,
since 1968. Mr. Argyros is a member of the board of directors for Rockwell
International Corporation, First American Financial Corporation, the Newhall
Land and Farming Company and selected companies within the Westar portfolio. Mr.
Argyros was the 1993 recipient of the Horatio Alger Award of Distinguished
Americans and currently serves as President and Chief Executive Officer of the
Washington, D.C. based Horatio Alger Association. Mr. Argyros formerly was a co-
owner of AirCal and owner of the Seattle Mariners Baseball Club of the American
League.
John W. Clark has served as a Director of the Company since consummation of
the Merger, prior to which he served as a director of Dogloo since September
1995. Mr. Clark has been a General Partner of Westar since 1995. From 1990 to
May 1995, Mr. Clark was a private investor. Prior to 1990, Mr. Clark was
President of Valentec International Corporation, a producer of metal and
electronic components for military and commercial products. Mr. Clark is a
director of Amerigon, Inc. and serves on the boards of selected
29
<PAGE> 32
companies within the Westar portfolio. Earlier in his career, Mr. Clark was
founder and Managing Partner of a CPA practice which grew substantially before
merging into Ernst & Young's predecessor firm, where he served as the office's
Managing Partner.
Charles D. Martin has served as a Director of the Company since
consummation of the Merger, prior to which he served as a director of Doskocil
since the Recapitalization in July 1997. Mr. Martin served as a director of
Dogloo from September 1995 to April 1997. Mr. Martin was the Founder and served
as the Managing Partner of Enterprise Partners, a large Southern California
based venture capital firm until his retirement last year and has also been a
General Partner of Westar since its formation in 1987. Mr. Martin has served on
the board of directors of 46 private and public companies.
Michael P. Hoopis has served as a Director of the Company since
consummation of the Merger, prior to which he served as a director of Dogloo
since December 1994. Mr. Hoopis has been President and Chief Executive Officer
of Water Pik Technologies, Inc. since November 1999. From October 1998 to
November 1999, he was President and Chief Executive Officer of the consumer
products segment of Allegheny Teledyne, Inc., the predecessor to Water Pik
Technologies, Inc. From July 1996 to September 1998, Mr. Hoopis served as
President of Worldwide Household Products, Black & Decker Corporation. From May
1992 to July 1996, Mr. Hoopis served as President of Price Pfister, Inc., a
division of Black & Decker Corporation. He serves as a member of the board of
directors of Meade Instruments, Inc. Mr. Hoopis received his BS degree in
Industrial Engineering from the University of Rhode Island.
Thomas J. Albani was elected a Director of the Company on August 1, 2000.
Mr. Albani previously served in a number of key management positions with
several leading consumer durable products companies, most recently (1991-1998)
as President and Chief Executive Officer of the Electrolux Corporation. Earlier
in his career Mr. Albani held positions as Executive Vice President and Chief
Operating Officer of Allegheny International; President of the Sunbeam
Corporation; and General Manager of the General Electric Housewares Operation.
He was also a management consultant with McKinsey & Company working principally
with consumer goods and services companies. Mr. Albani received a BA in
Political Science from Amherst College and an MBA in Marketing from The Wharton
Graduate School of Business at the University of Pennsylvania. He is also a
member of the board of directors of the Select Comfort Corporation and the
Dyersburg Corporation.
Elizabeth A. Wolszon was elected a Director of the Company on August 1,
2000. Ms. Wolszon is currently Senior Vice President of Safelite Glass
Corporation where she has held several executive positions since July 1992.
Prior to joining Safelite, Ms. Wolszon worked with Sears Roebuck and Company
serving as Senior Vice President of Marketing for Western Auto and Director of
Strategic Planning for Sears Specialty Merchandising. Ms. Wolszon has an
extensive background in strategic planning and brand marketing including
positions with McKinsey and Company and Proctor & Gamble Company. Ms. Wolszon
received a BS in Industrial Management from Purdue University and her MBA from
Northwestern University.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has a Compensation Committee and an Audit
Committee. The members of both the Compensation Committee and the Audit
Committee are Messrs. Clark and Hoopis.
The Compensation Committee is responsible for policies, procedures and
other matters relating to employee benefits and compensation plans. The
Compensation committee is also responsible for administering and making awards
under the stock based compensation plans.
The Audit Committee is responsible for policies, procedures and other
matters relating to accounting, internal financial controls and financial
reporting, including the engagement of independent auditors. The Audit Committee
reviews with the auditors their report on the financial statements following
completion of each such audit.
30
<PAGE> 33
ITEM 11. EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended June 2000, 1999 and
1998, the compensation paid or accrued by the Company to those persons who (i)
served as Chief Executive Officer and (ii) the other four most highly
compensated executive officers, "Named Executive Officers".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------- SECURITIES
NAME AND 12 MONTHS OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION(1) ENDED SALARY BONUS(4) COMPENSATION(2) OPTIONS/SARS(3)
--------------------- --------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Larry E. Rembold............... 6/30/00 $291,880 $ 25,000 $ 47,826 150,000
President and Chief Executive
Officer
Gary E. Kleinjan............... 6/30/98 $182,789 -- $109,316 93,500
President and Chief Executive 6/30/99 $291,250 -- $ 56,213 --
Officer 6/30/00 $290,000 -- $ 43,469 --
Richard E. Allen............... 6/30/99 $171,634 $ 20,000 $104,631 30,000
Senior Vice President,
Process 6/30/00 $178,365 -- -- 75,000
Technology
John J. Casey.................. 6/30/99 $141,923 -- $ 7,781 22,500
Chief Financial Officer 6/30/00 $191,156 -- $ 9,854 56,250
Richard F. Daugherty........... 6/30/00 $ 97,597 $ 25,000 $ 18,758 105,000
Executive Vice President,
Operations
Michael J. Farmer.............. 6/30/98 $132,461 $100,000 $195,038 45,000
Executive Vice President, 6/30/99 $179,889 $138,475 -- --
Sales & Marketing 6/30/00 $194,074 $ 83,000 -- 112,500
</TABLE>
---------------
(1) Mr. Kleinjan left the Company in July 1999. Mr. Casey joined the Company in
September 1998. Mr. Daugherty joined the Company in December 1999.
Accordingly, the compensation of these Company named executives presented
for those fiscal years includes only the amounts paid by the Company to each
executive during such period. The annualized compensation of Mr. Daugherty
was $175,000 during the past fiscal year.
(2) Consists of moving expenses plus reimbursement of federal taxes and other
adjustments in connection with the certain of the named executives' move to
Dallas, Texas area. Also includes certain per diem, housing and car
allowances.
(3) These represent shares underlying options to purchase common stock. See the
following table for more detailed information on such options.
(4) Bonuses paid to Mr. Daugherty represent a signing bonus. Bonus paid to Mike
Farmer represents pre-merger bonus arrangements.
Consulting Services. Mr. Benjamin L. Doskocil, Sr., retired from his
position as Doskocil's President and Chief Executive Officer in July 1997.
Thereafter Mr. Doskocil entered into a letter agreement with the Company whereby
he agreed to render certain consulting services. Pursuant to this agreement, Mr.
Doskocil receives $2,000 per day for consulting services, plus reimbursement of
expenses.
31
<PAGE> 34
Employment Agreements. Larry E. Rembold is a party to an agreement with the
Company pursuant to which he is currently serving as the President and Chief
Executive Officer of the Company. Pursuant to this agreement, Mr. Rembold
receives a monthly base salary of $27,600, plus an annual bonus of no less than
$25,000 for fiscal year 2000 and targeted at sixty percent (60.0%) of his annual
base salary if the Company meets certain performance targets for fiscal 2001.
Additionally, Mr. Rembold receives certain perquisites under this agreement,
including but not limited to the use of an automobile and temporary housing and
travel reimbursements pending his relocation to the Dallas, Texas metropolitan
area.
Mr. Michael J. Farmer is party to an employment agreement, pursuant to
which Mr. Farmer serves as Executive Vice President of Sales and Marketing of
the Company. Pursuant to this agreement, Mr. Farmer receives an annual base
salary of approximately $191,965, plus an annual bonus if he meets certain
performance targets agreed to by him and the Company at the start of each year.
In the event Mr. Farmer's employment is terminated other than for cause, Mr.
Farmer will receive severance pay equal to his annual base salary plus the
greater of (a) his last annual bonus, or (b) the performance bonus payable
during the fiscal year of termination.
Option Plan. In connection with the Merger, the Company adopted a stock
option plan (the "Option Plan"), which provides for the grant to employees from
time to time of non-qualified stock options and incentive stock options pursuant
to Section 422 of the IRC to purchase up to an aggregate of 625,000 shares of
the Company stock. The Company granted "base" options to certain employees
following the Merger at an exercise price of $15.03 per share, based on
management's estimate of the fair market value of the Company's Common Stock.
Additionally, all Dogloo employees who held options to purchase shares of Dogloo
Common Stock ("Dogloo Options") and who continued with the Company after the
Merger had their Dogloo Options assumed by the Company and converted into
options to purchase shares of the Company Common Stock. All "base" options to
purchase shares of the Company Common Stock, including those Dogloo Options
assumed by the Company in the Merger, will become exercisable at the rate of
twenty percent (20.0%) per year on the first through the fifth anniversaries of
the date of grant. The Option Plan also provides for the acceleration of the
exercisability of 50 percent of the previously unvested portion of the options,
unless the Company's Board of Directors determines that such options should not
be accelerated or provides for a greater percentage to be accelerated, upon the
occurrence of certain corporate events involving the dissolution or liquidation
of the Company, merger or consolidation where less than 50.0% of the outstanding
voting securities of the surviving entity are owned by former shareholders of
the Company, or the sale of substantially all of the Company's business or
assets. All option holders who exercise such options will be required to execute
and thereby become a party to the Second Securityholders Agreement (see
"Stockholder Agreements") and become subject to certain of the rights and
restrictions of that agreement.
In addition to the "base" options described above, the Company granted
additional "performance" stock options to certain employees of the Company
following the Merger. These options have an exercise price of $15.03 per share,
based on management's estimate of the fair market value of the Company's Common
Stock, and vest on the sixth anniversary of the grant date.
32
<PAGE> 35
On May 2, 2000 the Company amended the Option Plan to increase the
aggregate amount of shares to 1,500,000. The Company also granted stock options
during fiscal 2000 to certain employees based on management's estimate of the
fair market value of the Company's common stock. These options vest either 20.0%
per year on the first through the fifth anniversaries of the date granted or
33 1/3% per year on the first through the third anniversaries of the date of
grant.
OPTION GRANTS IN LAST FISCAL YEAR (a)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATE OF
% OF TOTAL STOCK APPRECIATION FOR
SECURITIES OPTIONS OPTION TERM(B)
UNDERLYING GRANTED TO EXERCISE ------------------------------
STOCK EMPLOYEES IN PRICE EXPIRATION
NAME AND PRINCIPAL POSITION YEAR OPTIONS FISCAL YEAR $/SHARE DATE 5%($) 10%($)
--------------------------- ---- ---------- ------------ -------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry E. Rembold...................... 2000 60,000(e) .01 05/02/10
President and Chief Executive
Officer 30,000(e) .01 05/02/10
30,000(e) 01 05/02/10
30,000(e) .01 05/02/10
---------
Total........................ 150,000 20.0% 943 2,391
Richard E. Allen...................... 2000 60,000(c) .01 05/02/10
Vice President of Process Technology 15,000(d) .01 05/02/10
---------
Total........................ 75,000 9.8% 472 1,195
John J. Casey......................... 2000 45,000(c) .01 05/02/10
Chief Financial Officer 11,250(d) ........ .01 05/02/10
---------
Total........................ 56,250 7.4% 354 896
Richard F. Daugherty.................. 2000 105,000(d) 13.8% .01 05/02/10
Executive Vice President, Operations 660 1,673
Michael J. Farmer..................... 2000 90,000(c) .01 05/02/10
Executive Vice President of Sales
and Marketing 22,500(d) ........ 01 05/02/10
---------
Total........................ 112,500 14.7% 708 1,793
</TABLE>
---------------
(a) No information is presented concerning SAR's because none have been granted
by the Company.
(b) Potential realizable value is presented net of the option exercise price,
but before any federal or state income taxes associated with exercise, and
is calculated assuming the fair market value on the date of the grant
appreciates at the indicated annual rate (set by the SEC), compounded
annually, for the term of the option. The 5.0% and 10.0% rates of
appreciation are mandated by the rules of the SEC and do not represent the
Company's estimate or projection of future increases in the value or price
of the Common Stock.
(c) Consists of Incentive Stock Options granted in the last fiscal year which
become exercisable at the rate of 33 1/3% per year starting on the one year
anniversary of the grant date and continuing to vest at an annual rate of
33 1/3% per year on the following two year anniversaries of the grant date.
