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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 3, 2004 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from       to Commission file number 0-27818 Doane Pet Care Company  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    43-1350515
(I.R.S. 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) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x As of the last business day of the registrants most recently completed
second fiscal quarter, the registrant had no common equity held by
non-affiliates. As of March 11, 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 PART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    18Item 3.
    
    Legal Proceedings
    
    
    19Item 4.
    
    Submissions of Matters to a Vote of Security Holders
    
    
    20PART IIItem 5.
    
    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    20Item 6.
    
    Selected Financial Data
    
    
    20Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 8.
    
    Financial Statements and Supplementary Data
    
    
    37Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    37Item 9A.
    
    Controls and Procedures
    
    
    37PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    38Item 11.
    
    Executive Compensation
    
    
    40Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    43Item 13.
    
    Certain Relationships and Related Transactions
    
    
    47Item 14.
    
    Principal Accountant Fees and Services
    
    
    49PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    50Signatures
    
    
    54Index to Financial Statements
    
    F-1Amend.No.5 to Amended Credit AgreementList of SubsidiariesConsent of KPMG LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  In this annual report on Form 10-K, Doane, the Company, we, us and
our refer to Doane Pet Care Company and its subsidiaries, unless the context
indicates otherwise.




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PART I 
 ITEM 1  Business General We are the largest manufacturer of private label pet food and the second
largest manufacturer of dry pet food overall in the United States. We are also
a leading manufacturer of private label pet food in Europe. We sell to
approximately 600 customers around the world and serve many of the top pet food
retailers in the United States, Europe and Japan. We offer our customers a full
range of pet food products for both dogs and cats, including dry, semi-moist,
wet, treats and dog biscuits. We categorize our sales into three product areas: (i) private label, (ii)
co-manufacturing and (iii) regional brands that we own. Our customers in
private label primarily include mass merchandisers, grocery chains, farm and
fleet companies and pet specialty stores. Our co-manufacturing customers
include the top five nationally advertised brand pet food companies in the world, for whom we
produce and package a portion of their products. A majority of our regional
brand sales are to the grocery and farm and fleet channels. We have been the primary supplier of private label pet food to WalMart
Stores, Inc. since 1973 and have been a supplier to its Sams Club division
since 1990. Collectively, we refer to them as Wal*Mart. We manufacture a wide
variety of products for Wal*Mart, including the majority of WalMart Stores,
Inc.s top selling private label pet food brands, Ol Roy and Special Kitty.
Ol Roy is the number one selling brand of dry pet food in the United States by
volume. Our net sales to Wal*Mart accounted for 40%, 44% and 42% of our total
net sales for fiscal 2001, 2002 and 2003, respectively. As the primary supplier of private label pet food to WalMart Stores, Inc.,
we jointly developed a cost-effective direct store delivery program, which we
refer to as DSD, to address certain logistical issues associated with
distributing dry pet food. Due to its size, bulk and weight, dry pet food bags
are not easily transferable to individual stores from WalMart Stores, Inc.s
distribution centers. As part of DSD, we serve as a just-in-time supplier to
WalMart Stores, Inc. for dry pet food, whereby we load customized,
store-specific pallets on WalMart Stores, Inc.s private fleet trailers. DSD
allows WalMart Stores, Inc. to utilize its fleet more efficiently by reducing
backhaul miles, lowering working capital and handling costs and increasing
inventory turns. As a result of DSD, our products are shipped directly to a
majority of the 3,000 U.S. stores of WalMart Stores, Inc. and we ship to these
stores a minimum of two times per week with one to two days of lead time. Doane Pet Care Company is a Delaware corporation. Our principal executive
offices are located at 210 Westwood Place South, Suite 400, Brentwood,
Tennessee 37027 and our telephone number is (615) 373-7774. Doane Pet Care Enterprises, Inc., our parent corporation, was formed in
1995 by a group of private equity investors led by Summit Capital, Inc., DLJ
Merchant Banking Partners, L.P., J.P. Morgan Partners (BHCA), L.P. and certain
members of existing management to acquire our
company, formerly known as Doane Products Company. Our parent has no other
material assets or activities other than the ownership of our common stock. Recent Developments Impact of commodity price volatility.Due to higher than expected
commodity costs, the volatility of domestic commodities prices and the
accompanying difficulty to hedge our commodity risk, we announced in late 2003
that we re-evaluated both our pricing strategy and risk management process. As
a result, 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 have reached cost-sharing arrangements with certain of our domestic customers to reduce
the impact of volatile commodity costs on our domestic business. 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. These
cost-sharing arrangements will allow us to better manage our financial
performance while protecting our customers brands as we move through the
commodity market cycles. In addition, we recently announced an additional price increase that will take affect during the second quarter of 2004. Because we generally do not have
long-term contracts with our customers, our recent price increases and our cost
sharing arrangements could change. 1




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Impact
of BSE.In the second quarter of fiscal 2003, the
first North American case of Bovine Spongiform Encephalopathy, or BSE, was
discovered in Canada. A second BSE case, also traceable to Canadian origin,
was subsequently discovered in the United States in the fourth quarter of
fiscal 2003. As a result of this case in the United States, a prohibition was imposed on all pet food exported
from the United States to Mexico. A prolonged prohibition could adversely
impact our results from operations because our net sales to Mexico approximated 3.5%
of our consolidated net sales in fiscal 2003. Amendment to senior credit facility.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 due to our cash position at the end of fiscal 2003; (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, as defined in our senior credit facility, 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. See Item 7 -
Managements Discussion and Analysis of Financial Condition
and Results of Operations - Senior Credit Facility. European consolidation.In December 2003, we finalized our plans, which
we refer to as Project 3-to-2, to consolidate our wet pet food
manufacturing operations in Vrä, Denmark into our facility in
Esbjerg, Denmark and our recently expanded facility in Carat, Austria during
fiscal 2004. As a result, we will close the Vrä facility in fiscal 2004, which
will result in a net workforce reduction of approximately 40 employees. We
anticipate that this project will result in lower labor and
administrative costs
and other operating efficiencies estimated to be $3 million to $4 million on an
annual basis. In conjunction with Project 3-to-2, we evaluated our long-lived
assets and recorded non-cash asset impairments of $5.3 million in other
operating expenses in the fourth quarter of fiscal 2003 for the building and
certain equipment from the Vrä facility that we anticipate will
not be utilized but
instead disposed of or sold. In fiscal 2004, we expect to incur additional
project expenses and have related cash requirements of approximately $5 million,
primarily for severance, installation of transferred equipment and operating
inefficiencies through the transition period. Divestiture of Crona facility.In January 2004, we divested our 51%
interest in Crona, which owns a manufacturing facility in Tver, Russia. In the
fourth quarter of fiscal 2003, we evaluated the net assets of this facility for
impairment and recorded asset impairments of $2.4 million in other operating
expenses. Products and Services We provide our customers with comprehensive pet food category management
services designed to expand each customers pet food product lines and to
improve the categorys profitability. Category management services include:  
    
    product development services;
    
    packaging design services; and
    
    pricing and marketing strategy services in connection with our customers store brand programs. Our store brand program involves the formulation and supply of a wide
variety of high quality pet food products, including dry, semi-moist, soft dry,
soft treats and dog biscuits as well as wet products in Europe. We believe that
these products are comparable in quality to competing nationally
advertised brand pet food
products, except we offer them at a lower price. For our nationally
advertised brand
customers, we manufacture pet food products to meet those customers
specifications and quality standards. Our regional brands are generally
economically priced and marketed by our customers as a complement to their
other pet food offerings. In the United States, we manufacture dry pet food under approximately 200
store brands, including Canine Club, Dura Life, Exceed, Hy Vee, Maxximum
Nutrition, NutraCare, Ol Roy, Pathmark, Pet Club, PMI-Nutrition, Retriever and
Special Kitty. Our regional brands, which include Country Prime, Kozy Kitten
and TrailBlazer, allow our customers to broaden their product offerings. We
also offer Bonkers and Pet Lovers branded treats to our retailers. In Europe,
we manufacture pet food under a variety of store brands. 2




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A description of each of our product lines is set forth below:  
    
    Dry pet food (73% of our 2003 net sales).We are the second largest
manufacturer of dry pet food in the United States. We produce, market
and distribute a wide selection of high quality dry pet food products,
predominately for dogs and cats. Our dry pet food product lines include
high protein, premium-blended, puppy food, gravy style and super premium
meat inclusion products for dogs, and regular and blended products for
cats.
    
    Biscuits and treats (9% of our 2003 net sales).We are the largest
manufacturer of dog biscuits in the world and a leading supplier of soft
treats. The manufacturing process for dog biscuits is different than the
process for dry pet food, in that manufacturing of biscuits primarily
involves baking and manufacturing of dry pet food involves extrusion.
    
    Wet, semi-moist and other (18% of our 2003 net sales).These
products are distinguishable from dry pet food based on their higher
moisture level content, the technology used to manufacture such products
and their higher packaging costs. Europe has a much stronger market for
wet products than the United States. To meet this demand, we manufacture
and sell wet products throughout Europe in all forms, including chunks
and gravy, pâté and loaf, and packages, such as cans, alucups and
pouches. In addition to manufacturing pet food products, we maintain an in-house
engineering technology services group. This group designs and builds extruders, conveyors, dryers and other parts and
equipment, including replacement parts, for our pet food manufacturing
facilities and, to a lesser extent, for third parties. The engineering
technology services group maintains repair staff that service and repair
machinery and equipment at our production facilities, giving us the ability to
make timely repairs and reduce downtime. Our in-house engineering technicians
generally design and supervise plant construction, thereby reducing plant
construction costs and resulting in consistency in manufacturing processes and
quality control. We believe our engineering technology services group provides
us with services at a lower cost and more timely and efficiently than we could
obtain from third parties. 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. Marketing We believe that our success depends upon our ability to partner with our
customers and create brands and products that their consumers pets will
love. It also depends on the ability of our people, together with our
customers, to find new and appealing ways to deliver those brands to pet-owning
consumers everywhere. Our marketing approach is grounded in fundamental
consumer, pet, brand and category research which we leverage to build
successful brand programs. Our team of experienced marketing professionals
provides consumer and category trend analysis, category and shelf management
expertise, product development direction, packaging design and promotional
planning to drive profitable growth for our customers brands and our company. Sales and Distribution Our direct sales force works directly with current and prospective
customers, including mass merchandisers, membership clubs, farm and fleet
stores, pet specialty stores and grocery chains. We also use independent food
brokers. We generate new business, in part, through the expansion of our
product lines and the development of new marketing programs to existing
customers. A substantial amount of our products are distributed utilizing our
customers transportation networks. Several of our largest customers utilize us
as a just-in-time supplier and maintain trailers at our manufacturing and
distribution facilities. Proximity to certain of our customers
distribution centers and retail locations is a key consideration in 3




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deciding the location of our manufacturing and distribution facilities and, we
believe, is a significant competitive advantage. Our customers trailers can be
loaded for shipment either directly to individual stores or to their own
distribution centers. Those customers that have products shipped directly from
our manufacturing and distribution facilities to their retail stores are able
to reduce their inventory, freight and handling costs by avoiding shipment to
their own distribution centers. Those customers that use their own
transportation fleet are able to utilize their trucks that would otherwise be
empty to backhaul a load of pet food on return to their distribution center or
directly to another store. For customers that do not utilize their own transportation fleet, we
provide transportation on a contract basis through common carriers. We do not
own or operate any transportation equipment. We provide vendor managed inventory fulfillment services for both direct
store and warehouse deliveries. We communicate on-line with our customers
inventory management systems, evaluate their inventory levels and place orders
on their behalf to meet their just-in-time inventory requirements and manage
their inventory levels. We believe this provides our customers with a
significant competitive advantage, which includes shorter lead-time
requirements, higher inventory turns, reduced out-of-stock positions and fresh
product for their customers. Customers We manufacture products for approximately 600 customers globally. Store
brand customers in the United States include mass merchandisers such as
Wal*Mart and Costco, pet specialty stores such as PETsMART, grocery chains such
as Food Lion, Kroger, Royal Ahold and Safeway, and farm
and fleet stores such as Tractor Supply, Mid-States and Purina Mills. In
addition, we manufacture products for many of the largest nationally advertised brand pet
food companies in the United States. Our European customer base is similar to
the United States. We sell to over 200 customers in Europe, including many of
the leading retailers, pet specialty stores and farm and fleet outlets, as well
as several branded customers. Net sales to Wal*Mart accounted for 40%, 44% and 42% of our total net
sales for fiscal 2001, 2002 and 2003, respectively. We have been the primary
supplier of private label dry pet food products to WalMart Stores, Inc. since
1973 and to its Sams Club division since 1990. We utilize a computerized order
and distribution system to ship products directly to substantially all domestic
Wal*Mart stores, a majority of which are located within 250 miles of one of our
facilities. We also offer direct delivery programs and electronic data
interchange systems to other customers who see these services as beneficial. Competition The pet food industry is highly competitive. The companies that produce
and market the major nationally advertised brand pet foods are national or international
conglomerates that are substantially larger than us and possess significantly
greater financial and marketing resources. Our store brand pet food products
compete for shelf space with nationally advertised brand pet food
products on the basis of quality and price. In addition, certain
nationally advertised
brand companies also manufacture store brands. Nationally advertised brand products
compete principally through advertising to create brand awareness and loyalty.
We experience some price competition from nationally advertised brand products. The
companies that produce and market the major nationally advertised brand pet foods
increased their prices early in fiscal 2004. We subsequently implemented a
broad price increase in January 2004 of approximately 7.5% to 9.5% for most of
our domestic products. Significant price competition from nationally advertised brand products or
considerably increased store brand presence by the nationally advertised brand
manufacturers could adversely affect our operating results and cash flows. We
also compete with regional branded manufacturers and other regional store brand
manufacturers. We believe we differentiate our company from the nationally advertised brand pet food
manufacturers by offering comparable, lower-priced products tailored to each
retailers needs. This provides retailers with the opportunity to increase pet
food category profitability and provides a destination purchase item in this
important consumer category. In addition, we believe we differentiate our
company from other store brand pet food manufacturers by offering higher
quality products and national production and distribution capabilities. 4




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Raw Materials and Packaging The principal ingredients required for our manufacturing operations are
bulk commodity grains and foodstocks, including corn, soybean meal, wheat,
rice, flour, wheat middling, poultry meal, meat and bone meal, corn gluten
meal, tallow and poultry fat. We purchase from large national commodity
companies and local grain cooperatives. The ingredient requirements of each of
our manufacturing facilities are purchased locally due to the high freight
costs of transporting bulk commodity products. As a result, ingredient costs
may vary substantially among our manufacturing facilities due to the impact of
local supply and demand and varying freight costs. While we do not maintain
long-term contracts with any of our suppliers, we believe alternative suppliers
are readily available. Our European operations purchase similar ingredients to
those noted above for the manufacturing of dry pet food. Manufacturing of our
wet food in Europe also requires fresh or frozen pork, beef and poultry
products. Our pricing strategy for pet food is based on the costs of raw materials,
packaging and certain other costs plus a conversion charge, which includes a
profit factor. We periodically adjust our prices based on fluctuations in raw
material, packaging and other costs. Future selling price increases may not be
acceptable to our customers in the event of increased material costs. See Risk
Factors  Risks Relating to Our Business Operations and Item 7  Managements Discussion and Analysis of
Financial Condition and Results of Operations  Inflation and Changes in
Prices. We
have reached cost-sharing arrangements with certain of our domestic
customers to reduce the impact of volatile commodity costs on our domestic
business. Going forward, as long as these arrangements continue in their
present form, we will effectively pass-through to our domestic customers approximately half
of future commodity movements, whether up or down. Because we
generally do not have long-term contracts with our customers, our
cost-sharing arrangements could change. We have in the past and may continue to seek to manage our commodity price
risk associated with market fluctuations by using derivative instruments for
portions of our corn, soybean meal, alternative proteins and natural gas
purchases, principally through exchange traded futures and options contracts.
The terms of such contracts are generally less than one year. Our policy does
not permit speculative commodity trading. See Item 7A  Quantitative and
Qualitative Disclosures About Market Risk. With the changes in our pricing
strategy resulting from reaching cost-sharing arrangements, we plan to
collaborate with our customers to collectively decide if we should hedge future
positions. Packaging is a significant component of our material costs. We have three
main packaging suppliers in the United States and believe that additional
packaging suppliers are readily available. We currently do not maintain
long-term contracts with our packaging suppliers. Research and Development We continuously strive to develop new and improved products and processes.
Our research and development department includes a full-time staff of food
technologists, chemists and companion animal nutritionists, a central
laboratory used for research and development, and quality control laboratories
at each of our production facilities. Our research and development team
formulates new recipes, comprised of raw materials, vitamins and minerals, and
tests the nutritional content of new products. We also use independent
commercial kennels and catteries for comparison taste tests with
nationally advertised brand products to seek to achieve comparable digestibility and palatability
and to substantiate the nutritional claims of new products. Quality Assurance We maintain a comprehensive program for qualifying new vendors, testing
raw materials for nutritional adequacy and screening to detect the presence of
bacteria and other harmful substances. We continuously test pet food production
at each of our plants by analyzing the finished pet food product against
specifications, formula and regulatory requirements. Packaging is inspected for
print quality, proper dimensions, construction and compliance with labeling
regulations. 5




