##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Form 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 3, 2004 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from        to Commission file number 0-27818 Doane Pet Care Company  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    43-1350515
(IRS Employer
Identification No.)
 210 Westwood Place South, Suite 400
Brentwood, TN 37027
(Address of principal executive office, including zip code) (615) 373-7774
(Registrants telephone number, including area code) 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x As of August 12, 2004, the registrant had outstanding 1,000 shares of
common stock, all of which were held by its parent, Doane Pet Care Enterprises,
Inc.




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TABLE OF CONTENTS PagePART I. Financial InformationItem 1.
    
    Financial StatementsUnaudited Condensed Consolidated Balance Sheets as of the end of the
second quarter of fiscal 2004 and the end of fiscal 2003
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the
second quarter and the first six months of fiscal 2004 and 2003
    
    
    2Unaudited Condensed Consolidated Statement of Stockholders Equity and
Comprehensive Loss as of the end of and for the first six months of fiscal 2004
    
    
    3Unaudited Condensed Consolidated Statements of Cash Flows for the
first six months of fiscal 2004 and 2003
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Report of Independent Registered Public Accounting Firm
    
    
    17Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    33PART II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    34Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    34Signatures
    
    
    36Change in Control Severance Agmt - Douglas J. CahillChange in Control Severance Agmt - David H. HortonChange in Control Severance Agmt - Joseph J. MeyersChange in Control Severance Agmt - Philip K. WoodliefLetter from KPMG LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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PART I. Financial Information 
 ITEM 1. Financial Statements DOANE PET CARE COMPANY AND SUBSIDIARIES 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and par value amounts)
 End ofSecond quarter
    
    Fiscal2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,062
    
    
    $
    29,293Accounts receivable, net
    
    
    93,340
    
    
    
    91,569Inventories, net
    
    
    71,309
    
    
    
    68,619Deferred tax assets
    
    
    2,362
    
    
    
    1,898Prepaid expenses and other current assets
    
    
    11,634
    
    
    
    14,390Total current assets
    
    
    188,707
    
    
    
    205,769Property, plant and equipment, net
    
    
    250,889
    
    
    
    266,457Goodwill and trademarks
    
    
    377,500
    
    
    
    380,418Other assets
    
    
    34,053
    
    
    
    33,270Total assets
    
    $
    851,149
    
    
    $
    885,914LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    10,763
    
    
    $
    13,185Accounts payable
    
    
    88,079
    
    
    
    100,512Accrued liabilities
    
    
    54,968
    
    
    
    51,719Total current liabilities
    
    
    153,810
    
    
    
    165,416Long-term debt:Long-term debt, excluding current maturities
    
    
    558,078
    
    
    
    560,861Senior Preferred Stock (Redeemable)
    
    
    98,487
    
    
    
    Total long-term debt
    
    
    656,565
    
    
    
    560,861Deferred tax liabilities
    
    
    30,994
    
    
    
    28,524Other long-term liabilities
    
    
    9,033
    
    
    
    8,863Total liabilities
    
    
    850,402
    
    
    
    763,664Senior Preferred Stock (Redeemable)
    
    
    
    
    
    
    91,052Commitments and contingenciesStockholders equity:Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding
    
    
    
    
    
    
    Additional paid-in-capital
    
    
    115,674
    
    
    
    115,674Accumulated other comprehensive income
    
    
    45,278
    
    
    
    50,185Accumulated deficit
    
    
    (160,205
    )
    
    
    (134,661
    )Total stockholders equity
    
    
    747
    
    
    
    31,198Total liabilities and stockholders equity
    
    $
    851,149
    
    
    $
    885,914
 See accompanying notes to the unaudited condensed consolidated financial statements and accompanying report of
independent registered public accounting firm. 1




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DOANE PET CARE COMPANY AND SUBSIDIARIES 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 Second quarter
    
    First six months fiscal2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    258,338
    
    
    $
    234,476
    
    
    $
    529,218
    
    
    $
    494,425Cost of goods sold
    
    
    225,201
    
    
    
    195,967
    
    
    
    455,263
    
    
    
    410,556Gross profit
    
    
    33,137
    
    
    
    38,509
    
    
    
    73,955
    
    
    
    83,869Operating expenses:Promotion and distribution
    
    
    13,767
    
    
    
    12,797
    
    
    
    27,994
    
    
    
    27,207Selling, general and administrative
    
    
    12,803
    
    
    
    12,373
    
    
    
    25,986
    
    
    
    24,481Amortization
    
    
    1,134
    
    
    
    1,163
    
    
    
    2,363
    
    
    
    2,317Other operating expenses
    
    
    3,938
    
    
    
    
    
    
    
    5,161
    
    
    
    Income from operations
    
    
    1,495
    
    
    
    12,176
    
    
    
    12,451
    
    
    
    29,864Interest expense, net
    
    
    18,186
    
    
    
    14,857
    
    
    
    36,163
    
    
    
    28,872Debt extinguishments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,113Other income, net
    
    
    (331
    )
    
    
    (414
    )
    
    
    (738
    )
    
    
    (585
    )Loss before income taxes
    
    
    (16,360
    )
    
    
    (2,267
    )
    
    
    (22,974
    )
    
    
    (9,536
    )Income tax expense
    
    
    1,377
    
    
    
    1,137
    
    
    
    2,570
    
    
    
    1,742Net loss
    
    
    (17,737
    )
    
    
    (3,404
    )
    
    
    (25,544
    )
    
    
    (11,278
    )Preferred stock dividends and accretion
    
    
    
    
    
    
    (3,319
    )
    
    
    
    
    
    
    (6,534
    )Net loss available to common shares
    
    $
    (17,737
    )
    
    $
    (6,723
    )
    
    $
    (25,544
    )
    
    $
    (17,812
    )
 See accompanying notes to the unaudited condensed consolidated financial statements and accompanying report of
independent registered public accounting firm. 2




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DOANE PET CARE COMPANY AND SUBSIDIARIES 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
 STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
 (In thousands, except share amounts)
 AccumulatedCommon stock
    
    Additional
    
    otherpaid-in
    
    comprehensive
    
    AccumulatedShares
    
    Amount
    
    capital
    
    income
    
    deficit
    
    TotalBalances at end of fiscal 2003
    
    
    1,000
    
    
    $
    
    
    
    $
    115,674
    
    
    $
    50,185
    
    
    $
    (134,661
    )
    
    $
    31,198Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,544
    )
    
    
    (25,544
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,907
    )
    
    
    
    
    
    
    (4,907
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,451
    )Balances at end of second quarter 2004
    
    
    1,000
    
    
    $
    
    
    
    $
    115,674
    
    
    $
    45,278
    
    
    $
    (160,205
    )
    
    $
    747
 See accompanying notes to the unaudited condensed consolidated financial statements and accompanying report of independent registered public accounting firm. 3




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DOANE PET CARE COMPANY AND SUBSIDIARIES 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 First six months fiscal2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (25,544
    )
    
    $
    (11,278
    )Items not requiring (providing) cash:Depreciation
    
    
    17,303
    
    
    
    15,120Amortization
    
    
    2,860
    
    
    
    2,814Deferred income tax expense
    
    
    2,065
    
    
    
    757Non-cash interest expense
    
    
    9,713
    
    
    
    2,961Equity in joint ventures
    
    
    (457
    )
    
    
    (298
    )Debt extinguishments
    
    
    
    
    
    
    11,113Asset impairments
    
    
    420
    
    
    
    Changes in current assets and liabilities
    
    
    (12,674
    )
    
    
    (6,527
    )Net cash provided by (used in) operating activities
    
    
    (6,314
    )
    
    
    14,662Cash flows from investing activities:Capital expenditures
    
    
    (5,126
    )
    
    
    (9,616
    )Proceeds from sale of assets
    
    
    400
    
    
    
    193Other, net
    
    
    (804
    )
    
    
    (1,915
    )Net cash used in investing activities
    
    
    (5,530
    )
    
    
    (11,338
    )Cash flows from financing activities:Net repayments under revolving credit agreements
    
    
    
    
    
    
    (15,000
    )Proceeds from issuance of long-term debt
    
    
    13,078
    
    
    
    210,444Principal payments on long-term debt
    
    
    (17,276
    )
    
    
    (191,215
    )Payments for debt issuance costs
    
    
    (3,002
    )
    
    
    (7,771
    )Net cash used in financing activities
    
    
    (7,200
    )
    
    
    (3,542
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (187
    )
    
    
    535Increase (decrease) in cash and cash equivalents
    
    
    (19,231
    )
    
    
    317Cash and cash equivalents, beginning of period
    
    
    29,293
    
    
    
    7,596Cash and cash equivalents, end of period
    
    $
    10,062
    
    
    $
    7,913
 See accompanying notes to the unaudited condensed consolidated financial statements and accompanying report of independent registered public accounting firm. 4




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DOANE PET CARE COMPANY AND SUBSIDIARIES 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements of
Doane Pet Care Company and its consolidated subsidiaries, or the Company, do
not include all the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements. The fiscal 2003
year-end condensed consolidated balance sheet data was derived from audited
financial statements. In the opinion of management, all material adjustments,
consisting of normal and recurring adjustments, have been made which were
considered necessary to present fairly the financial position and the results
of operations and cash flows at the dates and for the periods presented.
Certain reclassifications have been made to previously reported consolidated
financial statements to conform with the fiscal 2004 presentation. The unaudited condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
contained in the Companys 2003 annual report on Form 10-K for the fiscal year
ended January 3, 2004, or the 2003 10-K, including related exhibits. The
accounting policies used in preparing these financial statements are the same
as those summarized in the 2003 10-K with the exception of the Companys
accounting for its Senior Preferred Stock (Redeemable) as discussed in Note 3,
Change in Accounting Principle. The Companys fiscal year ends on the Saturday nearest to the end of
December. Each quarter also ends on a Saturday with the second quarters of
fiscal 2004 and 2003 ending on July 3, 2004 and June 28, 2003, respectively. (2) Recent Accounting Pronouncements In December 2003, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No. 46 Revised December 2003, Consolidation of
Variable Interest Entities, or FIN 46R. FIN 46R addresses how a business
enterprise should evaluate whether it has a controlling financial interest in
an entity through means other than voting rights and, if so, whether it should
consolidate the entity. The Company adopted FIN 46R as of the beginning of
fiscal 2004 and is required to apply FIN 46R to variable interests in variable
interest entities created after December 31, 2003, if any. The adoption of FIN
46R did not have an impact on the Companys condensed consolidated financial
statements. In
May 2004, the FASB issued Staff Position 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug Improvement
and Modernization Act of 2003, or FSP 106-2. FSP 106-2 superceded the
FASB's previously released guidance contained in FSP 106-1. FSP 106-2 allows companies to
recognize, or defer recognizing, the effects of the prescription-drug
provisions of the new Medicare Act, effectively suspending the application of
guidance currently required by the FASB. The Company has elected to defer
accounting for the economic effects of the Medicare Act. As a result, amounts
and disclosures relating to the post-retirement benefit obligation or net
periodic post-retirement benefit costs in the condensed consolidated financial
statements and in Note 9, Benefit Plans, do not reflect these effects. Future
authoritative guidance may require the Company to change previously reported
amounts and disclosures. (3) Change in Accounting Principle In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity, or SFAS 150. SFAS 150 required companies to
classify mandatorily redeemable financial instruments as liabilities and was
effective for the first fiscal period beginning after December 15, 2003 for
nonpublic entities. The Company adopted SFAS 150 as of the beginning of fiscal
2004 and reclassified its Senior Preferred Stock (Redeemable) as long-term debt
in its condensed consolidated balance sheet and the related accretion and
dividends as interest expense in its condensed consolidated statement of
operations for the second quarter and the first six months of fiscal 2004. 5




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (4) Inventories A summary of inventories follows (in thousands): End ofSecond quarter
    
    Fiscal2004
    
    2003Raw materials
    
    $
    15,671
    
    
    $
    14,726Packaging materials
    
    
    23,541
    
    
    
    23,551Finished goods
    
    
    37,069
    
    
    
    34,70376,281
    
    
    
    72,980Allowances
    
    
    (4,972
    )
    
    
    (4,361
    )Total
    
    $
    71,309
    
    
    $
    68,619
 (5) Long-Term Debt A summary of long-term debt follows (in thousands): End ofSecond quarter
    