(d) Consists of Incentive Stock Options granted in the last fiscal year, which
become exercisable at the rate of 20.0% per year starting on the one year
anniversary of the grant date and continuing to vest at an annual rate of
20.0% per year on the following four anniversaries of the grant date.
(e) Consists of Incentive Stock Options granted in the last fiscal year of
which 60,000 became exercisable on June 30, 2000. The remaining options
become exercisable at the following rate: 30,000 on 12/31/00; 30,000 on
6/30/01 and 30,000 on 12/31/01.
Stockholders' Agreements. The following agreements regulate the
relationship among the Company's shareholders: (1) a Stockholders' Agreement
dated as of July 1, 1997, by and among Benjamin L. Doskocil, Sr., Mary Frances
Doskocil (collectively, the "Doskocils") and the Company (the "Stockholders'
Agreement"); (2) a First Amendment to Stockholders' Agreement, dated as of
September 19, 1997, by and
33
<PAGE> 36
among Westar, HBI, the Doskocils and the Company (the "First Amendment"); and
(3) an Amended and Restated Securityholders Agreement, date as of September 19,
1997, by and among Westar, HBI, the Company and certain other security holders
other than the Doskocils (the "Second Securityholders Agreement").
Prior to the Merger, Dogloo Securityholders were and are bound by a
Securityholders Agreement dated as of September 22, 1995 (the "First
Securityholders Agreement"). The Second Securityholders Agreement amends and
restates the First Securityholders Agreement to apply on a going-forward basis
to all Company shareholders who sign the Second Securityholders Agreement (other
than the Doskocils), including those Dogloo shareholders whose shares of Dogloo
capital stock were converted into shares of Doskocil capital stock in the Merger
and, with respect to certain provisions, any shareholders who purchase shares or
exercise options in the future. (Company shareholders who do not sign the Second
Securityholders Agreement will continue to be bound by the First Securityholders
Agreement, which contains, with certain exceptions, provisions similar to those
contained in the Second Securityholders Agreement.) The Second Securityholders
Agreement contains (i) certain preemptive rights for all holders of more than
ten percent (10.0%) of the fully diluted Doskocil Common Stock ("Eligible
Securityholders"); (ii) rights of first offer in favor of Eligible
Securityholders in the event any Securityholder proposes to sell the Company's
securities; (iii) tag-along rights entitling securityholders other than Westar
and HBI ("Other Securityholders") to join in certain proposed sales of Company
securities by Eligible Securityholders; (iv) drag-along rights entitling a
majority in interest of the Eligible Securityholders to compel participation in,
or a vote in favor of, stock sales and certain other transactions; and (v)
certain registrations rights for all holders of Doskocil Common Stock. The
Second Securityholders Agreement also contains certain other restrictions on
transfer of equity securities. In the event any existing Other Securityholder
ceases to be an employee of the Company, the Second Securityholders Agreement
gives the Company the option to repurchase the shares of such Other
Securityholder.
The First Amendment added Westar LP, Westar LLC and HBI as signatories to
the Stockholders' Agreement. The First Amendment also reconciles certain
provision of the Stockholders' Agreement with the Second Securityholders
Agreement to provide for the Doskocils, Westar and HBI to share in certain
rights and restrictions of their stock ownership with all other securityholders
on a pro rata basis. Accordingly, pursuant to the First Amendment, the Doskocils
agree that the pro rata sharing provisions of their tag-along rights and
registration rights will be governed by the Second Securityholders Agreement,
rather than the Stockholders' Agreement, in order to provide for the Doskocils
to share in all rights and restrictions of such provisions with all other
Company security holders. Similarly, pursuant to the First Amendment, Westar LP,
Westar LLC and HBI became parties to the Stockholders' Agreement and agree that
their preemptive rights and rights of first offer will be governed by the Second
Securityholders Agreement, rather than the Stockholders' Agreement.
34
<PAGE> 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 2000 by (i) each person
who is known by the Company to own beneficially 5.0% or more of the outstanding
shares of Common Stock, (ii) each of the Company's directors, (iii) each of the
Company's executive officers, and (iv) all directors and executive officers as a
group. Except as indicated in the footnotes to the table, the persons named in
the table have sole voting and investment beneficially owned by them, subject to
community property laws where applicable, and are located at the Company's
principal offices at 4209 Barnett Boulevard, Arlington, Texas 76017.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AFTER THE TRANSACTIONS
--------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT(1)
------------------------------------- ---------- -----------
<S> <C> <C>
Westar Capital II, LLC,(2).................................. 2,240,066 26.5%
a Delaware limited liability company
Attn: John W. Clark
949 South Coast Drive, Suite 650
Costa Mesa, California 92626
Westar Capital, L.P.,(3).................................... 161,208 1.9%
a California limited partnership
Attn: John W. Clark
949 South Coast Drive, Suite 650
Costa Mesa, California 92626
HBI Financial Inc.,(4)...................................... 4,923,916 58.2%
a Washington corporation
Attn: Irwin Trigger
Boggle & Gates
601 Union Street, Suite 4700
Seattle, Washington 98101
Twelve D Limited,(5)........................................ 885,375 10.5%
a Texas limited partnership
Attn: Benjamin L. Doskocil, Sr.
801 Stephens Street
Arlington, TX 76017
George L. Argyros(6)........................................ 7,325,190 86.6%
Benjamin L. Doskocil, Sr.(7)................................ 885,375 10.5%
John W. Clark(8)............................................ 2,401,274 28.4%
Charles D. Martin(9)........................................ 2,401,274 28.4%
Larry E. Rembold(10)........................................ 115,980 1.4%
Michael P. Hoopis(11)....................................... 4,000 *
Michael J. Farmer(12)....................................... 25,747 *
Richard E. Allen(13)........................................ 8,000 *
John J. Casey(14)........................................... 3,000 *
Janet A. Dudsak(15)......................................... 3,000 *
Timmothy J. Elrod(16)....................................... 1,600 *
Richard F. Daugherty........................................ -- *
Thomas J. Albani............................................ -- --
Elizabeth A. Wolszon........................................ -- --
--------- ----
All directors and executive officers as a group (14
persons)(6)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16).......... 8,361,892 98.8%
</TABLE>
---------------
* Less than 1.0%
35
<PAGE> 38
(1) Percentage of ownership is based on 8,463,129 shares of Common Stock
outstanding as of June 30, 2000. The number of shares of Common Stock
beneficially owned and calculation of percentage ownership, in each case,
takes into account those shares underlying stock options that are
exercisable within 60 days after June 30, 2000.
(2) Shares held of record by Westar Capital II, LLC, a Delaware limited
liability company ("Westar LLC"). The members of Westar LLC are George L.
Argyros, Sr., and Westar Capital Associates II, LLC, a Delaware limited
liability company ("WCALLC"). The members of WCALLC are, among others, Mr.
Argyros, John W. Clark and Charles D. Martin. Messrs. Argyros, Clark and
Martin may be deemed to have shared voting or dispositive power with
respect to the shares held by Westar LLC. Messrs. Argyros, Clark and Martin
disclaim beneficial ownership of shares held by Westar LLC except to the
extent of their interests described above. Consists of 977,828 shares of
Common Stock and 1,262,240 warrants exercisable for the purchase of Common
Stock.
(3) Shares held of record by Westar Capital, L.P., a California limited
partnership ("Westar LP"). The sole general partner of Westar LP is Westar
Capital Associates, a California limited partnership ("WCALP"), of which,
among others, GLA Financial Corporation, a California corporation ("GLA"),
Messrs. Clark and Martin are general partners. Mr. Argyros is the sole
shareholder of GLA Financial and a limited partner of Westar LP and WCALP.
GLA and Messrs. Argyros, Clark and Martin may be deemed to have shared
voting or dispositive power with respect to the shares held by Westar LP.
GLA and Messrs. Argyros, Clark and Martin disclaim beneficial ownership of
shares held by Westar LP except to the extent of their interests described
above.
(4) Shares held of record by HBI Financial, Inc., a Washington Corporation
("HBI"), of which Mr. Argyros is the sole shareholder. Consists of
1,578,443 shares of Common Stock and 3,345,473 warrants exercisable for the
purchase of Common Stock.
(5) Shares held of record by Twelve D Limited, a Texas limited partnership
("TDL"). The sole general partner of TDL is Cyclone Tours, Inc., a Texas
corporation ("Cyclone"). Mr. Doskocil is a shareholder of Cyclone. Cyclone
and Mr. Doskocil may be deemed to have shared voting or dispositive power
with respect to the shares held by TDL. Cyclone and Mr. Doskocil disclaim
beneficial ownership of shares held by TDL except to the extent of their
interest described above. Consists of 332,755 shares of Common Stock and
552,620 warrants exercisable for the purchase of Common Stock.
(6) Consists of 2,240,066 shares of Common Stock held by Westar LLC, 161,208
shares held by Westar LP and 4,923,916 shares held by HBI. Mr. Argyros
disclaims beneficial ownership of the shares held by Westar LLC, Westar LP
and HBI, except to the extent of his ownership interest in Westar LLC,
Westar LP and HBI described above.
(7) Consists of 885,375 shares of Common Stock held by Twelve D Limited. Mr.
Doskocil disclaims beneficial ownership of the shares held by Twelve D
Limited except to the extent of his ownership interest in Twelve D Limited
described above.
(8) Consists of 2,240,066 shares of Common Stock held by Westar LLC of which
WCALLC is a member, and 161,208 shares held by Westar LP of which WCALP is
the sole general partner. Mr. Clark disclaims beneficial ownership of the
shares held by Westar LLC and Westar LP, except to the extent of his
ownership interests therein as described above.
(9) Consists of 2,240,066 shares of Common Stock held by Westar LLC of which
WCALLC is a member, 161,208 shares held by Westar LP of which WCALP is the
sole general partner. Mr. Martin disclaims beneficial ownership of the
shares held by Westar LP except to the extent of his interests described
above.
(10) Includes 5,980 shares of Common Stock issuable pursuant to options held by
Mr. Rembold exercisable within 60 days of June 30, 2000. Mr. Rembold also
holds 50,000 shares of Common Stock pursuant to a Stock Purchase Agreement,
dated as of July 24, 1999 which contains certain vesting and redemption
provisions. Mr. Rembold also holds 60,000 shares of Common Stock pursuant
to an Exercise Agreement, dated as of July 10, 2000.
36
<PAGE> 39
(11) Consists of 4,000 shares of Common Stock issuable to Mr. Hoopis pursuant to
options exercisable within 60 days of June 30, 2000.
(12) Includes approximately 19,747 shares of Common Stock issuable pursuant to
options held by Mr. Farmer exercisable with 60 days of June 30, 2000.
(13) Includes approximately 4,000 shares of Common Stock issuable pursuant to
options held by Mr. Allen exercisable within 60 days of June 30, 2000.
(14) Consists of 3,000 shares of Common Stock issuable pursuant to options held
by Mr. Casey exercisable within 60 days of June 30, 2000.
(15) Consists of 2,000 shares of Common Stock issuable pursuant to options held
by Ms. Dudsak exercisable within 60 days of June 30, 2000.
(16) Consists of 1,600 shares of Common Stock issuable pursuant to options held
by Mr. Elrod exercisable within 60 days of June 30, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 1, 1997, as part of the recapitalization ("Recapitalization") (see
"Notes to Financial Statements -- Note 3"), Doskocil purchased 5,666,145 shares
of Doskocil Common Stock from Mr. Benjamin L. Doskocil, Sr., and his spouse,
Doskocil's sole shareholders at the time, for approximately $87.4 million.
In connection with the Recapitalization, Doskocil entered into eleven
long-term real property lease agreements with Mr. Doskocil and/or entities owned
by him (the "Lessors") pursuant to which the Company leases substantially all of
its Arlington, Texas facilities. The total payments to the Lessors by the
Company under the current lease agreements is approximately $278,000 per month.
In July 2002, the base rent for each of these leases is scheduled to increase by
ten percent (10.0%). Each of the leases has an initial ten-year term, which may
be renewed by the Company (subject to certain conditions) for up to an
additional 15 years. The base rent for the renewal terms is the greater of (i)
the fair market value, or (ii) one hundred and ten percent (110.0%) of the
existing base rent, but in no event greater than one hundred and twenty-five
percent (125.0%) of the then existing base rent. Certain of the leases grant to
the Company the option to elect to purchase all of Lessors' interest in the
Arlington facilities, including without limitation, the buildings, parking lots,
fixtures and improvements constructed on the land, and all of Lessors'
equipment, machinery, furniture, used in connection with the operation of such
property. In connection with such leases, the Company may also elect to purchase
any or all vacant or undeveloped land that is contiguous to such property.
Additionally, the Company currently leases a manufacturing facility and a
warehouse from Mr. Doskocil on a month-to-month basis for approximately $115,000
per month.