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Environmental and Safety Matters We are subject to a broad range of federal, state, local and foreign
environmental laws and regulations, including those governing discharges into
the air, soil and water, the storage of petroleum substances and chemicals, the
handling and disposal of solid or hazardous wastes and the investigation or
remediation of contamination arising from spills and releases. Failure to
comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties, permit revocation and
modification, performance of investigatory or remedial activities, as well as,
in certain instances, the issuance of injunctions. We have not been subject to
any material environmental liabilities and compliance of our business and
operations with environmental laws and regulations has not had a material
adverse effect on our capital
expenditures, earnings, or competitive position. Environmental laws and
regulations have changed substantially over the years and we believe the trend
of more strict and expansive environmental laws and regulations will continue.
Although we believe we are in substantial compliance with applicable
environmental, safety and public health laws, there can be no assurance that
additional costs for compliance will not be incurred in the future or that such
costs will not be material. Our U.S. operations involve the use of aboveground and underground storage
tanks. Under applicable laws and regulations, we are responsible for the proper
use, maintenance and abandonment of regulated storage tanks that we own or
operate and for remediation of soils, groundwater and surface water impacted by
releases from such existing or abandoned aboveground or underground storage
tanks. Our U.S. operations are also subject to laws and regulations governing
remediation, recycling and disposal. The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, also known as CERCLA or the Superfund
law, and analogous state laws impose liability, without regard to fault or the
legality of the original conduct, on certain classes of persons who are
considered statutorily responsible for the release of a hazardous substance
into the environment. These persons include the owner or operator of a facility
where a hazardous substance release occurred and companies that disposed or
arranged for the disposal of hazardous substances. Persons who are or were
responsible for the releases of hazardous substances under CERCLA may be
subject to joint, several and retroactive liability for the costs of
environmental response measures and natural resource damages, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous
substances released into the environment. We also generate wastes that are
subject to the federal Resource Conservation and Recovery Act, also known as
RCRA, and comparable state statutes. The U.S. Environmental Protection Agency,
or EPA, and various state agencies have limited the approved methods of
disposal for certain hazardous and nonhazardous wastes and any future changes
to such methods that are more rigorous or restrictive can increase the
operating and disposal requirements incurred by us as well as by the industry
in general. In the past, nearby industries have suffered releases of hazardous
substances to the environment that are the subject of CERCLA investigations. It
is possible that these neighboring environmental activities may have impacted
some of our properties. We have not been advised, nor do we expect to be
advised, by any environmental agency that we are considered a potentially
responsible party for the neighboring environmental conditions, and we have no
reason to believe that such conditions would have a material adverse effect on
our company. We currently own or lease properties and through acquisitions in the
future could own or lease additional properties that, in some instances, have
been used for pet food manufacturing or feed mill operations for many years.
Although we have utilized operating and disposal practices that were standard
in the industry at the time, in some locations environmentally sensitive
materials were spilled or released on or under the properties owned or leased
by us or on or under other locations where such materials were taken for
disposal. In addition, many of these properties have been operated by third
parties whose use, handling and disposal of such environmentally sensitive
materials or similar wastes were not under our control. These properties and
the waste
materials spilled, released or otherwise found thereon may be subject to
CERCLA, RCRA, and analogous state laws. Under such laws, we can be required to
remove or remediate previously spilled or released waste materials (including
such materials spilled or released by prior owners or operators) or property
contamination (including groundwater contamination caused by prior owners or
operators), or to perform monitoring or remedial activities to prevent future
contamination (including releases from previously operated underground storage
tanks or existing aboveground bulk petroleum storage facilities). It is
possible that we could incur additional environmental response costs in the
future at existing manufacturing facilities or at other sites where waste
material impacts resulting from historical or ongoing operations may be
identified. 6




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Our U.S. operations are also subject to the federal Clean Water Act and
analogous state laws relating to the discharge of pollutants into state and
federal waters. These laws also regulate the discharge of stormwater in process
areas. Local sewerage authorities have established regulations governing
connections to and discharges into their sewer systems and treatment plants.
Pursuant to these laws and regulations, we are required to obtain and maintain
approvals or permits at a number of our facilities for the discharge of our
wastewater and stormwater and develop and implement spill prevention control
and countermeasure plans, also referred to as SPCC plans, in connection with
on-site storage of greater than threshold quantities of oil. In July
2002, the EPA issued a revised SPCC rule, whereby SPCC plans are
subject to more rigorous review and certification procedures. The
SPCC plans must be amended, if necessary to ensure compliance, by no
later than August 17, 2004, and any such amended plans must be
implemented by no later than February 18, 2005. Compliance with this
rule will require us to update and implement amended SPCC plans at a
number of our facilities where the plans are required. As part of the
regular overall evaluation of our ongoing operations, we are updating the
stormwater discharge permitting coverage at certain of our facilities.
Moreover, from time to time, we are required to make capital improvements or
make certain operational upgrades at certain of our facilities to assure
compliance with regulatory and permit conditions relating to our wastewaters
discharged offsite as well as our other operating activities. Failure to comply
with these laws, regulations and permit conditions may result in the imposition
of administrative, civil and criminal penalties. We believe that our operations
are in substantial compliance with the Clean Water Act and analogous state and
local requirements, and that the implementation of amended SPCC plans
and the installation of any wastewater discharge
capital improvements will not have a material adverse effect on our operations
or financial condition. Our U.S. operations are subject to federal, state and local requirements
pertaining to air emissions. We have been required from time to time to install
air emission control or odor control devices to satisfy applicable air
requirements. It is possible that in the future, additional air emission or
odor control devices may be required to be installed at facilities of ours as
deemed necessary to satisfy existing or future requirements. The manufacturing and marketing of our products in the United States are
subject to regulation by federal regulatory agencies, including the
Occupational Safety and Health Administration, the Food and Drug Administration
and the Department of Agriculture, and by various state and local authorities.
The Food and Drug Administration also regulates the labeling of our products.
Substantial administrative, civil and criminal penalties may be imposed for
violations of Occupational Safety and Health Administration, Food and Drug
Administration and Department of Agriculture regulations, and violations may be
restrained through injunction proceedings. We procure and maintain the
necessary permits and licenses to operate our U.S.
facilities and consider our company to be in material compliance with
applicable Occupational Safety and Health Administration, Food and Drug
Administration and Department of Agriculture requirements. Our manufacturing, distributing and other operating facilities outside of
the United States are potentially subject to similar foreign governmental
controls and restrictions pertaining to the environment, safety, and public
health. Among the controls and restrictions imposed on our facilities outside
of the United States are requirements for obtaining necessary environmental
permits, cleanup of subsurface conditions beneath our facilities arising from
primarily historical operations, control of odors resulting from our
operations, limitation of pollutants that are contained in wastewater effluent
discharged or otherwise transported from our facilities, and development and
implementation or upgrading of environmental management systems at our
facilities to assure compliance with applicable laws and regulations. We believe our U.S. and foreign operations are in compliance in all
material respects with applicable current environmental, safety and public
health laws and regulations; nevertheless, those laws and regulations may
change in the future and we may incur significant costs in the future to comply
with those laws and regulations or in connection with the effect of these
matters on our business. Trademarks Certain of our brands are protected by trademark registrations in the
United States and in certain foreign markets. We believe our registered
trademarks are adequate to protect such brand names. 7




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Employees As
of March 11, 2004, our global workforce consisted of 2,671 employees.
We had 1,771 employees in the United States and 900 employees in Europe,
comprised of 727 management and administrative personnel and 1,944
manufacturing personnel. Of our workforce, 424 employees are represented by
labor unions at six of our U.S. facilities. The collective bargaining
agreement with the Muscatine, Iowa facility covered 50 employees as
of March 11, 2004 and expires on June 30, 2006. The collective bargaining agreement with
the Hillburn, New York facility covered 33 employees as of
March 11, 2004 and
expires on May 1, 2004. The collective bargaining agreement with the
Birmingham, Alabama facility covered 81 employees as of
March 11, 2004 and
expires on January 22, 2005. The collective bargaining agreement with the
Joplin, Missouri facility covered 146 employees as of March 11, 2004 and
expires on February 4, 2006. The employees at our Portland,
Indiana and Allentown, Pennsylvania facilities have recently voted to
be represented by a union. In February 2004, we began negotiating a
collective bargaining agreement at the Portland, Indiana facility,
which would cover approximately 81 employees. We have not yet begun a
collective bargaining agreement at the Allentown, Pennsylvania
facility, which would cover approximately 33 employees. We consider
relations with our employees to be satisfactory. Foreign Operations For a discussion of our segment data relating to our United States
(domestic) and European (international) operations, see Note 17  Segment
Data to our accompanying audited consolidated financial statements included
herein. Forward-Looking Statements Certain of the statements in this annual report on Form 10-K are
forward-looking statements within the meaning of Section 27A of the
Securities Act 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:  
    
    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 risk
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. 8




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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,
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 below. We undertake no obligation to revise the 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. Risk Factors Risks Relating to Our Indebtedness Our level of indebtedness could negatively impact our financial condition,
results of operations and business prospects and prevent us from fulfilling our
debt service obligations. As of the end of fiscal 2003, we had $574.0 million of indebtedness
outstanding. The principal amounts due under this indebtedness at the
respective maturity dates include $213.0 million of senior notes, $185.3
million under our senior credit facility, $150.0 million of senior
subordinated notes, $15.0 million of industrial development revenue bonds
and $14.7 million of foreign debt. Our principal sources of liquidity as
of the end of fiscal 2003 consisted of $29.3 million of cash,
working capital excluding cash of $11.1 million and $29.6 million
of availability out of a total availability of $50.0 million under the
revolving credit facility portion of our senior credit facility after taking
into consideration the March 9, 2004 amendment. In addition, we
had outstanding $95.1 million of current redemption value,
excluding future dividends, for our senior preferred stock which has
a scheduled redemption date of September 30, 2007. We will be permitted to incur
additional indebtedness in the future if we meet certain requirements in our
senior credit facility and the indentures governing our senior notes and senior
subordinated notes. Our ability to meet future debt service obligations will be
dependent upon our future performance, which is subject to general economic
conditions and to financial, business and other factors affecting our
operations, many of which are beyond our control. Our level of indebtedness could have important consequences on our
operations, including:  
    
    making it more difficult for us to satisfy our debt service
obligations which, if we fail to comply with the requirements of any of
our debt, could result in an event of default;
    
    requiring us to dedicate a substantial portion of our cash flow from
operations to make repayments on debt, thereby reducing the availability
of cash flow for working capital, capital expenditures, acquisitions and
other general business activities;
    
    limiting our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions and other general
business activities;
    
    limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
    
    making us vulnerable to fluctuations in interest rates because
indebtedness under our senior credit facility is subject to variable
interest rates;
    
    detracting from our ability to withstand successfully a downturn in
our business or the general economy; and 9




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
    
    placing us at a competitive disadvantage against other less leveraged
competitors. 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 senior credit facility requires us to maintain specified financial
ratios and satisfy certain financial condition tests. Our ability to meet these
financial ratios and tests can be affected by events beyond our control, such
as prevailing economic, financial or industry conditions, and we may not be
able to meet these ratios or tests. We have experienced difficulty in the past
satisfying the financial covenants in our senior credit facility and have
either negotiated amendments or obtained waivers from our lenders for fiscal
2000, 2001 and 2003. Our senior credit facility, including these financial
covenants, was amended in February 2003 concurrently with the sale of senior notes and was
last amended effective March 9, 2004. It is possible that, without further price increases,
current commodity prices may adversely affect our operating results and cash flows to an extent that we may not be able to comply with our financial covenants in our senior credit facility.
If we violate these
amended covenants and are unable to negotiate amendments or obtain waivers from
our lenders, we could be in default and 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. Our debt agreements limit certain business activities and could materially
affect our operations. Our senior credit facility and the indentures governing our senior notes
and senior subordinated notes limit our ability to take a number of actions
that we may otherwise desire to take, including:  
    
    incurring additional indebtedness;
    
    incurring liens;
    
    paying dividends or making other restricted payments;
    
    selling assets;
    
    entering into transactions with affiliates;
    
    merging or consolidating with any other entity;
    
    disposing of substantially all of our assets; or
    
    entering into certain lines of business. If we are unable to generate sufficient operating cash flows in the future
to service our indebtedness, to comply with financial covenants and to meet
other commitments, we may be required to take certain actions, such as selling
material assets or operations, reducing or delaying capital expenditures, or
revising or delaying our strategic plans. We may not be able to take any of
these actions on a timely basis or on satisfactory terms or take actions that
would enable us to continue to satisfy our capital requirements. Certain of
these actions may be prohibited by the indentures governing our senior notes
and senior subordinated notes or require the consent of the lenders under our
senior credit facility. In addition, an event of default under one of these debt agreements may
affect other debt agreements that contain cross-acceleration or cross-default
provisions, causing obligations under the other agreements to be accelerated
and become due and payable. If any of these events occur, there can be no
assurance that we would be able to make necessary payments to the lenders or
that we would be able to find alternative financing. Even if we were able to
obtain alternative financing, there can be no assurance that it would be on
terms that are acceptable. Our senior notes and the related guarantees are effectively subordinated to all
of our secured debt, including the debt under our senior credit facility, and
if a default occurs, we may not have sufficient funds to fulfill our
obligations under our senior notes. 10




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Our senior notes and the related guarantees of these notes are not secured
by any of our assets and, therefore, are effectively subordinated to all of our
senior secured debt as well as any secured debt of our subsidiary guarantors to
the extent of the value of the assets securing that debt. We have pledged
substantially all of our assets as collateral to secure our indebtedness under
our senior credit facility. As of the end of fiscal 2003, we had secured
indebtedness in the principal amount of $185.3 million under our senior credit
facility to which our senior notes and the related guarantees would have been
effectively subordinated as a result of liens granted by us. We also have
secured indebtedness under our industrial development revenue bonds in the
principal amount of $15.0 million and foreign debt in the principal amount of
$14.7 million. We and our subsidiary guarantors may also incur additional
secured indebtedness in the future. In the event of our bankruptcy, liquidation, reorganization or other
winding up, our assets that secure our secured indebtedness will be available,
if at all, to pay obligations on our senior notes only after all secured
indebtedness has been repaid in full from those assets. Likewise, because our
obligations under our senior credit facility are secured obligations, our
failure to comply with the terms of our senior credit facility would entitle
those lenders to foreclose on substantially all of our assets that serve as
their collateral. In this event, these lenders would be entitled to be repaid
in full from the proceeds of the liquidation of those assets before those
assets would be available for distribution to other creditors, including
holders of our senior notes. Holders of our senior notes will share in our
remaining assets, if any, ratably with all holders of our unsecured
indebtedness that is deemed to be of the same class as our senior notes, and
potentially with all of our other general creditors. There may not be
sufficient assets remaining to pay amounts due on any or all of our senior
notes then outstanding. The guarantees of our senior notes will similarly be
subordinated to secured indebtedness of the guarantors. Our senior subordinated notes and the related guarantees of these notes are
subordinated in right of payment to all of our existing and future senior
indebtedness. Our senior subordinated notes and the related guarantees of these notes
are general unsecured obligations and subordinated in the right of payment to
all of our existing and future senior indebtedness, including all indebtedness
under our senior credit facility and senior notes. As of the end of fiscal
2003, we had senior indebtedness in the principal amount of $213.0 million under our senior notes
and the principal amount of $185.3 million under our senior credit facility as well as secured indebtedness
under our industrial development revenue bonds in the principal amount of $15.0 million and foreign debt
in the principal amount of $14.7 million. As a result of
the subordination, the holders of any senior indebtedness must be paid in full
before the holders of our senior subordinated notes in the event of the
insolvency, liquidation, reorganization, dissolution or other winding-up of our
company or upon a default in payment with respect to, or the acceleration of,
any senior indebtedness. If we incur any additional indebtedness that is on an
equal basis with the senior subordinated notes, the holders of that debt would
be entitled to share on an equal basis with the holders of our senior
subordinated notes in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other winding-up of our
company. This may have the effect of reducing the amount of proceeds paid to
holders of our senior subordinated notes. In addition, we cannot make cash
payments with respect to our senior subordinated notes during a payment default
with respect to senior indebtedness and, under certain circumstances, no
payments may be made with respect to the principal of, and premium, if any, on
our senior subordinated notes for a period of up to 179 days if a non-payment
default exists with respect to designated senior indebtedness. Our senior notes and senior subordinated notes are structurally subordinated to
all indebtedness of our subsidiaries that are not guarantors of the applicable
notes. Holders of our senior notes and senior subordinated notes will not have
any claim as a creditor against our subsidiaries that are not guarantors of the
applicable notes, and indebtedness and other liabilities, including trade
payables, whether secured or unsecured, of those subsidiaries will effectively
be senior to these holders claims against the assets of those subsidiaries.
All obligations owed by our non-guarantor subsidiaries would have to be
satisfied before any of the assets of these subsidiaries would be available for
distribution, upon a liquidation or otherwise, to us or a subsidiary that is a
guarantor of our senior notes or senior subordinated notes. Our non-guarantor
subsidiaries are currently the same for both our senior notes and senior
subordinated notes. Our non-guarantor subsidiaries represented 25.2% of our
consolidated net sales and 9.4% of our consolidated income from operations in
fiscal 2003. As of the end of fiscal 2003, our non-guarantor subsidiaries
represented after eliminations 36.4% of our consolidated assets and had $77.3
million of liabilities. This amount of liabilities
excludes $154.8 million of intercompany obligations owed to our guarantor
subsidiaries. These non-guarantor subsidiaries may incur additional
indebtedness in the future. 11




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Our senior notes mature after all of our other material obligations and the repayment of
such obligations could adversely affect our ability to satisfy our obligations under our senior notes. As of the
end of fiscal 2003, we had outstanding $213.0 million principal
amount of senior notes due 2010, $185.3 million principal amount
under our senior credit facility with tranches due in 2005 and 2006, $150.0 million principal amount of senior
subordinated notes due 2007 and $14.7 million principal amount
of foreign debt due in various years from 2004 to 2014. In addition,
we had outstanding $95.1 million of current redemption value,
excluding future dividends, for our senior preferred stock which has
a scheduled redemption date of September 30, 2007. Our senior
notes mature after all of our other obligations mature.
Consequently, our payment of these other obligations may make it more difficult
for us to pay interest due on our senior notes or to repay the outstanding
principal on our senior notes at maturity in 2010. In addition, all of the
subsidiary guarantors of our senior credit facility and our senior notes are also guarantors of our senior
subordinated notes. Accordingly, if we failed to pay these obligations at maturity, these subsidiary
guarantors would be required to satisfy our
payment obligation, possibly making it more difficult for the guarantors to
satisfy any obligations under their guarantees of our senior notes. Our senior subordinated notes mature after our senior credit facility and if we
were unable to satisfy our obligations under or refinance the senior credit
facility, we would not have sufficient funds to satisfy our obligations under
the senior subordinated notes. As of the
end of fiscal 2003, we had outstanding $185.3 million principal
amount under our senior credit facility with tranches due in 2005
and 2006
and $150.0 million principal amount under our senior subordinated notes that do not mature until 2007. As a consequence,
our payment of obligations under our senior credit facility may make it more
difficult for us to pay interest due on our senior subordinated notes or to
repay the outstanding principal on our senior subordinated notes at maturity in
2007. In addition, if we are unable to satisfy the obligations under our
senior credit facility, we would be in default under such facility, allowing
the lenders to accelerate the outstanding debt. If such an event were to occur
or appear likely to occur, there can be no assurance that we would be able to
make necessary payments to such lenders or that we would be able to refinance
with such lenders or find alternate financing to prevent such an occurrence.
Even if we were able to refinance or obtain alternate financing, there can be
no assurance that it would be on terms that are acceptable. If we were unable
to satisfy our obligations under, refinance or find alternate financing to
satisfy our obligations under the senior credit facility, we would not have
sufficient funds to satisfy our obligations under the senior subordinated notes. If a transaction constitutes a change of control that would obligate us to
offer to repurchase our senior notes, senior subordinated notes or senior
preferred stock, we may not be able to satisfy our obligation to repurchase
these securities. Upon the occurrence of certain change of control events, holders of our
senior notes, senior subordinated notes and shares of senior preferred stock
may require us to offer to repurchase all or part of their securities. However,
certain important corporate events, such as leveraged recapitalizations that
would increase the level of our indebtedness and transactions that do not
involve a sufficient change in voting power or beneficial ownership, would not
constitute a change of control. If a transaction constitutes a change of
control, we may not have sufficient funds at the time of the change of control
to make these required repurchases. Additionally, restrictions in our senior
credit facility may not allow such repurchases and certain events that would
constitute a change of control as defined in the indentures governing our
senior notes and senior subordinated notes or the certificate of designations
governing our senior preferred stock would constitute an event of default under
our senior credit facility. That event would, if it
should occur, permit the lenders to accelerate the debt outstanding under
our senior credit facility and that, in turn, would cause an event of default
under the indentures governing our senior notes and senior subordinated notes. The source of funds for any repurchase required as a result of any change
of control will be our available cash or cash generated from our operations or
other sources, including borrowings, sales of assets, sales of equity or funds
provided by a new controlling entity. We may not have sufficient available
funds at the time of any change of control to make any required repurchases of
our notes or shares of senior preferred stock tendered and to repay debt under
our senior credit facility. Furthermore, using available cash to fund the
potential consequences of a change of 12