    Fiscal2004
    
    2003Revolving Credit Facility
    
    $
    16,000
    
    
    $
    16,000Term Loan Facilities
    
    
    165,078
    
    
    
    169,322Senior notes
    
    
    210,961
    
    
    
    210,779Senior subordinated notes
    
    
    148,968
    
    
    
    148,789Debt of foreign subsidiaries
    
    
    13,346
    
    
    
    14,674Industrial development revenue bonds
    
    
    14,488
    
    
    
    14,482568,841
    
    
    
    574,046Less: Current maturities
    
    
    (10,763
    )
    
    
    (13,185
    )Subtotal
    
    
    558,078
    
    
    
    560,861Senior Preferred Stock (Redeemable)
    
    
    98,487
    
    
    
    Total
    
    $
    656,565
    
    
    $
    560,861
 As of the end of the second quarter of fiscal 2004, the Companys senior
credit facility provided for total commitments of a Euro 30.1 million Euro Term
Loan Facility ($36.6 million assuming a Euro to USD exchange rate of
approximately 1.22) and $178.5 million, consisting of a $128.5 million USD Term
Loan Facility and a $50 million Revolving Credit Facility, with a $20 million
sub-limit for the issuance of letters of credit. As of the end of the second quarter of fiscal 2004, the Company had $16.0
million of borrowings outstanding under its Revolving Credit Facility and $6.7
million of letters of credit outstanding, resulting in $27.3 million of
availability under its Revolving Credit Facility. Availability of funds under
the senior credit facility is subject to certain customary terms and
conditions. All loans under the senior credit facility bear interest at the higher of
the Euro dollar rate plus 5.00%, or the prime rate of the administrative agent plus 4.00%. As of the end of the second quarter of fiscal 2004, the Euro Term
Loan Facility bore interest at 7.09% and the USD Term Loan and Revolving Credit
Facilities bore interest at 6.22%. Effective March 9, 2004, the Company amended its senior credit facility to
(1) extend the maturity of the existing Revolving Credit Facility from March
31, 2005 to December 29, 2005; (2) permanently reduce the 6




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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) borrowing capacity
under the Revolving Credit Facility from $60.0 million to $50.0 million; (3)
waive non-compliance with certain financial covenants as of the end of fiscal
2003; (4) simplify the financial covenants to include only minimum consolidated
EBITDA, maximum senior secured leverage and capital expenditure limits; and (5)
increase the interest rates on all facilities by 0.25% as of March 9, 2004, an
additional 0.25% on all facilities as of September 30, 2004 and a final 1.00%
on all facilities as of March 31, 2005. The Senior Preferred Stock (Redeemable) has an initial liquidation
preference of $25 per share (aggregate initial liquidation preference is $30.0
million) with 3.0 million shares authorized and 1.2 million shares issued and
outstanding. Dividends on the Senior Preferred Stock (Redeemable) accrue
quarterly at the rate of 14.25% per annum on the most recent quarterly
liquidation value of each share and accrete to the liquidation value of the
Senior Preferred Stock (Redeemable). See Note 3, Change in Accounting
Principle, for a discussion of the reclassification of the Companys Senior
Preferred Stock (Redeemable) as long-term debt as of the beginning of fiscal
2004 and Note 7, Senior Preferred Stock (Redeemable), in the 2003 10-K for
additional disclosures. As of the end of the second quarter of fiscal 2004, the principal amounts
due under the Companys long-term debt and the respective final maturity dates
were as follows (in thousands): Maturities by fiscal year2009 andFinal maturity
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    thereafter
    
    TotalRevolving Credit Facility
    
    December 29, 2005
    
    $
    
    
    
    $
    16,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    16,000Term Loan Facilities:Euro Term Loan Facility
    
    December 30, 2005
    
    
    
    
    
    
    36,589
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,589USD Term Loan Facility:Tranche A
    
    March 31, 2005
    
    
    5,732
    
    
    
    4,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,319Tranche B
    
    December 31, 2005
    
    
    
    
    
    
    79,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,102Tranche C
    
    December 31, 2006
    
    
    
    
    
    
    
    
    
    
    39,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,068Subtotal
    
    
    
    
    5,732
    
    
    
    120,278
    
    
    
    39,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165,078Senior notes
    
    March 1, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210,961
    
    
    
    210,961Senior subordinated notes
    
    May 15, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148,968
    
    
    
    
    
    
    
    
    
    
    
    148,968Other
    
    Various
    
    
    441
    
    
    
    1,501
    
    
    
    1,581
    
    
    
    2,016
    
    
    
    2,152
    
    
    
    20,143
    
    
    
    27,834Senior Preferred Stock
(Redeemable)
    
    September 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,487
    
    
    
    
    
    
    
    
    
    
    
    98,487Total
    
    
    
    $
    6,173
    
    
    $
    137,779
    
    
    $
    40,649
    
    
    $
    249,471
    
    
    $
    2,152
    
    
    $
    231,104
    
    
    $
    667,328
 The Company is highly leveraged and has significant cash requirements for
debt service relating to its senior credit facility, senior notes, senior
subordinated notes, industrial development revenue bonds and foreign debt. The
Companys ability to borrow is limited by its senior credit facility, including
compliance with the financial covenants therein, and the limitations on the
incurrence of additional indebtedness in the indentures governing the Companys
senior notes and senior subordinated notes. The Company has experienced difficulty in the past satisfying financial
covenants in its senior credit facility and negotiated amendments and obtained
waivers for fiscal 2000, 2001 and 2003 due to covenant non-compliance. The
Companys senior credit facility, including the financial covenants, was last
amended effective March 9, 2004. The Companys ability to satisfy these
covenants is determined based on the Companys cash flows, senior secured debt
and capital expenditures. The Company may experience difficulty satisfying
these amended covenants in the future. It is possible that, if domestic
commodity prices increase beyond recent levels and the Company is unable to
recover such increased costs through price increases, the Company may face
additional challenges in satisfying its debt covenants. In addition, the
Company may face covenant challenges if its price increases adversely affect
sales volume or if its price increases are not sustainable. If the Company is
unable to negotiate an amendment or secure a waiver from its lenders for any
potential default, it could result in an event of default under its senior
credit facility and permit a majority of the lenders to accelerate outstanding
debt under its senior credit facility and permit a majority of its lenders
under its Revolving Credit Facility to terminate the Companys revolving credit
commitment
(without acceleration of such debt) and seize the cash in its operating
accounts. Such acceleration would result in a cross-default under the Companys
senior notes and senior subordinated notes. 7




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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (6) Accruals for Restructuring Costs A rollforward of the Companys accrued restructuring costs for the first
six months of fiscal 2004 follows (in thousands): First six monthsfiscal 2004Balance at end of fiscal 2003
    
    $
    1,154Plant closure costs
    
    
    2,547Severance
    
    
    3,028Cash payments
    
    
    (5,120
    )Balance at end of second quarter 2004
    
    $
    1,609
 The Company expects to incur total restructuring costs of approximately $6
million, excluding asset impairments, related to its European restructuring
efforts consisting of approximately (1) $3 million for severance; (2) $2
million for the installation of transferred equipment; and (3) $1 million
relating to manufacturing inefficiencies through the transition period. For
the second quarter of fiscal 2004, the Company recognized $3.9 million
consisting of $2.0 million of installation costs for the transferred equipment,
$1.3 million of severance costs and $0.6 million of
manufacturing inefficiencies as
other operating expenses. The Company recognized $5.6 million for the first
six months of fiscal 2004 including additional severance in the first quarter. The future expected payout of the Companys accrued restructuring costs,
consisting primarily of severance, as of the end of the second quarter of
fiscal 2004 follows (in thousands): Fiscal years ending
    
    Payout2004
    
    $
    1,1542005
    
    
    3902006
    
    
    65Total
    
    $
    1,609
 (7) Comprehensive Income (Loss) The components of comprehensive income (loss) were as follows (in
thousands): Second quarter
    
    First six months fiscal2004
    
    2003
    
    2004
    
    2003Comprehensive income
(loss):Net loss
    
    $
    (17,737
    )
    
    $
    (3,404
    )
    
    $
    (25,544
    )
    
    $
    (11,278
    )Foreign currency
translation
    
    
    (873
    )
    
    
    9,027
    
    
    
    (4,907
    )
    
    
    20,411Unrealized gain on
interest rate swap,
net of deferred tax
expense of $209
and
$396, respectively
    
    
    
    
    
    
    328
    
    
    
    
    
    
    
    621Total
    
    $
    (18,610
    )
    
    $
    5,951
    
    
    $
    (30,451
    )
    
    $
    9,754
 (8) Stock Option Plan of Parent The Company and its Parent, Doane Pet Care Enterprises, Inc., have elected
to continue to follow Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, or APB 25, to account for fixed stock 8




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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) awards granted to employees. However, if the Company adopted SFAS No.
123, Accounting for Stock Based Compensation, or SFAS 123, to account for fixed
stock awards granted to employees, the Companys net loss for the second
quarter and the first six months of fiscal 2004 and 2003 would have been
adjusted as follows (in thousands): Second quarter
    
    First six months fiscal2004
    
    2003
    
    2004
    
    2003Net loss available to common shares
    
    $
    (17,737
    )
    
    $
    (6,723
    )
    
    $
    (25,544
    )
    
    $
    (17,812
    )Less: Total stock-based employee
compensation expense determined based
on the fair value method for all awards,
net of income tax benefit
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (4
    )Pro forma net loss available to common shares
    
    $
    (17,738
    )
    
    $
    (6,725
    )
    
    $
    (25,546
    )
    
    $
    (17,816
    )
 Pro forma information regarding net loss has been determined as if the
Company had accounted for its employee stock options under the minimum value
method of SFAS 123 under the assumptions of a risk free rate of return of 3.70%
for the second quarter and first six months of fiscal 2004 and 2003, and an
expected life of options ranging from 3 to 10 years. The Company has no present
plans to pay dividends on its common stock. The effect of applying SFAS 123, as
calculated above, may not be representative of the effect on reported net
income (loss) for future years. (9) Benefit Plans Pension Plans The Company has an inactive defined benefit, non-contributory pension plan
covering certain hourly and salaried employees. As a result, future benefits no
longer accumulate and the Companys service cost ceased. The Companys funding
policy for this plan is to make the minimum annual contribution required by
applicable regulations. The Company also has an active defined benefit,
non-contributory pension plan covering approximately 50 union employees at one
of its facilities. The information below for both pension plans has been
determined based on the six months ending June 30, 2004 and 2003, respectively. Under federal law, the Company was not required to make any cash
contributions to its inactive plan in fiscal 2003 or the first six months of
fiscal 2004. A summary of net periodic cost for the Companys pension plans follows (in
thousands): Second quarter
    
    First six months fiscal2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    9
    
    
    $
    7
    
    
    $
    18
    
    
    $
    14Interest cost
    
    
    270
    
    
    
    268
    
    
    
    540
    
    
    
    536Expected income on plan assets
    
    
    (347
    )
    
    
    (311
    )
    
    
    (693
    )
    
    
    (623
    )Recognition of actuarial loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    173
    
    
    
    187
    
    
    
    345
    
    
    
    375Net periodic pension cost
    
    $
    105
    
    
    $
    151
    
    
    $
    210
    
    
    $
    302
 9




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Post-retirement Plan The Company has a post-retirement healthcare plan that provides medical
coverage for eligible retirees and their dependents. The Company pays benefits
under the plan when due and does not fund its plan obligations as
they accrue. The
post-retirement plan information below has been determined based on the six
months ending June 30, 2004 and 2003, respectively. A summary of net periodic cost for the Companys post-retirement plan
follows (in thousands): Second quarter
    
    First six months fiscal2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    3
    
    
    $
    5
    
    
    $
    7
    
    
    $
    10Interest cost
    
    
    75
    
    
    
    78
    
    
    
    150
    
    
    
    156Amortization
    
    
    14
    
    
    
    6
    
    
    
    28
    
    
    