Pursuant to the terms of the Second Securityholders Agreement, Westar is
permitted to charge the Company a monthly advisory fee of $50,000. This fee may
be modified from time to time by the Company's board of directors. During fiscal
1999 and 1998, the Company incurred $0.6 million and $0.6 million in management
fees to Westar, respectively. During fiscal 2000, the Company incurred $0.1
million in management fees to Westar.
In connection with and as a condition of, the Fourth Amendment to the
Credit Facility, the Company sold shares of Series D Preferred Stock to HBI,
Westar LLC and TDL, an entity controlled by Mr. Doskocil. In addition, those
entities received warrants to purchase shares of the Company's common stock for
certain guaranties (or reimbursement arrangements related thereto) of certain
Company borrowings (see Management's Discussion and Analysis of Financial
Conditions and Results of Operations "Liquidity and Capital Resources"). The
Company also sold shares of Series D Preferred Stock to those entities in order
to meet certain financial covenants under the Credit Facility for the six months
ended March 2000.
37
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. DOCUMENTS FILED AS PART OF THE REPORT
1. Financial Statements
Financial statements filed as part of this report are listed on the
Index to Financial Statements on page F-1.
2. Financial Statement Schedules and Supplementary Data
Financial statement schedules are omitted because they are not
applicable or the required information is contained in the applicable
financial statements or notes thereto.
B. REPORTS ON FORM 8-K
1. Form 8-K dated July 13, 2000 reported under Item 5 "Other Events," the
announcement of a Fifth Amendment to the Credit Facility and a Support
Agreement.
C. EXHIBITS
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
3.1+ Amended and Restated Articles of Incorporation of Doskocil (a)
Manufacturing Company, Inc.
3.2+ Bylaws of Doskocil Manufacturing Company, Inc. (a)
4.1+ Indenture, dated as of September 19, 1997, between (a)
Doskocil Manufacturing Company, Inc., and First Trust
National Association.
10.1+ Merger Agreement, dated September 19, 1997, between (a)
Doskocil Manufacturing Company, Inc., and Dogloo, Inc.
10.2+ Stock Redemption and Purchase Agreement, dated August 28, (a)
1997, among Aurelio F. Barreto, III, Doskocil
Manufacturing Company, Inc., and Westar Capital, L.P.
10.3+ Stock Redemption Agreement, dated as of September 15, (a)
1997, among Darrell R. Paxman, Doskocil Manufacturing
Company, Inc., and the other parties thereto.
10.4+ Purchase Agreement, dated September 11, 1997, among (a)
Doskocil Manufacturing Company, Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and NationsBanc Capital
Markets, Inc.
10.5*+ Registration Rights Agreement, dated as of September 19, (a)
1997, among Doskocil Manufacturing Company, Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and
NationsBanc Capital Markets, Inc.
10.6+ Confidentiality, Non-Competition Agreement and (a)
Non-Solicitation Agreement, dated as of July 1, 1997,
among Benjamin L. Doskocil, Sr., Mary Frances Doskocil and
Doskocil Manufacturing Company, Inc.
10.7*+ Letter/Consulting Agreement, dated as of July 1, 1997, (a)
between Doskocil Manufacturing Company, Inc., and Benjamin
L. Doskocil, Sr.
10.8+ Credit Agreement, dated September 19, 1997, among Doskocil (a)
Manufacturing Company, Inc. and NationsBank of Texas,
N.A., as administrative agent for certain lenders named
therein.
10.8.1+ First Amendment to Credit Agreement dated February 10, (b)
1999.
10.8.2+ Second Amendment to Credit Agreement dated May 14, 1999. (c)
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.8.3+ Third Amendment to Credit Agreement dated August 12, 1999. (e)
10.8.4+ Fourth Amendment to Credit Agreement dated October 12, (e)
1999.
10.8.5+ Fifth Amendment to the Credit Agreement dated June 30, (f)
2000
10.9*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4209 Barnett
Boulevard, Arlington, Texas 76017 and commonly referred to
as Building A.
10.10*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4300 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building B.
10.11*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for approximately
24,000 square feet of Building "C" located at 4408 Barnett
Boulevard, Arlington, Texas 76017 and commonly referred to
as Building C.
10.12*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4401 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building D.
10.13*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil,
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4208 Larry Lane,
Arlington, Texas 76017 and commonly referred to as
Building E.
10.14*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4207 Larry Lane,
Arlington, Texas 76017 and commonly referred to as
Building F.
10.15*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4209 Larry Lane,
Arlington, Texas 76017 and commonly referred to as
Building F Parking Lot.
10.16*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Marybe Investments, Ltd., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 800 Stephens, Arlington, Texas 76017 and
commonly referred to as Building G.
10.17*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4205 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building J.
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.18*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 720 and 722 West Interstate 20, Arlington,
Texas and commonly referred to as the Parking Facilities.
10.19*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the building(s) located at 600 Justice,
Mansfield, Texas and commonly referred to as Spectrum.
10.20*+ Form of Indemnification Agreement between Doskocil (a)
Manufacturing Company, Inc., and certain of its directors
and/or officers.
10.21*+ Doskocil Manufacturing Company, Inc., Stock Option Plan. (a)
10.21.1* First Amendment to the Doskocil Manufacturing Company,
Inc., Stock Option Plan
10.22*+ Employment Agreement, dated as of November 1, 1996, (a)
between Michael J. Farmer and Dogloo, Inc.
10.23*+ First Amendment to Stockholders' Agreement, dated as of (a)
September 19, 1997, among Benjamin L. Doskocil, Sr., Mary
Frances Doskocil, Doskocil Manufacturing Company, Inc.,
Westar Capital, L.P. and Westar Capital II, LLC.
10.24*+ Amended and Restated Securityholders Agreement, dated (a)
September 19, 1997, among Doskocil Manufacturing Company,
Inc., Dogloo, Inc., Westar Capital, L.P., Westar Capital
II, LLC, HBI Financial Inc., Aurelio F. Barreto III and
other parties thereto.
10.24.1 First Amendment to Amended and Restated Securityholders
agreement dated as of September 28, 1999
10.25*+ Credit Agreement, dated as of August 12, 1999, among the (d)
Company, certain lenders named therein and Bank of
America, N.A., as administrative agent.
10.25.1+ First Amendment to Credit Agreement, dated as of October (e)
12, 1999, among the Company, certain lenders named therein
and Bank of America, N.A. as administrative agent.
10.26+ Pledge Agreement as of August 12, 1999 by Westar Capital (e)
II, LLC in favor of Bank of America, N.A.
10.26.1 First Amendment to Pledge Agreement dated October 12,
1999.
10.27+ Security Agreement as of August 12, 1999 between the (e)
Company and Bank of America, N.A.
10.28+ Support Agreement as of June 21, 2000 by Westar Funds in (f)
favor of Bank of America, N.A.
10.29 Preferred Stock and Warrant Purchase Agreement dated as of
October 12, 1999 among the Company and certain purchases
named therein.
10.30 Series D Preferred Stock and Warrant Purchase Agreement
dated October 12, 1999 between the Company and certain
investors named therein.
10.31 Preferred Warrant Agreement dated as of October 12, 1999
among the Company and certain investors named therein.
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.32 Guaranty Warrant Agreement dated as of October 12, 1999
among the Company and certain investors named therein.
10.33 Series D Preferred Stock Purchase Agreement dated as of
May 30, 2000 among the Company and certain investors named
therein.
27.1 Financial Data Schedule.
</TABLE>
---------------
Notes to Exhibits:
* Indicates a contract or benefit plan under which one or more executive
officers or directors may receive benefits.
+ Indicates documents previously filed with the Securities and Exchange
Commission as set forth in the following table:
(a) Incorporated herein by reference to the Company's Registration Statement
on Form S-4 (Registration No. 333-37081) as filed on October 2, 1997.
(b) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Inc., Report on Form 10-Q for the quarter ended December 31, 1998.
(c) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc. Report on Form 10-Q for the quarter ended March 31, 1999.
(d) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc., Report on Form 8-K dated September 24, 1999.
(e) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc., Report on Form 10-K dated October 13, 1999.
(f) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc., Report on Form 8-K dated July 13, 2000.
41
<PAGE> 44
DOSKOCIL MANUFACTURING COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Report......................................... F-2
Report of Independent Auditors.............................. F-3
Audited Financial Statements
Statements of Operations.................................. F-4
Balance Sheets............................................ F-5
Statements of Shareholders' Equity (Deficit).............. F-6
Statements of Cash Flows.................................. F-7
Notes to Financial Statements............................. F-8
</TABLE>
F-1
<PAGE> 45
MANAGEMENT'S REPORT
The accompanying financial statements of Doskocil Manufacturing Company,
Inc. are the responsibility of and have been prepared by the Company in
conformity with generally accepted accounting principles. They necessarily
include some amounts that are based on management's judgments and estimates. The
financial information displayed in other sections of this report is consistent
with these financial statements.
Doskocil is committed to establishing a comprehensive formalized system of
internal accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable. Doskocil seeks
to assure the objectivity and integrity of its financial records by careful
selection of its managers, by organizational arrangements that provide an
appropriate division of responsibility and by communication programs aimed at
assuring that its policies and methods are understood throughout the
organization.
Various lapses in the system of internal controls occurred during the year
due to problems encountered with the systems implementation, management
turnover, and the distraction of reimplementation of new software systems. Our
auditors therefore performed a primarily substantive audit in accordance with
generally accepted auditing standards to obtain reasonable assurance whether the
financial statements are free of material misstatement.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal control through its Audit Committee. This committee,
composed solely of non-management directors, meets with the independent
accountants and management to monitor the proper discharge of each of its
responsibilities relative to internal accounting controls and the financial
statements.
Larry E. Rembold
President and Chief Executive
Officer
John J. Casey
Chief Financial Officer
F-2
<PAGE> 46
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Doskocil Manufacturing Company, Inc.