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control may impair our ability to obtain
additional financing in the future. Any future credit agreements or other
agreements relating to debt to which we may become a party will most likely
contain similar restrictions on our ability to repurchase our notes and other
securities upon a change of control. A guarantee of our senior notes or senior subordinated notes could be voided or
subordinated because of federal bankruptcy law or comparable state law
provisions. Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, one or more of the guarantees of our senior notes or
senior subordinated notes could be voided, or claims in respect of a guarantee
could be subordinated to all other debts of that guarantor if, among other
things, the guarantor, at the time it incurred the indebtedness evidenced by
its guarantee received less than reasonably equivalent value or fair
consideration for the incurrence of such guarantee; and  
    
    was insolvent or rendered insolvent by reason of such incurrence;
    
    was engaged in a business or transaction for which the guarantors
remaining assets constituted unreasonably small capital; or
    
    intended to incur, or believed that it would incur, indebtedness
beyond its ability to pay such debts as they would mature. In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor or to a fund for the
benefit of the creditors of the guarantor. The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:  
    
    the sum of its debts, including contingent liabilities, was greater
than the fair saleable value of all of its assets;
    
    the present fair saleable value of its assets was less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities,
as they become absolute and mature; or
    
    it could not pay its debts as they become due. A court may apply a different standard in making these determinations. Risks Relating to Our Business Operations One of our customers accounts for a substantial portion of our revenue and the
loss of this customer would have a material adverse effect on our results of
operations and reduce our ability to service our debt obligations. Net sales to Wal*Mart accounted for 40%, 44% and 42% of our total net
sales for fiscal 2001, 2002 and 2003, respectively. We do not have a long-term
contract with Wal*Mart. A significant decrease or change in business from
Wal*Mart would have a material adverse effect on our results of operations,
financial condition and cash flows. In addition, our results of operations and
ability to service our debt obligations would be negatively impacted to the
extent that Wal*Mart is unable to make payments or does not make timely
payments on outstanding accounts receivable. 13




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We rely on a small number of customers, certain of which are able to make
greater demands of us. We rely on a small number of customers to generate a substantial portion
of our net sales. As a result of the leading market positions of many of our
customers, they are able to exert pressure on us with respect to pricing,
promotions, new product introductions and other services that may affect our
results of operations. For our private label and co-manufactured business, we
rely on the strength of brands not owned by us and on the willingness of the
owners of such brands to promote them to increase sales volume. Our net sales
and results of operations may be increasingly sensitive to a deterioration in
the financial condition of, or other adverse developments with, one or more of
our customers. Increases in raw materials, packaging and natural gas costs, and volatility in the commodity markets has in the past and may in the future
adversely affect our results of operations. Our financial results depend to a large extent on the costs of raw
materials, packaging and natural gas, and our ability to pass along increases
in these 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 as well as
weather conditions during the growing and related 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 the pricing of
natural gas, which affects our manufacturing costs. 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. 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. Our results of operations have in the past been adversely affected by
volatility in the commodity and natural gas markets and our results of
operations may be adversely affected in the future by this volatility. See Item
7  Managements Discussion and Analysis of Financial Condition and Results of
Operations. The use of commodity derivative instruments exposes us to risk of market
fluctuations in commodity prices and adverse accounting effects. We have in the past and may continue to seek to manage our commodity price
risk associated with market fluctuations by using derivative instruments for
portions of our corn, soybean meal, alternative proteins and natural gas
purchases, principally through exchange traded futures and options contracts.
The terms of such contracts are generally less than one year. Although we seek
to manage the price risk of market fluctuations by hedging portions of our
primary commodity product purchases, our results of operations have been
adversely affected in the past by these fluctuations and they may be adversely
affected by these fluctuations in the future. Fair value accounting of our commodity derivative instruments under SFAS
133 has adversely affected our results of operations in the past and may
adversely affect our results of operations in the future. See Item 7 
Managements Discussion and Analysis of Financial Condition and Results of
Operations. As of the end of fiscal 2003, we had open commodity contracts
with a fair value gain of $1.4 million. 14




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The use of commodity derivative instruments reduces our flexibility in managing
fluctuations in
the costs of raw materials and may adversely affect our results of operations. The use of commodity contracts 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 sales 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. Restrictions imposed in reaction to outbreaks of mad cow disease, bird flu
and foot-and-mouth disease could adversely impact the cost and availability
of our raw materials. In late 2000, the cost of our raw materials was impacted by the publicity
surrounding BSE in Europe, which is a
terminal brain disease of cattle. BSE is also known as mad cow disease and is
generally believed to be caused by accumulation of abnormal prions (proteins
found in the brain that are transmitted by ingestion of infected brains and
spinal cord materials) used in cattle feed protein supplements at the time. In
the second quarter of fiscal 2003, the first North American case of BSE was
discovered in Canada. A second BSE case, also traceable to Canadian origin,
was subsequently discovered in the United States in the fourth quarter of
fiscal 2003. As a result of extensive global publicity and trade restrictions
imposed to provide safeguards against the disease, the cost of alternative sources for our
raw material proteins, such as soybeans, and pork meat and bone meal, increased
significantly in late fiscal 2000 and the first quarter of fiscal 2004. We can
provide no assurance that BSE, or resulting regulations or publicity, will not
adversely impact the cost or availability of either our raw materials or
alternative protein sources in the future. In fiscal 2001, there was an outbreak of foot-and-mouth disease, or FMD,
in Europe. FMD affects animals with cloven hooves, such as cattle, swine,
sheep, goats and deer. While FMD is not considered a threat to humans, people
who come in contact with the virus can spread it to animals. Our operations
could be adversely affected if the disease were to spread throughout Europe or
to the United States. In early fiscal 2004, the first case of highly pathogenic Avian Influenza,
or HPAI, in twenty years was detected in the United States. The H5N2 strain of
the U.S. HPAI virus, while classified as highly virulent to birds, has not been
shown to affect humans. The U.S. HPAI virus is not related to the highly
publicized H5N1 strain of the Asian HPAI virus that has spread to 10 Asian
countries and has killed over 20 people and several domestic cats reportedly
exposed to infected poultry. Ingredient rendering and pet food cooking
processes destroy both strains of the HPAI virus. Consequently, there is no
risk of disease transmission by pet food, but due to trade bans on unprocessed
U.S. poultry products, pork ingredient prices are projected to further
increase. If BSE, FMD or HPAI impacts the availability of our raw materials, we
would be required to locate alternative sources for our raw materials. We can
give no assurance that those sources would be available to sustain our sales
volumes or that these alternative sources would not be more costly. If BSE, FMD
or HPAI impacts the cost of our raw materials, or the cost of
alternative raw materials compared to current costs, we would be required
to increase the sales price for our products to avoid margin deterioration. We
can give no assurance of the timing or extent of our ability to implement
future price adjustments in the event of higher costs or of whether any such
price adjustments implemented by us may affect future sales volumes to our customers. Our acquisition activities, including integration, operation and management of
these businesses, may not be successful or may subject us to losses. Any acquisition we may pursue would be based on identifying and acquiring
businesses engaged in manufacturing and distributing pet food products in
markets where we currently do not operate or businesses with products that
would complement our product mix. Our lack of experience in new markets we may
enter through 15




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future acquisitions could have an adverse effect on our results
of operations and financial condition. Acquisitions may require investment of
operational and financial resources and could require integration of dissimilar
operations, assimilation of new employees, diversion of management time and
resources, increases in administrative costs, potential loss of key employees
of the acquired company and additional costs associated with debt or equity
financing. Acquisitions may also result in losses associated with discontinued
operations. For example, we recognized a net loss of $4.7 million in connection
with our 2001 divestitures of our Perham, Minnesota facility and our Deep Run
domestic wet pet food business, both of which we acquired in our 1998 Windy
Hill acquisition. We also recognized asset impairments of $2.4 million in the
fourth quarter of fiscal 2003 related to our 51% interest in Crona, which owns a manufacturing facility in Tver, Russia that we subsequently divested in
January 2004. We may encounter increased competition for acquisitions in the future,
which could result in acquisition prices we do not consider acceptable. We may
not have sufficient available capital resources to execute potential
acquisitions, and our ability to enter into acquisitions may be limited by our
senior credit facility and our indentures. We may not find suitable acquisition
candidates at acceptable prices or succeed in integrating any acquired business
into our existing business or in retaining key customers of acquired
businesses. Our operating results and financial condition could be materially and
adversely affected by acquisitions if any of the following were to occur:  
    
    the expected operating efficiencies from the acquisitions do not materialize;
    
    we fail to successfully integrate the acquisitions into our existing operations; or
    
    the cost of the acquisition integrations exceeds expectations. The amount of goodwill and other intangible assets we have recorded from our
acquisitions may not be realized, which could have a material adverse effect on
our results of operations and reduce our ability to service our debt
obligations. As of the end of fiscal 2003, we had $380.4 million of goodwill and
trademarks. Goodwill has
been recorded under the purchase accounting method to represent the excess
of the amount paid over the fair value of the assets acquired and liabilities
assumed. The assets associated with our goodwill and trademarks may not be
realized by us in the future. Goodwill and trademarks represented 42.9% of our
total consolidated assets as of the end of fiscal 2003. We completed our fiscal
2003 annual assessment of impairment related to goodwill and trademarks and
determined no impairment was evident, but our results of operations in future
periods could be adversely affected if our goodwill and trademarks are
determined to be impaired. We face significant competition from national, regional and store brand
manufacturers, many of whom are larger than we are and have significantly
greater resources than we do. The pet food industry is highly competitive. The companies that produce
and market the major nationally advertised brand pet foods are national or international
conglomerates that are substantially larger than us and possess significantly
greater financial and marketing resources than us. Our store brand pet food
products compete for shelf space with nationally advertised brand pet food products on the
basis of quality and price. In addition, certain nationally advertised brand manufacturers
also manufacture store brands. Nationally advertised brand products compete principally
through advertising to create brand awareness and loyalty. We experience some
price competition from nationally advertised brand products. To the extent significant
price competition from nationally advertised brand products exists or
the nationally advertised brand
manufacturers significantly increase their store brand presence, our operating
results and cash flows could be adversely affected. We also compete with
regional branded manufacturers and other store brand manufacturers. A portion of our revenues is derived from our international operations, which
subject us to additional business, economic and political risks and could limit
our ability to successfully carry out our business strategy. We operate a portion of our business and market products internationally.
We have facilities in Austria, Denmark, the United Kingdom and Spain. In
fiscal 2003, we sold our products in 39 countries. Our foreign 16




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subsidiaries
had net sales of $255.4 million, or 25.2% of our consolidated net sales, with
the majority of these sales in Europe. We are, therefore, subject to the risks
customarily attendant to international operations and investment in foreign
countries. We currently have foreign currency exposures relating to buying, selling
and financing in currencies other than our functional currencies. We have
Euro-denominated debt outstanding and, therefore, are exposed to foreign
currency exchange risk. We also have foreign currency exposure related to
foreign-denominated revenues and costs translated into U.S. dollars. These
exposures are primarily concentrated in the Euro, the Danish Krona
and the British
Pound Sterling. Fluctuations in foreign currency exchange rates may affect the
results of our operations and the value of our foreign assets, which in turn
may adversely affect reported earnings and the comparability of
period-to-period results of operations. Management of our foreign currency
exposure may not protect us from fluctuations in foreign currency exchange
rates. Fluctuations in foreign currency exchange rates could have a material
adverse effect on our business, results of operations and financial condition. Other risks include:  
    
    import and export license requirements;
    
    trade restrictions;
    
    foreign tax laws, tariffs, and other foreign laws and regulations;
    
    limitation on repatriating earnings back to the United States;
    
    difficulties in staffing and managing international operations;
    
    nationalization;
    
    expropriation;
    
    restrictive actions by local governments;
    
    acts of terrorism;
    
    war and civil disturbance; and
    
    disruptions or delays in shipments. Any of these events could have an adverse effect on our operations in
foreign countries and an interruption of our international operations could
have a material adverse effect on our results of operations and financial
condition. If we lose certain key personnel or are unable to hire additional qualified
personnel, we may not be successful. Our success depends, in part, upon the continued services of our highly
skilled personnel involved in management, production and distribution, and, in
particular, upon the efforts and abilities of our executive management group.
If we lose the service of any of the members of our executive management group,
the loss could have a material adverse effect on our business, financial
condition and results of operations. We do not have key person life insurance
covering any of our employees. Our success also depends upon our ability to
attract and retain highly qualified employees. We are subject to extensive regulation and our compliance with existing or
future laws and regulations or making any product recalls pursuant thereto
could cause us to incur substantial expenditures. 17




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##### Table of Contents



We are subject to a broad range of federal, state, local and foreign laws
and regulations intended to protect the public health and the environment,
including those governing discharges into the air and water, the storage of
petroleum substances and chemicals, the handling and disposal of solid or
hazardous wastes and the remediation of contamination associated with
releases of wastes or hazardous substances. Our U.S. operations are also
subject to regulation by the Occupational Safety and Health Administration, the
Food and Drug Administration, the Department of Agriculture and by various
state and local authorities regarding the processing, packaging, storage,
distribution, advertising and labeling of our products, including food safety
standards. Our foreign operations are subject to similar environmental and
safety laws and regulations that are enforced by governmental agencies, such as
the European Commissioner of Foods, which is the controlling body for public
health of the European Union. The European Union is taking a much stronger role
than the United States in both the regulation of raw materials for
manufacturing and the labeling of pet food. The European Commissioner of Food
is overseeing this movement towards heightened regulation of pet food.
Violations of any of these laws and regulations may result in administrative,
civil or criminal penalties being levied against us, permit revocation or
modification, performance of environmental investigatory or remedial
activities, or a cease and desist order against operations that are not in
compliance. See Business  Environmental and Safety Matters. These laws and regulations may change in the future and we may incur
material costs in our efforts to comply with current or future laws and
regulations or to effect future recalls. These matters may have a material
adverse effect on our business. The board of directors of Doane Pet Care Enterprises, Inc., our parent company,
and our board of directors are controlled by certain stockholders and their
interests may be different than those of our noteholders. Doane Pet Care Enterprises, Inc., our parent company, is a holding company
with no operations. We are its sole operating subsidiary. In connection with
our acquisition of Windy Hill Pet Food Company, Inc. in August 1998, we,
Summit/DPC Partners, L.P., Summit Capital, Inc., Chase Manhattan Investment
Holdings, Inc. (predecessor to J.P. Morgan Partners (BHCA), L.P.) and an
affiliate thereof, DLJ Merchant Banking Partners, L.P. and certain of its
affiliates, all of Windy Hills former stockholders, and certain other
stockholders of Doane Pet Care Enterprises, Inc. entered into an investors
agreement. The investors agreement provides certain of
these parties with board designation rights. Through their control of the
boards of directors of Doane Pet Care Enterprises, Inc. and our company, these
investors are able to control our policies, management and affairs and to
effectively prevent or cause a change in our control. Each of our
parents significant
stockholders, together with its affiliates, has other business interests and
activities in addition to its ownership interest in us. It is possible that the
significant stockholders may exercise their control in ways that serve their
individual interests but do not serve the best interests of our noteholders.
It is also possible that conflicts or
disagreements among the stockholders may make it difficult for us to take
action important to the achievement of our goals. We may be subject to work stoppages at our facilities or those of our principal
customers, which could adversely impact the profitability of our business. A portion of our global work force is unionized. If our unionized workers
were to engage in a strike, work stoppage or other slowdown in the future, we
could experience a significant disruption of our operations, which could have a
material adverse effect on us. Furthermore,
organizations responsible for shipping our products may be impacted by
strikes staged by the unions representing transportation employees. Any
interruption in the delivery of our products could have a material adverse
effect on us. If the investments in our pension plans do not perform as expected, we may have
to contribute additional amounts to the plans. We maintain a non-contributory pension plan covering hourly and salaried
workers of a predecessor company. The plan was frozen in 1998 and, as a result,
future benefits no longer accumulate and our annual service cost ceased as of
that date. Our only active plan covers 50 union employees at one facility. Due
to an overall decline since fiscal 2000 in the market value of these plans assets and interest rates used in discounting benefit liabilities, the
pension assets as of the end of fiscal 2003 were $0.7 million less than the accumulated
benefit obligations. As a result, we have
recognized a minimum pension liability of $8.2 million, or $5.0 million net of
deferred tax benefit, in 18