    13Net periodic post-retirement cost
    
    $
    92
    
    
    $
    89
    
    
    $
    185
    
    
    $
    179
 (10) Commitments and Contingencies In the first quarter of fiscal 2004, the Company won an arbitration award
from Merrick Petfoods, Inc., or Merrick, after Merrick terminated the joint
venture agreement with the Company related to a manufacturing facility in
Hereford, Texas. The award consisted of an initial payment and monthly royalty
payments. Under the arbitration agreement, the royalty payments will continue
for approximately nine years and are based on Merricks future sales volumes of
certain products. In the first quarter of fiscal 2004, the Company recorded
$1.0 million relating to the award, consisting of both the initial payment of
$0.8 million, recorded as an offset to other operating expenses, and royalty
payments of $0.2 million, recorded as other expense (income), net. Royalty
payments made subsequent to the initial payment in the first six months of
fiscal 2004 did not have a material impact on the Companys results of
operations, nor does the Company expect future payments to have a material
impact. The Company is also a party to other legal proceedings in the ordinary
course of business. The resolution of such matters is not expected to have a
material adverse effect on the Companys financial position, results of
operations or cash flows. (11) Financial Information Related to Guarantor Subsidiaries Unaudited condensed consolidated financial information related to the
Company and its guarantor subsidiaries and non-guarantor subsidiaries as of the
end of the second quarter of fiscal 2004 and the end of fiscal 2003 and for the
second quarter and first six months of fiscal 2004 and 2003 is disclosed to
comply with the reporting requirements of the Companys guarantor subsidiaries.
The guarantor subsidiaries are wholly-owned domestic subsidiaries of the
Company which have fully and unconditionally guaranteed the
Companys 10 3/4%
Senior Notes due March 1, 2010 and the Companys 9 3/4% Senior Subordinated
Notes due May 15, 2007. The non-guarantor subsidiaries are wholly-owned
foreign subsidiaries of the Company which have not fully and unconditionally
guaranteed the Companys 10 3/4% Senior Notes due March 1, 2010 or the
Companys 9 3/4% Senior Subordinated Notes due May 15, 2007. See Note 6,
Long-Term Debt and Liquidity, in the Companys 2003 10-K. Unaudited condensed
consolidated financial information follows (in thousands, except share and par
value amounts): 10




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Unaudited Condensed Consolidated Balance Sheets
For The Guarantor and Non-Guarantor Subsidiaries End of second quarter 2004IntercompanyGuarantor
    
    Non-guarantor
    
    eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,559
    
    
    $
    3,503
    
    
    $
    
    
    
    $
    10,062Accounts receivable, net
    
    
    41,079
    
    
    
    52,261
    
    
    
    
    
    
    
    93,340Inventories, net
    
    
    43,550
    
    
    
    27,759
    
    
    
    
    
    
    
    71,309Deferred tax assets
    
    
    2,362
    
    
    
    
    
    
    
    
    
    
    
    2,362Prepaid expenses and other current assets
    
    
    9,268
    
    
    
    2,366
    
    
    
    
    
    
    
    11,634Total current assets
    
    
    102,818
    
    
    
    85,889
    
    
    
    
    
    
    
    188,707Property, plant and equipment, net
    
    
    149,984
    
    
    
    100,905
    
    
    
    
    
    
    
    250,889Goodwill and trademarks
    
    
    267,780
    
    
    
    109,720
    
    
    
    
    
    
    
    377,500Other assets
    
    
    258,496
    
    
    
    13,026
    
    
    
    (237,469
    )
    
    
    34,053Total assets
    
    $
    779,078
    
    
    $
    309,540
    
    
    $
    (237,469
    )
    
    $
    851,149LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    10,319
    
    
    $
    444
    
    
    $
    
    
    
    $
    10,763Accounts payable
    
    
    47,412
    
    
    
    40,667
    
    
    
    
    
    
    
    88,079Accrued liabilities
    
    
    38,371
    
    
    
    16,597
    
    
    
    
    
    
    
    54,968Total current liabilities
    
    
    96,102
    
    
    
    57,708
    
    
    
    
    
    
    
    153,810Long-term debt:Long-term debt, excluding current maturities
    
    
    545,176
    
    
    
    167,297
    
    
    
    (154,395
    )
    
    
    558,078Senior Preferred Stock (Redeemable)
    
    
    98,487
    
    
    
    
    
    
    
    
    
    
    
    98,487Total long-term debt
    
    
    643,663
    
    
    
    167,297
    
    
    
    (154,395
    )
    
    
    656,565Deferred tax liabilities
    
    
    28,626
    
    
    
    2,368
    
    
    
    
    
    
    
    30,994Other long-term liabilities
    
    
    9,033
    
    
    
    
    
    
    
    
    
    
    
    9,033Total liabilities
    
    
    777,424
    
    
    
    227,373
    
    
    
    (154,395
    )
    
    
    850,402Commitments and contingenciesStockholders equity:Common stock, $0.01 par value; 1,000 shares
authorized, issued and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional paid-in-capital
    
    
    115,674
    
    
    
    83,984
    
    
    
    (83,984
    )
    
    
    115,674Accumulated other comprehensive income (loss)
    
    
    (14,538
    )
    
    
    58,906
    
    
    
    910
    
    
    
    45,278Accumulated deficit
    
    
    (99,482
    )
    
    
    (60,723
    )
    
    
    
    
    
    
    (160,205
    )Total stockholders equity
    
    
    1,654
    
    
    
    82,167
    
    
    
    (83,074
    )
    
    
    747Total liabilities and stockholders equity
    
    $
    779,078
    
    
    $
    309,540
    
    
    $
    (237,469
    )
    
    $
    851,149
 11




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Unaudited Condensed Consolidated Balance Sheets
For The Guarantor and Non-Guarantor Subsidiaries End of fiscal 2003IntercompanyGuarantor
    
    Non-guarantor
    
    eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,939
    
    
    $
    3,354
    
    
    $
    
    
    
    $
    29,293Accounts receivable, net
    
    
    35,639
    
    
    
    55,930
    
    
    
    
    
    
    
    91,569Inventories, net
    
    
    43,616
    
    
    
    25,003
    
    
    
    
    
    
    
    68,619Deferred tax assets
    
    
    1,898
    
    
    
    
    
    
    
    
    
    
    
    1,898Prepaid expenses and other current assets
    
    
    10,727
    
    
    
    3,663
    
    
    
    
    
    
    
    14,390Total current assets
    
    
    117,819
    
    
    
    87,950
    
    
    
    
    
    
    
    205,769Property, plant and equipment, net
    
    
    156,697
    
    
    
    109,760
    
    
    
    
    
    
    
    266,457Goodwill and trademarks
    
    
    267,780
    
    
    
    112,638
    
    
    
    
    
    
    
    380,418Other assets
    
    
    241,749
    
    
    
    12,396
    
    
    
    (220,875
    )
    
    
    33,270Total assets
    
    $
    784,045
    
    
    $
    322,744
    
    
    $
    (220,875
    )
    
    $
    885,914LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    8,952
    
    
    $
    4,233
    
    
    $
    
    
    
    $
    13,185Accounts payable
    
    
    52,006
    
    
    
    48,506
    
    
    
    
    
    
    
    100,512Accrued liabilities
    
    
    39,921
    
    
    
    11,798
    
    
    
    
    
    
    
    51,719Total current liabilities
    
    
    100,879
    
    
    
    64,537
    
    
    
    
    
    
    
    165,416Long-term debt, excluding current maturities
    
    
    550,420
    
    
    
    165,251
    
    
    
    (154,810
    )
    
    
    560,861Deferred tax liabilities
    
    
    26,161
    
    
    
    2,363
    
    
    
    
    
    
    
    28,524Other long-term liabilities
    
    
    8,863
    
    
    
    
    
    
    
    
    
    
    
    8,863Total liabilities
    
    
    686,323
    
    
    
    232,151
    
    
    
    (154,810
    )
    
    
    763,664Senior Preferred Stock (Redeemable)
    
    
    91,052
    
    
    
    
    
    
    
    
    
    
    
    91,052Commitments and contingenciesStockholders equity:Common stock, $0.01 par value; 1,000 shares
authorized, issued and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional paid-in-capital
    
    
    115,674
    
    
    
    67,040
    
    
    
    (67,040
    )
    
    
    115,674Accumulated other comprehensive income (loss)
    
    
    (15,562
    )
    
    
    64,772
    
    
    
    975
    
    
    
    50,185Accumulated deficit
    
    
    (93,442
    )
    
    
    (41,219
    )
    
    
    
    
    
    
    (134,661
    )Total stockholders equity
    
    
    6,670
    
    
    
    90,593
    
    
    
    (66,065
    )
    
    
    31,198Total liabilities and stockholders equity
    
    $
    784,045
    
    
    $
    322,744
    
    
    $
    (220,875
    )
    
    $
    885,914
 12




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Unaudited Condensed Consolidated Statements of Operations
For The Guarantor and Non-Guarantor Subsidiaries Second quarter 2004Guarantor
    
    Non-guarantor
    
    ConsolidatedNet sales
    
    $
    192,502
    
    
    $
    65,836
    
    
    $
    258,338Cost of goods sold
    
    
    173,380
    
    
    
    51,821
    
    
    
    225,201Gross profit
    
    
    19,122
    
    
    
    14,015
    
    
    
    33,137Operating expenses:Promotion and distribution
    
    
    6,580
    
    
    
    7,187
    
    
    
    13,767Selling, general and administrative
    
    
    8,673
    
    
    
    4,130
    
    
    
    12,803Amortization
    
    
    935
    
    
    
    199
    
    
    
    1,134Other operating expenses
    
    
    
    
    
    
    3,938
    
    
    
    3,938Income from operations
    
    
    2,934
    
    
    
    (1,439
    )
    
    
    1,495Interest expense, net
    
    
    12,205
    
    
    
    5,981
    
    
    
    18,186Other expense (income), net
    
    
    (521
    )
    
    
    190
    
    
    
    (331
    )Loss before income taxes
    
    
    (8,750
    )
    
    
    (7,610
    )
    
    
    (16,360
    )Income tax expense
    
    
    1,070
    
    
    
    307
    
    
    
    1,377Net loss
    
    $
    (9,820
    )
    
    $
    (7,917
    )
    
    $
    (17,737
    )
 Second quarter 2003Guarantor
    
    Non-guarantor
    
    ConsolidatedNet sales
    
    $
    175,882
    
    
    $
    58,594
    
    
    $
    234,476Cost of goods sold
    
    
    149,489
    
    
    
    46,478
    
    
    
    195,967Gross profit
    
    
    26,393
    
    
    
    12,116
    
    
    
    38,509Operating expenses:Promotion and distribution
    
    
    6,470
    
    
    
    6,327
    
    
    
    12,797Selling, general and administrative
    
    
    8,064
    
    
    
    4,309
    
    
    
    12,373Amortization
    
    
    982
    
    
    
    181
    
    
    
    1,163Income from operations
    
    
    10,877
    
    
    
    1,299
    
    
    
    12,176Interest expense, net
    
    
    8,363
    
    
    
    6,494
    
    
    
    14,857Other income, net
    
    
    (405
    )
    
    
    (9
    )
    
    
    (414
    )Income (loss) before income taxes
    
    
    2,919
    
    
    
    (5,186
    )
    
    
    (2,267
    )Income tax expense
    
    
    900
    
    
    
    237
    
    
    
    1,137Net income (loss)
    
    
    2,019
    
    
    
    (5,423
    )
    
    
    (3,404
    )Preferred stock dividends and accretion
    
    
    (3,319
    )
    
    
    
    
    
    
    (3,319
    )Net loss available to common shares
    
    $
    (1,300
    )
    
    $
    (5,423
    )
    
    $
    (6,723
    )
 13




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Unaudited Condensed Consolidated Statements of Operations
For The Guarantor and Non-Guarantor Subsidiaries First six months fiscal 2004Guarantor
    
    Non-guarantor
    
    ConsolidatedNet sales
    
    $
    391,940
    
    
    $
    137,278
    
    
    $
    529,218Cost of goods sold
    
    
    346,716
    
    
    
    108,547
    
    
    
    455,263Gross profit
    
    
    45,224
    
    
    
    28,731
    
    
    
    73,955Operating expenses:Promotion and distribution
    
    
    13,355
    
    
    
    14,639
    
    
    
    27,994Selling, general and administrative
    
    
    17,106
    
    
    
    8,880
    
    
    
    25,986Amortization
    
    
    1,956
    
    
    
    407
    
    
    
    2,363Other operating expenses
    
    
    (415
    )
    
    
    5,576
    
    
    
    5,161Income from operations
    
    
    13,222
    
    
    
    (771
    )
    
    
    12,451Interest expense, net
    
    
    23,956
    
    
    
