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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 April 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
    
    43-1350515(State or Other Jurisdiction of
Incorporation or Organization)
    
    (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 May 17, 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 first quarter of fiscal 2004 and the end of fiscal 2003
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the first quarter 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 quarter of fiscal 2004
    
    
    3Unaudited Condensed Consolidated Statements of Cash Flows for the first quarter of fiscal 2004 and 2003
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Independent Accountants Review Report
    
    
    17Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    31PART II. Other InformationItem 1. Legal Proceedings
    
    
    32Item 6. Exhibits and Reports on Form 8-K
    
    
    32Signatures
    
    
    33Letter regarding unaudited interim financial infoCert. of CEO pursuant to Rule 13a-14a/15d-14aCert. of CFO pursuant to Rule 13a-14a/15d-14aCertification 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 ofFirst quarter
    
    Fiscal2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,146
    
    
    $
    29,293Accounts receivable, net
    
    
    84,507
    
    
    
    91,569Inventories, net
    
    
    70,108
    
    
    
    68,619Deferred tax assets
    
    
    2,265
    
    
    
    1,898Prepaid expenses and other current assets
    
    
    11,183
    
    
    
    14,390Total current assets
    
    
    188,209
    
    
    
    205,769Property, plant and equipment, net
    
    
    257,598
    
    
    
    266,457Goodwill and trademarks
    
    
    377,957
    
    
    
    380,418Other assets
    
    
    35,840
    
    
    
    33,270Total assets
    
    $
    859,604
    
    
    $
    885,914LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    16,911
    
    
    $
    13,185Accounts payable
    
    
    86,489
    
    
    
    100,512Accrued liabilities
    
    
    48,527
    
    
    
    51,719Total current liabilities
    
    
    151,927
    
    
    
    165,416Long-term debt:Long-term debt, excluding current maturities
    
    
    554,682
    
    
    
    560,861Senior Preferred Stock (Redeemable)
    
    
    94,709
    
    
    
    Total long-term debt
    
    
    649,391
    
    
    
    560,861Deferred tax liabilities
    
    
    29,759
    
    
    
    28,524Other long-term liabilities
    
    
    9,170
    
    
    
    8,863Total liabilities
    
    
    840,247
    
    
    
    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
    
    
    46,151
    
    
    
    50,185Accumulated deficit
    
    
    (142,468
    )
    
    
    (134,661
    )Total stockholders equity
    
    
    19,357
    
    
    
    31,198Total liabilities and stockholders equity
    
    $
    859,604
    
    
    $
    885,914
 See accompanying notes to the unaudited condensed consolidated financial statements and accompanying independent accountants review report. 1




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DOANE PET CARE COMPANY AND SUBSIDIARIES 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 First quarter2004
    
    2003Net sales
    
    $
    270,880
    
    
    $
    259,949Cost of goods sold
    
    
    230,062
    
    
    
    214,589Gross profit
    
    
    40,818
    
    
    
    45,360Operating expenses:Promotion and distribution
    
    
    14,227
    
    
    
    14,410Selling, general and administrative
    
    
    13,183
    
    
    
    12,108Amortization
    
    
    1,229
    
    
    
    1,154Other operating expenses
    
    
    1,223
    
    
    
    Income from operations
    
    
    10,956
    
    
    
    17,688Interest expense, net
    
    
    17,977
    
    
    
    14,015Debt extinguishments
    
    
    
    
    
    
    11,113Other expense (income), net
    
    
    (407
    )
    
    
    (171
    )Loss before income taxes
    
    
    (6,614
    )
    
    
    (7,269
    )Income tax expense
    
    
    1,193
    
    
    
    605Net loss
    
    
    (7,807
    )
    
    
    (7,874
    )Preferred stock dividends and accretion
    
    
    
    
    
    
    (3,215
    )Net loss available to common shares
    
    $
    (7,807
    )
    
    $
    (11,089
    )
 See accompanying notes to the unaudited condensed consolidated financial statements and accompanying independent accountants review report. 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 (loss)
    
    deficit
    
    TotalBalances at end of fiscal 2003
    
    
    1,000
    
    
    $
    
    
    
    $
    115,674
    
    
    $
    50,185
    
    
    $
    (134,661
    )
    
    $
    31,198Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,807
    )
    
    
    (7,807
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,034
    )
    
    
    
    
    
    
    (4,034
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,841
    )Balances at end of first quarter 2004
    
    
    1,000
    
    
    $
    
    
    
    $
    115,674
    
    
    $
    46,151
    
    
    $
    (142,468
    )
    
    $
    19,357
 See accompanying notes to the unaudited condensed consolidated financial statements and accompanying independent accountants review report. 3




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DOANE PET CARE COMPANY AND SUBSIDIARIES 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 First quarter2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (7,807
    )
    
    $
    (7,874
    )Items not requiring (providing) cash:Depreciation
    
    
    8,384
    
    
    
    7,121Amortization
    
    
    1,478
    
    
    
    1,402Deferred income tax expense (benefit)
    
    
    917
    
    
    
    (91
    )Non-cash interest expense
    
    
    4,658
    
    
    
    1,984Equity in joint ventures
    
    
    (298
    )
    
    
    (107
    )Debt extinguishments
    
    
    
    
    
    
    11,113Asset impairments
    
    
    420
    
    
    
    Changes in current assets and liabilities
    
    
    (9,796
    )
    