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##### Table of Contents



accumulated other comprehensive income (loss) in the
accompanying audited consolidated financial statements included herein. Under
federal law, we were not required to make any cash contributions to the
inactive plan in fiscal 2001 through 2003 and do not expect to make any cash
contribution in fiscal 2004. Our contributions to the active plan in fiscal
2001 through 2003 were less than $0.1 million each year and we expect to
contribute approximately $0.1 million in fiscal 2004. However, if underperformance of
the plans investments continues, we may be required in the future to
contribute additional funds to ensure that the pension plans will be able to
pay out benefits as scheduled. Such an increase in funding could result in a
decrease in our available cash flow, which would limit our ability to fund our
business activities or pay principal or interest on our debt. 19




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##### Table of Contents



ITEM 2  Properties Our corporate headquarters are located in Brentwood, Tennessee. Our
manufacturing facilities are generally located in rural areas in close
proximity to our customers, raw materials and transportation networks,
including rail transportation. We believe the broad number of strategically
located facilities enhances our position as a low cost provider by reducing
freight costs for raw materials and finished goods and facilitating direct
delivery programs. The rural locations also reduce land and labor costs. We
believe we can construct new manufacturing facilities at a lower cost than
competitors by using our engineering services group to design and construct
most of the necessary production equipment. The following table shows our United States and European manufacturing,
warehouse and distribution facilities: Location
    
    Principal products
    
    Square footageDomestic manufacturing and warehouse facilities:Allentown, PA
    
    Dry dog/cat food
    
    
    70,000Birmingham, AL
    
    Dry dog/cat food
    
    
    142,000Butler, MO
    
    Dry dog/cat food
    
    
    75,000Cartersville, GA
    
    Dry dog/cat food
    
    
    42,000Clinton, OK
    
    Dry dog/cat food
    
    
    218,000Delavan, WI
    
    Semi-moist food; treats
    
    
    55,000Dexter, MO
    
    Dry dog/cat food
    
    
    70,000Everson, PA
    
    Dry dog/cat food
    
    
    74,000Hillburn, NY
    
    Dog biscuits
    
    
    95,000Joplin, MO
    
    Dry dog/cat food; dog biscuits
    
    
    308,000LeSueur, MN
    
    Dry dog/cat food; dog biscuits
    
    
    160,000Manassas, VA
    
    Dry dog/cat food
    
    
    80,000McKenzie, TN
    
    Dry dog/cat food
    
    
    90,000Miami, OK
    
    Dog and cat treats
    
    
    76,000Muscatine, IA
    
    Dry dog/cat food
    
    
    100,000Orangeburg, SC
    
    Dry dog/cat food
    
    
    139,000Portland, IN
    
    Dry dog/cat food; dog biscuits
    
    
    120,000Pueblo, CO
    
    Dry dog/cat food
    
    
    125,000San Bernardino, CA
    
    Dry dog/cat food
    
    
    169,000Temple, TX
    
    Dry dog/cat food
    
    
    110,000Tomah, WI
    
    Dry dog/cat food
    
    
    98,000Tracy, CA
    
    Dry dog/cat food
    
    
    110,000Washington Courthouse, OH
    
    Dry dog/cat food; dog biscuits
    
    
    190,000Domestic distribution warehouses:Alexandria, LA
    
    N/A
    
    
    35,000Johnstown,
NY(1)
    
    N/A
    
    
    41,000Ocala, FL
    
    N/A
    
    
    76,000European manufacturing and warehouse facilities:Carat, Austria (Arovit)
    
    Wet dog/cat food
    
    
    38,000Esbjerg, Denmark (Arovit)
    
    Wet dog/cat food; treats
    
    
    487,000Norwich, England (Larkshall)
    
    Dry dog/cat food
    
    
    81,000Valladolid, Spain (Ipes)
    
    Dry dog/cat food
    
    
    112,000Vejen, Denmark (Arovit)
    
    Dry dog/cat food
    
    
    151,000Vrä, Denmark (Arovit)(2)
    
    Wet dog/cat food
    
    
    120,000Joint venture facility:Milano, Italy (Effeffe)
    
    Dry dog/cat food
    
    
    67,000
   (1)
    
    This facility is leased. All other facilities are owned by us other than the joint venture facility.(2)
    
    We plan to close this facility during fiscal 2004. 20




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##### Table of Contents



ITEM 3  Legal Proceedings We
were named as a defendant in a case styled Petguard, Inc. v. Doane
Pet Care Company, which was filed on May 3, 2002 in the U.S.
District Court for the Middle District of Florida, Jacksonville
Division. The plaintiff alleged defects in pet food that was
manufactured by us at our former Deep Run facility and sold to the
plaintiff. In January 2004, we settled this litigation for an amount
that was not material to our results of operations or financial
condition. In the ordinary course of business, we are party to litigation from time
to time; however, we are not a party to any material pending legal
proceedings that, if adversely determined, we believe would have a material
effect on our financial condition or results of operations. 
 ITEM 4  Submissions of Matters to a Vote of Security Holders On April 23, 2003 our parent and sole stockholder, Doane Pet Care
Enterprises, Inc., approved by written consent in lieu of an annual meeting a
resolution naming the following individuals to our board of directors:
Lawrence S. Benjamin, Douglas J. Cahill, Edward H. DAlelio, Jerry W. Finney,
Jr., George B. Kelly, Mathew J. Lori, Terry R. Peets, Stephen C. Sherrill, Paul
E. Suckow and Jeffrey C. Walker. 
 PART II 
 ITEM 5  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information All of our common stock is owned by our parent. No established public
trading market currently exists for our common stock. Sales of Unregistered Equity Securities We did not sell any unregistered equity securities in fiscal 2003. Dividends We did not declare any cash dividends on our common stock in fiscal 2002
or 2003 and we do not anticipate paying any cash dividends in the foreseeable
future. We intend instead to retain any future earnings for reinvestment in
our business or other corporate purposes. Any future determination as to the
payment of dividends will be made at the discretion of our board of directors
and will depend on our operating results, financial condition, capital
requirements, general business conditions and such other factors as the board
of directors deems relevant. Our ability to pay dividends is also restricted by our senior credit
facility and the indentures governing our senior notes and our senior
subordinated notes. Equity Compensation Plan Information Neither we nor our parent, subsidiaries or affiliates have any
compensation plans or individual compensation arrangements under which our
equity securities are authorized for issuance to employees or non-employees in
exchange for consideration in the form of goods or services. 
 ITEM 6  Selected Financial Data The selected financial data presented below (except for pet food sold
data) was derived from our consolidated financial statements, which have been
audited by KPMG LLP, our independent auditors. The selected data should be
read in conjunction with the accompanying audited consolidated financial
statements and related notes included elsewhere in this annual report on Form
10-K. Effective January 1, 1999, we changed our fiscal year to end on the
Saturday nearest to the end of December; and therefore, fiscal 1999, 2000,
2001, 2002 and 2003 ended on January 1, 2000, December 30, 2000, December 29,
2001, December 28, 2002 and January 3, 2004, respectively. Fiscal 1999 through
2002 were each 52-week years and fiscal 2003 was a 53-week year. The tables
presented below are in thousands. 21




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##### Table of Contents



Fiscal1999 (1)
    
    2000 (2)
    
    2001 (3)(4)
    
    2002
    
    2003Statement of income data:Net sales
    
    $
    754,343
    
    
    $
    875,761
    
    
    $
    895,830
    
    
    $
    887,333
    
    
    $
    1,013,865Cost of goods sold
    
    
    579,124
    
    
    
    687,799
    
    
    
    749,092
    
    
    
    701,418
    
    
    
    851,578Gross profit
    
    
    175,219
    
    
    
    187,962
    
    
    
    146,738
    
    
    
    185,915
    
    
    
    162,287Operating expenses:Promotion and distribution
    
    
    42,006
    
    
    
    51,929
    
    
    
    58,241
    
    
    
    52,445
    
    
    
    57,616Selling, general and administrative
    
    
    41,212
    
    
    
    50,863
    
    
    
    47,945
    
    
    
    48,712
    
    
    
    52,015Amortization (5)
    
    
    10,357
    
    
    
    12,779
    
    
    
    13,743
    
    
    
    4,583
    
    
    
    4,989Other operating expenses (6)
    
    
    2,539
    
    
    
    28,639
    
    
    
    8,655
    
    
    
    1,447
    
    
    
    7,227Income from operations
    
    
    79,105
    
    
    
    43,752
    
    
    
    18,154
    
    
    
    78,728
    
    
    
    40,440Interest expense, net
    
    
    39,739
    
    
    
    51,223
    
    
    
    57,020
    
    
    
    62,395
    
    
    
    58,845Debt extinguishments (7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,142Other income, net
    
    
    (1,201
    )
    
    
    (1,732
    )
    
    
    (757
    )
    
    
    (724
    )
    
    
    (1,156
    )Income (loss) before income taxes
and cumulative effect of a
change in accounting principle
    
    
    40,567
    
    
    
    (5,739
    )
    
    
    (38,109
    )
    
    
    17,057
    
    
    
    (29,391
    )Income tax expense (benefit)
    
    
    16,858
    
    
    
    (854
    )
    
    
    (16,171
    )
    
    
    1,786
    
    
    
    25,039Income (loss) before cumulative effect of
a change in accounting principle
    
    
    23,709
    
    
    
    (4,885
    )
    
    
    (21,938
    )
    
    
    15,271
    
    
    
    (54,430
    )Cumulative effect at adoption at the beginning of fiscal
1999 of a change in accounting for commodity
derivative instruments, net of income tax
benefit of $1,440 (8)
    
    
    (2,263
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    21,446
    
    
    $
    (4,885
    )
    
    $
    (21,938
    )
    
    $
    15,271
    
    
    $
    (54,430
    )
 Fiscal1999 (1)
    
    2000 (2)
    
    2001 (3)(4)
    
    2002
    
    2003Other data:Cash flows provided by (used in) operating activities
    
    $
    59,938
    
    
    $
    45,388
    
    
    $
    (23,936
    )
    
    $
    78,773
    
    
    $
    55,663Cash flows provided by (used in) investing activities
    
    
    (34,458
    )
    
    
    (181,316
    )
    
    
    1,466
    
    
    
    (25,902
    )
    
    
    (30,185
    )Cash flows provided by (used in) financing
activities
    
    
    (21,531
    )
    
    
    131,972
    
    
    
    25,433
    
    
    
    (51,731
    )
    
    
    (4,572
    )Depreciation and amortization
    
    
    26,083
    
    
    
    36,334
    
    
    
    41,430
    
    
    
    32,164
    
    
    
    37,161Capital expenditures (9)
    
    
    26,668
    
    
    
    35,347
    
    
    
    17,316
    
    
    
    24,348
    
    
    
    28,062Pet food sold (thousands of U.S. tons):United States
    
    
    1,669
    
    
    
    1,710
    
    
    
    1,653
    
    
    
    1,705
    
    
    
    1,836Europe
    
    
    72
    
    
    
    207
    
    
    
    282
    
    
    
    258
    
    
    
    276
 End of fiscal1999 (1)
    
    2000 (2)
    
    2001 (3)
    
    2002
    
    2003Balance sheet data:Working capital
    
    $
    32,832
    
    
    $
    25,812
    
    
    $
    46,995
    
    
    $
    59,215
    
    
    $
    40,353Total assets
    
    
    693,296
    
    
    
    907,062
    
    
    
    836,545
    
    
    
    870,667
    
    
    
    885,914Total debt
    
    
    427,922
    
    
    
    573,165
    
    
    
    587,823
    
    
    
    554,020
    
    
    
    574,046Senior Preferred Stock (Redeemable)
    
    
    45,965
    
    
    
    55,205
    
    
    
    65,672
    
    
    
    77,550
    
    
    
    91,052Stockholders equity
    
    
    82,946
    
    
    
    70,881
    
    
    
    37,926
    
    
    
    58,503
    
    
    
    31,198
  (1)
    
    Results for fiscal 1999 include the results of our acquisition on October
14, 1999 of the Larkshall Extrusions, division of Buxted Chicken Limited
for approximately $5.0 million in cash.(2)
    
    Results for fiscal 2000 include the results of our acquisition on May 10,
2000 of A/S Arovit Petfood, headquartered in Esbjerg, Denmark, for
approximately $144.4 million and assumed indebtedness, net of cash, of
approximately $11.8 million. Arovit manufacturers and sells throughout
Europe a full range of pet food products for dogs and cats, including wet,
dry and treats, primarily through private label programs. 22




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##### Table of Contents



(3)
    
    Results for fiscal 2001 include the results of two divestitures until the
dates of sale: our Perham, Minnesota facility from the beginning of fiscal
2001 through April 27, 2001 and our Deep Run domestic wet pet food
business from the beginning of fiscal 2001 through May 3, 2001. See Item
7  Managements Discussion and Analysis of Financial Condition and
Results of Operations  Results of Operations.(4)
    
    Results for fiscal 2001 include $16.9 million of expenses associated with
strategic initiatives that commenced in fiscal 2001 and consist of $6.7
million of other operating expenses related to the divestitures and $10.2
million of Project Focus expenses. The Project Focus expenses were
classified as follows: (1) $0.3 million as a reduction in net sales; (2)
$6.6 million as cost of goods sold; (3) $0.9 million as promotion and
distribution expenses; (4) $0.4 million as selling, general and
administrative expenses; and (5) $2.0 million as other operating expenses.
See Note 13  Other Operating and Project Focus Implementation Expenses
to our accompanying audited consolidated financial statements included
herein.(5)
    
    As of the beginning of fiscal 2002, we adopted SFAS 142 and ceased
amortization of goodwill and trademarks. See Note 1  Summary of
Significant Accounting Policies  Goodwill and Trademarks to our
accompanying audited consolidated financial statements included herein for
our results of operations for fiscal 2001, as adjusted to give effect to
SFAS 142 as if it were adopted as of the beginning of fiscal 2001. Net
income (loss) for fiscal 1999 and 2000, as adjusted to give effect to the
adoption of SFAS 142 as of the beginning of each of these fiscal years,
would be $27.9 million and $2.3 million, respectively.(6)
    
    Other operating expenses of $2.5 million in fiscal 1999 include $1.1
million of transition expenses in connection with the Windy Hill
acquisition and $1.4 million of expenses related to the proposed initial
public offering by our parent, which was subsequently withdrawn.Other operating expenses of $28.6 million in fiscal 2000 include: (1)
restructuring costs of $22.3 million consisting of asset impairments of
$15.3 million related to the closure of certain inefficient manufacturing
facilities, severance costs of $3.5 million related to these facility
closures and the elimination of corporate positions and $3.5 million of
shutdown expenses for these facility closures; and (2) transaction costs of
$6.3 million, consisting of a $4.6 million loss on a foreign currency
forward contract associated with the Arovit acquisition, a $1.5 million
charge for the write-off of costs for unconsummated acquisitions and $0.2
million of miscellaneous transaction costs.Other operating expenses of $8.7 million in fiscal 2001 include a $4.7
million net loss from the divestitures and $4.0 million of restructuring
costs consisting of (1) $2.0 million of severance costs for the elimination
of corporate positions following the divestitures; and (2) $2.0 million of
Project Focus related costs comprised of $1.0 million of asset impairments
and other plant closure costs for the shutdown of an inefficient
manufacturing facility and $1.0 million of severance costs for the
elimination of additional corporate positions in the fourth quarter of
fiscal 2001.Other operating expenses of $1.4 million in fiscal 2002 include a $0.8
million write-off of costs related to our postponed bond offering and a
$0.6 million write-off of costs related to our abandoned European sale
process.Other operating expenses of $7.2 million in fiscal 2003 include: (1) asset
impairments of $5.3 million to the building and certain equipment relating to our
manufacturing facility in Vrä, Denmark, which is being
consolidated into two of our other facilities:
(2) asset impairments of $2.4 million relating to our divesture of our 51%
interest in Crona, which owns a manufacturing
 facility in Tver, Russia; and (3) net positive  revisions to
estimated restructuring costs of $0.5 million primarily related to plant closures in prior years.
 See Note 13  Other Operating and Project Focus Implementation
Expenses to our accompanying audited consolidated financial statements
included herein.(7)
    
    Debt extinguishments of $12.1 million in fiscal 2003 consisted of $11.1
million related to our refinancing in February 2003 and $1.0 million
related to the optional prepayment on our senior credit facility. The $11.1 million related to the
refinancing in February 2003 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 the excess
leverage fee accrual.(8)
    
    The cumulative effect of a change in accounting principle as of the
beginning of fiscal 1999 relates to a change in accounting for commodity
derivative instruments in accordance with SFAS 133.(9)
    
    Capital expenditures exclude payments for acquisitions. 23




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##### Table of Contents



ITEM 7  Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with the accompanying
audited consolidated financial statements and related notes included elsewhere
in this annual report on Form 10-K. You are also urged to read Item 1 
Business  Forward-Looking Statements and  Risk Factors for some of the
factors that could cause our actual results to differ materially from those
contained in any forward-looking statements in this discussion. Business Overview The U.S. pet food industry is approximately a $12.4 billion industry with
a compound annual growth rate of 3.6% from 2000 through 2003. From 2000 to
2003,the U.S. dog and cat population grew from 135 million to 140 million. Recent trends in the U.S. pet food industry include the following:  
    
    Dry pet food has grown more rapidly than wet pet food. From 2000
to 2003, dry pet food grew at a compound annual growth rate of 4.0%
compared to a compound annual growth rate of 1.9% for wet pet food.
    
    Private label pet food has grown more rapidly than nationally advertised brand pet
food. In 2000, private label sales accounted for 31% of industry sales
and nationally advertised brand sales accounted for 69% of industry sales. From 2000 to
2002, private label dry pet food grew at a compound annual growth rate
of 6.2% compared to 3.8% for nationally advertised brand dry pet food.
    
    Sales through the mass merchant channel have grown more rapidly
than sales through the grocery channel. From 2000 to 2003, pet food
sales through the mass merchant channel grew at a compound annual
growth rate of 10.4%, compared to a decline of 3.6% for the grocery
channel. In fiscal 2003, approximately 35% of mass merchant pet food
sales was private label compared to 10% for the grocery channel.
    