    12,207
    
    
    
    36,163Other expense (income), net
    
    
    (1,134
    )
    
    
    396
    
    
    
    (738
    )Loss before income taxes
    
    
    (9,600
    )
    
    
    (13,374
    )
    
    
    (22,974
    )Income tax expense
    
    
    2,001
    
    
    
    569
    
    
    
    2,570Net loss
    
    $
    (11,601
    )
    
    $
    (13,943
    )
    
    $
    (25,544
    )
 First six months fiscal 2003Guarantor
    
    Non-guarantor
    ConsolidatedNet sales
    
    $
    377,727
    
    
    $
    116,698
    
    
    $
    494,425Cost of goods sold
    
    
    320,739
    
    
    
    89,817
    
    
    
    410,556Gross profit
    
    
    56,988
    
    
    
    26,881
    
    
    
    83,869Operating expenses:Promotion and distribution
    
    
    14,506
    
    
    
    12,701
    
    
    
    27,207Selling, general and administrative
    
    
    16,103
    
    
    
    8,378
    
    
    
    24,481Amortization
    
    
    1,942
    
    
    
    375
    
    
    
    2,317Income from operations
    
    
    24,437
    
    
    
    5,427
    
    
    
    29,864Interest expense, net
    
    
    14,704
    
    
    
    14,168
    
    
    
    28,872Debt extinguishments
    
    
    11,113
    
    
    
    
    
    
    
    11,113Other expense (income), net
    
    
    (723
    )
    
    
    138
    
    
    
    (585
    )Loss before income taxes
    
    
    (657
    )
    
    
    (8,879
    )
    
    
    (9,536
    )Income tax expense
    
    
    900
    
    
    
    842
    
    
    
    1,742Net loss
    
    
    (1,557
    )
    
    
    (9,721
    )
    
    
    (11,278
    )Preferred stock dividends and accretion
    
    
    (6,534
    )
    
    
    
    
    
    
    (6,534
    )Net loss available to common shares
    
    $
    (8,091
    )
    
    $
    (9,721
    )
    
    $
    (17,812
    )
 14




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Unaudited Condensed
Consolidated Statements of Cash Flows
For The Guarantor and Non-Guarantor Subsidiaries First six months fiscal 2004Guarantor
    
    Non-guarantor
    
    ConsolidatedCash flows from operating activities:Net loss
    
    $
    (11,601
    )
    
    $
    (13,943
    )
    
    $
    (25,544
    )Items not requiring (providing) cash:Depreciation and amortization
    
    
    11,640
    
    
    
    8,523
    
    
    
    20,163Deferred income tax expense
    
    
    2,001
    
    
    
    64
    
    
    
    2,065Asset impairments
    
    
    420
    
    
    
    
    
    
    
    420Other non-cash charges (income), net
    
    
    9,359
    
    
    
    (103
    )
    
    
    9,256Changes in current assets and liabilities
    
    
    (21,535
    )
    
    
    8,861
    
    
    
    (12,674
    )Net cash provided by (used in) operating activities
    
    
    (9,716
    )
    
    
    3,402
    
    
    
    (6,314
    )Cash flows from investing activities:Capital expenditures
    
    
    (2,990
    )
    
    
    (2,136
    )
    
    
    (5,126
    )Proceeds
from sale of assets
    
    
    2
    
    
    
    398
    
    
    
    400Other, net
    
    
    (454
    )
    
    
    (350
    )
    
    
    (804
    )Net cash used in investing activities
    
    
    (3,442
    )
    
    
    (2,088
    )
    
    
    (5,530
    )Cash flows from financing activities:Proceeds from the issuance of long-term debt
    
    
    
    
    
    
    13,078
    
    
    
    13,078Principal payments on long-term debt
    
    
    (3,220
    )
    
    
    (14,056
    )
    
    
    (17,276
    )Payments for debt issuance costs
    
    
    (3,002
    )
    
    
    
    
    
    
    (3,002
    )Net cash used in financing activities
    
    
    (6,222
    )
    
    
    (978
    )
    
    
    (7,200
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (187
    )
    
    
    (187
    )Increase (decrease) in cash and cash equivalents
    
    
    (19,380
    )
    
    
    149
    
    
    
    (19,231
    )Cash and cash equivalents, beginning of period
    
    
    25,939
    
    
    
    3,354
    
    
    
    29,293Cash and cash equivalents, end of period
    
    $
    6,559
    
    
    $
    3,503
    
    
    $
    10,062
 15




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Unaudited Condensed Consolidated Statements of Cash Flows
For The Guarantor and Non-Guarantor Subsidiaries First six months fiscal 2003Guarantor
    
    Non-guarantor
    
    ConsolidatedCash flows from operating activities:Net loss
    
    $
    (1,557
    )
    
    $
    (9,721
    )
    
    $
    (11,278
    )Items not requiring (providing) cash:Depreciation and amortization
    
    
    10,627
    
    
    
    7,307
    
    
    
    17,934Deferred income tax expense (benefit)
    
    
    900
    
    
    
    (143
    )
    
    
    757Debt extinguishments
    
    
    11,113
    
    
    
    
    
    
    
    11,113Other
non-cash charges (income), net
    
    
    2,778
    
    
    
    (115
    )
    
    
    2,663Changes in current assets and liabilities
    
    
    (20,310
    )
    
    
    13,783
    
    
    
    (6,527
    )Net cash provided by operating activities
    
    
    3,551
    
    
    
    11,111
    
    
    
    14,662Cash flows from investing activities:Capital expenditures
    
    
    (4,766
    )
    
    
    (4,850
    )
    
    
    (9,616
    )Proceeds from sale of assets
    
    
    27
    
    
    
    166
    
    
    
    193Other, net
    
    
    2,631
    
    
    
    (4,546
    )
    
    
    (1,915
    )Net cash used in investing activities
    
    
    (2,108
    )
    
    
    (9,230
    )
    
    
    (11,338
    )Cash flows from financing activities:Net repayments under revolving credit agreements
    
    
    (15,000
    )
    
    
    
    
    
    
    (15,000
    )Proceeds from issuance of long-term debt
    
    
    210,444
    
    
    
    
    
    
    
    210,444Principal payments on long-term debt
    
    
    (189,092
    )
    
    
    (2,123
    )
    
    
    (191,215
    )Payments for debt issuance costs
    
    
    (7,771
    )
    
    
    
    
    
    
    (7,771
    )Net cash used in financing activities
    
    
    (1,419
    )
    
    
    (2,123
    )
    
    
    (3,542
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    535
    
    
    
    535Increase in cash and cash equivalents
    
    
    24
    
    
    
    293
    
    
    
    317Cash and cash equivalents, beginning of period
    
    
    57
    
    
    
    7,539
    
    
    
    7,596Cash and cash equivalents, end of period
    
    $
    81
    
    
    $
    7,832
    
    
    $
    7,913
 16




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors
Doane Pet Care Company: We have reviewed the accompanying condensed consolidated balance sheet of Doane
Pet Care Company and subsidiaries as of July 3, 2004, the related condensed
consolidated statements of operations for the three-month and six-month periods
ended July 3, 2004 and June 28, 2003, the related condensed consolidated
statement of stockholders equity and comprehensive loss as of and for the
six-month period ended July 3, 2004 and the related condensed consolidated
statements of cash flows for the six-month periods ended July 3, 2004 and June
28, 2003. These condensed consolidated financial statements are the
responsibility of the Companys management. We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with U.S. generally accepted accounting
principles. We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Doane Pet Care Company and subsidiaries as of January 3, 2004, and the related
consolidated statements of operations, stockholders equity and comprehensive
(income) loss and cash flows for the year then ended (not presented herein);
and in our report dated February 25, 2004, except as to Note 6, which was as of
March 9, 2004, we expressed an unqualified opinion on those consolidated
financial statements. Our report refers to a change in accounting for goodwill
and other intangible assets in fiscal 2002. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of January 3,
2004 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived. As discussed in Note 3 to the accompanying condensed consolidated financial
statements, effective January 4, 2004, Doane Pet Care Company and subsidiaries
adopted Statement of Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. /s/ KPMG LLPNashville,TennesseeJuly 27, 2004
 17




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The reader is encouraged to refer to the accompanying unaudited condensed
consolidated financial statements and related notes included elsewhere in this
quarterly report on Form 10-Q and our audited consolidated financial statements
and related notes in our annual report on Form 10-K for the fiscal year ended
January 3, 2004, or the 2003 10-K. Forward-Looking Statements Certain of the statements in this quarterly report on Form 10-Q are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Some of these statements can be identified by terms
and phrases such as anticipate, believe, assume, intend, estimate,
expect, continue, could, may, plan, project, predict, will and
similar expressions. These statements appear in a number of places and include
statements regarding our plans, beliefs or current expectations, including
those plans, beliefs and expectations of our officers and directors, with
respect to, among other things:  
    
    reliance on a few customers for a large portion of our sales and
our ability to maintain our relationships with these customers;  
    
    our exposure to, and our ability to manage, our market risks
relating to commodity prices, interest rates and foreign currency
exchange rates;  
    
    future capital expenditures and our ability to finance these
capital expenditures;  
    
    our ability to finance our debt service requirements under our
senior credit facility and our other debt and to comply with the
financial covenants under our debt agreements;  
    
    our future results of operations or financial condition;  
    
    our business strategies and other plans and objectives for future operations;  
    
    general economic and business conditions;  
    
    business opportunities that may be presented to and pursued by us from time to time;  
    
    risks related to our international operations;  
    
    the impact of existing or new accounting pronouncements; and  
    
    the outcome of any legal proceedings to which we or any of our subsidiaries may be a party. These forward-looking statements are based on our assumptions and analyses
and are not guarantees of our future performance. These statements are subject
to risks, many of which are beyond our control, that could cause our actual
results to differ materially from those contained in our forward-looking
statements. Factors that could cause results to differ materially include
without limitation: decreases or changes in demand for our products, changes in
market trends, general competitive pressures from existing and new competitors,
price volatility of commodities, natural gas, other raw materials and
packaging, foreign currency exchange rate fluctuations, future investment
returns on our pension plans, changes in laws and regulations, adverse changes
in operating performance, adverse economic conditions and other factors
described under Risk Factors in our 2003 10-K. 18




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##### Table of Contents



We undertake no obligation to revise these forward-looking statements to
reflect any future events or circumstances. All forward-looking statements
attributable to us are expressly qualified in their entirety by this cautionary
statement. Second Quarter Fiscal 2004 in Review In the second quarter of fiscal 2004, net sales increased 10.2% to $258.3
million from $234.5 million in the second quarter of fiscal 2003. Excluding
the impact of foreign currency exchange rate fluctuations, net sales increased
8.5%. The favorable impact of the Companys 2004 domestic price increases, as
well as European volume growth, was partially offset by lower domestic
volume due to reduced shipments to Mexico and the impact of the 2004 domestic
price increases on volume. The $5.4 million decrease in our gross profit was a
result of higher global commodity costs, partially offset by the above factors
impacting net sales. Our net loss of $17.7 million was further impacted by two
factors. First, we recognized additional European restructuring costs in the
amount of $3.9 million primarily relating to our consolidation of the Vrä,
Denmark facility. Second, we recognized $3.8 million of accretion and
dividends relating to our Senior Preferred Stock (Redeemable) as interest
expense in connection with our adoption of Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liability and Equity, or SFAS 150. Due to higher than expected commodity costs and the volatility of domestic
commodity prices, we implemented a broad price increase in January 2004 of
approximately 7.5% to 9.5% followed by additional price increases in the second
quarter of 2004 of approximately 6.0% to 8.0% for most of our domestic
products.In addition, we have cost-sharing arrangements with certain of our
domestic customers such that we now have approximately 80% of our domestic
volume under some form of cost-sharing arrangement. In the aggregate, these
arrangements enable us to pass through to our domestic customers approximately
half of any commodity movements, whether up or down. Because we generally do
not have long-term contracts with our customers, our recent price increases and
our cost-sharing arrangements are subject to change. The first domestic
case of Bovine Spongiform Encephalopathy, or BSE, resulted in limitations on the export of pet food from the United States to Mexico
which lingered into the second quarter of fiscal 2004. Net sales to
Mexico were lower in the second quarter of fiscal 2004 compared to
the 2003 period by $1.7 million, primarily related to the limitations
imposed on exports from the United States. The border is currently open to the
export of our products. We continued to implement phases of our European restructuring plan in the
second quarter of fiscal 2004 and recognized $3.9 million of other operating
expenses, consisting of $2.0 million for the reinstallation of transferred
equipment, $1.3 million for severance costs and $0.6 million relating to
manufacturing inefficiencies. Our European restructuring plan is comprised of
two major components: (1) the consolidation of our wet pet food operation in
Vrä, Denmark into our facility in Esbjerg, Denmark and our recently expanded
facility in Carat, Austria; and (2) the reorganization of certain of our
European subsidiaries to more efficiently manage our foreign operations and
reduce selling, general and administrative expenses. We anticipate that this
project will result in lower labor and administrative costs and other operating
efficiencies estimated to be approximately $4 million to $5 million on an
annual basis. As of the beginning of fiscal 2004, we adopted SFAS 150, which required us
to reclassify our Senior Preferred Stock (Redeemable) to long-term debt and to
recognize the related accretion and dividends of $3.8 million for the second
quarter of fiscal 2004 as interest expense rather than as a component of
stockholders equity. SFAS 150 explicitly prohibits restatement of prior
periods. See Note 3, Change in Accounting Principle, in the accompanying
unaudited condensed consolidated financial statements. 19