    
    (13,403
    )Net cash provided by (used in) operating activities
    
    
    (2,044
    )
    
    
    145Cash flows from investing activities:Capital expenditures
    
    
    (2,124
    )
    
    
    (4,299
    )Other, net
    
    
    (438
    )
    
    
    (843
    )Net cash used in investing activities
    
    
    (2,562
    )
    
    
    (5,142
    )Cash flows from financing activities:Net repayments under revolving credit agreements
    
    
    
    
    
    
    (8,700
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    210,444Principal payments on long-term debt
    
    
    (1,530
    )
    
    
    (189,902
    )Payments for debt issuance costs
    
    
    (2,990
    )
    
    
    (7,771
    )Net cash provided by (used in) financing activities
    
    
    (4,520
    )
    
    
    4,071Effect of exchange rate changes on cash and cash equivalents
    
    
    (21
    )
    
    
    133Decrease in cash and cash equivalents
    
    
    (9,147
    )
    
    
    (793
    )Cash and cash equivalents, beginning of period
    
    
    29,293
    
    
    
    7,596Cash and cash equivalents, end of period
    
    $
    20,146
    
    
    $
    6,803
 See accompanying notes to the unaudited condensed consolidated financial statements and accompanying independent accountants review report. 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 generally accepted
accounting principles for complete financial statements. The 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 first quarters of
fiscal 2004 and 2003 ending on April 3, 2004 and March 29, 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, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in
an entity through means other than voting rights and accordingly if 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 balance
sheet. As the Company continues to evaluate the impact of applying FIN 46R,
entities may be identified that need to be consolidated by the Company. In January 2004, the FASB issued Staff Position 106-1, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug Improvement
and Modernization Act of 2003, or FSP 106-1, which 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 and as a result amounts and disclosures
relating to the postretirement benefit obligation or net periodic
postretirement benefit costs in the condensed consolidated financial statements and in Note 9, Benefit Plans, do not reflect these
effects. Future authoritative guidance could 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 requires 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 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 first quarter 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 ofFirst quarter
    
    Fiscal2004
    
    2003Raw materials
    
    $
    13,715
    
    
    $
    15,508Packaging materials
    
    
    22,176
    
    
    
    23,237Finished goods
    
    
    38,832
    
    
    
    34,23574,723
    
    
    
    72,980Allowances
    
    
    (4,615
    )
    
    
    (4,361
    )Total
    
    $
    70,108
    
    
    $
    68,619
 (5) Long-Term Debt and Liquidity A summary of long-term debt follows (in thousands): End ofFirst quarter
    
    Fiscal2004
    
    2003Revolving Credit Facility
    
    $
    16,000
    
    
    $
    16,000Term Loan Facilities
    
    
    168,150
    
    
    
    169,322Senior notes
    
    
    210,870
    
    
    
    210,779Senior subordinated notes
    
    
    148,878
    
    
    
    148,789Debt of foreign subsidiaires
    
    
    13,210
    
    
    
    14,674Industrial development revenue bonds
    
    
    14,485
    
    
    
    14,482571,593
    
    
    
    574,046Less: Current maturities
    
    
    (16,911
    )
    
    
    (13,185
    )Subtotal
    
    
    554,682
    
    
    
    560,861Senior Preferred Stock (Redeemable)
    
    
    94,709
    
    
    
    Total
    
    $
    649,391
    
    
    $
    560,861
 As of the end of the first quarter of fiscal 2004, the Companys senior
credit facility provided for total commitments of a Euro 30.1 million Euro Term
Loan Facility ($36.8 million assuming a Euro to USD exchange rate of
approximately 1.22) and $181.4 million, consisting of a $131.4 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 first 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%. These rates will increase 0.25% on September 30, 2004 and a final
1.00% on March 31, 2005. As of the end of the first quarter of fiscal 2004,
the Euro Term Loan Facility bore interest at 7.20%, the USD Term Loan Facility
bore interest at 6.18% and the Revolving Credit Facility bore interest at
8.00%. 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 borrowing capacity
under the Revolving Credit Facility from $60.0 million to $50.0 million; (3)
waive non- 6




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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 first 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
    
    
    
    
    
    
    36,794
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,794USD Term Loan Facility:Tranche A
    
    March 31, 2005
    
    
    8,599
    
    
    
    4,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,186Tranche B
    
    December 31, 2005
    
    
    
    
    
    
    79,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,102Tranche C
    
    December 31, 2006
    
    
    
    
    
    
    
    
    
    
    39,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,068Subtotal
    
    
    
    
    8,599
    
    
    
    120,483
    
    
    
    39,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168,150Senior notes
    
    March 1, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210,870
    
    
    
    210,870Senior subordinated notes
    
    May 15, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148,878
    
    
    
    
    
    
    
    
    
    
    
    148,878Other
    
    Various
    
    
    3,052
    
    
    
    3,562
    
    
    
    2,451
    
    
    
    2,803
    
    
    
    1,201
    
    
    
    14,626
    
    
    
    27,695Senior Preferred Stock
(Redeemable)
    
    September 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,709
    
    
    
    
    
    
    
    
    
    
    
    94,709Total
    
    
    
    $
    11,651
    
    
    $
    140,045
    
    
    $
    41,519
    
    
    $
    246,390
    
    
    $
    1,201
    
    
    $
    225,496
    
    
    $
    666,302
 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 further and the Company is unable to recover such
increased costs through price increases, the Company may face additional
challenges in covenant compliance. In addition, the Company may face covenant
challenges if its price increases adversely affect sales volume. If the
Company is unable to negotiate an amendment or secure a waiver from its lenders
for any potential default, it could 7