    Consolidation. Over the past several years, significant
consolidation occurred among pet food producers, including Nestlé
S.A.s 2001 acquisition of Ralston Purina Company in the United States and
Mars, Inc.s 2002 acquisition of Royal Canin S.A. in Europe. 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 a variety of types of retailers. Our net sales to Wal*Mart
accounted for 40%, 44% and 42% of our total net sales for fiscal 2001, 2002 and
2003, respectively. 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 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, amortization and other corporate overhead costs, which typically do
not increase proportionately with increases in volume and product sales. 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 24




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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 and
may be exposed 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. We cannot provide assurance regarding the timing or
extent of our ability to implement future price adjustments in the event of
increased raw materials, packaging and natural gas costs, or of whether any
price increases implemented by us may affect the volumes of future shipments to
our customers. 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. Fiscal 2003 Year in Review Fiscal 2003 was a challenging year for our company. Excluding the impact
of foreign currency exchange fluctuations and the 53rd week, net sales
increased 7.8% in fiscal 2003 primarily due to higher sales volumes. Although
we experienced favorable sales growth, our income from operations decreased by
$38.3 million primarily due to significantly higher commodity and natural gas
costs. We also had $7.2 million of other operating expenses, primarily non-cash asset impairments as described below. Our net loss of $54.4 million was impacted by a non-cash income tax
expense of $23.6 million, reflecting the uncertainty concerning our ability to
realize net operating loss carryforwards as well as $12.1 million of
non-cash debt extinguishment costs. Due to higher than expected commodity costs, the volatility of domestic
commodities prices and the accompanying difficulty to hedge our commodity risk,
we announced in late 2003 that we re-evaluated both our pricing strategy and
risk management process. As a result, 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 have reached cost-sharing arrangements, starting in
fiscal 2004, such that we now have approximately 80% of our domestic volume under some
form of cost-sharing arrangements. 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. These
cost-sharing arrangements will allow us to better manage our financial
performance while protecting our customers brands as we move through the
commodity market cycles. In addition, we recently announced an additional price increase that will take affect during the second quarter of 2004. Because we generally do not have long-term contracts
with our customers, our recent price increases and our cost-sharing arrangements
could change. We took steps in 2003 to address our significant cash requirements for
debt service relating to our outstanding indebtedness. In the first quarter of
fiscal 2003, we issued $213.0 million aggregate principal amount of 10 3⁄4%
senior notes due 2010. We used $169.3 million of the net proceeds from the
sale of our senior notes to repay a portion of our senior credit facility and
we used $33.3 million of the remaining net proceeds to repay our sponsor
facility in full. In conjunction with the issuance of our senior notes, we
amended our senior credit facility. See  Liquidity and Capital Resources 
Amendments to Senior Credit Facility. We also took steps to increase our cash flows from working
capital by negotiating more favorable payment terms with certain customers in
the third quarter of fiscal 2003. These new payment terms permitted us to make
a $15.0 million prepayment on our senior credit facility. In December 2003, we finalized our plans for Project 3-to-2 to consolidate
the production and most of the equipment from our manufacturing facility in Vrä, Denmark into our facility in Esbjerg, Denmark and our
recently expanded facility in Carat, Austria during fiscal 2004. As a result,
we will close the Vrä facility in fiscal 2004. In conjunction with Project
3-to-2, we evaluated our long-lived assets and recorded non-cash asset
impairments of $5.3 million in the fourth quarter of fiscal 2003 to the
building and certain equipment from the Vrä facility that we anticipate will not be utilized, but instead disposed of or sold. 25




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In January 2004, we divested our 51% interest in Crona, which
owns a manufacturing facility in Tver, Russia. In the fourth quarter of fiscal 2003, we
evaluated the net assets of this facility for impairment and recorded asset impairments
of $2.4 million in other operating expenses. Financial Covenant Compliance One of our major risks is 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 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 these financial ratios and tests can be affected by
events beyond our control, such as prevailing economic, financial or industry
conditions, and the occurrence of any such event may prevent us from meeting
these financial ratios and tests. In particular, if domestic commodity prices
remain at or near their current levels or increase further and we are unable to recover such
increased costs through price increases, we may face additional challenges in
covenant compliance. We have experienced difficulty in the past satisfying the
financial covenants in our senior credit facility and have either negotiated
amendments or obtained waivers from our lenders for fiscal 2000, 2001 and 2003.
Our senior credit facility, including these financial covenants, was amended in February 2003 concurrently with the sale of senior notes and 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 Our fiscal year ends on the Saturday nearest to the end of December; and
therefore, fiscal 2001, 2002 and 2003 ended on December 29, 2001, December 28,
2002 and January 3, 2004, respectively. Each quarter also ends on the Saturday
nearest to the end of the month. Fiscal 2001 and 2002 were 52-week years and
fiscal 2003 was a 53-week year. 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 significantly impacted in fiscal
2003 and minimally impacted in fiscal 2002 by foreign currency exchange rate
fluctuations. For the purpose of evaluating our results of operations, the
average year-over-year Euro to USD exchange rates for fiscal 2001, 2002 and
2003 were 0.8953, 0.9425 and 1.1281, respectively. For the purpose of
evaluating our financial position, the Euro to USD exchange rates as of the end
of fiscal 2002 and 2003 were 1.0481 and 1.2495, respectively. Statement of operations data.The following table sets forth our
statement of operations derived from the accompanying audited consolidated
financial statements included herein expressed as a percentage of net sales for
the fiscal years indicated (table in thousands, except percentages): 26




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Fiscal2001
    
    2002
    
    2003Net sales
    
    $
    895,830
    
    
    
    100.0
    %
    
    $
    887,333
    
    
    
    100.0
    %
    
    
    
    
    
    $
    1,013,865
    
    
    
    100.0
    %Cost of goods sold:Commodities
    
    
    396,539
    
    
    
    44.3
    
    
    
    390,899
    
    
    
    44.1
    
    
    
    
    
    
    
    494,302
    
    
    
    48.8Other
    
    
    352,553
    
    
    
    39.3
    
    
    
    310,519
    
    
    
    34.9
    
    
    
    
    
    
    
    357,276
    
    
    
    35.2Total cost of goods sold
    
    
    749,092
    
    
    
    83.6
    
    
    
    701,418
    
    
    
    79.0
    
    
    
    
    
    
    
    851,578
    
    
    
    84.0Gross profit
    
    
    146,738
    
    
    
    16.4
    
    
    
    185,915
    
    
    
    21.0
    
    
    
    
    
    
    
    162,287
    
    
    
    16.0Operating expenses:Promotion and distribution
    
    
    58,241
    
    
    
    6.5
    
    
    
    52,445
    
    
    
    5.9
    
    
    
    
    
    
    
    57,616
    
    
    
    5.7Selling, general and administrative
    
    
    47,945
    
    
    
    5.4
    
    
    
    48,712
    
    
    
    5.5
    
    
    
    
    
    
    
    52,015
    
    
    
    5.1Amortization
    
    
    13,743
    
    
    
    1.5
    
    
    
    4,583
    
    
    
    0.5
    
    
    
    
    
    
    
    4,989
    
    
    
    0.5Other operating expenses
    
    
    8,655
    
    
    
    1.0
    
    
    
    1,447
    
    
    
    0.2
    
    
    
    
    
    
    
    7,227
    
    
    
    0.7Income from operations
    
    
    18,154
    
    
    
    2.0
    
    
    
    78,728
    
    
    
    8.9
    
    
    
    
    
    
    
    40,440
    
    
    
    4.0Interest expense, net
    
    
    57,020
    
    
    
    6.4
    
    
    
    62,395
    
    
    
    7.0
    
    
    
    
    
    
    
    58,845
    
    
    
    5.8Debt extinguishments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,142
    
    
    
    1.2Other income, net
    
    
    (757
    )
    
    
    (0.1
    )
    
    
    (724
    )
    
    
    
    
    
    
    
    
    
    
    (1,156
    )
    
    
    (0.1
    )Income (loss) before income taxes
    
    
    (38,109
    )
    
    
    (4.3
    )
    
    
    17,057
    
    
    
    1.9
    
    
    
    
    
    
    
    (29,391
    )
    
    
    (2.9
    )Income tax expense (benefit)
    
    
    (16,171
    )
    
    
    (1.8
    )
    
    
    1,786
    
    
    
    0.2
    
    
    
    
    
    
    
    25,039
    
    
    
    2.5Net income (loss)
    
    $
    (21,938
    )
    
    
    (2.5
    )%
    
    $
    15,271
    
    
    
    1.7
    %
    
    
    
    
    
    $
    (54,430
    )
    
    
    (5.4
    )%
 Fiscal 2003 Compared to Fiscal 2002 Net sales.
Net sales in fiscal 2003 increased 14.3% to $1,013.9 million
from $887.3 million in fiscal 2002. Net sales in fiscal 2003
increased 14.3%, to $1,013.9 million from $887.3 million in fiscal
2002. The fiscal 2003 sales increase was primarily due to sales
volume growth and the favorable currency exchange rate between the dollar
and the Euro. Fiscal 2003 sales volume growth also benefited from an
extra week in the 2003 fiscal period compared to the 2002 period.
Excluding only the foreign currency exchange rate impact from fiscal
2003, net sales increased 9.5%; whereas excluding only the benefit of
the extra week of sales in fiscal 2003, net sales increased 12.6%.
Excluding both the positive impact of foreign currency exchange rate
and the extra week, net sales increased 7.8%. The increase in sales volume is primarily attributable to the impact of a full
year of Meow Mix and Ol Roy Meaty Chunks N Gravy volume in fiscal 2003
compared to a partial year of such volume for fiscal 2002. Gross profit.Gross profit in fiscal 2003 decreased 12.7%, or $23.6
million, to $162.3 million from $185.9 million in fiscal 2002. Excluding the
impact of foreign currency exchange fluctuations and the 53rd week in fiscal
2003, gross profit decreased $35.0 million, or 18.8%, from fiscal 2002 to
fiscal 2003. This decrease was primarily due to higher commodities costs,
which increased as a percentage of net sales to 48.8% in fiscal 2003
from 44.1% in fiscal 2002. In addition, other cost of goods sold
increased as a percentage of net sales to 35.2% in fiscal 2003 from
34.9% in fiscal 2002 primarily due to higher natural gas costs. The
impact of these higher costs on gross profit was partially offset by the increase in our sales volume in fiscal 2003.
We had a $0.3 million increase in our gross profit due to the volatility of
commodity prices under SFAS 133 fair value accounting of our commodity
derivative instruments, which resulted from a $5.2 million reduction in our
cost of goods sold in fiscal 2003 compared to a $4.9 million reduction in our
cost of goods sold in fiscal 2002. Promotion and distribution. Promotion and distribution expenses in fiscal
2003 increased 9.9% to $57.6 million from $52.4 million in fiscal 2002. As a
percentage of net sales, promotion and distribution expenses decreased to 5.7%
in fiscal 2003 from 5.9% in fiscal 2002 primarily due to the product mix of our
new business. Selling, general and administrative. Selling, general and administrative
expenses in fiscal 2003 increased 6.8% to $52.0 million from $48.7 million in
fiscal 2002. Excluding the impact of foreign currency exchange fluctuations in
fiscal 2003, selling, general and administrative
expenses were consistent with fiscal 2002. Other operating
expenses.Other operating expenses of $7.2 million in fiscal 2003 include: (1) asset
impairments of $5.3 million to the building and certain equipment relating to
our manufacturing facility in Vrä, Denmark; (2) asset
impairments of $2.4 million relating to our divesture of our 51%
interest in Crona, which owns a manufacturing facility in Tver, Russia; and (3)
net positive revisions to estimated restructuring costs of $0.5
million primarily related to plant closures in prior years. 27




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completed in February 2003 and a $0.6 million write-off of costs for our
abandoned European sale process. Interest expense, net. Interest expense, net of interest income, in
fiscal 2003 decreased 5.7% to $58.8 million from $62.4 million in fiscal 2002.
This decrease was primarily due to the elimination of the excess leverage fee
accrual under our senior credit facility and a decrease in interest rates
associated with our floating rate debt, partially offset by a higher interest
rate on the portion of our long-term debt refinanced in February 2003. See
"Liquidity and Capital Resources  Amendments to Senior
Credit Facility. Debt
extinguishments.Debt extinguishments of $12.1 million in fiscal 2003 consisted of $11.1 million related to our
refinancing in February 2003 and $1.0 million related to the optional
prepayment on our senior credit facility in the third quarter of fiscal 2003.
The $11.1 million related to the refinancing in February 2003 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 the excess
leverage fee accrual. Income tax expense (benefit). We recognized income tax expense of $25.0
million in fiscal 2003 compared to income tax expense of $1.8 million in fiscal
2002. We recorded valuation allowances against deferred tax assets during
these periods of $42.5 million in fiscal 2003 and $0.6 million in fiscal 2002.
Due to the magnitude of our operating losses in fiscal 2003, coupled
with the variability of our historical earnings, we determined that we no
longer met 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. Fiscal 2002 Compared to Fiscal 2001 Net sales. Net sales in fiscal 2002 decreased 0.9% to $887.3 million from
$895.8 million in fiscal 2001. Net sales in fiscal 2001 included $16.6 million
of net sales from our Deep Run and
Perham businesses prior to their divestiture in the second quarter of
2001. Excluding the fiscal 2001 net sales associated with these divestitures,
our net sales for fiscal 2002 increased 0.9%, or $8.1 million. This increase
was primarily due to the increase in our sales volume as a result of new
business awards, partially offset by lower sales volume from Project Focus
implementation. Gross profit.Gross profit in fiscal 2002 increased 26.7%, or $39.2
million, to $185.9 million from $146.7 million in fiscal 2001 partially due to
the favorable impact caused by the volatility of commodity prices as recognized
under the SFAS 133 fair value accounting of our commodity derivative
instruments. Such accounting resulted in a $4.9 million reduction in our cost
of goods sold in fiscal 2002 compared to a $12.6 million increase in our cost
of goods sold in fiscal 2001, which accounts for $17.5 million of the $39.2
million increase in gross profit. Also, our fiscal 2001 gross profit was
impacted by the implementation of Project Focus. Of the total $10.2 million
Project Focus related charges, $6.9 million negatively impacted gross profit
and was primarily due to the write-down in packaging inventories. See Note 13
 Other Operating and Project Focus Implementation Expenses to our
accompanying audited consolidated financial statements included herein. The
remaining increase in our gross profit is primarily due to Project Focus
implementation, including improvements in manufacturing efficiencies, customer
mix and/or product mix, and our European operations. Wage inflation was offset
by lower natural gas costs. Promotion and distribution. Promotion and distribution expenses in fiscal
2002 decreased 10.0% to $52.4 million from $58.2 million in fiscal 2001. As a percentage of net sales, promotion and distribution expenses
decreased to 5.9% in fiscal 2002 from 6.5% in fiscal 2001 primarily
due to new business and Project Focus mix improvement, freight outsourcing and
improved cost control measures. 28




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##### Table of Contents



Selling, general and administrative. Selling, general and administrative
expenses in fiscal 2002 increased 1.6% to $48.7 million from $47.9 million in
fiscal 2001 primarily due to higher variable compensation incentives tied to
our business performance and higher fringe benefit costs, partially offset by
lower costs resulting from Project Focus cost savings initiatives. Amortization. Amortization expense in fiscal 2001 decreased 66.7% to $4.6
million from $13.7 million in fiscal 2001 primarily due to goodwill and
trademarks no longer being amortized. See Note 1  Summary of Significant
Accounting Policies  Goodwill and Trademarks to our accompanying audited
consolidated financial statements included herein. Other operating expenses.Other operating expenses in fiscal 2002 consist
of a $0.8 million write-off of costs for our postponed bond offering that was
subsequently completed in February 2003 and a $0.6 million write-off of costs
for our abandoned European sale process. Fiscal 2001 other operating expenses
of $8.7 million included a $4.7 million net loss from the
divestitures of our former Deep Run and Perham businesses and $4.0
million of restructuring costs. These restructuring costs consist of (1) $2.0
million of severance costs for the elimination of corporate positions following
the divestitures; and (2) $2.0 million of Project Focus related costs comprised
of $1.0 million of asset impairments and other plant closure costs for the
shutdown of an inefficient manufacturing facility and $1.0 million of severance
costs for the elimination of additional corporate positions in the fourth
quarter of fiscal 2001. Interest expense, net. Interest expense, net of interest income, for
fiscal 2002 increased 9.4% to $62.4 million from $57.0 million in fiscal 2001
primarily due to a $6.7 million accrual of non-cash interest expense for the
excess leverage fee under our senior credit facility, partially offset by a
decrease in interest rates associated with our floating rate debt in fiscal
2002 compared to
fiscal 2001. Income tax expense (benefit). We recognized income tax expense of $1.8
million for fiscal 2002 compared to an income tax benefit of $16.2 million in
fiscal 2001. Our effective tax rate was different from the combined U.S.
federal and state statutory rate of 38.9% due to the difference between U.S.
and foreign effective tax rates which results primarily from certain items
being deductible in the United States and also in certain foreign
jurisdictions. In addition, our effective tax rate in fiscal 2001 was impacted
by certain goodwill amortization that was not deductible for income tax
purposes. 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 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. We believe that
cash flows generated from our business, together with
available cash balances and future borrowings, will be sufficient for the
foreseeable future to enable us to make interest payments on our debt and to
provide us with the necessary liquidity for operational and capital
requirements in the current operating environment. As of the end of fiscal 2003,
our principal sources of liquidity consisted of cash of
$29.3 million, working capital
excluding cash of $11.1 million and available borrowing capacity
of $29.6 million under our
revolving credit facility after taking into consideration the March 9,
2004 amendment to our senior credit facility. We may be required, however,
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 at the same time fund the planned expansion
and customer requirements for fiscal 2004. We anticipate that our
capital expenditures will approximate $25 million, with approximately
$10 million to $12 million required for maintenance of business and
the remainder required for customer requirements, cost reduction
projects and
planned expansions. 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. 29




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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. Cash and Cash Flows Net cash provided by our operating activities was $55.7 million in fiscal
2003 compared to $78.8 million in fiscal 2002. This decrease was due to the
impact of higher commodity and natural gas costs, partially offset by favorable
working capital management. Favorable working capital management resulted from
improved payment terms with certain customers in fiscal 2003. Net cash used in our investing activities was $30.2 million in fiscal 2003
compared to $25.9 million in fiscal 2002. Capital expenditures in fiscal 2003
were $28.1 million compared to $24.3 million in fiscal 2002. Net cash used in our financing activities was $4.6 million in fiscal 2003
compared to $51.7 million in fiscal 2002. In fiscal 2003, we received $210.4
million of gross proceeds from the issuance of our senior notes that was used
to repay $169.3 million of the outstanding indebtedness under our senior credit
facility and repay our sponsor facility in full in the amount of $33.3 million.
In addition, we paid transaction fees and expenses of $7.8 million in fiscal
2003 in connection with the issuance of our senior notes and concurrent
amendments to our senior credit facility and had net borrowings under our
revolving credit facility of $1.0 million. In fiscal 2002, we paid down $36.2
million of debt and $23.0 million under our revolving credit facility. We
refinanced $9.7 million of debt in Europe and incurred transaction fees and
expenses of $2.3 million for an amendment to our senior credit facility. 30