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##### Table of Contents



Financial Covenant Compliance One of our major risks is our ability to finance our cash requirements for
debt service under our senior credit facility and our other debt and to comply
with the financial covenants under our senior credit facility. Our senior
credit facility requires us to maintain specified financial ratios and satisfy
certain financial tests which, if violated, could place us in default, and our
lenders could then accelerate our debt and prohibit us from borrowing
additional funds from this facility to meet our liquidity needs. Our ability to meet the financial ratios and tests required under our
senior credit facility can be affected by events beyond our control, such as
prevailing economic, financial or industry conditions. The occurrence of any
such event may prevent us from meeting these financial ratios and tests. In
particular, if domestic commodity prices increase beyond recent levels and we
are unable to recover such increased costs through price increases, we may face
additional challenges in satisfying our debt covenants. In addition, we may
face covenant challenges if any of our price increases adversely affect our
sales volume or if our price increases are not sustainable. We have
experienced difficulty in the past satisfying the financial covenants in our
senior credit facility and have negotiated amendments and obtained waivers from
our lenders for fiscal 2000, 2001 and 2003 due to covenant non-compliance. Our
senior credit facility, including the financial covenants, was last amended
effective March 9, 2004. If we violate these amended covenants and are unable
to either negotiate amendments or obtain waivers from our lenders, we could be
in default under our debt agreements, our lenders may accelerate our debt, and
we would not be able to draw upon additional availability under our senior
credit facility to meet our liquidity needs. Results of Operations We manufacture pet food, primarily private label, in the United States and
Europe using 29 combined manufacturing and distribution facilities that we own
or lease. We manufacture pet food products primarily 20




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##### Table of Contents



for dogs and cats, including dry, wet, semi-moist, soft dry, soft treats
and biscuits. We sell our products to various types of retailers. Historically, approximately 75% of our cost of goods sold has been
comprised of raw material and packaging costs with the remainder primarily
comprised of salaries, wages and related fringe benefits, utilities and
depreciation. Our operating expenses generally consist of promotion and
distribution expenses and selling, general and administrative expenses.
Promotion and distribution expenses are primarily comprised of promotions,
freight, brokerage fees and warehousing expenses. Selling, general and
administrative expenses primarily include salaries and related fringe benefits,
depreciation and other corporate overhead costs, which typically do not
increase proportionately with increases in volume and product sales. We have foreign currency exposure related to foreign-denominated revenues
and costs translated into U.S. dollars, or USD, primarily related to the Euro
to USD exchange rate. Our results of operations were impacted by foreign
currency exchange rate fluctuations for the three and six-month periods ending
in the second quarter of fiscal 2004 and 2003. For the purpose of evaluating
our results of operations, the average Euro to USD exchange rates for the three
months ending in the second quarter of fiscal 2004 and 2003 were approximately
1.20 and 1.13, respectively, and for the six months ending in the second
quarter of fiscal 2004 and 2003 were approximately 1.23 and 1.10, respectively.
For the purpose of evaluating our financial position, the Euro to USD exchange
rates as of end of the second quarter of fiscal 2004 and the end of fiscal 2003
were approximately 1.22 and 1.25, respectively. Our fiscal year ends on the Saturday nearest to the end of December; and
therefore, fiscal 2003 ended on January 3, 2004. Each quarter also ends on a
Saturday with the second quarter of fiscal 2004 and 2003 ending on July 3, 2004
and June 28, 2003, respectively. Statement of operations data.The following table sets forth our
statement of operations derived from the accompanying unaudited condensed
consolidated financial statements expressed as a percentage of net sales for
the second quarter and first six months of fiscal 2004 and 2003 as indicated
(table in thousands, except percentages): Second quarter
    
    First six months fiscal2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    258,338
    
    
    
    100.0
    %
    
    $
    234,476
    
    
    
    100.0
    %
    
    $
    529,218
    
    
    
    100.0
    %
    
    $
    494,425
    
    
    
    100.0
    %Cost of goods sold:Commodity costs
    
    
    134,152
    
    
    
    51.9
    
    
    
    111,631
    
    
    
    47.6
    
    
    
    270,476
    
    
    
    51.1
    
    
    
    237,126
    
    
    
    47.9Other
    
    
    91,049
    
    
    
    35.3
    
    
    
    84,336
    
    
    
    36.0
    
    
    
    184,787
    
    
    
    34.9
    
    
    
    173,430
    
    
    
    35.1Total cost of goods sold
    
    
    225,201
    
    
    
    87.2
    
    
    
    195,967
    
    
    
    83.6
    
    
    
    455,263
    
    
    
    86.0
    
    
    
    410,556
    
    
    
    83.0Gross profit
    
    
    33,137
    
    
    
    12.8
    
    
    
    38,509
    
    
    
    16.4
    
    
    
    73,955
    
    
    
    14.0
    
    
    
    83,869
    
    
    
    17.0Operating expenses:Promotion and distribution
    
    
    13,767
    
    
    
    5.3
    
    
    
    12,797
    
    
    
    5.4
    
    
    
    27,994
    
    
    
    5.3
    
    
    
    27,207
    
    
    
    5.5Selling, general and administrative
    
    
    12,803
    
    
    
    5.0
    
    
    
    12,373
    
    
    
    5.3
    
    
    
    25,986
    
    
    
    4.9
    
    
    
    24,481
    
    
    
    5.0Amortization
    
    
    1,134
    
    
    
    0.4
    
    
    
    1,163
    
    
    
    0.5
    
    
    
    2,363
    
    
    
    0.4
    
    
    
    2,317
    
    
    
    0.5Other operating expenses
    
    
    3,938
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    5,161
    
    
    
    1.0
    
    
    
    
    
    
    
    Income from operations
    
    
    1,495
    
    
    
    0.6
    
    
    
    12,176
    
    
    
    5.2
    
    
    
    12,451
    
    
    
    2.4
    
    
    
    29,864
    
    
    
    6.0Interest expense, net
    
    
    18,186
    
    
    
    7.0
    
    
    
    14,857
    
    
    
    6.4
    
    
    
    36,163
    
    
    
    6.8
    
    
    
    28,872
    
    
    
    5.8Loss from debt extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,113
    
    
    
    2.2Other income, net
    
    
    (331
    )
    
    
    
    
    
    
    (414
    )
    
    
    (0.2
    )
    
    
    (738
    )
    
    
    (0.1
    )
    
    
    (585
    )
    
    
    (0.1
    )Loss before income taxes
    
    
    (16,360
    )
    
    
    (6.4
    )
    
    
    (2,267
    )
    
    
    (1.0
    )
    
    
    (22,974
    )
    
    
    (4.3
    )
    
    
    (9,536
    )
    
    
    (1.9
    )Income tax expense
    
    
    1,377
    
    
    
    0.5
    
    
    
    1,137
    
    
    
    0.5
    
    
    
    2,570
    
    
    
    0.5
    
    
    
    1,742
    
    
    
    0.4Net loss
    
    $
    (17,737
    )
    
    
    (6.9
    )%
    
    $
    (3,404
    )
    
    
    (1.5
    )%
    
    $
    (25,544
    )
    
    
    (4.8
    )%
    
    $
    (11,278
    )
    
    
    (2.3
    )%
 Second quarter of fiscal 2004 compared to second quarter of fiscal 2003 Net sales. Net sales for the second quarter of fiscal 2004 increased
10.2% to $258.3 million from $234.5 million in the second quarter of fiscal
2003. Excluding the impact of foreign currency exchange fluctuations in the
second quarter of fiscal 2004, net sales increased 8.5%, or $20.0 million. The
increase in 21




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##### Table of Contents



net sales in the second quarter of fiscal 2004 was primarily due to
our domestic price increases and European sales volume growth, partially offset
by a decrease in domestic sales volume. The decrease in
domestic sales volume is due to the impact of our domestic
price increases on volume and the limitations imposed by Mexico on the export of pet food
from the United States. Gross profit.Gross profit in the second quarter of fiscal 2004 decreased
13.9% to $33.1 million from $38.5 million in the second quarter of fiscal 2003.
Excluding the impact of foreign currency exchange fluctuations in the second
quarter of fiscal 2004, gross profit decreased 16.1%, or $6.2 million. This
decrease was primarily due to higher global commodity costs, which increased as
a percentage of net sales to 51.9% in the second quarter of fiscal 2004 from
47.6% in the second quarter of fiscal 2003, and lower consolidated sales
volume, offset by the positive impact of the 2004 domestic price increases.
Other costs of goods sold included a $2.9 million loss in the second quarter of
fiscal 2004 compared to a $3.0 million gain for the same period of fiscal 2003
related to fair value accounting under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, or SFAS 133, for the Companys commodity
derivative instruments. Remaining other costs of goods sold were consistent in
the second quarter of fiscal 2004 compared to the second quarter of fiscal
2003. Promotion and distribution. Promotion and distribution expenses for the
second quarter of fiscal 2004 increased 7.6% to $13.8 million from $12.8
million in the second quarter of fiscal 2003. Excluding the impact of foreign
currency exchange fluctuations in the second quarter of fiscal 2004, promotion
and distribution expenses increased 4.3%, or $0.6 million. This increase is
due to the growth in net sales as promotion and distribution expenses were
consistent as a percentage of net sales in the second quarter of fiscal 2004
compared to the second quarter of fiscal 2003. Selling, general and administrative. Selling, general and administrative
expenses in the second quarter of fiscal 2004 increased 3.5% to $12.8 million
from $12.4 million in the second quarter of fiscal 2003. Excluding the impact
of foreign currency exchange fluctuations in the second quarter of fiscal 2004,
selling, general and administrative expenses were consistent as these expenses
increased 1.2%, or $0.2 million from the second quarter of 2003. Other operating expenses.Other operating expenses of $3.9 million in the
second quarter of fiscal 2004 consisted of installation costs of $2.0 million,
severance costs of $1.3 million and manufacturing inefficiency costs of $0.6
million related to our European restructuring plan. Interest expense, net. Interest expense, net of interest income, in the
second quarter of fiscal 2004 increased 22.4% to $18.2 million from $14.9
million in the second quarter of fiscal 2003. The increase was primarily due
to $3.8 million of accretion and dividends relating to our Senior Preferred
Stock (Redeemable). See Note 3, Change in Accounting Principle, in the
accompanying unaudited condensed consolidated financial statements. Debt extinguishments.Debt extinguishments of $11.1 million in the second
quarter of fiscal 2003 related to our refinancing in February 2003 and
included: (1) a $4.0 million write-off of deferred financing costs, primarily
related to our senior credit facility; (2) a charge of $7.6 million for the
accretion of our sponsor facility to face value; (3) a charge of $6.2 million
realized foreign currency translation loss as a result of retiring a portion of
our Euro term loan facility with a corresponding credit to accumulated other
comprehensive income; and (4) a credit of $6.7 million for the reversal of an
excess leverage fee accrual. Income tax expense. We recognized income tax expense of $1.4 million in
the second quarter of fiscal 2004 compared to $1.1 million in the second
quarter of fiscal 2003. We recorded valuation allowances against deferred tax
assets of $0.8 million and $4.6 million in the second quarter of fiscal 2004
and 2003, respectively. Due primarily to the magnitude of our operating losses
in fiscal 2003, our losses through the second quarter of fiscal 2004 and the
variability of our historical earnings, we do not believe that we meet the
more likely than not recoverability criteria necessary to recognize our
deferred tax assets, except for those assets which will be recovered through
known reversals of deferred tax liabilities. The overall effective tax rate
for both periods differs from the expected combined federal and state rate of
38.9% due to 22