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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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. (6) Accruals for Restructuring Costs A rollforward of the Companys accrued restructuring costs for the first
quarter of fiscal 2004 follows (in thousands): First quarter2004Balance at end of fiscal 2003
    
    $
    1,154Severance
    
    
    1,638Cash payments
    
    
    (869
    )Balance at end of first quarter 2004
    
    $
    1,923
 The Company continued to implement phases of its European restructuring
plan in the first quarter of fiscal 2004. This plan initiates an
operational strategy to better focus the Companys resources and permanently
reduce its cost structure through the optimization of its production facilities
and reduction of its workforce. The Company began the optimization of its
production facilities with the consolidation of the production and
most of the equipment from the manufacturing facility in Vrä, Denmark into the
Companys facility in Esbjerg, Denmark and its recently expanded facility in
Carat, Austria during fiscal 2004. The Company recorded initial costs related
to the restructuring in the fourth quarter of fiscal 2003, consisting of asset
impairments of $5.3 million for the building and certain equipment at the Vrä,
Denmark facility that the Company anticipates will not be utilized, but instead
disposed of or sold. The Company expects to incur total restructuring costs of
approximately $5 million to $6 million, excluding asset impairments, for its European
restructuring efforts consisting of approximately (1) $3.0 million for severance; (2) $1.5
million for the installation of transferred equipment; and (3) $1.0 million
relating to operating inefficiencies through the transition period. As of the end of and
for the first quarter of fiscal 2004, the Company recorded $1.6 million of
severance costs as other operating expenses. The future expected payout of the Companys accrued restructuring costs as
of the end of the first quarter of fiscal 2004 follows (in thousands): Fiscal years ending
    
    Payout2004
    
    $
    1,4772005
    
    
    3822006
    
    
    64Total
    
    $
    1,923
 (7) Comprehensive Income (Loss) The components of comprehensive income (loss) were as follows (in
thousands): 8




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DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) First quarter2004
    
    2003Comprehensive income (loss):Net loss
    
    $
    (7,807
    )
    
    $
    (7,874
    )Foreign currency translation
    
    
    (4,034
    )
    
    
    11,384Unrealized gain on interest rate swap, net
of deferred tax expense of $187
    
    
    
    
    
    
    293Total
    
    $
    (11,841
    )
    
    $
    3,803
 (8) Stock Option Plan of Parent The Company and its Parent 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 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 first quarter of fiscal 2004 and 2003 would have been adjusted as
follows (in thousands): First quarter2004
    
    2003Net loss available to common shares
    
    $
    (7,807
    )
    
    $
    (11,089
    )Less: Total stock-based employee
compensation expense determined based on
the fair value method for all awards, net of
income tax benefit
    
    
    (1
    )
    
    
    (2
    )Pro forma net loss available to common shares
    
    $
    (7,808
    )
    
    $
    (11,091
    )
 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 first quarter 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 a defined benefit, non-contributory pension plan covering
certain hourly and salaried employees which was frozen on May 28, 1998. 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. In addition, the Company
terminated a defined benefit, non-contributory pension plan on May 31, 1998
that previously covered all non-bargaining employees. The Companys only active
pension plan covers approximately 50 union employees at one of its facilities. The pension plan information below has been determined
based on the three months ending March 31, 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 quarter of
fiscal 2004. The Company expects to contribute approximately
$0.1 million to its active plan in fiscal 2004. A summary of net periodic pension cost for the Companys pension plans
follows (in thousands): 9




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) First quarter2004
    
    2003Service cost
    
    $
    9
    
    
    $
    7Interest cost
    
    
    270
    
    
    
    268Expected income on plan assets
    
    
    (347
    )
    
    
    (311
    )Recognition of actuarial loss
    
    
    169
    
    
    
    184Amortization
    
    
    4
    
    
    
    3Net periodic pension cost
    
    $
    105
    
    
    $
    151
 Postretirement Plan The Company has a postretirement 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 Company expects to contribute $0.5 million to the plan in fiscal 2004. The
postretirement plan information below has been determined based on the three
months ending March 31, 2004 and 2003, respectively. A summary of net periodic postretirement cost for the Companys
postretirement plan follows (in thousands): First quarter2004
    
    2003Service cost
    
    $
    3
    
    
    $
    5Interest cost
    
    
    75
    
    
    
    78Amortization
    
    
    14
    
    
    
    7Net periodic postretirement cost
    
    $
    92
    
    
    $
    90
 (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. The Company does not
expect the future royalty payments to have a material impact on its results of
operations. 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 first quarter of fiscal 2004 and the end of fiscal 2003 and for the
first quarter of fiscal 2004 and 2003 is disclosed to comply with the reporting
requirements of the Companys 10




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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): 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 first quarter 2004Non-
    
    IntercompanyGuarantor
    
    guarantor
    
    eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,050
    
    
    $
    3,096
    
    
    $
    
    
    
    $
    20,146Accounts receivable, net
    
    
    31,986
    
    
    
    52,521
    
    
    
    
    
    
    
    84,507Inventories, net
    
    
    43,243
    
    
    
    26,865
    
    
    
    
    
    
    
    70,108Deferred tax assets
    
    
    2,265
    
    
    