We have audited the accompanying balance sheets of Doskocil Manufacturing
Company, Inc. as of June 30, 2000 and 1999 and the related statements of
operations, shareholders' equity (deficit), and cash flows for each of the three
years in the period ended June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Doskocil Manufacturing
Company, Inc. at June 30, 2000 and 1999 and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2000 in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Dallas, Texas
September 8, 2000
Except for last paragraph of
Note 6 for which the date
is September 28, 2000
F-3
<PAGE> 47
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $158,418 $169,932 $147,156
Cost of goods sold.......................................... 106,359 110,995 94,756
-------- -------- --------
Gross profit................................................ 52,059 58,937 52,400
Selling, general and administrative expense................. 47,816 53,259 36,346
Impairment of long-lived assets (Note 5).................... 4,098 6,789 --
-------- -------- --------
Operating income (loss)..................................... 145 (1,111) 16,054
Other (income) expense:
Interest expense and other financing costs (Note 6)....... 22,354 17,750 17,461
Interest income........................................... (132) (34) (124)
Other, net................................................ (610) 58 (232)
-------- -------- --------
Total other expense............................... 21,612 17,774 17,105
-------- -------- --------
Loss before income taxes.................................... (21,467) (18,885) (1,051)
Provision for income taxes (Note 7)......................... -- -- 1,869
-------- -------- --------
Net loss.................................................... (21,467) (18,885) (2,920)
Preferred stock dividends................................... 1,477 916 1,184
-------- -------- --------
Net loss attributable to common shareholders................ $(22,944) $(19,801) $ (4,104)
======== ======== ========
Net loss per common share (basic and diluted)............... $ (7.28) $ (6.38) $ (1.50)
======== ======== ========
Weighted average common shares outstanding.................. 3,150 3,105 2,740
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 48
DOSKOCIL MANUFACTURING COMPANY, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,253 $ 114
Receivables, less allowance for doubtful accounts of $558
and $1,090.............................................. 17,189 20,747
Inventories (Note 4)...................................... 25,605 26,161
Other current assets...................................... 1,313 1,684
-------- --------
Total current assets............................... 45,360 48,706
Property, plant and equipment, net (Note 5)................. 49,497 53,602
Fixed assets held for sale.................................. -- 3,259
Goodwill (Note 3)........................................... 49,036 51,920
Debt issuance costs (Note 6)................................ 4,633 4,390
Other assets (Includes $0.8 million due from shareholders at
June 2000 and 1999)....................................... 1,825 1,825
-------- --------
Total assets....................................... $150,351 $163,702
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,890 $ 7,682
Accrued liabilities (Includes $1.1 million at June 2000
and $0.9 million at June 1999 to shareholders).......... 4,187 4,308
Accrued interest.......................................... 3,311 3,169
Accrued taxes............................................. 411 573
Payroll and benefits payable.............................. 3,212 3,359
Current portion of long-term debt (Note 6)................ 10,116 8,514
Additional credit facility (Note 6)....................... 8,000 --
-------- --------
Total current liabilities.......................... 36,127 27,605
Long-term debt (Note 6)..................................... 168,145 178,281
-------- --------
Total liabilities.................................. 204,272 205,886
Commitments and contingencies (Note 16)..................... -- --
Shareholders' (deficit) equity: (Note 8)
Preferred stock, no par value:
Authorized shares -- 2,434,465 -- none issued or
outstanding............................................ -- --
Series B redeemable preferred stock, no par value:
Authorized shares -- 10,224,255 -- none issued or
outstanding............................................ -- --
Series C redeemable preferred stock
No par value: Authorized shares -- 11,841,280; issued
and outstanding -- 9,161,567 at June 30, 2000 and
1999................................................... 9,161 9,161
Series D redeemable preferred stock, $100 liquidation
preference, no par value net of discount:
Authorized shares -- 500,000; issued and
outstanding -- 63,670 at June 30, 2000................. 5,662 --
Common stock
No par value: Authorized shares -- 15,000,000; issued
and outstanding -- 3,143,644 at June 30, 2000;
3,104,644 at June 30, 1999............................. 34,288 34,283
Warrants to purchase common stock......................... 4,180 --
Accumulated deficit....................................... (107,212) (85,628)
-------- --------
Total shareholders' deficit........................ (53,921) (42,184)
-------- --------
Total liabilities and shareholders' (deficit)
equity............................................ $150,351 $163,702
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 49
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
------------------------------ -------------------------------
YEAR ENDED YEAR ENDED
------------------------------ -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998 2000 1999 1998
-------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCKS:
Series A:
Outstanding at beginning of period..................... -- -- -- $ -- $ -- $ --
Issued for cash........................................ -- -- 1,531 -- -- 23,000
Redeemed............................................... -- -- (466) -- -- (7,000)
Conversion to common stocks............................ -- -- (1,065) -- -- (16,000)
----- ----- ------- --------- -------- --------
Outstanding at end of period........................... -- -- -- $ -- $ -- $ --
Series B:
Outstanding at beginning of period..................... -- -- -- $ -- $ -- $ --
Issued in Dogloo merger................................ -- -- 10,224 -- -- 10,224
Redeemed............................................... -- -- (10,224) -- -- (10,224)
----- ----- ------- --------- -------- --------
Outstanding at end of period........................... -- -- -- $ -- $ -- $ --
Series C:
Outstanding at beginning of period..................... 9,161 9,161 -- $ 9,161 $ 9,161 $ --
Issued in Dogloo merger................................ -- -- 11,841 -- -- 11,841
Redeemed............................................... -- -- (2,680) -- -- (2,680)
----- ----- ------- --------- -------- --------
Outstanding at end of period........................... 9,161 9,161 9,161 $ 9,161 $ 9,161 $ 9,161
Series D:
Outstanding at beginning of period..................... -- -- -- $ -- $ -- $ --
Shares issued.......................................... 64 -- -- 5,545 -- --
Amortization of discount............................... -- -- -- 117 -- --
----- ----- ------- --------- -------- --------
Outstanding at end of period........................... 64 -- -- $ 5,662 $ -- $ --
COMMON STOCKS:
Outstanding at beginning of period....................... 3,105 3,103 5,999 $ 34,283 $ 34,262 $ 24
Shares exchanged for partnership interest in Spectrum.... -- -- 798 -- -- 4,804
Shares issued............................................ 50 2 250 5 21 3,682
Redeemed................................................. (11) -- (6,409) -- -- (11,458)
Stock issued in Dogloo merger............................ -- -- 1,400 -- -- 21,210
Conversion from preferred stock.......................... -- -- 1,065 -- -- 16,000
----- ----- ------- --------- -------- --------
Outstanding at end of period............................. 3,144 3,105 3,103 $ 34,288 $ 34,283 $ 34,262
WARRANTS TO PURCHASE COMMON STOCK:
Outstanding at beginning of period....................... -- -- -- $ -- $ -- $ --
Warrants issued.......................................... 5,160 -- -- 4,180 -- --
----- ----- ------- --------- -------- --------
Outstanding at end of period............................. 5,160 -- -- $ 4,180 $ -- $ --
RETAINED EARNINGS (DEFICIT):
Balance at beginning of period........................... $ (85,628) $(66,743) $ 25,258
Net income (loss)........................................ (21,467) (18,885) (2,920)
Redeemed common stock.................................... -- -- (87,377)
Recapitalization costs................................... -- -- (1,392)
Dividends on Series A Preferred Stock.................... -- -- (469)
Dividends on Series D Preferred Stock.................... (117) -- --
Fair value of options assumed in Dogloo merger........... -- -- 157
--------- -------- --------
Balance at end of period................................. $(107,212) $(85,628) $(66,743)
--------- -------- --------
TOTAL SHAREHOLDERS' DEFICIT........................ $ (53,921) $(42,184) $(23,320)
PARTNERS' EQUITY:
Balance at beginning of period........................... $ -- $ -- $ 3,808
Net loss................................................. -- -- --
Distributions............................................ -- -- (3,808)
--------- -------- --------
Balance at end of period................................. $ -- $ -- $ --
--------- -------- --------
TOTAL SHAREHOLDERS' AND PARTNERS' DEFICIT.......... $ (53,921) $(42,184) $(23,320)
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE> 50
DOSKOCIL MANUFACTURING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
---------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(21,467) $(18,885) $ (2,920)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 11,012 10,367 10,748
Amortization of debt issuance costs....................... 3,115 768 3,120
Deferred income taxes..................................... -- -- 1,869
Impairment of long-lived assets........................... 4,098 6,789 --
(Gain) loss on sale of assets............................. (425) 48 (230)
Changes in:
Receivables............................................ 3,558 (2,397) 4,031
Inventories............................................ 556 (4,746) 4,981
Payables............................................... (792) 3,053 (3,425)
Accrued liabilities and other.......................... 34 (1,406) (3,591)
-------- -------- ---------
Net cash (used in) provided by operating
activities...................................... (311) (6,409) 14,583
INVESTING ACTIVITIES:
Repurchase of leased assets................................. -- -- (18,724)
Capital expenditures........................................ (6,770) (14,988) (11,458)
Increase in other assets.................................... (33) (39) --
Cash of acquired business................................... -- -- 1,335
Proceeds from disposal of assets............................ 3,618 845 2,834
-------- -------- ---------
Net cash used in investing activities............. (3,185) (14,182) (26,013)
FINANCING ACTIVITIES:
Proceeds from long-term debt................................ -- -- 262,500
Payments of long-term debt.................................. (10,659) (4,126) (102,600)
Payment of debt of acquired business........................ -- -- (34,584)
Net proceeds (payments) of revolving credit agreement....... 1,437 22,900 (7,250)
Proceeds from sale of common stock.......................... 5 21 3,780
Redemption of common stock.................................. -- -- (11,098)
Proceeds from sale of preferred stock....................... 5,545 -- 23,000
Proceeds from warrants...................................... 822 -- --
Redemption of preferred stock and accumulated dividends..... -- -- (24,433)
Other debt payments......................................... (515) -- --
Net proceeds from additional credit facility................ 8,000 -- --
Cash paid to stockholders from recapitalization............. -- -- (87,922)
Debt issuance costs (including Bridge financing costs)...... -- -- (8,257)
Recapitalization costs...................................... -- -- (1,393)
Cash dividends.............................................. -- -- (469)
-------- -------- ---------
Net cash provided by financing activities......... 4,635 18,795 11,274
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,139 (1,796) (156)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 114 1,910 2,066
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,253 $ 114 $ 1,910
======== ======== =========
</TABLE>
See Note 15 for supplementary cash flow information.
The accompanying notes are an integral part of these financial statements
F-7
<PAGE> 51
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
On September 19, 1997, Dogloo, Inc. ("Dogloo"), was merged with and into
Doskocil Manufacturing Company, Inc. ("Doskocil"). Beginning September 19, 1997,
the financial results of Doskocil include the financial position, results of
operations and cash flows for Dogloo. The term "Doskocil" refers to Doskocil
Manufacturing Company, Inc. and Spectrum Polymers Ltd. prior to giving effect to
the merger, "Dogloo" refers to Dogloo, Inc. prior to giving effect to the merger
and the term "Company" refers to the combined entity comprised of Doskocil and
Dogloo.
Prior to July 1, 1997, the general partnership interest of Spectrum was
held by Bed Rock International, Inc., a Texas corporation wholly owned by
Benjamin L. Doskocil and Mary Francis Doskocil (the "Doskocils"). Both the
limited partnership interest of Spectrum and Doskocil were owned by the
Doskocils. Doskocil was a Texas corporation engaged in the manufacture and sale
of injection molded consumer plastic products primarily for the pet care,
hardware, sports and leisure markets, principally in the United States. Spectrum
was organized under the Texas Revised Limited Partnership Act and was engaged in
the purchasing, recycling and blending of plastic resin primarily for use by the
Corporation in injection molded consumer plastic products.
Since the Merger, the Company has 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, the
need to outsource certain production and failed information systems conversion.
These difficulties have caused higher than expected operating costs, working
capital requirements and capital spending which resulted in increased net losses
and a liquidity shortage. In July 1999, the Company implemented a new enterprise
resource planning system to assist in alleviating some of these difficulties.
The launch of certain elements of these systems was not successful. Accordingly,
the systems were reconfigured and re-launched in June 2000.
The Company is highly leveraged and has relied upon debt financing to
provide for working capital and certain capital expenditures. Furthermore, as a
result of the above difficulties, the Company was unable in December 1998, March
1999 and June 1999 to meet the debt covenants required by the Credit Facility
(as defined in Note 6). 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 September 2000, the lenders amended the Additional
Credit Facility to extend to September 28, 2001. 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.
On June 21, 2000 the Bank Group and the Company amended the Credit Facility
for the fifth time (the "Fifth Amendment"). The Fifth Amendment includes a
Support Agreement with Westar Funds to provide capital necessary to meet the
financial covenants for the quarter ending June 2000 and for the four quarters
of fiscal 2001. The Bank Group in turn agreed to remove the minimum EBITDA
requirement for fiscal 2001 and redefined the minimum fixed charge coverage
ratio (detailed below). The Fifth Amendment also confirms an interest rate
increase negotiated as part of the Fourth Amendment, increases the borrowing
base for the Company until September 2000 to allow the Company to reduce its
inventories, at which time it will revert to the borrowing base in the Credit
Facility dated September 19, 1997 and also extends the period for the fourth
quarter for adding capital to meet financial covenants to ninety days to that
the Company's independent auditors have time to complete the annual audit.
In conjunction with the Fifth Amendment, the Westar Funds entered into a
Support Agreement dated June 21, 2000 with the Company and Bank of America,
N.A., as administrative agent for certain lenders named therein (the "Support
Agreement"). The Westar Funds agreed to jointly and severally provide capital to
the Company pursuant to the Support Agreement in an amount that would meet the
minimum EBITDA
F-8
<PAGE> 52
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
covenant of the Credit Facility that is applicable as of June 30, 2000. The
Westar Funds also agreed to jointly and severally provide capital to the Company
pursuant to the Support Agreement in an amount necessary, when added to EBITDA,
to make EBITDA greater than the sum of the maintenance capital expenditures,
plus scheduled payments of principal on indebtedness for borrowed money and
capital leases plus payments of cash interest for the previous nine months
ending June 30, 2000 and the previous twelve months ending on September 30,
2000, December 31, 2000, March 31, 2001 and June 30, 2001. All capital
contributions made under the Support Agreement will be considered to meet
certain financial covenants in the Credit Facility as further provided in the
Fifth Amendment.
The Company's plan is to grow sales, reduce fixed costs and improve
manufacturing productivity. The Company expects to benefit in fiscal 2001 from
better systems support and new manufacturing management focusing on customer
service. Shipments may be negatively affected, in the short term, as customers
draw down their safety stocks, based on their renewed confidence in the
Company's ability to ship on time. Construction was completed on a new warehouse
that is expected to cut costs for material handling and outside warehousing in
fiscal 2001. In the last half of fiscal 2000, the Company implemented a project
designed to streamline the Company, eliminating unprofitable customers and
products. Raw materials in fiscal 2001 are expected to increase sharply with
higher natural gas and oil prices. Liquidity is expected to improve from
increased cash flow from operations and efforts to reduce the Company's
investment in inventories.
The Company expects to be able to fund operations and comply with the
revised covenants through at least the last 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents -- Cash and cash equivalents include cash on hand
and on deposit and highly liquid instruments with original maturities of three
months or less.
Inventories -- Inventories are stated at the lower of weighted-average cost
or market.
Property, plant and equipment -- Property, plant and equipment are stated
at cost and depreciated on the straight-line basis over the estimated useful
lives of the assets. Repairs and maintenance which do not extend the lives or
improve the assets are charged to expense.
Intangible assets -- The cost of intangible assets (patents, trademarks and
non-compete agreements) are being amortized on a straight-line basis over 7 - 16
years. The cost of such assets, net of related accumulated amortization, is
included in other assets in the accompanying financial statements. Accumulated
amortization at June 30, 2000 and 1999 was $0.7 million and $1.7 million,
respectively.