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Senior Note Offering In February 2003, we issued $213.0 million principal amount of 10 3/4%
senior notes at a price of 98.8% of par. Our senior notes mature on March 1,
2010, with interest payable semiannually in arrears on March 1 and September 1
of each year. The notes are general unsecured senior obligations, effectively
subordinated to all of our secured debt, including debt under our senior credit
facility, and senior to all of our existing and future subordinated debt,
including debt under our senior subordinated notes. The senior notes
are effectively subordinated to all liabilities, including trade payables, of each
of our subsidiaries that is not a guarantor of the senior notes. Our senior
notes are unconditionally guaranteed on a senior unsecured basis by DPC
Investment Corp. and Doane/Windy Hill Joint Venture L.L.C., representing each
of our domestic subsidiaries as of the issue date of the senior notes, and may
be guaranteed by additional subsidiaries in the future. Use of proceeds.
We used $169.3 million of the net proceeds
from the sale of our senior notes to repay a portion of our senior credit
facility and $33.3 million was used to repay the sponsor facility in full. The
remainder of the net proceeds received was used to pay $7.8 million of
transaction fees and expenses related to the senior note offering and
amendments to our senior credit facility, which were completed concurrently
in February 2003. Senior Credit Facility We are highly leveraged and have significant cash requirements for debt
service relating to our senior credit facility, senior notes, senior
subordinated notes, industrial development revenue bonds and foreign debt. Our
ability to borrow is limited by our senior credit facility, including
compliance with the financial covenants therein, and the limitations on the
incurrence of additional indebtedness in the indentures governing our senior
notes and senior subordinated notes. We entered into an amended and restated senior credit facility dated as of
May 8, 2000 with a syndicate of banks and other institutional investors, as
lenders, and JPMorgan Chase Bank, as administrative agent. Our senior credit
facility was amended in March 2001, March 2002, February 2003 and March 2004. The facilities.As of the end of fiscal 2003 after taking into
consideration the March 9, 2004 amendment described above, our senior credit
facility provides for total commitments as follows:  
    
    a Euro 30.1 million ($37.6 million assuming a Euro to USD exchange
rate of 1.2495) Euro term loan facility; and
    
    $181.7 million, consisting of  
    
    a $131.7 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 fiscal 2003 after taking into consideration the March 9,
2004 amendment, we had $16.0 million of borrowings outstanding under our
revolving credit facility and $4.4 million of letters of credit outstanding,
resulting in $29.6 million of availability under our revolving credit facility. Availability of funds under our senior credit facility is subject to
certain customary terms and conditions. Amendments
to Senior Credit Facility.
 In conjunction with the issuance of our senior notes, we amended our
senior credit facility in February 2003 to provide for, among other things (1)
concurrent issuance of our senior notes and repayment of our sponsor
facility; (2) repayment of a portion of the term loans under our senior
credit facility in order of forward maturity; (3) less restrictive covenants on
capital expenditures, investments and certain other activities; (4) elimination of
certain financial covenants and the revision of other financial
covenants; (5) elimination of the excess leverage fee; (6) elimination
of the fixed rate debt percentage requirement; and (7) permanent reduction
in our revolving credit facility from $75.0 million to $60.0 million. 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 due to our cash position as of the end of fiscal 2003; (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 fiscal 2003, all loans under our senior
credit facility bore interest at the higher of the Euro dollar rate plus 4.75%,
or the prime rate of the administrative agent plus 3.75%, until maturity. As
of the end of fiscal 2003, our Euro term facility bore interest at 6.95%, our
USD term facility bore interest at 5.94% and our revolving credit facility bore
interest at 7.75%. Effective March 9, 2004, all loans under our 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 1.00% on March 31, 2005. 31




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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. The Company made a $15.0
million optional prepayment in the third quarter of fiscal 2003. Our senior credit facility also provides for mandatory prepayments of the
borrowings upon certain specified events and in certain specified percentages,
including:  
    
    100% of the net cash proceeds received by our parent, us or any of
our restricted subsidiaries from the issuance of indebtedness not
currently expressly permitted by our senior credit facility;
    
    100% of the net cash proceeds of any sale or other disposition of any
assets, subject to certain exceptions;
    
    100% of excess cash flow; and
    
    100% of the net proceeds of any sale or issuance of equity, subject
to certain exceptions. Guarantees; collateral.We, our parent and certain of our domestic
subsidiaries are required to guarantee amounts outstanding under our senior
credit facility. To secure the indebtedness and obligations under our senior
credit facility, we, our parent and certain of our domestic subsidiaries have
pledged the following U.S. assets:  
    
    substantially all of our personal property assets, subject to certain
exceptions;
    
    substantially all of our real property assets and any subsequently
acquired real property having a fair market value in excess of $0.5
million, subject to certain exceptions;
    
    substantially all of our intellectual property assets; and
    
    substantially all of the stock owned or subsequently acquired by each
of us in each of our respective domestic subsidiaries and 65% of the
foreign subsidiaries owned directly by us or a domestic subsidiary. In addition, pursuant to the pledge agreement between DPC Investment Corp.
and Doane Pet Care Europe (ApS), 65% of the capital stock of Doane Pet Care
Europe (ApS) is pledged to secure the obligations under our senior credit
facility. Covenants.Our senior credit facility, as 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. 32




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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
expense, (d) amortization of intangibles (including, but not limited to,
goodwill) and organization costs, (e) any extraordinary, unusual,
transition or non-recurring expenses or losses (including, whether or not
otherwise includable as a separate item in the statement of such
consolidated net income for such period, non-cash losses on sales of
assets outside of the ordinary course of business), and (f) any other
non-cash charges (including any dividends or accretion on the existing
preferred stock or any replacement preferred stock to the extent not
actually paid in cash during such period) and minus, to the extent
included in the statement of such consolidated net income for such
period, the sum of (x) interest income, (y) any extraordinary, unusual or
non-recurring non-cash income or non-cash gains (including, whether or
not otherwise includable as a separate item in the statement of such
consolidated net income for such period, gains on the sales of assets
outside of the ordinary course of business) and (z) any other non-cash
income, all as determined on a consolidated basis.
    
    Senior Secured Leverage. Our consolidated senior secured debt ratio
as of certain specified periods must not exceed ratios as set forth
below: Fiscal quarter ending, on ornearest to
    
    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 or obtained waivers for
fiscal 2000, 2001 and 2003. Our senior credit facility, including the financial
covenants, was amended in February 2003 concurrently with the sale of our
senior notes and 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, without further price increases,
current commodity prices may affect our operating results and cash flows to an
extent that we may not be able to comply with these covenants. 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. 33




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Events of default.Our senior credit facility contains default provisions
that we believe are customary for facilities and transactions of this type,
including default provisions relating to:  
    
    our failure to pay principal or interest when and as due or any other
amount under our senior credit facility within five days after such
amount becomes due;
    
    representations or warranties being inaccurate in any material
respect when made;
    
    cross-default to certain other indebtedness and agreements including
our senior notes and senior subordinated notes;
    
    bankruptcy or insolvency;
    
    actual invalidity, or invalidity asserted by us, of any security document;
    
    material judgments;
    
    certain ERISA events; and
    
    change of control or ownership. Liquidity As
of the end of fiscal 2003, our
principal sources of liquidity as of the end of fiscal 2003
consisted of cash of $29.3 million, working capital, excluding cash of $11.1 million
and had $29.6 million of remaining
availability under the revolving credit facility portion of our senior credit
facility out of a total availability of $50.0 million after
taking into consideration the March 9, 2004 amendment to our senior
credit facility. 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 believe that cash
flows generated from our business, together with future borrowings, will be
sufficient for the foreseeable future to enable us to make interest payments on
our debt and to provide us with the necessary liquidity for operational and
capital requirements in the current operating environment. We may be required,
however, 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
also 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 at the same time 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 long-term debt as of the end of
fiscal 2003 after taking into consideration the March 9, 2004 amendment to our
senior credit facility follows (in thousands): 34




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Fiscal
    
    Maturities2004
    
    $
    13,1852005
    
    
    140,9922006
    
    
    41,5742007
    
    
    151,6462008
    
    
    1,2182009 and thereafter
    
    
    225,431$
    574,046
 Contractual Obligations The following tables present the maturities of our contractual obligations
and other commercial obligations at the end of fiscal 2003 after taking into
consideration the March 9, 2004 amendment to our senior credit facility (in
thousands): Payments due by period2004
    
    2005-2006
    
    2007-2008 (1)
    
    2009 and thereafter
    
    TotalContractual obligations:Long-term debt
    
    $
    13,185
    
    
    $
    182,566
    
    
    $
    152,864
    
    
    $
    225,431
    
    
    $
    574,046Operating leases
    
    
    4,821
    
    
    
    7,253
    
    
    
    3,842
    
    
    
    1,227
    
    
    
    17,143Total contractual obligations
    
    $
    18,006
    
    
    $
    189,819
    
    
    $
    156,706
    
    
    $
    226,658
    
    
    $
    591,189
 Payments due by period2004
    
    2005-2006
    
    2007-2008
    
    2009 and thereafter
    
    TotalOther commercial obligations:Lines of credit
    
    $
    12,579
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    12,579Standby letters of credit
    
    
    4,431
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,431Total commercial commitments
    
    $
    17,010
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17,010
   (1)
    
    As of the end of fiscal 2003, the  company had
outstanding $95.1 million of current redemption value, excluding future dividends, for our senior preferred stock,
which has a scheduled redemption date of September 30, 2007. 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. See Item 1  Business  Environmental and
Safety Matters. 35




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In 1996 and 1997, we entered into partial guarantees of certain
third-party loans made to 11 employees in connection with their purchase of our
parents common stock under our parents 1996 and 1997 Management Stock
Purchase Plans. We guaranteed to cover up to a maximum of $0.3 million of such
loans in the event one or more of the employees defaulted in their loan
repayment. None of the individuals who received such loans currently serve as
one of our executive officers. 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. As
mentioned previously, we have reached 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, we implemented a broad price increase in
January 2004 and recently announced an additional price increase that will take effect during
the second quarter of fiscal 2004. 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. Critical Accounting Policies Accounts receivable allowances.As of the end of fiscal 2002 and 2003, our
gross accounts receivable were $134.6 and $94.2 million, respectively. We had
allowances of $5.3 and $2.6 million as of the end of fiscal 2002 and 2003,
respectively, primarily for doubtful accounts and outstanding deductions with
customers. The decrease of $2.7 million is primarily due to the
lower overall accounts receivable balance, the write-off of fully
reserved uncollectible accounts and the improved management of
customer deductions. Our policy is to estimate our 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 allowance.As of the end of fiscal 2002 and 2003, our gross
inventories were $68.5 and $73.0 million, respectively. We had an allowance for
obsolescence of $4.9 million and $4.4 million as of the end of fiscal 2002 and
2003, respectively, primarily related to packaging inventories. Our policy is
to estimate our allowance based on specific identification of obsolete stock
keeping units, or SKUs, or probable SKUs to be rationalized. We may revise our
allowance against inventories as we receive more information on this matter or
as we assess other factors impacting the realizability of our inventories. Deferred tax assets.As of the end of fiscal 2002 and 2003, our federal net
operating loss, or NOL, carryforwards were $77.3 million and $126.5 million and
our foreign NOL carryforwards were $5.8 million and $2.2 million, respectively.
Our gross deferred tax assets, including federal, foreign, state and local NOL
carryforwards, were $52.0 million and $72.3 million as of the end of fiscal 2002
and 2003, respectively, and our gross deferred tax liabilities were $52.8
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,
coupled with the variability of our historical earnings, we determined that we
no longer met 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. As of the end of fiscal
2002, we had no valuation allowance against our U.S. federal and state deferred
tax assets and a valuation allowance of $0.6 million against foreign deferred
tax assets. During fiscal 2003, we recorded valuation allowances against our
U.S. federal and state deferred tax assets and an increase in our valuation
allowance against foreign deferred tax assets in the amounts of $35.2 million
and $7.3 million, respectively, creating a consolidated valuation allowance of
$43.1 million as of the end of fiscal 2003. We currently expect that future
years deferred income tax expense (benefit) will include deferred income tax
expense in an amount approximating the growth in the deferred tax liabilities
related to the tax amortization of goodwill and other intangible assets
recognized on our income tax return. 36




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Goodwill and trademarks.At the end of fiscal 2002 and 2003, our goodwill
and trademarks were $363.1 million and $380.4 million,
respectively. The increase of $17.3 million is primarily due to
exchange rate fluctuation in fiscal 2003. 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 quarters of fiscal 2002
and 2003, we performed our annual assessment of impairment and determined no
impairment was evident at either assessment date. Recently Issued Accounting Pronouncements See Note 1 to our accompanying audited consolidated financial statements
included elsewhere in this annual report on Form 10-K for a description of
recent accounting pronouncements, including the respective expected dates of
adoption and expected impact to our results of operations and financial
condition. 
 ITEM 7A  Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risks, which may give rise to losses from adverse
changes in market prices and rates. Our market risks could arise from changes
in commodity prices, interest rates and foreign currency exchange rates. Commodity price risk.We are exposed to market risk related to changes in commodity prices. We have in the past and may continue to seek to
manage our commodity price risk associated with market fluctuations by using
derivative instruments for portions of our corn, soybean meal, alternative
proteins and natural gas purchases, principally through exchange traded futures
and options contracts. The terms of such contracts are generally less than one
year. During the term of a contract, we balance positions daily with cash
payments to or from the exchanges. At the termination of a contract, we have
the ability to settle financially or by exchange for the physical commodity, in
which case, we would deliver the contract against the acquisition of the
physical commodity. Our policy does not permit speculative commodity trading. Although we 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, without further price increases,
current commodity prices may adversely affect our operating results and cash
flows to an extent that we may not be able to comply with our financial
covenants in our senior credit facility. See Item 7  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
133 in our accompanying audited consolidated financial statements included
herein. 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. 37




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As of the end of fiscal 2003, we had open commodity contracts with a fair
value gain of $1.4 million. Based upon an analysis we completed at the end of
fiscal 2003 in which we utilized our actual derivative contractual volumes and
assumed a 5% adverse movement in commodity prices, we determined the potential
decrease in the fair value of our commodity derivative instruments would be
approximately $2.0 million. With the changes in our pricing strategy resulting from reaching
cost-sharing arrangements, we plan to collaborate with our customers
to collectively decide if we should hedge future positions. 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 $185.3 million at the end of fiscal 2003.
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. At the end of fiscal 2003, we had no outstanding 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 $1.9 million for fiscal 2003. In
addition, such a change would result in a decrease of approximately $15.3
million in the fair value of our fixed rate debt at the end of fiscal 2003. 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 audited
consolidated financial statements included herein. At the end of fiscal 2003,
we had a cumulative translation gain of $55.2 million, which included an
unrealized cumulative loss of $10.5 million for the translation of our
Euro-denominated debt to U.S. dollars, that has been recognized in the
accompanying audited consolidated financial statements included herein. 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. We did not enter into any foreign currency contracts in
fiscal 2003. 
 ITEM 8  Financial Statements and Supplementary Data Reference is made to the information beginning on page F-1, which is filed
as a part of this annual report on Form 10-K. 
 ITEM 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 ITEM 9A  Controls and Procedures Evaluation and 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 38




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Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Based on an evaluation of our disclosure controls and procedures as of the
end of the period covered by this report conducted by our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, the
Chief Executive Officer and Chief Financial Officer believe that these controls
and procedures are effective to ensure that we are able to collect, process and
disclose the information we are required to disclose in the reports we file
with the Securities and Exchange Commission within the required time periods. Changes in internal controls over financial reporting.There have been no
changes in our internal controls over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter
that has materially affected or is reasonably likely to materially affect our
internal controls over financial reporting. 39




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PART III 
 ITEM 10  Directors and Executive Officers of the Registrant The following table sets forth the names, ages and titles of the current
directors and executive officers of Doane and Doane Pet Care Enterprises, Inc.
Pursuant to an investors agreement, our board of directors and the board of
directors of Doane Pet Care Enterprises, Inc. each consist of at least seven
members. Except as indicated below, each of the members of the board of
directors of Doane named below also serves on the board of directors of Doane
Pet Care Enterprises, Inc. See Item 13  Certain Relationships and Related
Transactions  Investors Agreement. Officers serve at the discretion of the
boards of directors. For information regarding employment agreements with the
executive officers of Doane, see Item 11  Executive Compensation  Employment
and Retirement Agreements. In addition, the board of directors of Doane
approved the addition of two new board members as of November 7, 2002 that were
designated by a majority of holders of our senior preferred stock. These
board members will remain as board members until the next annual meeting, at
which time the holders of our preferred stock will designate such director
seats. Name
    
    Age
    
    PositionGeorge B. Kelly
    
    
    54
    
    
    Chairman of the BoardDouglas J. Cahill (1)
    
    
    44
    
    
    Chief Executive Officer, President and DirectorPhilip K. Woodlief (1)
    
    
    50
    
    
    Vice President, Finance and Chief Financial OfficerDavid L. Horton
    
    
    43
    
    
    Vice President and General Manager, North American OperationsJoseph J. Meyers
    
    
    42
    
    
    Vice President, Supply Chain, Quality and Chief Information OfficerRichard A. Hannasch
    
    
    50
    
    
    Vice President, Co-Manufacturing and SpecialtyLawrence S. Benjamin
    
    
    48
    
    
    DirectorEdward H. DAlelio (2)
    
    
    51
    
    
    DirectorJerry W. Finney, Jr.
    