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the valuation allowances described above and the tax benefit
arising from certain items being deductible in the United States and also in
certain foreign jurisdictions. First six months fiscal 2004 compared to first six months fiscal 2003 Net sales.Net sales for the first six months of fiscal 2004 increased
7.0% to $529.2 million from $494.4 million for the first six months of fiscal
2003. Excluding the impact of foreign currency exchange fluctuations in the
first six months of 2004, net sales increased 4.2%, or $20.9 million. The
increase in net sales in the first six months of fiscal 2004 was primarily due
to our domestic price increases and European sales volume growth, partially
offset by a decrease in domestic sales volume. The decrease in domestic sales
volume was due to the impact of our domestic price increases on
volume and the
initial prohibition and subsequent limitations imposed by Mexico on the export
of pet food from the United States to Mexico. Gross profit.Gross profit for the first six months of fiscal 2004
decreased 11.8% to $74.0 million from $83.9 million for the first six months of
fiscal 2003. Excluding the impact of foreign currency exchange fluctuations,
gross profit decreased 15.3%, or $12.8 million. This decrease was primarily
due to higher global commodity costs, which increased as a percentage of net
sales to 51.1% in the first six months of fiscal 2004 from 47.9% in the first
six months of fiscal 2003, and lower consolidated sales volume,
partially offset by the
positive impact of the 2004 domestic price increases. Other costs of goods
sold were consistent in the first six months of fiscal 2004 compared to the
first six months of fiscal 2003 as a percentage of net sales. However, other
costs of goods sold for the first six months of fiscal 2004 included two
significant but offsetting changes. First, other costs of goods sold included
a $4.3 million loss in the second quarter of fiscal 2004 compared to a $3.5
million gain for the same period of fiscal 2003 related to SFAS 133 fair value
accounting for the Companys commodity derivative instruments. Second,
offsetting the fair value change, other costs of goods sold included increased
manufacturing efficiencies in the first six months of 2004 compared to the same
period of 2003. Promotion and distribution. Promotion and distribution expenses for the
first six months of fiscal 2004 increased 2.9% to $28.0 million from $27.2
million for the first six months of 2003. Excluding the impact of foreign
currency exchange fluctuations in the first six months of fiscal 2004,
promotion and distribution expenses decreased 2.5% or $0.7 million. As a
percent of sales, promotion and distribution decreased from 5.5% for the first
six months of 2003 to 5.3% for the first six months of 2004 as a result of
lower distribution costs associated with reduced shipments to Mexico. Selling, general and administrative.Selling, general and administrative
expenses for the first six months of fiscal 2004 increased 6.1% to $26.0
million from $24.5 million for the first six months of 2003. Excluding the
impact of foreign currency exchange fluctuations in the first six months of
fiscal 2004, selling, general and administrative expenses increased 2.5%, or
$0.6 million from the first six months of fiscal 2003. Other operating expenses. Other operating expenses of $5.2 million in the
first six months of fiscal 2004 consisted of: (1) severance costs of $3.0
million, installation costs of $2.0 million and manufacturing inefficiency
costs of $0.6 million related to our European restructuring plan; (2) asset
impairments of $0.4 million related to the closure of our distribution center
in Alexandria, Louisiana; and (3) $0.8 million of income related to the
arbitration award we received from Merrick. See Note 10, Commitments and
Contingencies, in the accompanying unaudited condensed consolidated financial
statements. Interest expense, net.Interest expense, net of interest income, for the
first six months of fiscal 2004 increased 25.3% to $36.2 million from $28.9
million for the first six months of 2003. The increase was primarily due to
$7.4 million of accretion and dividends relating to our Senior Preferred Stock
(Redeemable). See Note 3, Change in Accounting Principle, in the accompanying
unaudited condensed consolidated financial statements. Loss from debt extinguishment. We incurred a loss from debt
extinguishment of $11.1 million in the first six months of fiscal 2003. This
pre-tax charge included: (1) a $4.0 million write-off of deferred 23




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financing
costs, primarily related to our senior credit facility; (2) a charge of $7.6
million for the accretion of our sponsor facility to face value; (3) a charge
of $6.2 million realized foreign currency translation loss as a result of
retiring a portion of our Euro term loan facility with a corresponding credit
to accumulated
other comprehensive income; and (4) a credit of $6.7 million for the
reversal of the excess leverage fee accrual. Income tax expense.We recognized income tax expense of $2.6 million for
the first six months of fiscal 2004 compared to $1.7 million for the first six
months of 2003. We recorded valuation allowances against deferred tax assets
that were generated during these periods of $5.1 million in the 2004 period and
$8.7 million in the 2003 period. Due primarily to the magnitude of our
operating losses in fiscal 2003, our losses for the first six months of fiscal
2004 and the variability of our historical earnings, we do not believe that we
meet the more likely than not recoverability criteria necessary to recognize
our deferred tax assets, except for those assets which will be recovered
through known reversals of deferred tax liabilities. The overall effective tax
rate for both periods differs from the expected combined federal and state rate
of 38.9% due to the valuation allowances described above and the tax benefit
arising from certain items being deductible in the United States and also in
certain foreign jurisdictions. Liquidity and Capital Resources General We have historically funded our operations, capital expenditures and
working capital requirements with cash flows from operations, bank borrowings
and the issuance of other long-term indebtedness. We are highly leveraged and
have significant cash requirements for debt service relating to our senior
credit facility, senior notes, senior subordinated notes, industrial
development revenue bonds and foreign debt. As of the end of the second quarter of fiscal 2004, our principal sources
of liquidity consisted of cash of $10.1 million, working capital excluding cash
of $24.8 million, and available borrowing capacity of $27.3 million under our
revolving credit facility. We anticipate that our capital expenditures will not exceed $25 million
for fiscal 2004 and that approximately $10 million to $12 million is required
for maintenance of our business. We believe that we have sufficient
flexibility under our senior credit facility to meet these needs. We believe that offerings of additional debt securities are possible if
the need arises, although such offerings may not be available to us on
acceptable terms based on market conditions that exist at the time of any such
offering. Moreover, our ability to borrow is limited by our senior credit
facility, including compliance with the financial covenants therein, and the
limitations on the incurrence of additional indebtedness in the indentures
governing our senior notes and senior subordinated notes. We may be required
to refinance all or a portion of the principal amount of our outstanding debt
on or prior to maturity or a mandatory redemption date, and we may not have
sufficient capital available to us for any future acquisitions, joint ventures
or similar transactions. Although we believe that future borrowings under our revolving credit
facility will be available to fund our liquidity needs, availability of these
funds is subject to our satisfaction of certain terms and conditions, including
our ability to satisfy the financial covenants in our senior credit facility.
As discussed below, we have experienced difficulty in the past generating
sufficient operating revenues and cash flows to satisfy these financial
covenants and were required to negotiate amendments and obtain waivers from our
lenders. We may experience difficulty in the future satisfying these financial
covenants and, absent an amendment or waiver from our lenders, it could result
in an event of default under our senior credit facility and permit a majority
of the lenders to accelerate outstanding debt under our senior credit facility
and permit a majority of our lenders under our revolving credit facility to
terminate our revolving credit commitment (without acceleration of such debt)
and seize the cash in our operating accounts. Such acceleration would result
in cross-defaults under our senior notes and senior subordinated notes. In
that event, we may not have sufficient liquidity to make interest payments on
our debt and for operational and capital requirements. See Financial Covenant
Compliance above. 24




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Statement of Cash Flows Review Net cash used in our operating activities was $6.3 million for the first
six months of fiscal 2004 compared to net cash provided by operating activities
of $14.7 million for the first six months of fiscal 2003. The change is
primarily due to the required working
capital associated with the higher commodity costs and the related sales price
increases, cash deposits for our hedging contacts and European restructuring costs. Net cash used in our investing activities was $5.5 million for the first
six months of fiscal 2004 compared to $11.3 million for the first six months of
fiscal 2003. Capital expenditures for the first six months of fiscal 2004 were
$5.1 million compared to $9.6 million for the first six months of fiscal 2003. Net cash used in our financing activities was $7.2 million for the first
six months of fiscal 2004 compared to $3.5 million for the first six months of
fiscal 2003. In the first six months of fiscal 2004, we paid $3.0 million in
transaction fees and expenses relating to our March 9, 2004 amendment to our
senior credit facility and made scheduled payments in the amount of $3.2
million on the USD term loan facility of our senior credit facility.
Additionally in June 2004, we refinanced our European loans and borrowed $13.1
million, of which we used $11.8 million to repay the previous loans. The
purpose of the refinancing was to consolidate multiple loans. In the second
quarter of fiscal 2003, we received $210.4 million of gross proceeds from the
issuance of our senior notes that was used to repay a portion of the
outstanding debt under our senior credit facility, repay our sponsor facility
in full, and pay related transaction fees and expenses. Senior Credit Facility We are highly leveraged and have significant cash requirements for debt
service relating to our senior credit facility, senior notes, senior
subordinated notes, industrial development revenue bonds and foreign debt. Our
ability to borrow is limited by our senior credit facility, including
compliance with the financial covenants therein, and the limitations on the
incurrence of additional indebtedness in the indentures governing our senior
notes and senior subordinated notes. We entered into an amended and restated senior credit facility dated as of
May 8, 2000 with a syndicate of banks and other institutional investors, as
lenders, and JPMorgan Chase Bank, as administrative agent. Our senior credit
facility was subsequently amended in March 2001, March 2002, February 2003 and
March 2004. The facilities.As of the end of the second quarter of fiscal 2004, our
senior credit facility provides for total commitments as follows:  
    
    a Euro 30.1 million ($36.6 million assuming a Euro to USD exchange
rate of approximately 1.22) Euro term loan facility; and  
    
    $178.5 million, consisting of   a $128.5 million USD term loan facility; and a $50.0 million revolving credit facility, with a $20.0
million sub-limit for issuance of letters of credit. As of the end of the second quarter of fiscal 2004, we had $16.0 million
of borrowings outstanding under our revolving credit facility and $6.7 million
of letters of credit outstanding, resulting in $27.3 million of availability
under our revolving credit facility. Availability of funds under our senior
credit facility is subject to certain customary terms and conditions. 25




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Senior credit facility amendments.Effective March 9, 2004, we amended our
senior credit facility to (1) extend the maturity of the revolving credit
facility from March 31, 2005 to December 29, 2005; (2) permanently reduce the
borrowing capacity under the revolving credit facility from $60.0 million to
$50.0 million; (3) waive non-compliance with certain financial covenants as of
the end of fiscal 2003; (4) simplify the financial covenants to include only
minimum consolidated EBITDA, maximum senior secured leverage and capital
expenditure limits; and (5) increase our interest rates on all facilities by
0.25% as of March 9, 2004, an additional 0.25% on all facilities as of
September 30, 2004 and a final 1.00% on all facilities as of March 31, 2005. Interest rates.As of the end of the second quarter of fiscal 2004, all
loans under our senior credit facility bore interest at the higher of the Euro
dollar rate plus 5.00%, or the prime rate of the administrative agent plus
4.00%. As of the end of the second quarter of fiscal 2004, our Euro term loan
facility bore interest at 7.09%, and our USD term loan and revolving credit
facilities bore interest at 6.22%. Prepayments.The loans under our senior credit facility may be prepaid
and commitments may be reduced in certain specified minimum amounts. Optional
prepayments of the term loans are generally applied ratably to the four
tranches and ratably to the respective installments. Optional prepayments of
the term loans may not be reborrowed. Our senior credit facility also provides for mandatory prepayments of the
borrowings upon certain specified events and in certain specified percentages,
including:  
    
    100% of the net cash proceeds received by our parent, us or any of
our restricted subsidiaries from the issuance of indebtedness not
currently expressly permitted by our senior credit facility;
    
    100% of the net cash proceeds of any sale or other disposition of any
assets, subject to certain exceptions;
    