    
    
    
    
    
    
    
    
    2,265Prepaid expenses and other current assets
    
    
    8,839
    
    
    
    2,344
    
    
    
    
    
    
    
    11,183Total current assets
    
    
    103,383
    
    
    
    84,826
    
    
    
    
    
    
    
    188,209Property, plant and equipment, net
    
    
    152,998
    
    
    
    104,600
    
    
    
    
    
    
    
    257,598Goodwill and trademarks
    
    
    267,780
    
    
    
    110,177
    
    
    
    
    
    
    
    377,957Other assets
    
    
    254,060
    
    
    
    13,280
    
    
    
    (231,500
    )
    
    
    35,840Total assets
    
    $
    778,221
    
    
    $
    312,883
    
    
    $
    (231,500
    )
    
    $
    859,604LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    13,186
    
    
    $
    3,725
    
    
    $
    
    
    
    $
    16,911Accounts payable
    
    
    44,296
    
    
    
    42,193
    
    
    
    
    
    
    
    86,489Accrued liabilities
    
    
    32,936
    
    
    
    15,591
    
    
    
    
    
    
    
    48,527Total current liabilities
    
    
    90,418
    
    
    
    61,509
    
    
    
    
    
    
    
    151,927Long-term debt:Long-term debt, excluding current maturities
    
    
    545,197
    
    
    
    163,666
    
    
    
    (154,181
    )
    
    
    554,682Senior Preferred Stock (Redeemable)
    
    
    94,709
    
    
    
    
    
    
    
    
    
    
    
    94,709Total long-term debt
    
    
    639,906
    
    
    
    163,666
    
    
    
    (154,181
    )
    
    
    649,391Deferred tax liabilities
    
    
    27,459
    
    
    
    2,300
    
    
    
    
    
    
    
    29,759Other long-term liabilities
    
    
    9,170
    
    
    
    
    
    
    
    
    
    
    
    9,170Total liabilities
    
    
    766,953
    
    
    
    227,475
    
    
    
    (154,181
    )
    
    
    840,247Commitments and contingenciesStockholders equity:Common stock, $0.01 par value; 1,000 shares
authorized, issued and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional paid-in-capital
    
    
    115,674
    
    
    
    78,305
    
    
    
    (78,305
    )
    
    
    115,674Accumulated other comprehensive income (loss)
    
    
    (14,744
    )
    
    
    59,909
    
    
    
    986
    
    
    
    46,151Accumulated deficit
    
    
    (89,662
    )
    
    
    (52,806
    )
    
    
    
    
    
    
    (142,468
    )Total stockholders equity
    
    
    11,268
    
    
    
    85,408
    
    
    
    (77,319
    )
    
    
    19,357Total liabilities and stockholders equity
    
    $
    778,221
    
    
    $
    312,883
    
    
    $
    (231,500
    )
    
    $
    859,604
 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 Balance Sheets
For The Guarantor and Non-Guarantor Subsidiaries End of fiscal 2003Non-
    
    IntercompanyGuarantor
    
    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
 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 quarter 2004Non-Guarantor
    
    guarantor
    
    ConsolidatedNet sales
    
    $
    199,438
    
    
    $
    71,442
    
    
    $
    270,880Cost of goods sold
    
    
    173,336
    
    
    
    56,726
    
    
    
    230,062Gross profit
    
    
    26,102
    
    
    
    14,716
    
    
    
    40,818Operating expenses:Promotion and distribution
    
    
    6,775
    
    
    
    7,452
    
    
    
    14,227Selling, general and administrative
    
    
    8,433
    
    
    
    4,750
    
    
    
    13,183Amortization
    
    
    1,021
    
    
    
    208
    
    
    
    1,229Other operating expenses
    
    
    (415
    )
    
    
    1,638
    
    
    
    1,223Income from operations
    
    
    10,288
    
    
    
    668
    
    
    
    10,956Interest expense, net
    
    
    11,751
    
    
    
    6,226
    
    
    
    17,977Other expense (income), net
    
    
    (613
    )
    
    
    206
    
    
    
    (407
    )Loss before income taxes
    
    
    (850
    )
    
    
    (5,764
    )
    
    
    (6,614
    )Income tax expense
    
    
    931
    
    
    
    262
    
    
    
    1,193Net loss
    
    $
    (1,781
    )
    
    $
    (6,026
    )
    
    $
    (7,807
    )
 First quarter 2003Non-Guarantor
    
    guarantor
    
    ConsolidatedNet sales
    
    $
    201,845
    
    
    $
    58,104
    
    
    $
    259,949Cost of goods sold
    
    
    171,250
    
    
    
    43,339
    
    
    
    214,589Gross profit
    
    
    30,595
    
    
    
    14,765
    
    
    
    45,360Operating expenses:Promotion and distribution
    
    
    8,036
    
    
    
    6,374
    
    
    
    14,410Selling, general and administrative
    
    
    8,039
    
    
    
    4,069
    
    
    
    12,108Amortization
    
    
    960
    
    
    
    194
    
    
    
    1,154Income from operations
    
    
    13,560
    
    
    
    4,128
    
    
    
    17,688Interest expense, net
    
    
    6,341
    
    
    
    7,674
    
    
    
    14,015Debt extinguishments
    
    
    11,113
    
    
    
    
    
    
    
    11,113Other expense (income), net
    
    
    (318
    )
    