Goodwill -- Costs in excess of net assets of businesses acquired are
amortized on a straight line basis over 30 years and represent the excess of the
cost of acquired businesses over the fair value of net assets received at the
date of acquisition. Goodwill is presented net of accumulated amortization of
$5.3 million and $3.5 million at June 30, 2000 and 1999, respectively. See Note
3.
Impairment of long-lived assets and long-lived assets to be disposed
of -- The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may be impaired. Recoverability of assets to be held and used
is
F-9
<PAGE> 53
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Goodwill associated with assets acquired in a purchase business
combination is included in impairment evaluations when events or circumstances
exist that indicate the carrying amount of those assets may not be recoverable.
Risk concentration -- Financial instruments that potentially subject the
Company to concentrations of credit risk are accounts receivable. The Company
generally sells consumer products to wholesale distributors and retail
customers, throughout the United States, Canada, and Europe, who are associated
with the pet, sport, home and garden and leisure industries. The Company
continuously evaluates the creditworthiness of its customers and generally does
not require collateral.
During the year ended June 30, 2000, two customers accounted for
approximately 22.0% and 12.0% of total sales. During the year ended June 30,
1999, two customers accounted for approximately 17.0% and 13.0% of total sales.
During the year ended June 30, 1998, two customers accounted for approximately
13.0% and 11.0% of total sales. Included in trade accounts receivable is
approximately $4.4 million and $4.7 million due from these customers at June 30,
2000 and 1999, respectively.
Use of estimates -- Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
year-end and the reported amounts of revenues and expenses during the year.
Significant items subject to such estimates and assumptions include the carrying
value of long-lived assets and valuation of receivables, inventories and
deferred income tax assets. Actual results may differ from such estimates.
Revenue recognition -- Revenue is recognized when goods are shipped.
Advertising expense -- Advertising costs are expensed as incurred.
Advertising expense was approximately $3.2 million, $7.3 million and $2.9
million for the years ended June 30, 2000, 1999 and 1998, respectively.
Research and development -- Research and development costs are charged to
expense as incurred. Research and development expense for the years ending June
30, 2000, 1999 and 1998 was $1.2 million, $1.5 million and $0.9 million,
respectively.
Reclassifications -- Certain reclassifications of prior years' data have
been made to conform to fiscal year 2000 classification.
Comprehensive income -- For all periods presented there was no difference
between the comprehensive income (loss) and net income (loss).
New 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 adopted the standard effective July 1, 2000, as required. The
effect of the adoption did not have a material impact on either the financial
position or results of operations of the Company.
NOTE 3. MERGER
On September 19, 1997, Doskocil consummated a merger with Dogloo, Inc.,
wherein 1,400,603 of the Company's common shares were exchanged for Dogloo
equity in the approximate amount of $21.2 million and Dogloo was merged with and
into Doskocil. The Company is now controlled by an investor group (the "Investor
Group") consisting of various Westar Capital entities and certain of their
affiliates (collectively "Westar"). Pursuant to the Merger Agreement, each
issued and outstanding share of Dogloo Series A
F-10
<PAGE> 54
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock was converted into one share of the Company's Series B Preferred
Stock and each issued and outstanding share of Dogloo Series B Preferred Stock
was converted into one share of the Company's Series C Preferred Stock. In
connection with the Merger, except as described below, all of the outstanding
options to purchase shares of Dogloo Common Stock were assumed by the Company
and thereby became options to purchase shares of the Company's Common Stock,
with adjustments to such options to reflect the ratio by which shares of Dogloo
Common Stock were converted into shares of the Company's Common Stock.
In connection with the Merger, Doskocil purchased an aggregate of 249,703
shares of Dogloo Common Stock for an aggregate price of approximately $0.4
million from shareholders of Dogloo other than the Investor Group and Mr.
Aurelio F. Barreto, III, the co-founder and former Chief Executive Officer of
Dogloo. In addition, Doskocil cashed out for $0.41 per option 211,000 options
held by Dogloo employees who did not continue with the Company after the Merger.
All Dogloo employees who continued with the Company had their options assumed by
the Company and therefore converted into options to purchase the Company's
Common Stock. Immediately prior to the Merger, Dogloo had 736,000 outstanding
options to purchase shares of Dogloo Common Stock. Immediately after the closing
of the Merger, 1,064,816 shares of the Company's Series A Preferred Stock were
converted into 1,064,816 shares of the Company's Common Stock.
Concurrent with the closing of the Merger, the Company used proceeds of a
Credit Facility (see Note 6) to redeem for $14.9 million (including dividends
accrued through September 19, 1997) 598,959 shares of the Company's Common Stock
and 359,376 shares of the Company's Series A Preferred Stock owned by various
Enterprise Partners funds and certain of their affiliates (collectively
"Enterprise"), and to redeem for $3.6 million, 133,102 shares of the Company's
Common Stock and 106,482 shares of the Company's Series A Preferred Stock from
Enterprise.
Immediately following the Merger, the Company also used proceeds from the
offering of 10 1/8% Senior Subordinated Notes and the Credit Facility to redeem
the following additional shares of Series B Preferred Stock and Series C
Preferred Stock: (i) 6,890,000 shares of Series B Preferred Stock held by Mr.
Barreto for $8.4 million (including dividends accrued through September 19,
1997); (ii) 3,334,255 shares of Series B Preferred Stock held by Darrell R.
Paxman, co-founder of Dogloo, for $4.0 million (including dividends accrued
through September 19, 1997); (iii) 538,433 shares of Series C Preferred Stock
held by Enterprise for $1.3 million (including dividends accrued through
September 19, 1997); and (iv) 2,141,260 shares of Series C Preferred Stock held
by Mr. Barreto for $2.6 million (including dividends accrued through September
19, 1997). Further, immediately following the Merger, the Company paid
approximately $1.5 million of accrued dividends on the shares of Series C
Preferred Stock which remained outstanding. In connection with the conversion
and redemption of shares of Series A Preferred Stock, the Company borrowed $0.5
million under the Credit Facility to pay cumulative dividends on such shares of
Series A Preferred Stock as of the date of the Merger.
The Merger has been accounted for as a purchase transaction under generally
accepted accounting principles, and, accordingly, the purchase price has been
allocated on the basis of the estimated fair value of the assets acquired. The
purchase price allocation resulted in goodwill of approximately $57.3 million.
The Company issued 10 1/8% Senior Subordinated Notes (the "Notes") due
September 15, 2007, in the aggregate principal amount of $85.0 million. The
Notes were exchanged for registered Notes (the "Subordinated Notes") pursuant to
the Offer to Exchange dated February 23, 1998, effective as of March 30, 1998.
Discounts and commissions aggregated 3.0% 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 35.0% of the aggregate principal amount
of the
F-11
<PAGE> 55
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subordinated Notes originally outstanding may be redeemed at the option of the
Company at a redemption price stipulated in the Subordinated Notes. The
Subordinated Notes limit, among other things, dividends, incurrence of
additional indebtedness and other restricted payments, as defined, and contain
cross default provisions with the Company's Senior Indebtedness. Debt issuance
costs of $5.8 million are being amortized over the respective terms of the
Subordinated Notes and the Credit Facility.
Management formulated a plan in 1997 to exit the Dogloo facilities and
merge operations into its Arlington facilities. Included in this plan was the
termination and relocation of employees and disposal of facilities. Expenses
accrued as part of the purchase price were associated with closing costs,
relocation, retention bonus, reserves and other identified items. Costs of $6.3
million were charged against the accrual for the year ended June 30, 1998 when
employees were terminated during the second and third fiscal quarters and
selected management was relocated. Costs of $2.4 million for the idle facility
carrying costs were charged against the accrual and $3.9 million was reversed
against goodwill during the year ended June 30, 1999. Final exit from the former
Indianapolis facility occurred in August 1999 resulting in net cash proceeds of
$3.6 million.
NOTE 4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $15,708 $13,898
Work-in-process............................................. 1,604 2,060
Raw materials............................................... 8,293 10,203
------- -------
Net inventories................................... $25,605 $26,161
======= =======
</TABLE>
As of June 30, 2000 and 1999 the Company had recorded reserves of $2.0
million and $1.1 million, respectively, for inventory obsolescence.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Machinery & equipment (20 years)............................ $ 47,835 $55,264
Molds (6-10 years).......................................... 32,995 27,196
Computer equipment (5 years)................................ 8,535 4,601
Leasehold improvements (5-10 years)......................... 10,374 8,448
Office furniture and equipment (5-10 years)................. 1,654 1,547
Other (5 years)............................................. 286 213
-------- -------
Total............................................. 101,679 97,269
Less accumulated depreciation and amortization.............. 52,182 43,667
-------- -------
Net............................................... $ 49,497 $53,602
======== =======
</TABLE>
During the year ended June 30, 2000 the Company recorded a $4.1 million
impairment charge of which $1.2 million relates to the write off of certain
machinery and molds due to the SKU reduction, $1.8 million of costs related to
the fast forward ERP and warehousing systems implementation in July 1999 which
management believed had minimal future benefit and $1.1 million charge
reflecting management's ongoing
F-12
<PAGE> 56
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
review of recoverability of assets, including related goodwill. Included in
these fast forward costs is $0.8 million related to the abandoned warehouse
management system and $1.0 million of costs incurred for the ERP system with no
future benefit due to the reconfiguration. Certain elements of the original ERP
implementation were deemed to not function and were reconfigured and re-launched
in June 2000.
During the year ended June 30, 1999, the Company recorded a $6.8 million
impairment charge of which $2.3 million relates to a failed system conversion
and management's assessment that implementation costs have minimal future
benefit, a $1.3 million charge due to the decision to divest the Company of
non-core business assets which have been sold, and a $3.2 million charge
reflecting management's ongoing review of recoverability of assets, including
related goodwill.
Depreciation expense for the years ended June 30, 2000, 1999 and 1998 is
$9.0 million, $8.0 million and $9.0 million, respectively. Property, plant and
equipment includes gross assets acquired under capital leases. Depreciation
expense includes amortization of capital leases.
NOTE 6. LONG TERM DEBT
Total long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Credit Facility Borrowings:
Variable secured notes (term loan Tranche A), due 2003.... $ 33,250 $ 41,250
Variable secured notes (term loan Tranche B), due 2004.... 34,186 36,844
Revolving credit facility, due 2003....................... 24,336 22,900
Additional credit facility, due 2001...................... 8,000 --
Senior subordinated notes:
Non-convertible 10.125% notes, due 2007................... 85,000 85,000
Capital leases and other.................................. 1,489 801
-------- --------
Total............................................. 186,261 186,795
Less: Current maturities.................................. 18,116 8,514
-------- --------
Total long-term debt.............................. $168,145 $178,281
======== ========
</TABLE>
Concurrent with the consummation of the Merger, the Company entered into a
Credit Facility agreement with a syndicate of lending institutions (the
"Lenders"), which agreement provides for an aggregate principal amount of loans
of up to $110.0 million. Loans under the Credit Facility consist of $82.5
million in aggregate principal amount of term loans ("Term Loan Facility"),
which facility includes a $45.0 million tranche A term loan subfacility, a $37.5
million tranche B term loan subfacility, and a $27.5 million revolving credit
facility ("Revolving Credit Facility"), which has been reduced to $24.7 million.
The Credit Facility includes a subfacility for swingline borrowings and a
sublimit for letters of credit. The Company's obligations under the Credit
Facility are secured by a security interest in substantially all of the
Company's assets. The Company used proceeds from the Term Loan Facility and a
portion of the Revolving Credit Facility to provide a portion of the funding
necessary to consummate the Merger. There was $24.3 million outstanding on the
Revolving Credit Facility at June 30, 2000 as compared with the approximately
$24.7 million available based on eligible accounts receivable and inventory.
F-13
<PAGE> 57
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of June 30, 2000, future maturities of long-term debt were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2001.................................................. $ 18,116
2002.................................................. 11,165
2003.................................................. 11,582
2004.................................................. 52,142
2005.................................................. 8,256
Later years........................................... 85,000
--------
$186,261
========
</TABLE>
The tranche B term loan facility matures on September 30, 2004. The tranche
A term loan facility and the Revolving Credit Facility mature on September 30,
2003. The Term Loan Facility is subject to repayment according to quarterly
amortization of principal based upon the Scheduled Amortization (as defined in
the Credit Facility). The Credit Facility provides for mandatory prepayment of
the Term Loan Facility and the Revolving Credit Facility until certain financial
ratios are attained by the Company. Prepayments on the Term Loan Facility are
applied to reduce scheduled amortization payments as provided in the Credit
Facility. The mandatory prepayments defined in the Credit Facility include: (a)
100.0% 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) 50.0% of excess cash flow pursuant to an annual cash
sweep arrangement; (c) up to 100.0% of the net cash proceeds of certain
indebtedness subject to certain exceptions and (d) 100.0% of the net cash
proceeds from the issuance of equity by the Company or any subsidiary subject to
de minimus baskets and certain exceptions. In addition, the Company may prepay
the Credit Facility in whole or in part at any time without penalty, subject to
reimbursement of certain costs of the Lenders.