    100% of excess cash flow; and
    
    100% of the net proceeds of any sale or issuance of equity, subject to certain exceptions. Guarantees; collateral.We, our parent and certain of our domestic
subsidiaries are required to guarantee amounts outstanding under our senior
credit facility. To secure the indebtedness and obligations under our senior
credit facility, we, our parent and certain of our domestic subsidiaries have
pledged the following U.S. assets:  
    
    substantially all of our personal property assets, subject to certain
exceptions;
    
    substantially all of our real property assets and any subsequently
acquired real property having a fair market value in excess of $0.5
million, subject to certain exceptions;
    
    substantially all of our intellectual property assets; and
    
    substantially all of the stock owned or subsequently acquired by each
of us in each of our respective domestic subsidiaries and 65% of the
foreign subsidiaries owned directly by us or a domestic subsidiary. In addition, pursuant to the pledge agreement between DPC Investment Corp.
and Doane Pet Care Europe (ApS), 65% of the capital stock of Doane Pet Care
Europe (ApS) is pledged to secure the obligations under our senior credit
facility. 26




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Covenants.Our senior credit facility, as last amended on March 9, 2004,
contains financial and other covenants that we believe are usual and customary
for a secured credit agreement, including covenants that limit our and certain
of our subsidiaries abilities to, among other things:  
    
    incur indebtedness or issue guarantees;
    
    grant liens;
    
    make investments;
    
    make certain capital expenditures;
    
    make certain restricted payments; and
    
    enter into certain lines of business. Our senior credit facility also contains the following financial covenant
requirements:  
    
    Minimum Consolidated EBITDA. Our consolidated EBITDA, as defined in
the senior credit facility, must exceed the following amounts in the
respective periods: $16.2 million for the second quarter of fiscal
2004; $33.5 million for the first two quarters of fiscal 2004; $56.0
million for the first three quarters of fiscal 2004; $85.0 million for
the full year fiscal 2004; $90.0 million for the twelve-month period
ending in the first quarter of fiscal 2005; $95.0 million for the
twelve-month period ending in the second quarter of fiscal 2005; $97.0
million for the twelve-month period ending in the third quarter of
fiscal 2005; and $100.0 million for the full year fiscal 2005.Our senior credit facility defines consolidated EBITDA for any period as
consolidated net income for such period plus, without duplication and to
the extent reflected as a charge in the statement of such consolidated
net income for such period, the sum of (a) income tax expense, (b)
interest expense, amortization or writeoff of debt discount and debt
issuance costs and commissions, discounts and other fees and charges
associated with indebtedness (including the loans), (c) depreciation and
amortization expense, (d) amortization of intangibles (including, but not
limited to, goodwill) and organization costs, (e) any extraordinary,
unusual, transition or non-recurring expenses or losses (including,
whether or not otherwise includable as a separate item in the statement
of such consolidated net income for such period, non-cash losses on sales
of assets outside of the ordinary course of business), and (f) any other
non-cash charges (including any dividends or accretion on the existing
preferred stock or any replacement preferred stock to the extent not
actually paid in cash during such period) and minus, to the extent
included in the statement of such consolidated net income for such
period, the sum of (x) interest income, (y) any extraordinary, unusual or
non-recurring non-cash income or non-cash gains (including, whether or
not otherwise includable as a separate item in the statement of such
consolidated net income for such period, gains on the sales of assets
outside of the ordinary course of business) and (z) any other non-cash
income, all as determined on a consolidated basis.
    
    Senior Secured Leverage. Our consolidated senior secured debt ratio
as of certain specified periods must not exceed ratios as set forth
below: Fiscal quarter ending on ornearest to
    
    RatioJune 30, 2004
    
    
    2.60:1.00September 30, 2004
    
    
    2.50:1.00December 31, 2004 and thereafter until maturity
    
    
    2.00:1.00
 27




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Consolidated senior secured debt as of any day is the then outstanding
principal balance of the loans under the senior credit facility.
    
    Capital Expenditures. Capital expenditures must not exceed $27.0
million for each fiscal year commencing on or after January 3, 2004. We have experienced difficulty in the past satisfying financial covenants
in our senior credit facility and negotiated amendments and obtained waivers
for fiscal 2000, 2001 and 2003 due to covenant non-compliance. Our senior
credit facility, including the financial covenants, was last amended on March
9, 2004. Our ability to satisfy these covenants is determined based on our cash
flows, outstanding senior secured debt and capital expenditures. We may
experience difficulty satisfying these amended covenants in the future. It is
possible that, if domestic commodity prices increase beyond recent levels and
we are unable to recover such increased costs through price increases, we may
face additional challenges in satisfying our debt covenants. In addition, we
may face covenant challenges if any of our price increases adversely affect our
sales volume or if our price increases are not sustainable. If we are unable
to negotiate an amendment or secure a waiver from our lenders for any potential
default, it could result in an event of default under our senior credit
facility and permit a majority of the lenders to accelerate outstanding debt
under our senior credit facility and permit a majority of our lenders under our
revolving credit facility to terminate our revolving credit commitment (without
acceleration of such debt) and seize the cash in our operating accounts. Such
acceleration would result in cross-defaults under our senior notes and senior
subordinated notes. Events of default.Our senior credit facility contains default provisions
that we believe are customary for facilities and transactions of this type,
including default provisions relating to:  
    
    our failure to pay principal or interest when and as due or any other
amount under our senior credit facility within five days after such
amount becomes due;
    
    representations or warranties being inaccurate in any material
respect when made;
    
    cross-default to certain other indebtedness and agreements including
our senior notes and senior subordinated notes;
    
    bankruptcy or insolvency;
    
    actual invalidity, or invalidity asserted by us, of any security document;
    
    material judgments;
    
    certain ERISA events; and
    
    change of control or ownership. Liquidity As of the end of the second quarter of fiscal 2004, our principal sources
of liquidity consisted of cash of $10.1 million, working capital excluding cash
of $24.8 million, and $27.3 million of remaining availability under the
revolving credit facility out of a total availability of $50.0 million.
Availability of funds under the revolving credit facility is subject to our
satisfaction of certain terms and conditions, including our ability to satisfy
the financial covenants in our senior credit facility. See Covenants above.
We may be required to refinance all or a portion of the principal amount of our
outstanding debt on or prior to maturity or a mandatory redemption date. We
believe the capital expenditures permitted under our senior credit facility are
sufficient to provide us with the necessary flexibility to spend required
capital for fiscal 2004. 28




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Any future acquisitions, joint ventures or similar transactions will
likely require additional capital and we may not have such capital available to
us on commercially reasonable terms, on terms acceptable to us, or at all. Our
business may not generate sufficient cash flows or future borrowings may not be
available in an amount sufficient to enable us to make principal and interest
payments on our debt, including our senior notes and senior subordinated notes,
or to fund our other liquidity needs. In addition, our business may not
generate sufficient operating results and cash flows to allow us to comply with
the financial covenants in our senior credit facility. In the event of a
default under our senior credit facility, absent an amendment or a waiver from
our lenders, a majority of our lenders could accelerate outstanding debt under
our senior credit facility and a majority of our lenders under our revolving
credit facility could terminate our revolving credit commitment (without
acceleration of such debt) and seize the cash in our operating accounts. In
that event, we may not have sufficient liquidity to make interest payments on
our debt and for operational and capital requirements. Annual Maturities of Long-Term Debt A summary of the annual maturities of our long-term debt, including our
Senior Preferred Stock (Redeemable), as of the end of the second quarter of
fiscal 2004 follows (in thousands): End of fiscal
    
    Maturities2004
    
    $
    6,1732005
    
    
    137,7792006
    
    
    40,6492007
    
    
    249,4712008
    
    
    2,1522009 and thereafter
    
    
    231,104$
    667,328
 Commitments and Contingencies We believe our operations are in compliance in all material respects with
environmental, safety and other regulatory requirements. However, these
requirements may change in the future, which may cause us to incur material
costs to comply with these requirements or in connection with the effect of
these matters on our business. Inflation and Changes in Prices Our financial results depend to a large extent on the costs of raw
materials and packaging and our ability to pass through increased costs to our
customers. Historically, market prices for commodity grains and food stocks
have fluctuated in response to a number of factors, including changes in U.S.
government farm support programs, changes in international agricultural trading
policies, impacts of disease outbreaks on protein sources and the potential
effect on supply and demand, changes in international demand, as well as
weather conditions during the growing and harvesting seasons. Fluctuations in
paper prices, which affect our costs for packaging materials, have resulted
from changes in supply and demand, general economic conditions and other
factors. In addition, we have exposure to changes in pricing of natural gas,
which affects our manufacturing costs. Our results of operations have been
exposed to volatility in the commodity and natural gas markets in the past. We
have cost-sharing arrangements with certain of our domestic customers to reduce
the impact of volatile commodity costs; however, these arrangements only reduce
our exposure to such volatility in the future, and only as long as these
agreements continue in effect. In the event of any increases in raw materials, packaging and natural gas
costs, we may be required to seek additional sales price increases for our
products to avoid margin deterioration. For instance, because of
the increases in our raw material costs during fiscal 2003 and 2004, we
implemented a price increase in 29




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January 2004 and additional price increases in
the second quarter of fiscal 2004 for most of our domestic products. We cannot
provide any assurances as to the timing or extent of our ability to implement
future price adjustments in the event of increased raw materials, packaging or
natural gas costs or of whether any price increases implemented by us may
affect future sales volumes to our customers. Seasonality Our sales are moderately seasonal. We normally experience an increase in
net sales during the first and fourth quarters of each year, which is typical
in the pet food industry. Generally, cooler weather results in increased dog
food consumption. Recently Issued Accounting Pronouncements See Note 2, Recent Accounting Pronouncements, in the accompanying
unaudited condensed consolidated financial statements. Critical Accounting Policies Accounts receivable allowances.As of the end of the second quarter of
fiscal 2004 and the end of fiscal 2003, our gross accounts receivable were
$96.0 and $94.2 million, respectively. We had allowances of $2.6 million as of
the end of both the second quarter of fiscal 2004 and the end of fiscal 2003,
primarily for doubtful accounts and outstanding deductions with customers. Our
policy is to estimate our allowances by applying a recovery percentage based on
historical collection experience and performing a specific identification
review of customer account balances. We may revise our allowances against
accounts receivable as we receive more information or as we assess other
factors impacting the realizability of our accounts receivable. Inventories allowances.As of the end of the second quarter of fiscal
2004 and the end of fiscal 2003, our gross inventories were $76.3 and $73.0
million, respectively. We had allowances of $5.0 million and $4.4 million as of
the end of the second quarter of fiscal 2004 and the end of fiscal 2003,
respectively, primarily related to obsolescence of packaging inventories. Our
policy is to estimate our allowances based on specific identification of
obsolete stock keeping units, or SKUs, or probable SKUs to be rationalized. We
may revise our allowances against inventories as we receive more information or
as we assess other factors impacting the realizability of our inventories. Deferred tax assets.As of the end of the second quarter of fiscal 2004
and the end of fiscal 2003, our federal net operating loss, or NOL,
carryforwards were $141.2 million and $126.5 million, respectively, and our
foreign NOL carryforwards were $1.5 million and $2.2 million, respectively.
Our gross deferred tax assets, including federal, foreign, state and local NOL
carryforwards, were $77.0 million and $72.3 million as of the end of the second
quarter of fiscal 2004 and the end of fiscal 2003, respectively, and our gross
deferred tax liabilities were $57.4 million and $55.8 million, respectively.
We assess the realization of our deferred tax assets dependent upon our ability
to generate sufficient taxable income during the periods in which our deferred
tax assets may be utilized. This assessment incorporates a determination of
whether it is more likely than not that we will realize the benefit of our
existing deferred tax assets in future periods. When we determine that we do
not meet this probability criteria, we record valuation allowances that take
into consideration tax planning strategies, historical and projected earnings,
and the future reversal of taxable temporary differences. Due primarily to the magnitude of our operating losses in fiscal 2003, our
loss in the first six months of fiscal 2004 and the variability of our
historical earnings, we do not believe that we currently meet the more likely
than not recoverability criteria necessary to recognize our deferred tax
assets, except for those assets which will be recovered through known reversals
of deferred tax liabilities. Our consolidated valuation allowance was $48.2
million and $43.1 million as of the end of the second quarter of fiscal 2004
and the end of fiscal 2003, respectively. During the first six months of
fiscal 2004 and for the full year fiscal 2003, we recorded valuation allowances
against our U.S. federal and state deferred tax assets in the
amounts of $7.2 million and $35.2 million, respectively. We reduced our
valuation allowances against 30