    
    147
    
    
    
    (171
    )Loss before income taxes
    
    
    (3,576
    )
    
    
    (3,693
    )
    
    
    (7,269
    )Income tax expense
    
    
    
    
    
    
    605
    
    
    
    605Net loss
    
    
    (3,576
    )
    
    
    (4,298
    )
    
    
    (7,874
    )Preferred stock dividends and accretion
    
    
    (3,215
    )
    
    
    
    
    
    
    (3,215
    )Net loss available to common shares
    
    $
    (6,791
    )
    
    $
    (4,298
    )
    
    $
    (11,089
    )
 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 quarter 2004Non-Guarantor
    
    guarantor
    
    ConsolidatedCash flows from operating activities:Net loss
    
    $
    (1,781
    )
    
    $
    (6,026
    )
    
    $
    (7,807
    )Items not requiring (providing) cash:Depreciation and amortization
    
    
    5,627
    
    
    
    4,235
    
    
    
    9,862Deferred income tax expense (benefit)
    
    
    931
    
    
    
    (14
    )
    
    
    917Asset impairments
    
    
    420
    
    
    
    
    
    
    
    420Other non-cash charges (income), net
    
    
    4,441
    
    
    
    (81
    )
    
    
    4,360Changes in current assets and liabilities
    
    
    (14,290
    )
    
    
    4,494
    
    
    
    (9,796
    )Net cash provided by (used in) operating activities
    
    
    (4,652
    )
    
    
    2,608
    
    
    
    (2,044
    )Cash flows from investing activities:Capital expenditures
    
    
    (1,096
    )
    
    
    (1,028
    )
    
    
    (2,124
    )Other, net
    
    
    202
    
    
    
    (640
    )
    
    
    (438
    )Net cash used in investing activities
    
    
    (894
    )
    
    
    (1,668
    )
    
    
    (2,562
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (353
    )
    
    
    (1,177
    )
    
    
    (1,530
    )Payments for debt issuance costs
    
    
    (2,990
    )
    
    
    
    
    
    
    (2,990
    )Net cash used in financing activities
    
    
    (3,343
    )
    
    
    (1,177
    )
    
    
    (4,520
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (21
    )
    
    
    (21
    )Decrease in cash and cash equivalents
    
    
    (8,889
    )
    
    
    (258
    )
    
    
    (9,147
    )Cash and cash equivalents, beginning of period
    
    
    25,939
    
    
    
    3,354
    
    
    
    29,293Cash and cash equivalents, end of period
    
    $
    17,050
    
    
    $
    3,096
    
    
    $
    20,146
 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 quarter 2003Non-Guarantor
    
    guarantor
    
    ConsolidatedCash flows from operating activities:Net loss
    
    $
    (3,576
    )
    
    $
    (4,298
    )
    
    $
    (7,874
    )Items not requiring (providing) cash:Depreciation and amortization
    
    
    5,166
    
    
    
    3,357
    
    
    
    8,523Deferred income tax benefit
    
    
    
    
    
    
    (91
    )
    
    
    (91
    )Debt extinguishments
    
    
    11,113
    
    
    
    
    
    
    
    11,113Other non-cash charges, net
    
    
    1,877
    
    
    
    
    
    
    
    1,877Changes in current assets and liabilities
    
    
    (18,246
    )
    
    
    4,843
    
    
    
    (13,403
    )Net cash provided by (used in) operating activities
    
    
    (3,666
    )
    
    
    3,811
    
    
    
    145Cash flows from investing activities:Capital expenditures
    
    
    (2,590
    )
    
    
    (1,709
    )
    
    
    (4,299
    )Other, net
    
    
    1,376
    
    
    
    (2,219
    )
    
    
    (843
    )Net cash used in investing activities
    
    
    (1,214
    )
    
    
    (3,928
    )
    
    
    (5,142
    )Cash flows from financing activities:Net repayments under revolving credit agreements
    
    
    (8,700
    )
    
    
    
    
    
    
    (8,700
    )Proceeds from issuance of long-term debt
    
    
    210,444
    
    
    
    
    
    
    
    210,444Principal payments on long-term debt
    
    
    (189,092
    )
    
    
    (810
    )
    
    
    (189,902
    )Payments for debt issuance costs
    
    
    (7,771
    )
    
    
    
    
    
    
    (7,771
    )Net cash provided by (used in) financing activities
    
    
    4,881
    
    
    
    (810
    )
    
    
    4,071Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    133
    
    
    
    133Increase (decrease) in cash and cash equivalents
    
    
    1
    
    
    
    (794
    )
    
    
    (793
    )Cash and cash equivalents, beginning of period
    
    
    57
    
    
    
    7,539
    
    
    
    7,596Cash and cash equivalents, end of period
    
    $
    58
    
    
    $
    6,745
    
    
    $
    6,803
 16




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##### Table of Contents



INDEPENDENT ACCOUNTANTS REVIEW REPORT 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 April 3, 2004, the related condensed
consolidated statements of operations for the three-month periods ended April
3, 2004 and March 29, 2003, the condensed consolidated statement of
stockholders equity and comprehensive loss as of and for the three-month
period ended April 3, 2004 and the condensed consolidated statements of cash
flows for the three-month periods ended April 3, 2004 and March 29, 2003.
These condensed consolidated financial statements are the responsibility of the
Companys management. We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. 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 auditing standards generally accepted in the United States of
America, 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 accounting principles generally
accepted in the United States of America. We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, 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 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 LLP Nashville, Tennessee
May 7, 2004 17