Indebtedness under the Term Loan Facility and the Revolving Credit Facility
bears interest at a rate based (at the Company's option) upon (i) LIBOR for one,
two, three or six months, plus 3.5% with respect to the tranche A term loan
facility and the Revolving Credit Facility or plus 4.0% with respect to the
tranche B term loan facility, or (ii) the Alternate Base Rate (as defined in the
Credit Facility) plus 2.0% with respect to the tranche A term loan facility and
the Revolving Credit Facility or plus 2.5% with respect to the tranche B term
loan facility; provided, however, the interest rates for the Revolving Credit
Facility and tranche A term loan are subject to several point reductions in the
event the Company meets certain performance targets.
Interest rates at June 30, 2000 were 10.2%, 10.7% and 10.2% on tranche A
and tranche B term loans and the Revolver, respectively.
The Company is required to pay to the Lenders in the aggregate a commitment
fee equal to 0.5% per annum on the committed undrawn amount of the Revolving
Credit Facility during the preceding quarter, provided this fee may be subject
to reduction in the event the Company meets certain performance targets.
Amendments to the Credit Facility. At December 31, 1998 the Company was not
in compliance with certain financial covenants. The Company entered into an
amendment to the Credit Facility as of February 10, 1999 (the "First Amendment")
which provided, among other matters, for the waiver of such covenant defaults,
the revision of certain existing financial covenants, including the addition of
minimum EBITDA requirements in place of the maximum leverage ratio and interest
rate increases of approximately 0.75% per annum as described below.
The Credit Facility, as amended in February 1999, 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,
F-14
<PAGE> 58
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
among other things, limit additional indebtedness, liens, sales of assets and
business combinations. As of March 31, 1999 the Company was not in compliance
with the interest coverage ratio, fixed charge coverage ratio and the minimum
EBITDA requirement. The Company entered into a second amendment to the Credit
Facility in May 1999 (the "Second Amendment"). The Second Amendment provided,
among other things, for the waiver of the March 31, 1999 defaults and lowered
June 30 and September 30 interest coverage ratios, fixed charge coverage ratios
and minimum EBITDA requirements and also provided for a 0.5% interest rate
increase on all loans outstanding under the Credit Facility from the date of the
second Amendment through and including December 31, 1999.
The Company was not in compliance with certain financial covenants at June
30, 1999, including the interest coverage ratio, fixed charge coverage ratio,
and the minimum EBITDA requirements of the existing Credit Facility. On August
12, 1999, the Company entered into an amendment to the Credit Facility (the
"Third Amendment") to permit, among other things, the Company to enter into an
additional credit facility (the "Additional Credit Facility") with BankAmerica,
N.A. (the "Additional Lender"), which is described below. On October 12, 1999,
the Company entered into a fourth amendment to the Credit Facility (the "Fourth
Amendment"). The Fourth Amendment provides, among other things, for the waiver
of all financial covenant ratios for September 30, 1999 and all fiscal quarters
prior thereto, and, commencing with the fiscal quarter ending on December 31,
1999, raises the maximum leverage ratio and lowers each of (i) the minimum fixed
charge coverage ratio, (ii) the interest coverage ratio and (iii) minimum
EBITDA. Additionally, the Fourth Amendment (i) adds a covenant for the senior
leverage commencing with the fiscal quarter ending on September 30, 2000, (ii)
adds a covenant prohibiting the principal amount of all loans outstanding under
the existing Credit Facility from exceeding (a) $96,000,000 as of the last day
of each fiscal quarter through June 30, 2000, and (b) thereafter, the lesser of
(x) $96,000,000 and (y) the Company's EBITDA for the four consecutive fiscal
quarters immediately preceding the date of calculation, times 3.0, and (iii)
reduces the maximum amount of the "Revolving Credit Commitment" to $24.7
million.
The Fourth Amendment included 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 the proceeds thereof are used to repay Credit Facility loans,
to reduce total debt and senior debt for purposes of such financial covenants.
There was no commitment or obligation on the part of Westar, TDL or any other
shareholder to provide additional capital to the Company.
On June 30, 2000, the Company amended the Credit Facility for the fifth
time (the "Fifth Amendment"). The Fifth Amendment, among other things, increases
the interest rates on the term loan advances and revolving advances based on the
Company's leverage. In addition, the borrowing base for the Company was
increased until September 2000 at which time it will revert to the borrowing
base in the Credit Facility dated September 19, 1997. The Fifth Amendment also
modifies the minimum fixed charge coverage ratio and the minimum EBITDA
covenants and redefines certain stated definitions.
In conjunction with the Fifth Amendment, the Westar Funds entered into a
Support Agreement dated June 30, 2000 with the Company and Bank of America,
N.A., as administrative agent for certain lenders named therein (the "Support
Agreement" ). The Westar Funds agreed to jointly and severally provide capital
to the Company pursuant to the Support Agreement in an amount that would cure
the minimum EBITDA covenant of the Credit Facility that is applicable as of June
30, 2000. The Westar Funds also agreed to jointly and severally provide capital
to the Company pursuant to the Support Agreement in an amount necessary, when
added to EBITDA, to make EBITDA greater than the sum of the maintenance capital
expenditures plus scheduled payments of principal on indebtedness for borrowed
money and capital leases plus payments of cash interest for the previous nine
months ending June 30, 2000 and the twelve months ending on
F-15
<PAGE> 59
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001. All
capital contributions made under the Support Agreement will be considered to
meet certain financial covenants in the Credit Facility as further provided in
the Fifth Amendment.
As of June 30, 2000, the Company is in compliance with all financial
covenants including the interest coverage ratio, fixed charge coverage ratio,
total leverage ratio and the minimum EBITDA requirements of the existing Credit
Facility and the Additional Credit Facility. In September 2000, $1.0 million was
contributed for Series D Preferred Stock. Of that additional investment, $0.1
was required to meet the June 2000 minimum EBITDA requirements. An equity
infusion of $1.4 million was made in May 2000 for the March 2000 EBITDA
requirement.
The Additional Credit Facility. The Additional Credit Facility is a senior
revolving credit facility which the Company entered into on August 12, 1999.
Amounts outstanding under the Additional Credit Facility are secured by liens on
certain equipment and other property of the Company that are junior in lien
priority to the lien securing the Company's existing Credit Facility. Pursuant
to an amendment to the Additional Credit Facility executed on October 12, 1999,
the maturity of such facility was extended to September 30, 2000 and the maximum
amount of borrowings thereunder was increased from $10.0 million to $15.0
million. In September 2000, the lenders amended the Additional Credit Facility
to extend to September 2001. Advances under the Additional Credit Facility may
be made at the option of the Company as a base rate advance or a LIBOR Advance.
Base rate advances bear interest at a per annum interest rate equal to the
higher of (a) the sum of (i) 0.5% 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 amended
financial covenants in the Company's existing Credit Facility are incorporated
by reference into the Additional Credit Facility.
In order to induce the Additional Lender to provide the Additional Credit
Facility, Westar LP and Westar LLC (together, the "Westar Funds") have entered
into a Continuing Guaranty dated as of August 12, 1999 (the "Guaranty") and a
Pledge Agreement dated as of August 12, 1999 (the "Pledge Agreement") pursuant
to which, from time to time in the discretion of the Westar Funds, the Westar
Funds may guarantee loans made by the Additional Lender under the Additional
Credit Facility and pursuant to which Westar Capital LLC has pledged $5.0
million to secure its obligations under the Guaranty. In addition, Twelve D
Limited, a limited partnership controlled by Benjamin L. Doskocil, Sr. ("TDL"),
has entered into a Reimbursement Agreement dated as of August 12, 1999 (the
"Reimbursement Agreement") with the Westar Funds pursuant to which TDL has
agreed to reimburse the Westar Funds for payments made pursuant to the Guaranty
and the related pledge arrangements under the Pledge Agreement in an amount
proportional to its equity interests in the Company.
In connection with certain amendments to the Additional Credit Facility on
October 12, 1999, the Guaranty and Reimbursement Agreement was increased to
$15.0 million and was extended to September 30, 2000 and the Pledge Agreement
was revised to, among other things, require Westar LLC to pledge additional
collateral to the Additional Lender in the event that loans under the Additional
Credit Facility exceed $10.0 million.
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 the Company will be able to comply with the
financial or other covenants set forth in the Credit Facility. A failure to
comply with the obligations contained in the Credit Facility or the Subordinated
Notes, if not cured or waived, could permit acceleration of the related
indebtedness and acceleration of indebtedness under other instruments that
contain cross-acceleration or cross-defaults. While management expects to meet
all covenants in the future, there is no assurance the Company will do so.
F-16
<PAGE> 60
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Subordinated Notes. On September 19, 1997, the Company obtained
financing through the issuance of $85.0 million in Senior Subordinated debt
("Subordinated Notes"). The Subordinated Notes will mature on September 15,
2007. Interest on the Subordinated Notes is payable in cash semi-annually on
March 15 and September 15 of each year, commencing on March 15, 1998. The
Subordinated Notes are redeemable, in whole or in part, at the option of the
Company, at any time on or after September 15, 2002, at the redemption prices
set forth at predetermined amounts, plus accrued and unpaid interest and
liquidated damages, if any, to the date of redemption. In addition, at any time
on or before September 15, 2000, the Company may redeem up to 35.0% of the
original aggregate principal amount of the Subordinated Notes with the net
proceeds of an Initial Public Equity offering at a redemption price equal to
110 1/8% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the date of redemption. Upon a change of control
redemption event, the Company will have the option, at any time on or prior to
September 15, 2002, to redeem the Subordinated Notes in whole but not in part at
a redemption price equal to 100.0% of the principal amount thereof plus the
applicable premium plus accrued and unpaid interest and liquidated damages, if
any, to the date of redemption. Upon a change of control, each holder of the
notes will have the right to require the Company to repurchase all or any part
of such holder's notes (unless previously redeemed in connection with a change
in control redemption event) at 101.0% of the principal amount thereof, plus
accrued and unpaid interest and liquidated damages, if any, to the date of
repurchase. There can, however, be no assurance that sufficient funds will be
available at the time of any change of control to make any required repurchases
of the Subordinated Notes tendered, or that restrictions in the Credit Facility
or under the Company's debt instruments existing at such time will allow the
Company to make such required repurchases.
Fees associated with obtaining the Subordinated Notes and the tranche A and
tranche B term loans were $5.8 million, which are amortized over the terms of
the respective notes. Amortization expense of $0.7 million, $0.8 million and
$0.8 million relating to such fees is included in interest expense for the years
ended June 30, 2000, 1999 and 1998, respectively.
Bridge Financing. As part of the Recapitalization on July 1, 1997, Doskocil
Funding, Inc., and NationsBridge, LLC purchased an aggregate of $32.5 million of
senior subordinated increasing rate notes from Doskocil. The Notes repaid bore
interest initially at prime plus 3.5%, increasing on each rate determination
date, and matured on July 1, 1998 (or January 1, 2005 if the Company elected not
to pay the debt in full on July 1, 1998 and no default had occurred prior to
such time). Fees associated with obtaining the Bridge Note and other interim
financing were $2.5 million which were amortized over the life of the Bridge
Note and are included in interest expense for the twelve months ended June 30,
1998. The note was repaid in full on September 19, 1997.
Extension of Additional Credit Facility. In September 2000 the lenders
amended the Additional Credit Facility to extend to September 28, 2001.
F-17
<PAGE> 61
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES
Effective January 1, 1988, the Corporation elected to be taxed as a
Subchapter S Corporation under the provisions of the Internal Revenue Code.
Under these provisions, the Corporation did not pay a corporate level tax on its
taxable income. Rather, the Corporation's taxable income or loss was passed
through to the shareholders and was included on their individual income tax
returns.