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foreign deferred tax assets
in the amount of $2.1
million in the first six months of fiscal 2004, while for the full year fiscal
2003, we recorded valuation allowances in the amount of $7.3 million. The
reduction to the valuation allowance against foreign deferred tax assets in the
first six months of fiscal 2004 related to a tax law change in one of the
foreign jurisdictions in which we operate. The tax law change eliminated a
deferred tax asset in the amount of $6.3 million against which we had
previously recorded a valuation allowance in the full amount. Accordingly, we
wrote off the deferred tax asset and made a corresponding reduction to the
associated valuation allowance. The offsetting increase of $4.2 million was
recorded against deferred tax assets generated in foreign jurisdictions during
the first six months of 2004 resulting in a net reduction of $2.1 million to
the valuation allowance against deferred tax assets in foreign jurisdictions in
the first six months of fiscal 2004. Due to these recent changes, we are in
the process of evaluating our foreign corporate tax strategies, and plan to
have that evaluation completed by the end of fiscal 2004. We do not expect any
adverse changes in our effective tax rate in the near term. We currently
expect that future years deferred income tax expense (benefit) will include
deferred income tax expense in an amount approximating the growth in our
deferred tax liabilities related to the tax amortization of goodwill and other
intangible assets recognized on our income tax return. Goodwill and trademarks.As of the end of the second quarter of fiscal
2004 and the end of fiscal 2003, our goodwill and trademarks were $377.5
million and $380.4 million, respectively. Our policy is to test the fair value
of goodwill and trademarks for impairment annually in the fourth quarter of
each fiscal year and upon the occurrence of certain events. Our impairment
test includes quantitative analyses of discounted future cash flows, market
multiples of earnings and comparable transactions. If the estimated fair value
of goodwill or trademarks of either the domestic or international reporting
unit is less than the carrying value, an impairment loss will be recognized.
In the fourth quarter of fiscal 2003, we performed our annual assessment of
impairment and determined no impairment was evident at this date. 
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risks, which may give rise to losses from adverse
changes in market prices and rates. Our market risks could arise from changes
in commodity prices, interest rates and foreign currency exchange rates. Commodity price risk.We are exposed to market risk related to changes in
commodity prices. We have in the past and may continue to seek to manage our
commodity price risk associated with market fluctuations by using derivative
instruments for portions of our corn, soybean meal, alternative proteins and
natural gas purchases, principally through exchange traded futures and options
contracts. The terms of such contracts are generally less than one year. During
the term of a contract, we balance positions daily with cash payments to or
from the exchanges. At the termination of a contract, we have the ability to
settle financially or by exchange for the physical commodity, in which case, we
would deliver the contract against the acquisition of the physical commodity.
Our policy does not permit speculative commodity trading. Although we seek to manage the price risk of market fluctuations by
hedging portions of our primary commodity product purchases, our results of
operations have been adversely affected in the past by these fluctuations and
may in the future. It is possible that, if domestic commodity prices increase
beyond recent levels and we are unable to recover such increased costs through
price increases, we may face additional challenges in satisfying our debt
covenants. In addition, we may face covenant challenges if any of our price
increases adversely affect our sales volume or if our price increases are not
sustainable. See Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources  Senior
Credit Facility and Financial Covenant Compliance. Moreover, the use of
futures contracts also reduces our ability to take advantage of short-term
reductions in raw material prices. If one or more of our competitors is able to
reduce their costs by taking advantage of any reductions in raw material
prices, we may face pricing pressures from these competitors and may be forced
to reduce our prices or face a decline in net sales, either of which could have
a material adverse effect on our business, results of operations and financial
condition. 31




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Our commodity derivative instruments are measured at fair value under SFAS 133, in our accompanying unaudited condensed consolidated financial statements.
Our results of operations have been adversely affected in the past by
volatility in commodity prices under the SFAS 133 fair value accounting of our
commodity derivative instruments and our results of operations may be adversely
affected in the future by SFAS 133 accounting. As of the end of the second quarter of fiscal 2004, we had open commodity
contracts with a fair value loss of $4.1 million. Based upon an analysis we
completed at the end of the second quarter of fiscal 2004 in which we utilized
our actual derivative contractual volumes and assumed a 5% adverse movement in
commodity prices, we determined the potential decrease in the fair value of our
commodity derivative instruments would be approximately $1.2 million. With the changes in our pricing strategy resulting from reaching
cost-sharing arrangements, we have and will continue to collaborate with our
customers on any hedging strategies we may pursue. Interest rate risk.We are exposed to market risk related to changes in
interest rates. We periodically use interest rate swap and cap contracts to
limit our exposure to the interest rate risk associated with our domestic
floating rate debt, which totaled $181.1 million at the end of the second
quarter of fiscal 2004. Changes in market values of these financial instruments
are highly correlated with changes in market values of the hedged item both at
inception and over the life of the contract. As of the end of the second
quarter of fiscal 2004, we had no open interest rate swap or cap contracts. Our net loss is affected by changes in interest rates. Assuming a 100
basis point increase in interest rates on our floating rate debt, our net
income would decrease by approximately $0.5 million and $0.9 million for the
second quarter and first six months of fiscal 2004, respectively. In addition,
such a change would result in a decrease of approximately $14.3 million in the
fair value of our fixed rate debt at the end of the second quarter of fiscal
2004. In the event of an adverse change in interest rates, we could take
action to mitigate our exposure; however, due to the uncertainty of these
potential actions and their possible effects, our analysis assumes no such
actions. Furthermore, our analysis does not consider the effect of any changes
in the level of overall economic activity that may exist in such an
environment. Foreign currency exchange risk.Our financial position and results of
operations are affected by foreign currency exchange rate fluctuations. Our
European operations sell pet food products throughout Europe. In connection
with our fiscal 2000 acquisition of Arovit, we funded a portion of the
acquisition with Euro-denominated debt and designated our Euro-denominated debt
as a hedge of our net investment in Europe. The cumulative translation
adjustment for the net investment in our foreign operations is recorded in
accumulated other comprehensive income (loss) in the accompanying unaudited
condensed consolidated financial statements. As of the end of the second
quarter of fiscal 2004, we had a cumulative translation gain of $50.3 million,
which included an unrealized cumulative loss of $9.5 million for the
translation of our Euro-denominated debt to U.S. dollars, that has been
recognized in the accompanying unaudited condensed consolidated financial
statements. We are exposed to foreign currency exchange risk arising from transactions
in the normal course of business in Europe as well as the translation of the
results of our European operations. From time to time, we may enter into
foreign currency forward contracts for the purchase or sale of a currency to
mitigate the risk from foreign currency exchange rate fluctuations in those
transactions. Accordingly, changes in market values of these financial
instruments are highly correlated with changes in the market values of the
hedged items both at inception and over the life of the contracts. Changes in
fair value of foreign currency forward contracts that qualify for hedge
accounting are recorded in accumulated other comprehensive income (loss), net
of deferred taxes, in our consolidated balance sheet until they are realized,
at which point, they are recognized in other income, net, in the accompanying
consolidated statements of income. All other gains and losses on foreign
currency forward contracts are recorded as an increase or decrease in net sales
in our consolidated statements of income as they occur. As of the end of the
second quarter of fiscal 2004, we had no material open foreign currency forward
or option contracts. 32




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ITEM 4. Controls and Procedures Evaluation of disclosure controls and procedures.Our disclosure controls
and procedures are designed to ensure that information required to be disclosed
in the reports that we file or submit under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the quarterly period ending
July 3, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective. Changes in internal controls.There were no significant changes in our
internal controls or in other factors that could significantly affect our
internal controls subsequent to the date of their evaluation, nor were there
any significant deficiencies or material weaknesses in our internal controls.
As a result, no corrective actions were required or undertaken. 33




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PART II. Other Information 
 ITEM 1. Legal Proceedings See Note 10, Commitments and Contingencies, in the accompanying unaudited
condensed consolidated financial statements included in Part I, Item 1 of this
quarterly report on Form 10-Q, which is incorporated by reference in this Part
II, Item 1. 
 ITEM 6. Exhibits and Reports on Form 8-K  (a) ExhibitsExhibitNumber

Description10.1
    
    Amendment No. 5 to Amended and Restated Credit Agreement
dated as of March 9, 2004 among Doane Pet Care Enterprises, Inc.,
Doane Pet Care Company, as borrower, Doane/Windy Hill Joint Venture
L.L.C., DPC Investment Corp. and JPMorgan Chase Bank, as
administrative agent, and the lenders party thereto (incorporated by
reference to Doane Pet Care Companys Annual Report on Form 10-K for
the year ended January 3, 2004).10.2
    *
    Change in Control Severance Agreement dated April 22, 2004,
between Doane Pet Care Company and Douglas J. Cahill.10.3
    *
    Change in Control Severance Agreement dated April 22, 2004,
between Doane Pet Care Company and David L. Horton.10.4
    *
    Change in Control Severance Agreement dated April 22, 2004,
between Doane Pet Care Company and Joseph J. Meyers.10.5
    *
    Change in Control Severance Agreement dated April 22, 2004,
between Doane Pet Care Company and Philip K. Woodlief.15.1
    *
    Letter from KPMG LLP dated July 27, 2004 regarding unaudited
interim financial information.31.1
    *
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) / 15(d)-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2
    *
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) / 15(d)-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes Oxley
Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.   *
    
    Filed herewith.
    
    Not consider to be filed for the purposes of Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to the liabilities of that section.
    
    Management contracts or compensatory plans or arrangements. 34




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(b) Reports on Form 8-K  The following report on Form 8-K was furnished during the second quarter
of fiscal 2004:Report on Form 8-K dated May 17, 2004 was furnished pursuant to Item 9
and Item 12 of Form 8-K in connection with our issuance of a press
release announcing our first quarter of fiscal 2004 results and
discussing other matters set forth therein. We also announced that we had
provided the Securities and Exchange Commission with certifications of
our Chief Executive Officer and Chief Financial Officer on May 17, 2004
in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.Information in Form 8-K furnished pursuant to Item 9 and Item 12 is not
considered to be filed for the purposes of Section 18 of the Exchange
Act or otherwise subject to the liabilities of that section, except if
Doane specifically states that the information is to be considered
filed under the Exchange Act or incorporates it by reference into a
filing under the Securities Act or the Exchange Act. 35




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized. DOANE PET CARE COMPANYBy:
    
    /s/ PHILIP K. WOODLIEFPhilip K. WoodliefVice President, Finance andChief Financial OfficerBy:
    
    /s/ STEPHEN P. HAVALAStephen P. HavalaCorporate Controller andPrincipal Accounting OfficerDate: August 12, 2004
 36




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EXHIBIT INDEX   ExhibitNumber
    
    Description10.1
    

    Amendment No. 5 to Amended and Restated Credit Agreement
dated as of March 9, 2004 among Doane Pet Care Enterprises, Inc.,
Doane Pet Care Company, as borrower, Doane/Windy Hill Joint Venture
L.L.C., DPC Investment Corp. and JPMorgan Chase Bank, as
administrative agent, and the lenders party thereto (incorporated by
reference to Doane Pet Care Companys Annual Report on Form 10-K for
the year ended January 3, 2004).10.2
    *

    Change in Control Severance Agreement dated April 22, 2004,
between Doane Pet Care Company and Douglas J. Cahill.10.3
    *

    Change in Control Severance Agreement dated April 22, 2004,
between Doane Pet Care Company and David L. Horton.10.4
    *

    Change in Control Severance Agreement dated April 22, 2004,
between Doane Pet Care Company and Joseph J. Meyers.10.5
    *

    Change in Control Severance Agreement dated April 22, 2004,
between Doane Pet Care Company and Philip K. Woodlief.15.1
    *

    Letter from KPMG LLP dated July 27, 2004, regarding
unaudited interim financial information.31.1
    *

    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) / 15(d)-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes Oxley
Act of 2002.31.2
    *

    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) / 15(d)-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes Oxley
Act of 2002.32.1
    

    Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    

    Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.   *
    
    Filed herewith.
    
    Not consider to be filed for the purposes of Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to the liabilities of that section.
    
    Management contracts or compensatory plans or arrangements.