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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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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. First Quarter Fiscal 2004 in Review In the first quarter of fiscal 2004, net sales increased 4.2% to $270.9
million from $259.9 million in the first quarter of fiscal 2003. Excluding
the impact of foreign currency exchange rate fluctuations, net sales increased
0.3%. The moderate growth in our net sales was primarily due to our first
quarter domestic price increase, offset by a decline in domestic sales volume, including
reduced shipments to Mexico related to the prohibition of the export of pet
food products from the United States. The $4.5 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 $7.8 million was further
impacted by the reclassification of $3.7 million of accretion and dividends
relating to our Senior Preferred Stock (Redeemable) to interest expense in
connection with our adoption of SFAS 150. Due to higher than expected commodity costs, the volatility of domestic
commodity prices and the accompanying difficulty to hedge our commodity risk,
we implemented a broad price increase in January 2004 of approximately 7.5% to
9.5% for most of our domestic products. In addition, we reached 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 will enable us to
pass-through to our domestic customers approximately half of future commodity
movements, whether up or down, as long as these arrangements continue in their
present form. Subsequently, we implemented additional price increases
during the second quarter of fiscal 2004 to manage the continued
increases in commodity costs. 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 prohibition of all pet food exported from the United States to Mexico
continued in the first quarter of fiscal 2004. The prohibition resulted from
the first case of Bovine Spongiform Encephalopathy, or BSE,
traceable to Canadian origin, discovered in
the United States in the fourth quarter of 2003. Currently, the border is
open to most pet food exported from the United States with limitations on
certain products containing beef. It is currently unclear as to how long the
border will remain open to exports from the United States. A prolonged
prohibition could adversely impact our results of operations as our sales to
Mexico approximated 3.5% of our consolidated net sales in fiscal 2003. We continued to implement phases of our European restructuring plan in the
first quarter of fiscal 2004 with 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. In connection with this plan, we recorded $1.6 million of
severance costs in other operating expenses. In addition, we completed the
sale of our 51% interest in Crona, which owns a manufacturing facility in Tver,
Russia. We had no additional charges related to this divestiture in the first
quarter of fiscal 2004. In the first quarter of fiscal 2004, we won an arbitration award from
Merrick Petfoods, Inc., or Merrick, after Merrick terminated our joint venture
agreement related to a manufacturing facility in Hereford, Texas. The award of
$1.0 million consisted of both an 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. See Note 10, Commitments and Contingencies, in
the accompanying unaudited condensed consolidated financial statements. 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 record the related accretion and dividends of
$3.7 million for the first quarter of fiscal 2004 as interest expense. 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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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 further and we are unable to recover such increased costs through
price increases, we may face additional challenges in covenant compliance. In
addition, we may face covenant challenges if any of our price increases
adversely affect our sales volume. 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 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 in the first quarter of fiscal 2004 and
2003. For the purpose of evaluating our results of operations, the average
Euro to USD exchange rates for the first quarter of fiscal 2004 and 2003 were
approximately 1.25 and 1.07, respectively. For the purpose of evaluating our
financial position, the Euro to USD exchange rates as of end of the first
quarter of fiscal 2004 and as of 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 first quarter of fiscal 2004 and 2003 ending on April 3, 2004
and March 29, 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 first quarter of fiscal 2004 and 2003 as indicated (table in thousands,
except percentages): 20




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##### Table of Contents



First quarter2004
    
    2003Net sales
    
    $
    270,880
    
    
    
    100.0
    %
    
    $
    259,949
    
    
    
    100.0
    %Cost of goods sold:Commodity costs
    
    
    136,324
    
    
    
    50.3
    
    
    
    125,495
    
    
    
    48.3Other
    
    
    93,738
    
    
    
    34.6
    
    
    
    89,094
    
    
    
    34.3Total cost of goods sold
    
    
    230,062
    
    
    
    84.9
    
    
    
    214,589
    
    
    
    82.6Gross profit
    
    
    40,818
    
    
    
    15.1
    
    
    
    45,360
    
    
    
    17.4Operating expenses:Promotion and distribution
    
    
    14,227
    
    
    
    5.2
    
    
    
    14,410
    
    
    
    5.5Selling, general and administrative
    
    
    13,183
    
    
    
    4.9
    
    
    
    12,108
    
    
    
    4.7Amortization
    
    
    1,229
    
    
    
    0.5
    
    
    
    1,154
    
    
    
    0.4Other operating expenses
    
    
    1,223
    
    
    
    0.5
    
    
    
    
    
    
    
    Income from operations
    
    
    10,956
    
    
    
    4.0
    
    
    
    17,688
    
    
    
    6.8Interest expense, net
    
    
    17,977
    
    
    
    6.6
    
    
    
    14,015
    
    
    
    5.4Debt extinguishments
    
    
    
    
    
    
    
    
    
    
    11,113
    
    
    
    4.3Other expense (income), net
    
    
    (407
    )
    
    
    (0.1
    )
    
    
    (171
    )
    
    
    (0.1
    )Loss before income taxes
    
    
    (6,614
    )
    
    
    (2.5
    )
    
    
    (7,269
    )
    
    
    (2.8
    )Income tax expense
    
    
    1,193
    
    
    
    0.4
    
    
    
    605
    
    
    