As a result of the Corporation's termination as an S Corporation on July 1,
1997, the Corporation became a C Corporation effective July 1, 1997. For tax
years subsequent to July 1, 1997, the Corporation's taxable income will be
subject to a corporate level income tax. Accordingly, the following deferred tax
assets and liabilities were established with a net charge to earnings on July 1,
1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current deferred tax assets:
Allowance for doubtful accounts........................... $ 92
Reserve for inventories................................... 298
Accrued expenses.......................................... 512
Other..................................................... 67
-------
Total current tax assets.......................... 969
Non-current deferred tax assets (liabilities):
Tax depreciation in excess of book........................ (4,062)
Reserve for equipment to be disposed...................... 1,423
-------
Net non-current deferred tax liability.................... (2,639)
-------
Net deferred tax liability at July 1, 1997........ $(1,670)
=======
</TABLE>
Provisions for income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 2000 YEAR ENDED JUNE 30, 1999 YEAR ENDED JUNE 30, 1998
-------------------------- -------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ----- ------- -------- ----- ------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal............... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $1,918 $1,918
State and local....... -- -- -- -- -- -- -- (49) (49)
---- ---- ---- ---- ---- ---- ---- ------ ------
Total....... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $1,869 $1,869
==== ==== ==== ==== ==== ==== ==== ====== ======
</TABLE>
A reconciliation of federal statutory tax rate to total provisions follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense (benefit) at federal statutory rate on pretax
loss................................................... $(7,299) $(6,610) $ (357)
Add (deduct):
S Corporation status change............................ -- -- 1,670
Spectrum goodwill amortization......................... (188) (194) (272)
Dogloo goodwill amortization........................... 626 717 496
Write off of Dogloo goodwill........................... 354 2,064 --
Change in valuation allowance for deferred tax
assets.............................................. 7,093 3,643 354
Other.................................................. (586) 380 (22)
------- ------- ------
Total tax expense.............................. $ -- $ -- $1,869
======= ======= ======
</TABLE>
F-18
<PAGE> 62
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts/credit memos.............. $ 1,235 $ 690
Reserve for inventories................................... 749 393
Accrued exit costs........................................ 4 121
Accrued expenses.......................................... 1,153 1,213
Other..................................................... 127 137
-------- -------
Total current deferred tax assets................. 3,268 2,554
Non-current deferred tax assets (liabilities):
Tax depreciation in excess of book........................ (5,574) (6,029)
Reserve for fixed assets held for sale.................... -- 564
Net operating loss carry forwards......................... 15,370 9,067
Other..................................................... 363 178
-------- -------
Net non-current deferred tax asset.......................... 10,159 3,780
Valuation allowance for deferred tax assets................. (13,427) (6,334)
-------- -------
Net deferred tax asset............................ $ -- $ --
======== =======
</TABLE>
At June 30, 2000, the Company had net operating loss carry forwards
totaling approximately $41.5 million which expire beginning in 2010 and ending
in 2020. The tax return of Doskocil for the year ended 1998 is under various
stages of audit and administrative review by the IRS. A valuation allowance has
been recorded for the entire amount of the net deferred tax asset as management
does not believe it is more likely than not the deferred tax asset will be
realized in future years.
At June 30, 1999, the Company had net operating loss carry forwards
totaling approximately $24.5 million, which expire beginning in 2010 and ending
in 2020. The tax returns of Dogloo and Doskocil for the years 1996 and 1997 are
under various stages of audit and administrative review by the IRS. The company
believes it has made adequate provision for income taxes and interest which may
become payable for years not yet settled.
NOTE 8. COMMON AND PREFERRED STOCK
Holders of shares of the Company's Common Stock are entitled to one vote
per share on all matters to be voted on by shareholders. The holder of shares of
the Company's Common Stock are entitled to receive such dividends, if any, as
may be declared from time to time by the board of directors in its discretion
from funds legally available therefore, and upon liquidation or dissolution are
entitled to receive all assets available for distribution to the shareholders.
Holders of the Company's Common Stock have no preemptive or other subscription
rights, except those provided for in the Second Securityholders Agreement and
there are no conversion rights or redemption or sinking fund provisions with
respect to such shares. All of the outstanding shares of the Company's Common
Stock are fully paid and nonassessable.
The Company is authorized to issue 25,000,000 shares of preferred stock, no
par value and 15,000,000 shares of common stock, no par value. For the twelve
months ended June 30, 1998, the Company paid cash dividends upon the redemption
of its Series A Preferred Stock in the aggregate amount of $0.5 million. For the
twelve months ended June 30, 2000 and June 30, 1999 there were no cash dividends
paid.
The Company's board of directors has the authority, without further action
by the stockholders, to issue up to a total of 25,000,000 shares of the
Company's Preferred Stock in one or more additional series and to fix
F-19
<PAGE> 63
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designations of such series. The Company's Series C Redeemable Preferred
Stock (the "Series C Preferred Stock") accumulates dividends at the rate of
$0.10 per share per annum, payable on March 1 of each year, subject to the
availability of funds and the terms of the Company's loan agreements. Dividends
accumulated, but not accrued or paid, at June 30, 2000 and 1999 are $2.7 million
and $1.8 million, respectively.
Dividends are cumulative and accrue on each outstanding share of the
Company's Series C Preferred Stock whether or not earned or declared. The
Company's Series C Preferred Stock has a redemption price of $1.00 per share,
plus all accrued but unpaid dividends, and must be redeemed if the Company
effects a business combination with another entity (by way of merger,
consolidation or reorganization) or an initial underwritten public offering of
common stock. Such redemption provisions have been removed by an amendment to
the designation of Series C Preferred Stock. Shares of the Company's Series C
Preferred Stock may also be redeemed by voluntary repurchase. Holders of the
Company's Series C Preferred Stock have a liquidation preference equal to the
redemption price. The Company's Series C Preferred Stock has no voting rights,
except for such rights as are provided under applicable law and class voting
rights with respect to transactions adversely affecting the rights, preferences,
privileges or restrictions of the Company's Series C Preferred Stock or the
issuance of any equity security having a preference over, or being on parity
with, the Company's Series C Preferred Stock.
In order to induce the Westar Funds to continue the Guaranty and the Pledge
Agreement (see Note 6) 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, 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. 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 Company's Series D Redeemable Preferred Stock (the "Series D Preferred
Stock") has a stated value of $100. 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 12.0% 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 were entitled to receive $100 per share plus any accrued and
unpaid dividends, before the distribution of
F-20
<PAGE> 64
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Dividends
accumulated but not accrued or paid at June 30, 2000 is $0.4 million.
NOTE 9. STOCK BASED COMPENSATION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the fair value of the underlying stock on the date
of grant, no compensation expense is recognized. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
FASB Statement 123, the Company's net loss and net loss per share for the years
ended June 30, 2000 and 1999 would have been as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Pro forma net loss attributable to common shareholders...... $(22,867) $(20,175)
Pro forma loss per common share basic and diluted........... $ (7.26) $ (6.50)
</TABLE>
The Company's 1997 Stock Option Plan has authorized the grant of stock
options to management personnel for up to 625,000 shares of the Company's common
stock. On May 2, 2000, the Company's 1997 Stock Option Plan was amended to
increase the number of shares available for the grant of options to 1,500,000
shares. Under the Incentive Stock Option Award (the "Base Award"), the Company
grants selected executives and other key employees stock option awards whose
vesting ranges from primarily 20.0% to 33 1/3%, beginning one year after grant
date. Under the Incentive Performance Stock Option Award (the "Performance
Award"), the Company granted selected executives and other key employees stock
option awards whose vesting may be accelerated based upon certain Company
performance measures. Options under the Performance Award vest at the end of six
years if the performance measures have not been met. The exercise price of each
option, which has a 10-year life, is equal to the fair value of the Company's
stock on the date of grant. Performance options of 84,500, 138,500 and 115,750
were included in outstanding options at June 30, 2000, 1999 and 1998,
respectively.
F-21
<PAGE> 65
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
---------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES OF AVERAGE SHARES OF AVERAGE SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........... 423,300 $15.03 346,950 $15.03 -- --
Granted.................................... 762,750 .01 122,250 15.03 381,846 $15.03
Forfeited.................................. (186,500) 15.03 (45,900) 15.03 (34,896) 15.03
-------- ------- -------
Outstanding at end of year................. 999,550 $ 3.57 423,300 $15.03 346,950 $15.03
Exercisable at end of year................. 142,917 $ 8.72 59,460 $15.03 21,952 $15.03
Weighted average fair value of options
granted during the year.................. $ 0.00 $ 3.90 $ 3.84
</TABLE>
Pro forma information regarding net loss and loss per common share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes Minimum Value option model with the following
weighted-average assumptions for 2000 and 1999: risk-free interest rates of
6.0%; dividend yield of zero; volatility factors of the expected market price of
the Company's common stock of zero, as the Company's stock is not publicly
traded; and an expected life of 5 years.
The Minimum Value option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The following table summarizes additional information about stock options
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
RANGE OF WEIGHTED
EXERCISE AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE NUMBER OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ------------------ -------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
1$5.03.. 236,800 7.7 $15.03 82,917 $15.03
$ .01 762,750 9.8 .01 60,000 .01
------- -------
999,550 9.3 $ 3.57 142,917 $ 8.72
======= =======
</TABLE>
From time to time, the Company issues restricted stock grants. Restricted
stock is issued at the market price per share at the date of the grant and vest
over a service period of five years. The vesting is accelerated if certain
Company performance measures are met. The following table presents information
on restricted stock grants:
<TABLE>
<CAPTION>
JUNE 30
--------------
2000 1999
------- ----
<S> <C> <C>
Number of shares granted.................................... 25,000 --
Weighted average fair value per share....................... $ .00 --
</TABLE>
F-22
<PAGE> 66
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. Cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities and variable rate debt are reflected in
the financial statements at fair value based on current market rates. The fair
market value of the Subordinated Notes is based on market trades of the Notes,
at or near year end, which are thinly traded.
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
--------------------- ---------------------
CARRYING CARRYING
FAIR VALUE AMOUNT FAIR VALUE AMOUNT
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Subordinated Notes........................... $29,750 $85,000 $43,350 $85,000
======= ======= ======= =======
</TABLE>
NOTE 11. SEGMENT INFORMATION
Effective for the year ended June 30, 1999, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." In
accordance with SFAS No. 131, the Company operates within a single reportable
segment, the manufacture and sale of molded consumer plastic products. The
information provided to the Company's chief decision maker and the Board of
Directors includes the Company as a whole and, as such, the Company is
considered to operate in one segment. The nature of products, production
processes, types of customers and methods of distribution are consistent across
the Company.
The information below summarizes export sales from the United States to the
following geographic areas:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Far East................................................ $ 2,059 $ 2,751 $ 2,861
Europe.................................................. 6,599 5,844 5,775
Other................................................... 3,360 2,118 1,888
------- ------- -------
Total......................................... $12,018 $10,713 $10,524
======= ======= =======
</TABLE>
The information below summarizes sales by product line:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pet.................................................. $136,476 $140,022 $118,027
Sport................................................ 13,857 15,118 16,148
Furniture, custom molding, tackle and hardware....... -- 3,873 6,669
Outside resin sales.................................. 8,085 10,919 6,312
-------- -------- --------
Total...................................... $158,418 $169,932 $147,156
======== ======== ========
</TABLE>
F-23
<PAGE> 67
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. LEASES
Future minimum commitments for capital leases and for operating leases
having initial non-cancelable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
2001........................................................ $ 664 $ 4,024
2002........................................................ 414 3,888
2003........................................................ 254 3,720
2004........................................................ 192 3,549
2005........................................................ -- 3,396
Thereafter.................................................. -- 6,782
Sublease.................................................... -- (166)
------ -------
Total minimum lease payments...................... 1,524 $25,193
=======
Less imputed interest costs................................. 201
Less current portion........................................ 598
------
Present value of net minimum lease payments
included in long-term debt...................... $ 725
======
</TABLE>
Operating lease rental expense from continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Rental expense............................................ $5,617 $5,417 $4,157
====== ====== ======
</TABLE>
The Company conducts the major part of its operations from leased
facilities which include its manufacturing plant, warehouses, and offices. The
majority of these facilities are leased under long-term non-cancelable operating
leases with the Chairman of the Board of Directors who was formerly the
Company's majority stockholder. Leases with terms in excess of five years
include a clause which increases the monthly rent payments by 10.0% beginning in
year six. The leases have various renewal options which are available at the end
of the lease term. Aggregate monthly payments are $0.3 million. Additionally,
the Company rents a warehouse and a manufacturing facility from Mr. Doskocil on
a month-to-month basis for approximately $0.1 million per month. Rents paid for
all facilities to Mr. Doskocil were $4.5 million, $4.4 million and $3.4 million
for the years ended June 30, 2000, 1999 and 1998, respectively. The Company also
leases a wide variety of equipment including office, transportation and
production equipment.
NOTE 13. SAVINGS PLAN
As of January 1, 1998, the Company sponsors a 401(k) savings plan (the
"Plan") for its employees. The Plan is a defined contribution plan covering all
eligible employees. All employees who have completed three months of service may
elect to contribute to the Plan up to 15.0% of their compensation to the annual
maximum limit established by the Internal Revenue Service. The Company may make
matching contributions to the Plan at its discretion which are allocated to
participants in proportion to salary deferral amounts for the applicable plan
year. The Company may contribute an amount equal to 100.0% of the first 3.0% of
salary deferral and 50.0% of the next 4.0%-6.0%, up to a maximum of two thousand
five hundred dollars and subject to the limitations imposed by the Internal
Revenue Code. The Company's expenses related to the
F-24
<PAGE> 68
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plan, including contributions, were $0.4, $0.5 million and $0.3 million for the
years ended June 30, 2000, 1999 and 1998, respectively.