    
    35
    
    
    DirectorMathew J. Lori
    
    
    40
    
    
    DirectorTerry R. Peets
    
    
    59
    
    
    DirectorStephen C. Sherrill
    
    
    50
    
    
    DirectorPaul E. Suckow (2)
    
    
    56
    
    
    DirectorJeffrey C. Walker
    
    
    48
    
    
    Director
   (1)
    
    These executive officers hold the same positions at Doane and Doane Pet
Care Enterprises, Inc.(2)
    
    Does not serve on the board of directors of Doane Pet Care Enterprises,
Inc. Set forth below is a brief description of the business experience of the
directors and executive officers of Doane and Doane Pet Care Enterprises, Inc.
Each of the directors of Doane Pet Care Enterprises, Inc. is elected to serve a
three-year term. The terms of Messrs. Benjamin, Cahill and Lori expire in 2004.
The terms of Messrs. Kelly, Finney and Walker expire in 2005. The terms of
Messrs. Sherrill and Peets expire in 2006. The directors of Doane are elected
at each annual meeting to serve for the ensuing year. George B. Kellyhas served as Chairman of the Board of Doane since October
1995 and Chairman of the Board of Doane Pet Care Enterprises, Inc. since June
1995. Mr. Kelly is Chairman of The CapStreet Group, LLC (formerly known as
Summit Capital Group, LLC), Summit Capital, Inc., and Jackson
Products, Inc.,
and is a director of FS Strategies, Switch & Data Facilities Company, Inc.,
Susser Holdings and other privately held companies. Douglas J. Cahillbecame Chief Operating Officer of Doane and Doane Pet
Care Enterprises, Inc. in December 1997, began serving as President of Doane
and Doane Pet Care Enterprises, Inc. in January 1998 and began serving 40




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##### Table of Contents



as Chief
Executive Officer of Doane and Doane Pet Care Enterprises, Inc. in July 1998.
He has been a director of Doane and Doane Pet Care Enterprises, Inc. since
December 1998 and currently serves as the Chairman of the Pet Food Institute.
Prior to joining us, Mr. Cahill served as President of Olin Corporations
Winchester Division, Corporate Vice President of Olin Corporation and held
various other positions with Olin Corporation during the period from July 1984
through December 1997. Philip K. Woodliefbecame Vice President, Finance and Chief Financial
Officer of Doane and Doane Pet Care Enterprises, Inc. in June 2000 and served
as Vice President, Finance for Doane from February 1999 to June 2000. Prior to
joining us, Mr. Woodlief was an independent financial consultant from June 1998
to January 1999. From April 1997 to May 1998, Mr. Woodlief was Vice President
and Corporate Controller of Insilco Corporation, a diversified consumer and
industrial products manufacturing company, and served as Corporate Controller
of Insilco from January 1989 to April 1997. David L. Hortonjoined Doane in December 1997, began serving as Vice
President and General Manager of North American Operations in June 2001, served
as Vice President, Manufacturing, Engineering, and Quality from January 1999 to
June 2001 and Vice President, Fulfillment from December 1997 to January 1999.
Prior to joining us, Mr. Horton served as Vice President of Manufacturing and
Engineering for Olin Corporations Winchester Division and held various other
positions with Olin Corporation from January 1984 to November 1997. Joseph J. Meyersbecame Chief Information Officer of Doane in August 1998,
and began serving as Vice President Supply Chain, Quality in June 2001 and
served as Vice President, Fulfillment from January 1999 to June 2001. Prior to
joining us, Mr. Meyers held various information technology positions at
Realtime Consulting, PricewaterhouseCoopers LLP and Olin Corporation from 1992
to 1998. Richard A. Hannaschjoined Doane in October 1996, began serving as Vice
President, Co-Manufacturing and Specialty in March 2000, served as Vice
President, Business Integration from August 1999 to March 2000, Vice President,
Fulfillment from January 1999 to October 1999, Vice President, Strategic
Planning from June 1998 to January 1999 and Vice President, Marketing from
November 1997 to January 1999. Prior to joining us, Mr. Hannasch served as
Director, Business Development for Ralston Purina Companys International
Division and held various other positions at Ralston Purina Company from
December 1978 to October 1996. Lawrence S. Benjaminbecame a director of Doane and Doane Pet Care
Enterprises, Inc. in May 2002. Since October 2003, Mr. Benjamin has been Chief
Executive Officer of U.S.
Foodservice. Mr. Benjamin had been Chief Executive Officer of The
NutraSweet Company from October 2002 to October 2003. Mr. Benjamin previously
was a partner with Roark Capital Group, a private equity investment firm, and
president of Lake Field Partners, a private equity advisory firm. He held these
positions from June 2002 and April 2001, respectively, to October 2002. Prior
to that, Mr. Benjamin worked for Oak Hill Capital Management, a private equity
fund, and its predecessor funds between August 1994 and May 2002. During that
time, Mr. Benjamin was President and Chief Executive Officer of Specialty Foods
Corporation(3) from January 1997 to March 2001 and Stella Foods from August 1994
to January 1997. Mr. Benjamin also served in a number of senior executive
positions with Kraft Foods from June 1986 to August 1994, including as
President of Budget Gourmet/Birdseye, a division of Kraft Foods. Edward H. DAleliobecame a director of Doane in November 2002. Mr.
DAlelio has served as an Executive in Residence at the College of Management
of the University of Massachusetts. From 1989 until 2002, Mr. DAlelio was a
Managing Director of Putnam Investments, where he also served as the Chief
Investment Officer of the Taxable Fixed Income area. Mr. DAlelio is also a
director of Archibald Candy Corporation. Jerry W. Finney, Jr. became a director of Doane and Doane Pet Care
Enterprises, Inc. in August 2001. He is a director of the Private Equity Group
of Credit Suisse First Boston, which includes DLJ Merchant Banking Partners,
L.P. In November 2000, Credit Suisse Group acquired Donaldson, Lufkin &
Jenrette, Inc. Prior to the acquisition, Mr. Finney was a principal of Credit
Suisse First Boston Equity Partners since May 2000. Previously, he was a Vice
President in the Mergers & Acquisitions Group of Credit Suisse First Boston,
Inc. from 1999 to 2000 and an associate from 1995 to 1999. Mathew J. Loribecame a director of Doane and Doane Pet Care Enterprises,
Inc. in March 2001 and currently serves as a principal of J.P. Morgan Partners,
LLC., the private equity investment arm of J.P. Morgan Chase & Co. 41




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##### Table of Contents



Mr. Lori
joined the predecessor of J.P. Morgan Partners, LLC in 1993 after completing
his M.B.A. from Kellogg Graduate School of Management at Northwestern
University. Prior to receiving his M.B.A., he worked in the Corporate Finance
Group at Ernst & Young in Toronto. Mr. Lori is also a director of Berry
Plastics Corporation. Terry R. Peetsbecame a director of Doane and Doane Pet Care Enterprises,
Inc. in October 2001. Mr. Peets is currently a consultant to JPMorgan
Partners. Over the past 25 years, Mr. Peets has served as Chairman of Brunos
Supermarkets, Inc., Executive Vice President of Vons Grocery Company, Executive
Vice President of Ralphs Grocery Company, and President and CEO of PIA
Merchandising, Inc. Mr. Peets is the Chairman of the Board and Director of World Kitchens, Inc.,
Vice Chairman and Director of City of Hope, Director of Pinnacle Food Inc., PSC
Scanning Inc., QRS Inc., Ruiz Foods Inc. and Children's Museum of Orange County. Stephen C. Sherrillbecame a director of Doane and Doane Pet Care
Enterprises, Inc. in August 1998. He has been a Managing Director of Bruckmann,
Rosser, Sherrill & Co., Inc. since its formation in 1995. Bruckmann, Rosser,
Sherrill & Co., Inc. is the management company for Bruckmann, Rosser, Sherrill
& Co., L.P. Mr. Sherrill previously served as a director of Windy Hill. Mr.
Sherrill was an officer of Citicorp Venture Capital from 1983 through 1994.
Previously, he was an associate at the New York law firm of Paul, Weiss,
Rifkind, Wharton & Garrison. Mr.
Sherrill is a director of Galey & Lord, Inc., B & G Foods, Inc.,
HealthPlus Corporation and Alliance Laundry Systems, L.L.C. Paul E. Suckowbecame a director of Doane in November 2002. Mr. Suckow has
been an adjunct professor of economics and finance at Villanova University and
Widener University since 1999. Prior to his teaching career, he spent 25 years
in the investment management industry, retiring in 1999. Mr. Suckow held
positions as Executive Vice President, Chief Investment Officer-Fixed Income at
Delaware Investment Advisers, Inc. and Executive Vice President, Director of
Fixed Income Securities at Oppenheimer Management Corporation. He is a director
of Ascent Assurance, Inc., Prandium, Inc. and Grove Worldwide, Inc. Jeffrey C. Walkerhas been a director of Doane and Doane Pet Care
Enterprises, Inc. since April 1996. Mr. Walker is Vice Chairman of J.P. Morgan
Chase & Co. and has been Managing Partner of J.P. Morgan Partners, LLC, the
private equity investment arm of J.P. Morgan Chase & Co., since 1988 and a
General Partner thereof since 1984. Mr. Walker is a director of 1-800-Flowers
and Guitar Center. He is also a director of a number of privately held
companies. Messrs. Benjamin, Kelly and Walker serve on our Compensation Committee.
Messrs. Peets, Sherrill and Walker serve on our Audit Committee. Mr. Peets is an
audit committee financial expert as defined in Item 401(h) of Regulation S-K
and is independent as that term is defined in Sections 303.01(B)(2)(a) and
(3) of the New York Stock Exchanges listing standards.   (3)
    
    Specialty Foods Corporation filed for protection under Chapter 11 of the
U.S. Bankruptcy Code on September 18, 2000. Code of Ethics We have adopted a code of ethics which contains the ethical principles by
which our chief executive officer, chief financial officer, controller and principal
accounting officer, assistant controller, finance director,
purchasing director, treasurer and assistant treasurer are expected to conduct
themselves when carrying out their duties and responsibilities. A copy of our
code of ethics is available without charge upon oral or written request.
Contact Doane Pet Care Company, 210 Westwood Place South, Suite 400, Brentwood,
Tennessee 37027, Attention :   Human Resources Department, telephone (615) 373-7774. 
 ITEM 11  Executive Compensation Summary Compensation Table The following table sets forth information with respect to the Chief
Executive Officer of Doane and the other four most highly compensated
individuals serving as executive officers in fiscal 2003 who earned $100,000 or
more in combined salary and bonus during such year (collectively, the Named
Executive Officers): 42




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##### Table of Contents



Long-termAnnual compensation (1)
    
    compensationawards ofsecuritiesunderlyingName and principal
    
    Fiscal
    
    
    
    
    
    Other annual
    
    options/SARSposition at Doane
    
    year
    
    Salary
    
    Bonus (2)
    
    compensation
    
    (#)
    
    All other compensationDouglas J. Cahill
    
    
    2003
    
    
    $
    400,000
    
    
    $
    
    
    
    $
    
    
    
    
    100,000
    
    
    $
    206,350
    (3) (4) (5) (6) (7)President and Chief
    
    
    2002
    
    
    
    400,000
    
    
    
    479,982
    
    
    
    
    
    
    
    
    
    
    
    207,506
    (3) (4) (5) (6)Executive Officer
    
    
    2001
    
    
    
    400,000
    
    
    
    
    
    
    
    
    
    
    
    298,000
    
    
    
    7,006
    (3) (4) (5)Philip K. Woodlief
    
    
    2003
    
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    70,000
    
    
    
    66,112
    (3) (4) (5) (6) (7)Vice President, Finance and
    
    
    2002
    
    
    
    225,000
    
    
    
    134,995
    
    
    
    
    
    
    
    
    
    
    
    61,139
    (3) (4) (5) (6)Chief Financial Officer
    
    
    2001
    
    
    
    220,833
    
    
    
    
    
    
    
    
    
    
    
    135,000
    
    
    
    4,164
    (3) (4) (5)David L. Horton
    
    
    2003
    
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    70,000
    
    
    
    61,569
    (3) (4) (5) (6) (7)Vice President and General Manager
    
    
    2002
    
    
    
    225,000
    
    
    
    134,995
    
    
    
    
    
    
    
    
    
    
    
    62,973
    (3) (4) (5) (6)of North American Operations
    
    
    2001
    
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    135,000
    
    
    
    6,782
    (3) (4) (5)Joseph J. Meyers
    
    
    2003
    
    
    
    220,000
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    54,251
    (3) (4) (5) (6)Vice President, Supply Chain, Quality
    
    
    2002
    
    
    
    200,000
    
    
    
    119,995
    
    
    
    
    
    
    
    
    
    
    
    57,052
    (3) (4) (5) (6)and Chief Information Officer
    
    
    2001
    
    
    
    187,500
    
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    6,768
    (3) (4) (5)Richard A. Hannasch
    
    
    2003
    
    
    
    183,750
    
    
    
    
    
    
    
    
    
    
    
    35,000
    
    
    
    55,598
    (3) (4) (5) (6) (7)Vice President, Co-Manufacturing
    
    
    2002
    
    
    
    183,750
    
    
    
    110,246
    
    
    
    
    
    
    
    
    
    
    
    53,336
    (3) (4) (5) (6)and Specialty
    
    
    2001
    
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    6,711
    (3) (4) (5)
   (1)
    
    Amounts exclude perquisites and other personal benefits that did not
exceed the lesser of either $50,000 or 10% of the total annual salary
and bonus reported for each executive officer.(2)
    
    Annual bonus for the Named Executive Officers is calculated by
multiplying their respective target bonus amounts times a factor that is
determined according to the achievement of a company performance
incentive target. Actual company performance can result in the actual
bonus being less than or greater than the target bonus. The target
bonus for Mr. Cahill is 100% of his annual base salary amount and the
target bonuses for each of Messrs. Woodlief, Horton, Meyers and Hannasch
are 50% of their respective annual base salary amounts. Actual bonus
payments can differ from the target bonus payments based on the
companys actual performance for the respective fiscal year. Actual
company performance for fiscal 2002 was 120% of the incentive target.
No bonus payments were made for fiscal 2001 and 2003.(3)
    
    Amounts include a company match and profit sharing contribution under
the Doane Pet Care Retirement Savings Plan as follows: Mr. Cahill -
$5,000 in 2001, $5,500 in 2002 and $2,769 in 2003; Mr. Woodlief  $2,250
in 2001, $2,969 in 2002 and $6,000 in 2003; Mr. Horton  $4,875 in 2001,
$4,803 in 2002 and $1,950 in 2003; Mr. Meyers  $4,865 in 2001, $5,144
in 2002 and $2,331 in 2003; and Mr. Hannasch  $4,813 in 2001, $5,500 in
2002 and $5,851 in 2003.(4)
    
    Amounts include term life insurance premiums as follows: Mr. Cahill -
$192 in 2001, 2002 and 2003; Mr. Woodlief  $100 in 2001, $106 in 2002
and $120 in 2003; Mr. Horton  $93 in 2001, $106 in 2002 and $120 in
2003; Mr. Meyers  $89 in 2001, $94 in 2002 and $106 in 2003; and Mr.
Hannasch  $84 in 2001, $86 in 2002 and $88 in 2003.(5)
    
    Amounts include disability insurance premiums in 2001, 2002 and 2003
of $1,814.(6)
    
    Amounts include retention bonuses paid as follows: Mr. Cahill -
$200,000 in 2002 and 2003; Mr. Woodlief  $56,250 in 2002 and 2003; Mr.
Horton  $56,250 in 2002 and 2003; Mr. Meyers  $50,000 in 2002 and
2003; and Mr. Hannasch  $45,936 in 2002 and in 2003.(7)
    
    Amounts include supplemental long-term disability premiums in fiscal
2003 as follows: Mr. Cahill  $1,575; Mr. Woodlief  $1,928; Mr. Horton
- $1,435; and Mr. Hannasch  $1,909. Employment and Retirement Agreements We entered into employment agreements with Messrs. Cahill, Horton and
Hannasch effective January 1, 1998, Mr. Meyers effective August 17, 1998 and
Mr. Woodlief effective February 15, 1999, all of which renew annually. The
terms of their employment agreements are substantially
similar except for salary and bonus amounts. The agreements are subject to
early termination for cause without severance. The employment agreements for
Messrs. 43




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##### Table of Contents



Woodlief, Horton and Meyers provide (1) that terminations without cause
entitle the executive to receive severance payments equal to two years base
salary and bonus and (2) for a two year non-competition agreement commencing
upon termination for any reason. The employment agreements of
Messrs. Cahill and Hannasch contain similar provisions for severance and non-competition, but with terms of
three years and one year, respectively. Compensation of Directors Lawrence S. Benjamin and Terry R. Peets serve as independent directors of
Doane and Doane Pet Care Enterprises, Inc. Pursuant to agreements entered at
the time of their appointments, Mr. Benjamin is paid a $2,000 per quarter
retainer fee and Mr. Peets is paid a $1,500 per month retainer fee. Mr.
Benjamin and Mr. Peets are both paid $2,000 for each board of directors meeting
they attend and each informal operations meeting of Doane Pet Care Enterprises,
Inc. they attend. In addition, Mr. Benjamin and Mr. Peets were each granted
stock options covering 20,000 shares under the 1999 Stock Incentive Plan in
fiscal 2003. These options have a time-vesting schedule pursuant to which
one-third of the stock options will vest after each of the first three years
following the grant date. Edward H. DAlelio and Paul E. Suckow serve as
independent directors of Doane. Mr. DAlelio and Mr. Suckow are paid $2,000
for each board of directors meeting they attend. In fiscal 2003, Messrs.
Peets, Benjamin, DAlelio and Suckow earned $26,000, $16,000, $8,000 and
$8,000, respectively. No compensation was paid by us to our other directors. Stock Option Plans Effective November 1, 1996, our parent adopted its 1996 Stock Option Plan,
as amended. On July 14, 1999, our parent adopted the 1999 Stock Incentive Plan.
In connection with the adoption of the 1999 Stock Incentive Plan, no new grants
can be made under the 1996 Stock Option Plan. Effective October 31, 2001, our
parent approved the repricing of all vested and unvested stock options under
the 1996 Stock Option Plan and the 1999 Stock Incentive Plan that had an
exercise price exceeding $2.50 per share. All such eligible stock options were
given a new exercise price of $2.50 per share. However, because there was a
change in the vesting of the stock options, with all eligible stock options
being put on a new time-vesting schedule, the repricing involved a surrender
of the eligible stock options in exchange for a grant of new stock options
covering an equivalent number of shares at the new exercise price. Stock
options covering 566,000 shares under the 1996 Stock Option Plan and stock
options covering 950,300 shares under the 1999 Stock Incentive Plan were
surrendered. Stock options covering a total of 1,516,300 shares were granted
at the $2.50 per share exercise price, and all such grants were made under the
1999 Stock Incentive Plan and are accounted for as variable plan awards. Since
the fair value of our parents Class A common stock was less than $2.50 per
share as of the end of fiscal 2001 and 2003, no compensation expense was
recorded in fiscal 2001 or 2003 for these variable awards. While the estimated
fair value of our parents Class A common stock exceeded $2.50 per share
as of the end of fiscal 2002, the compensation expense in fiscal 2002 was minimal.
Pursuant to the time-vesting schedule for the stock options granted to our
employees, 50% of an individuals stock options will vest two years after the
grant date, 25% will vest after the third year, and the remaining 25% will vest
after the fourth year. Generally, all stock options vest upon a change of
control of our parent. Under the 1996 Stock Option Plan, options covering
442,200 shares were outstanding as of the end of fiscal 2003. Under the 1999 Stock
Incentive Plan, 4,200,000 shares are authorized for issuance, and as of the end of fiscal 2003, options covering 3,788,150 shares had been granted and remain
outstanding. Stock Option Grants The following table sets forth certain information on options granted in fiscal 2003 under the 1999 Stock Incentive Plan to the Named Executive Officers. Individual GrantsPotential realizable
    