    0.2Net loss
    
    $
    (7,807
    )
    
    
    (2.9
    )%
    
    $
    (7,874
    )
    
    
    (3.0
    )%
 First Quarter of Fiscal 2004 Compared to First Quarter of Fiscal 2003 Net sales. Net sales in the first quarter of fiscal 2004 increased 4.2%
to $270.9 million from $259.9 million in the first quarter of fiscal 2003.
Excluding the impact of foreign currency exchange fluctuations in the first
quarter of fiscal 2004, net sales increased 0.3%. The increase in net sales in the first quarter of fiscal
2004 was primarily due to our domestic price increase and European
sales volume growth, partially offset by a decrease in domestic sales
volume resulting from the prohibition on the export of all pet food from the
United States to Mexico. Gross profit.Gross profit in the first quarter of fiscal 2004 decreased
10.0%, or $4.5 million, to $40.8 million from $45.4 million in the first
quarter of fiscal 2003. Excluding the impact of foreign currency exchange
fluctuations in the first quarter of fiscal 2004, gross profit decreased $6.6
million, or 14.6%, from the first quarter of fiscal 2003. This decrease was
primarily due to higher global commodity costs, which increased as a percentage
of net sales to 50.3% in the first quarter of fiscal 2004 from 48.3% in the
first quarter of fiscal 2003, and lower domestic sales volume, partially offset by the
positive impact of the first quarter domestic price increase. Other cost of
goods sold was consistent in the first quarter of fiscal 2004 compared to the first
quarter of fiscal 2003 as a percentage of net sales. Promotion and distribution. Promotion and distribution expenses for the
first quarter of fiscal 2004 decreased 1.3% to $14.2 million from $14.4 million
in the first quarter of fiscal 2003. Excluding the impact of foreign currency
exchange fluctuations in the first quarter of fiscal 2004, promotion and
distribution expenses decreased $1.2 million, or 8.6%, from the first quarter
of fiscal 2003. This decrease was primarily due to lower freight costs
associated with the reduced shipments to Mexico discussed above. Selling, general and administrative. Selling, general and administrative
expenses in the first quarter of fiscal 2004 increased 8.9% to $13.2 million
from $12.1 million in the first quarter of fiscal 2003. Excluding the impact
of foreign currency exchange fluctuations in the first quarter of fiscal
2004, selling, general and administrative expenses increased $0.4 million, or
3.3%. 21




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Other operating expenses.Other operating expenses of $1.2 million in the
first quarter of fiscal 2004 consisted of severance costs of $1.6 million
related to our European restructuring plan and asset impairments of $0.4
million related to the closure of our distribution center in Alexandria,
Louisiana. These expenses were partially offset by $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. We had no other operating expenses in the
first quarter of fiscal 2003. Interest expense, net. Interest expense, net of interest income, in the
first quarter of fiscal 2004 increased 28.3%, or $4.0 million, to $18.0 million
from $14.0 million in the first quarter of fiscal 2003. The increase was
primarily due to accretion and dividends of $3.7 million relating to our Senior
Preferred Stock (Redeemable). This amount was included in interest expense in
the first quarter of fiscal 2004, but not in the first quarter of fiscal 2003.
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 first
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 $1.2 million in
the first quarter of fiscal 2004 compared to $0.6 million in the first quarter
of fiscal 2003. We recorded valuation allowances against deferred tax assets
of $4.3 million and $4.1 million in the first quarter of fiscal 2004 and 2003,
respectively. Due primarily to the magnitude of our operating losses in fiscal
2003, our loss in the first 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 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 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 first
quarter of fiscal 2004, our principal sources of liquidity consisted of cash of
$20.1 million, working capital excluding cash of $16.1 million, and available
borrowing capacity of $27.3 million under our revolving credit facility. 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. We believe the capital expenditures permitted under our senior credit
facility are sufficient to provide us with the necessary flexibility to spend
required maintenance capital and fund our planned expansion and customer
requirements for fiscal 2004. We anticipate that our capital expenditures will
not exceed $27.0 million for fiscal 2004 and that approximately $10 million to
$12 million is required for maintenance of our business. 22




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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. 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. Cash and Cash Flows Net cash used in our operating activities was $2.0 million in the first
quarter of fiscal 2004 compared to net cash provided by operating activities of
$0.1 million in the first quarter of fiscal 2003. The
year-over-year decrease was due to
higher global commodity costs and lower sales volume,
partially offset by the first quarter 2004 domestic price increase and
favorable working capital. The favorable change in working capital resulted from
improvements in customer collections and vendor payments, partially offset by a reduction in packaging
inventory which occurred in the first quarter of fiscal 2003. Net cash used in our investing activities was $2.6 million in the first
quarter of fiscal 2004 compared to $5.1 million in the first quarter of fiscal
2003. Capital expenditures in the first quarter of fiscal 2004 were $2.1
million compared to $4.3 million in the first quarter of fiscal 2003. Net cash used in our financing activities was $4.5 million in the first
quarter of fiscal 2004 compared to net cash provided by financing activities of
$4.1 million in the first quarter of fiscal 2003. In the first
quarter 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. In the first 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 23




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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 first quarter of fiscal 2004, our
senior credit facility provides for total commitments as follows:  
    
    a Euro 30.1 million ($36.8 million assuming a Euro to USD exchange
rate of approximately 1.22) Euro term loan facility; and
    