Prior to January 1, 1998, the Company had established an employee defined
contribution profit sharing plan. Contributions were at the discretion of the
Board of Directors. Eligible employees were those who had been employed for one
year or more and were currently employed on the admittance dates of January 1
and July 1 each year. Effective January 1, 1998 the profit sharing plan was
merged into the 401(k) Plan. The Company may continue to contribute to the
profit sharing plan. For the years ended June 30, 2000 and 1999, respectively,
no contributions were made by the Company.
NOTE 14. NET LOSS PER SHARE
Basic net loss per share is based on weighted average number of common
shares outstanding. Diluted net loss per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of stock
options, provided in each case, the effect is not anti-dilutive. At June 30,
2000, 1999 and 1998 respectively, options of 999,550, 423,300 and 346,950 were
not included in their respective years per share calculations because their
effect was anti-dilutive.
Net loss per share for the years ended June 30, 2000, 1999 and 1998 are
calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
2000 1999 1998
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss attributable to common shareholders.......... $(22,944) $(19,801) $(4,104)
Average shares outstanding during the period:
Basic and diluted................................... 3,150 3,105 2,740
Net loss per common share:
Basic and diluted................................... $ (7.28) $ (6.38) $ (1.50)
</TABLE>
NOTE 15. SUPPLEMENTAL CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid................... $19,060 $16,427 $14,251
Income taxes paid......................................... -- -- $ 250
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Dogloo Common Stock into the Company's
Common Stock........................................... -- -- $21,210
Conversion of Dogloo Series B Preferred Stock for
Company's Series C Preferred Stock..................... -- -- $ 9,161
Capital leases for equipment purchases.................... $ 1,037 $ 801 --
Warrants issued for debt guarantee........................ $ 3,358 -- --
</TABLE>
Bad debt expense for the years ended June 30, 2000, 1999 and 1998 was $0.0
million, $1.0 million and $0.0 million, respectively.
NOTE 16. CONTINGENCIES AND COMMITMENTS
Various claims and lawsuits are pending against the Company. In the opinion
of the Company's management, the potential loss on all claims will not be
significant to the Company's financial position or results of operations.
F-25
<PAGE> 69
DOSKOCIL MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMITMENTS
The Company is self-insured for medical and dental benefits for its
employees and their covered dependents. Medical claims exceeding $0.1 million
per covered individual are covered through a private insurance carrier.
At June 30, 2000, contract commitments for capital expenditures for
property, plant and equipment totaled $1.2 million, all of which are due and
payable during fiscal year 2001.
The Company has commitments to certain members of management that require,
among other things, that if the employee is terminated without cause or resigns
for good reason (as defined by the commitments) the Company will continue to pay
certain salaries and benefits for a fixed period of time.
GUARANTEES
The Company has guaranteed loans made by a bank to employees to fund the
employee's purchase of common stock. These loans were made at market terms with
full recourse to the employees/borrowers. The outstanding balance of such loans
at June 30, 2000 is $0.1 million.
NOTE 17. RELATED PARTY TRANSACTIONS
During 1999 and 1998, the Company expensed $0.6 million each year in
management fees charged by Westar. In 2000, Westar fees expensed were $0.1
million. Fees and expenses of $0.1 million, $0.2 million and $0.1 million were
paid to directors for board meetings in 2000, 1999 and 1998, respectively. At
June 30, 2000, the Company has a receivable of $0.8 million from the controlling
stockholder. Also at June 30, 2000, the Company has payable to other
stockholders $1.1 million. In addition, the Company pays rent to a stockholder,
as disclosed in Footnote 13.
NOTE 18. RECAPITALIZATION
Effective July 1, 1997, the Corporation was recapitalized through the
following transactions: (1) 100.0% of the Spectrum partnership interest was sold
to a group of investors for $11.0 million; (2) after retirement of approximately
$1.0 million of Spectrum debt by the investors, the partnership interests were
exchanged for 798,612 shares of the Corporation's common stock; (3) the
Corporation's Articles of Incorporation were amended to establish the
Corporation as a C Corporation and authorize 15,000,000 shares of preferred
stock and 15,000,000 shares of common stock, each with no par value per share;
(4) certain investors purchased 199,654 shares of common stock for $3.0 million
and 1,530,674 shares of Series A Preferred Stock for $23.0 million; (5) all
outstanding balances under then existing lines of credit and long-term debt,
along with related accrued interest and pre-payment penalties, were paid in
full; and (6) the Corporation redeemed 5,666,145 shares of common stock from the
previous majority stockholder for approximately $87.4 million. The acquisition
of Spectrum has been accounted for as a combination of entities under common
control, and, accordingly, the assets acquired were recorded at their historical
cost.
F-26
<PAGE> 70
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 28, 2000.
DOSKOCIL MANUFACTURING COMPANY, INC.
By: /s/ LARRY E. REMBOLD
---------------------------------------
Larry E. Rembold
President and Chief Executive Officer
By: /s/ JOHN J. CASEY
---------------------------------------
John J. Casey
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE>
<S> <C> <C>
/s/ GEORGE L. ARGYROS Director September 28, 2000
-----------------------------------------------------
George L. Argyros
/s/ JOHN W. CLARK Director September 28, 2000
-----------------------------------------------------
John W. Clark
/s/ CHARLES D. MARTIN Director September 28, 2000
-----------------------------------------------------
Charles D. Martin
/s/ BENJAMIN L. DOSKOCIL, SR. Director September 28, 2000
-----------------------------------------------------
Benjamin L. Doskocil, Sr.
/s/ MICHAEL P. HOOPIS Director September 28, 2000
-----------------------------------------------------
Michael P. Hoopis
/s/ THOMAS J. ALBANI Director September 28, 2000
-----------------------------------------------------
Thomas J. Albani
/s/ ELIZABETH A. WOLSZON Director September 28, 2000
-----------------------------------------------------
Elizabeth A. Wolszon
</TABLE>
<PAGE> 71
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
3.1+ Amended and Restated Articles of Incorporation of Doskocil (a)
Manufacturing Company, Inc.
3.2+ Bylaws of Doskocil Manufacturing Company, Inc. (a)
4.1+ Indenture, dated as of September 19, 1997, between (a)
Doskocil Manufacturing Company, Inc., and First Trust
National Association.
10.1+ Merger Agreement, dated September 19, 1997, between (a)
Doskocil Manufacturing Company, Inc., and Dogloo, Inc.
10.2+ Stock Redemption and Purchase Agreement, dated August 28, (a)
1997, among Aurelio F. Barreto, III, Doskocil
Manufacturing Company, Inc., and Westar Capital, L.P.
10.3+ Stock Redemption Agreement, dated as of September 15, (a)
1997, among Darrell R. Paxman, Doskocil Manufacturing
Company, Inc., and the other parties thereto.
10.4+ Purchase Agreement, dated September 11, 1997, among (a)
Doskocil Manufacturing Company, Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and NationsBanc Capital
Markets, Inc.
10.5*+ Registration Rights Agreement, dated as of September 19, (a)
1997, among Doskocil Manufacturing Company, Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and
NationsBanc Capital Markets, Inc.
10.6+ Confidentiality, Non-Competition Agreement and (a)
Non-Solicitation Agreement, dated as of July 1, 1997,
among Benjamin L. Doskocil, Sr., Mary Frances Doskocil and
Doskocil Manufacturing Company, Inc.
10.7*+ Letter/Consulting Agreement, dated as of July 1, 1997, (a)
between Doskocil Manufacturing Company, Inc., and Benjamin
L. Doskocil, Sr.
10.8+ Credit Agreement, dated September 19, 1997, among Doskocil (a)
Manufacturing Company, Inc. and NationsBank of Texas,
N.A., as administrative agent for certain lenders named
therein.
10.8.1+ First Amendment to Credit Agreement dated February 10, (b)
1999.
10.8.2+ Second Amendment to Credit Agreement dated May 14, 1999. (c)
10.8.3+ Third Amendment to Credit Agreement dated August 12, 1999. (e)
10.8.4+ Fourth Amendment to Credit Agreement dated October 12, (e)
1999.
10.8.5+ Fifth Amendment to the Credit Agreement dated June 30, (f)
2000
10.9*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4209 Barnett
Boulevard, Arlington, Texas 76017 and commonly referred to
as Building A.
10.10*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4300 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building B.
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.11*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for approximately
24,000 square feet of Building "C" located at 4408 Barnett
Boulevard, Arlington, Texas 76017 and commonly referred to
as Building C.
10.12*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4401 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building D.
10.13*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil,
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4208 Larry Lane,
Arlington, Texas 76017 and commonly referred to as
Building E.
10.14*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4207 Larry Lane,
Arlington, Texas 76017 and commonly referred to as
Building F.
10.15*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the property located at 4209 Larry Lane,
Arlington, Texas 76017 and commonly referred to as
Building F Parking Lot.
10.16*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Marybe Investments, Ltd., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 800 Stephens, Arlington, Texas 76017 and
commonly referred to as Building G.
10.17*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 4205 Barnett Boulevard, Arlington, Texas 76017
and commonly referred to as Building J.
10.18*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., as landlord, and Doskocil
Manufacturing Company, Inc., as tenant, for the property
located at 720 and 722 West Interstate 20, Arlington,
Texas and commonly referred to as the Parking Facilities.
10.19*+ Industrial Real Estate Lease, dated July 1, 1997, between (a)
Benjamin L. Doskocil, Sr., and Mary Frances Doskocil, as
landlord, and Doskocil Manufacturing Company, Inc., as
tenant, for the building(s) located at 600 Justice,
Mansfield, Texas and commonly referred to as Spectrum.
10.20*+ Form of Indemnification Agreement between Doskocil (a)
Manufacturing Company, Inc., and certain of its directors
and/or officers.
10.21*+ Doskocil Manufacturing Company, Inc., Stock Option Plan. (a)
10.21.1* First Amendment to the Doskocil Manufacturing Company,
Inc., Stock Option Plan
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
----------- ----------- -------------
<C> <S> <C>
10.22*+ Employment Agreement, dated as of November 1, 1996, (a)
between Michael J. Farmer and Dogloo, Inc.
10.23*+ First Amendment to Stockholders' Agreement, dated as of (a)
September 19, 1997, among Benjamin L. Doskocil, Sr., Mary
Frances Doskocil, Doskocil Manufacturing Company, Inc.,
Westar Capital, L.P. and Westar Capital II, LLC.
10.24*+ Amended and Restated Securityholders Agreement, dated (a)
September 19, 1997, among Doskocil Manufacturing Company,
Inc., Dogloo, Inc., Westar Capital, L.P., Westar Capital
II, LLC, HBI Financial Inc., Aurelio F. Barreto III and
other parties thereto.
10.24.1 First Amendment to Amended and Restated Securityholders
agreement dated as of September 28, 1999
10.25*+ Credit Agreement, dated as of August 12, 1999, among the (d)
Company, certain lenders named therein and Bank of
America, N.A., as administrative agent.
10.25.1+ First Amendment to Credit Agreement, dated as of October (e)
12, 1999, among the Company, certain lenders named therein
and Bank of America, N.A. as administrative agent.
10.26+ Pledge Agreement as of August 12, 1999 by Westar Capital (e)
II, LLC in favor of Bank of America, N.A.
10.26.1 First Amendment to Pledge Agreement dated October 12,
1999.
10.27+ Security Agreement as of August 12, 1999 between the (e)
Company and Bank of America, N.A.
10.28+ Support Agreement as of June 21, 2000 by Westar Funds in (f)
favor of Bank of America, N.A.
10.29 Preferred Stock and Warrant Purchase Agreement dated as of
October 12, 1999 among the Company and certain purchases
named therein.
10.30 Series D Preferred Stock and Warrant Purchase Agreement
dated October 12, 1999 between the Company and certain
investors named therein.
10.31 Preferred Warrant Agreement dated as of October 12, 1999
among the Company and certain investors named therein.
10.32 Guaranty Warrant Agreement dated as of October 12, 1999
among the Company and certain investors named therein.
10.33 Series D Preferred Stock Purchase Agreement dated as of
May 30, 2000 among the Company and certain investors named
therein.
27.1 Financial Data Schedule.
</TABLE>
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Notes to Exhibits:
* Indicates a contract or benefit plan under which one or more executive
officers or directors may receive benefits.
<PAGE> 74
+ Indicates documents previously filed with the Securities and Exchange
Commission as set forth in the following table:
(a) Incorporated herein by reference to the Company's Registration Statement
on Form S-4 (Registration No. 333-37081) as filed on October 2, 1997.
(b) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Inc., Report on Form 10-Q for the quarter ended December 31, 1998.
(c) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc. Report on Form 10-Q for the quarter ended March 31, 1999.
(d) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc., Report on Form 8-K dated September 24, 1999.
(e) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc., Report on Form 10-K dated October 13, 1999.
(f) Incorporated by reference to Exhibit 10.1 to the Doskocil Manufacturing
Company, Inc., Report on Form 8-K dated July 13, 2000.