    $181.4 million, consisting of  
    
    a $131.4 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 first 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. 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 first 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 first quarter of fiscal 2004, our
Euro term loan facility bore
interest at 7.20%, our USD loan term facility bore interest at 6.18% and
our revolving credit facility bore interest at 8.00%. These rates will
increase 0.25% on September 30, 2004 and a final 1.00% on March 31, 2005 in
accordance with the March 9, 2004 amendment. 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 pro rata to the four
tranches and ratably to the respective installments thereof. 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 24




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##### Table of Contents




    
    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. 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 first 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.Consolidated EBITDA means for any period, 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 25




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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 endingon or nearest to
    
    RatioMarch 31, 2004
    
    
    2.60:1.00June 30, 2004
    
    

    2.60:1.00September 30, 2004
    
    
    2.50:1.00December 31, 2004 and thereafter until maturity
    
    
    2.00:1.00
  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 further and we are
unable to recover such increased costs through price increases, we may face
additional challenges in covenant compliance. In addition, we may face
covenant challenges if any of our price increases adversely affect our sales
volume. 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; 26




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
    
    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 first quarter of fiscal 2004, our principal sources
of liquidity consisted of cash of $20.1 million, working capital excluding cash
of $16.1 million, and $27.3 million of remaining availability under the
revolving credit facility portion of our senior 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 maintenance capital
and fund the planned expansion and customer requirements for fiscal 2004. 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
first quarter of fiscal 2004 follows (in thousands): 27




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End of fiscal
    
    Maturities2004
    
    $
    11,6512005
    
    
    140,0452006
    
    
    41,5192007
    
    
    246,3902008
    
    
    1,2012009 and thereafter
    
    
    225,496$
    666,302
 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 along 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. In the event of any increases in raw materials, packaging and natural gas
costs, we may be required to seek increased sales prices 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
January 2004 and an additional price increase 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 first quarter of
fiscal 2004 and the end of fiscal 2003, our gross accounts receivable were
$87.2 and $94.2 million, respectively. We had allowances of $2.7 and $2.6
million as of the end of the first quarter of fiscal 2004 and the end of fiscal
2003, respectively, primarily for doubtful accounts and outstanding deductions
with customers. Our policy is to estimate our 28




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allowance 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 first quarter of fiscal 2004
and the end of fiscal 2003, our gross inventories were $74.7 and $73.0 million,
respectively. We had allowances of $4.6 million and $4.4 million as of the end
of the first 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 first quarter of fiscal 2004
and the end of fiscal 2003, our federal net operating loss, or NOL,
carryforwards were $130.7 million and $126.5 million, respectively, and our
foreign NOL carryforwards were $1.9 million and $2.2 million, respectively.
Our gross deferred tax assets, including federal, foreign, state and local NOL
carryforwards, were $77.1 million and $72.3 million as of the end of the first
quarter of fiscal 2004 and the end of fiscal 2003, respectively, and our gross
deferred tax liabilities were $57.2 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 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. During the first quarter 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 $2.0 million and $35.2 million,
respectively, and valuation allowances against our foreign deferred tax assets
in the amounts of $2.3 million and $7.3 million, respectively. These
additional amounts created a consolidated valuation allowance of $47.4 million
and $43.1 million as of the end of the first quarter of fiscal 2004 and the end
of fiscal 2003, respectively. 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 first quarter of fiscal
2004 and the end of fiscal 2003, our goodwill and trademarks were $378.0
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 29




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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 may 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
further and we are unable to recover such increased costs through price
increases, we may face additional challenges in covenant compliance. In
addition, we may face covenant challenges if any of our price increases
adversely affect our sales volume. 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 production 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. Our commodity derivative instruments are measured at fair value under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, or 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 first
quarter of fiscal 2004, we had no open commodity contracts. With the changes in our pricing strategy resulting from reaching
cost-sharing arrangements, we plan to collaborate with our customers on any hedging strategies. 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 $184.2 million at the end of the first
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 first quarter of
fiscal 2004, we had no open interest rate swap and 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, interest
expense would increase by approximately $0.5 million for the first quarter of
fiscal 2004. In addition, such a change would result in a decrease of
approximately $14.8 million in the fair value of our fixed rate debt at the end
of the first 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 first quarter
of fiscal 2004, we had a cumulative translation gain of $51.2 million, which
included an unrealized cumulative loss of $9.7 million for the translation of
our Euro- 30




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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. From time to time, we periodically
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. As of the end of the first quarter of fiscal 2004, we had
no open foreign currency forward contracts. 
 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 April 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. 31




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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) Exhibits 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 Exhibit 10.18 to the 2003 Form 10-K).15.1*
    
    Letter from KPMG LLP dated
May 14, 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 or furnished herewith, as the case may be (b) Reports on Form 8-K The following report on Form 8-K is furnished during the first quarter of
fiscal 2004:  1.
    
    Report on Form 8-K dated March 11, 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 fourth quarter and fiscal
2003 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 March 11, 2004 in accordance with Section
906 of the Sarbanes-Oxley Act of 2002. 32




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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 and

Chief Financial OfficerBy:
    
    /s/ STEPHEN P. HAVALAStephen P. HavalaCorporate Controller and

Principal Accounting Officer
 Date: May 17, 2004 33




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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 Exhibit 10.18 to the 2003 Form 10-K).15.1*
    
    Letter from KPMG LLP dated
May 14, 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 or furnished herewith, as the case may be