    Potential realizablevalue at assumed
    
    value at assumed% of total
    
    
    
    
    
    
    
    
    
    5% annual rate of
    
    10% annual rate ofNumber of securities
    
    options granted
    
    Exercise
    
    
    
    
    
    stock price
    
    stock priceunderlying options
    
    to employees in
    
    price per
    
    Expiration
    
    appreciation for
    
    appreciation forName
    
    granted
    
    fiscal 2003
    
    share
    
    Date
    
    option term
    
    option termDouglas J. Cahill
    
    
    100,000
    
    
    
    13.9
    %
    
    $
    2.57
    
    
    
    2013
    
    
    $
    18,283
    
    
    $
    181,342Philip K. Woodlief
    
    
    70,000
    
    
    
    9.7
    %
    
    $
    2.57
    
    
    
    2013
    
    
    $
    12,798
    
    
    $
    126,940David L. Horton
    
    
    70,000
    
    
    
    9.7
    %
    
    $
    2.57
    
    
    
    2013
    
    
    $
    12,798
    
    
    $
    126,940Joseph J. Meyers
    
    
    50,000
    
    
    
    6.9
    %
    
    $
    2.57
    
    
    
    2013
    
    
    $
    9,142
    
    
    $
    90,671Richard A. Hannasch
    
    
    35,000
    
    
    
    4.9
    %
    
    $
    2.57
    
    
    
    2013
    
    
    $
    6,399
    
    
    $
    63,470 44




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##### Table of Contents



Stock Option Exercises The following table sets forth certain information with respect to
exercises of stock options in fiscal 2003 by the Named Executive Officers
and the number of shares underlying unexercised stock options held by such
officers as of the end of fiscal 2003; Number ofsharesacquired on
    
    Value

    Number of shares underlyingunexercised options
    
    Value of shares underlying in-the-money unexercised optionsName
    
    exercise
    
    Realized

    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableDouglas J. Cahill
    
    
    
    
    $
    
    
    
    450,100
    
    
    
    550,100
    
    
    $
    
    
    
    $
    Philip K. Woodlief
    
    
    
    
    
    

    
    120,600
    
    
    
    190,600
    
    
    
    
    
    
    
    David L. Horton
    
    
    
    
    
    

    
    140,600
    
    
    
    210,600
    
    
    
    
    
    
    
    Joseph J. Meyers
    
    
    
    
    
    

    
    110,600
    
    
    
    160,600
    
    
    
    
    
    
    
    Richard Hannasch
    
    
    
    
    
    
    
    
    97,900
    
    
    
    121,700
    
    
    
    
    
    
    
    
 The value of the exercisable and unexercisable options is calculated based
on the difference between the option exercise price and the fair market value
as of the end of fiscal 2003. Compensation Committee Interlocks and Insider Participation Douglas J. Cahill, our President and Chief Executive Officer, served as a
member of our Compensation Committee in fiscal 2003.
Messrs. Benjamin, Kelly, and Walker
also served on our Compensation Committee in fiscal 2003. Other Compensatory Arrangements 401(k)plans.We currently have two active plans. On January 1, 2000, we
adopted the Doane Pet Care Retirement Savings Plan, which was formed through
the merger of two
predecessor plans. The merged plan was amended and restated and is
intended to be a qualified plan under the Internal Revenue Code. The plan
provides coverage for eligible employees and permits employee contributions
from 1% to 60% of pre-tax earnings, subject to annual dollar limits set by the
IRS. We match 50% of the first 6% of the participants contribution with a
provision for other contributions at the board of directors discretion.
Employer contributions are vested 25% per year for each full year of service. The Doane Pet Care Savings and Investment Plan  Union Plan covers
eligible union employees at the Joplin, Missouri and Muscatine, Iowa plants.
This plan is intended to be a qualified retirement plan under the Internal
Revenue Code and permits employee contributions between 1% and 60% of pre-tax
earnings, subject to annual dollar limits set by the IRS, and provides for a
variety of investment options. Non-qualified salary continuation agreements.Doane has entered into
agreements with all of the Named Executive Officers to provide benefits to
those employees or their beneficiaries in the event of the death of the
employee or retirement by the employee at age 65 or on or after age 55 with 10
years of service with Doane. If the employee remains employed until age 65, the
employee or the employees beneficiary will receive an annual retirement
benefit payable for 10 years as set forth in the agreement. If the employee
terminates employment before age 65 but after age 55 and with 10 years of
service with Doane, the employees retirement benefit will be reduced in
accordance with percentages specified in the agreement, depending upon the
employees age at retirement ranging from 100% at age 65 to 55.8% at age 55.
Assuming that the Named Executive Officers remain employed with Doane until age
65, they will receive the following annual amounts for ten years: Mr. Cahill -
$160,000; Mr. Woodlief  $90,000; Mr. Horton  $90,000; Mr. Meyers  $80,000
and Mr. Hannasch  $70,000. Under the terms of the agreements, each employee
may, with the consent of Doane, elect to receive the benefit in a lump-sum
payment equal to the actuarial equivalent of the installment payments
discounted at a 6% interest rate. 45




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##### Table of Contents



ITEM 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters All of our issued and outstanding shares of common stock are held by Doane
Pet Care Enterprises, Inc. As of January 31, 2004, we had 1,200,000 shares of
senior preferred stock issued and outstanding, 200,000 of which were held by
J.P. Morgan Partners (BHCA), L.P. and one of its affiliates and 1,000,000 of
which were held by qualified institutional buyers, as defined in Rule 144A
under the Securities Act. The following table sets forth certain information
regarding the beneficial ownership of Doane Pet Care Enterprises, Inc.s common
stock as of January 31, 2004 by:  
    
    each director of Doane;
    
    each Named Executive Officer;
    
    each person who is known by us to own beneficially more than 5% of
the common stock
of Doane Pet Care Enterprises, Inc.;
    
    all parties to the investors agreement as a group; and
    
    all directors and executive officers as a group. Unless otherwise indicated, each person has sole voting and dispositive
power over the shares indicated as owned by that person. Certain of Doane Pet
Care Enterprises, Inc.s principal stockholders are parties to the investors
agreement. See Item 13  Certain Relationships and Related Transactions -
Investors Agreement. 46




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##### Table of Contents



Number of sharesName of beneficial owner (1)
    
    owned beneficially
    
    Percent of Class (2)J.P. Morgan Partners (BHCA), L.P. (3)
    
    
    9,682,246
    
    
    
    34.9Bruckmann, Rosser, Sherrill & Co., L.P. (4)
    
    
    6,162,868
    
    
    
    26.1DLJ Merchant Banking Partners, L.P. (5)
    
    
    4,866,356
    
    
    
    19.0Equus II Inc.
    
    
    1,943,598
    
    
    
    9.2Summit Capital, Inc. (6)
    
    
    1,892,769
    
    
    
    9.0Laura Hawkins Mansur (7)
    
    
    1,781,000
    
    
    
    8.5Bob L. Robinson (8)
    
    
    1,181,546
    
    
    
    5.6PNC Capital Corp. (9)
    
    
    1,111,304
    
    
    
    5.2Jeffrey C. Walker (3)
    
    
    9,682,246
    
    
    
    34.9Stephen C. Sherrill (4)
    
    
    6,162,868
    
    
    
    26.1Lawrence S. Benjamin (12)
    
    
    6,666
    
    
    
    *Jerry W. Finney, Jr. (5)
    
    
    4,866,356
    
    
    
    19.0George B. Kelly (6)
    
    
    1,892,769
    
    
    
    9.0Mathew J. Lori (10)
    
    
    
    
    
    
    *Edward H. DAlelio (11)
    
    
    
    
    
    
    *Paul E. Suckow (11)
    
    
    
    
    
    
    *Terry R. Peets (12)
    
    
    13,332
    
    
    
    *Douglas J. Cahill (12)
    
    
    695,662
    
    
    
    3.2Philip K. Woodlief (12)
    
    
    148,381
    
    
    
    *David L. Horton (12)
    
    
    188,381
    
    
    
    *Joseph J. Meyers (12)
    
    
    110,600
    
    
    
    *Richard A. Hannasch (12)
    
    
    196,593
    
    
    
    *All parties to the investors agreement as a group
    
    
    33,872,653
    
    
    
    95.7All executive officers and
directors as a group (17 persons)
    
    
    24,077,954
    
    
    
    66.9
   *
    
    Represents less than one percent.(1)
    
    The address of J.P. Morgan Partners (BHCA), L.P. and Messrs. Walker
and Lori is 1221 Avenue of the Americas, New York, New York 10020. The
address of Bruckmann, Rosser, Sherrill & Co., L.P. and Mr. Sherrill is
126 East 56th Street, New York, New York 10022. The address of DLJ
Merchant Banking Partners, L.P. and Mr. Finney is 11 Madison Avenue,
16th Floor, New York, New York 10010. The address of Equus II Inc. is
2929 Allen Parkway, Suite 2500, Houston, Texas 77019. The address of
Summit Capital, Inc. and Mr. Kelly is 600 Travis, Suite 6110, Houston,
Texas 77002. The address of Mrs. Mansur is 5602 Indian Circle, Houston,
Texas 77056. The address of Mr. Robinson is 8591 SE Highway 166, Baxter
Springs, Kansas 66713. The address of PNC Capital Corp. is 3150 CNG
Tower, 625
Liberty Avenue, Pittsburgh, Pennsylvania 15222. The address of Mr.
Benjamin is 9755 Patuxent Woods Drive, Columbia, Maryland 21046. The
address of Mr. Peets is 327 Coral Avenue, Balboa Island, Newport Beach,
California 92662. The address of Messrs. Cahill, Woodlief, Horton, Meyers
and Hannasch is 210 Westwood Place South, Suite 400, Brentwood, Tennessee
37027. The address of Mr. DAlelio is 7 Ringbolt Road, Hingman,
Massachusetts 02043. The address of Mr. Suckow is 1219 Denbigh Lane,
Radnor, Pennsylvania 19087.(2)
    
    In accordance with Rule 13d-3(d) under the Securities Exchange Act of
1934, the calculation of this percentage assumes that securities subject
to options, warrants, rights or conversion privileges are outstanding
for the purpose of computing the percentage of outstanding securities of
the class owned by each beneficial owner, but such securities subject to
options, warrants, rights or conversion privileges are not deemed to be
outstanding for the purpose of computing the percentage of the class
owned by any other person.(3)
    
    Amount represents shares held by J.P. Morgan Partners (BHCA), L.P.
and related parties. Of the 9,682,246 shares indicated as owned by J.P.
Morgan Partners (BHCA), L.P., (i) 428,000 represent shares of Class A
Common Stock; (ii) 2,560,093 represent shares of Class B Common Stock;
and (iii) 6,694,153 are shares issuable within 60 days upon 47




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##### Table of Contents



exercise of
warrants. Mr. Walker, a director of Doane, serves as President of JPMP
Capital Corp., the general partner of JPMP Master Fund Manager, L.P.,
the general partner of J.P. Morgan Partners (BHCA), L.P. As such, Mr.
Walker may be deemed to beneficially own the shares indicated as owned
by J.P. Morgan Partners (BHCA), L.P. Mr. Walker disclaims beneficial
ownership of these shares within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934.(4)
    
    Amount includes shares held by Bruckmann, Rosser, Sherrill & Co.,
L.P. and certain other entities and individuals affiliated with it. Of
the 6,162,868 shares indicated as owned by Bruckmann, Rosser, Sherrill &
Co., L.P., (i) 3,585,822 represent shares of Class A Common Stock and
(ii) 2,577,046 are shares issuable within 60 days upon exercise of
warrants. Of the shares indicated as owned by Bruckmann, Rosser,
Sherrill & Co., L.P., (i) 60,617 shares of Class A Common Stock and (ii)
44,042 shares issuable within 60 days upon exercise of warrants are
owned individually by Mr. Sherrill, a director of Doane. Mr. Sherrill
may be deemed to beneficially own 5,924,484 shares beneficially owned by
Bruckmann, Rosser, Sherrill & Co., L.P. and certain other entities and
individuals affiliated with it. Mr. Sherrill disclaims beneficial
ownership of 238,384 of such shares within the meaning of Rule 13d-3 of
the Securities Exchange Act of 1934.(5)
    
    Amount represents shares held by DLJ Merchant Banking Partners, L.P.
and related parties. Of the 4,866,356 shares held by DLJ Merchant
Banking Partners, L.P., (i) 351,428 represents shares of Class A common
stock and (ii) 4,514,928 are shares issuable within 60 days upon the
exercise of warrants. Of the shares indicated, 150,494 shares, 80,135
shares, 81,474 shares, 34,917 shares and 4,408 shares are held by DLJ
Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ
ESC II, L.P., DLJ Merchant Banking Funding, Inc. and DLJ Offshore
Partners, C.V., respectively. Of the warrants indicated, warrants to
purchase 2,126,748 shares, 950,960 shares, 524,444 shares, 857,640 and
55,136 shares are held by DLJ Merchant Banking Partners, L.P., DLJ
International Partners, C.V., DLJ First ESC L.P., DLJ Merchant Banking
Funding, Inc., and DLJ Offshore Partners, C.V., respectively. In
November 2000, Credit Suisse First Boston, Inc. acquired Donaldson,
Lufkin & Jenrette, Inc. DLJ Merchant Banking Partners, L.P. is a limited
partnership, the general partner of which is DLJ Merchant Banking, Inc.,
an indirect affiliate of Credit Suisse First Boston, Inc. and Credit
Suisse Group. Mr. Finney is a director of Doane and serves as a Director
of the Private Equity Group of Credit Suisse First Boston and as such
may be deemed to beneficially own such shares. Mr. Finney disclaims
beneficial ownership of such shares within the meaning of Rule 13d-3 of
the Securities Exchange Act of 1934.(6)
    
    Amount includes shares held by Summit Capital, Inc. Summit/DPC
Partners, L.P. was dissolved in 2001 and all of the shares it held were
distributed to its partners, including Summit Capital, Inc. Mr. Kelly, a
director of Doane, is Chairman of the Board and a stockholder of Summit
Capital, Inc. Mr. Kelly may be deemed to beneficially own the shares
indicated. Mr. Kelly disclaims beneficial ownership of 24,006 shares
within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934.(7)
    
    Of the shares indicated as owned by Mrs. Mansur, 634,500 are held by
the estate of Walid Mansur, 846,500 are owned by Mrs. Mansur and 300,000
are held in trust for their children.(8)
    
    Of the shares indicated as owned by Mr. Robinson, 264,566 are held in Mr. Robinsons name, 560,000 are held in a limited partnership of which
Mr. Robinson is the Managing Partner, 150,371 are held in trust for Mr.
Robinson, 150,371 are held in trust for Mr. Robinsons wife, Jeanine L.
Robinson, and 56,238 are held in Mrs. Robinsons name.(9)
    
    Amount represents shares held by PNC Capital Corp. and related
entities. Of the 1,111,304 shares indicated as owned
by PNC Capital Corp., (i) 711,384 represent shares of Class A Common
Stock; and (ii) 399,920 are shares issuable within 60 days upon the
exercise of warrants.(10)
    
    Amount excludes shares held by J.P. Morgan Partners (BHCA), L.P. and
related parties. Mr. Lori, a director of Doane, is a limited partner of
JPMP Master Fund Manager, L.P., the general partner of J.P. Morgan
Partners (BHCA), L.P. As such, Mr. Lori is not deemed to beneficially
own the shares indicated as owned by J.P. Morgan Partners (BHCA), L.P.(11)
    
    These directors serve only on our board of directors, and not on the
board of directors of Doane Pet Care Enterprises, Inc.(12)
    
    Amounts include shares which are issuable within 60 days upon
exercise of warrants as follows:, Mr. Cahill- 45,562 and Mr.
Woodlief-22,781. In addition, amounts include options which are
exerciseable within 60 days as follows: Mr. Cahill  450,100; Mr.
Woodlief  120,600; Mr. Horton  140,600; Mr. Meyers  110,600; Mr.
Hannasch  97,900; Mr. Peets  13,332; and Mr. Benjamin  6,666. 48




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Equity Compensation Plans Neither we nor our parent, subsidiaries or affiliates have any
compensation plans or individual compensation arrangements under which our
equity securities are authorized for issuance to employees or non-employees in
exchange for consideration in the form of goods or services. The compensation plans under which the
equity securities of our parent are authorized for issuance are discussed
above. 
 ITEM 13  Certain Relationships and Related Transactions Investors Agreement Doane Pet Care Enterprises, Inc., Doane, Summit Capital, Inc., J.P. Morgan
Partners (BHCA), L.P. and an affiliate thereof, DLJ Merchant Banking Partners,
L.P. and certain of its affiliates, Bruckmann, Rosser, Sherrill
& Co., L.P.(1) and
certain affiliated entities and individuals, all of the former stockholders of
Windy Hill and certain other stockholders of Doane are parties to a second
amended and restated investors agreement. The investors agreement contains
provisions concerning our governance and the governance of Doane Pet Care
Enterprises, Inc., restrictions on the transferability of our securities and
those of Doane Pet Care Enterprises, Inc. and registration rights for such
securities. The governance provisions of the investors agreement provide that our
board of directors and the board of directors of Doane Pet Care Enterprises,
Inc. each consist of at least seven members. The investors agreement provides
that if at any time the number of shares of common stock (which, for the
purposes of the investors agreement, includes warrants on an as-if-exercised
basis) of Doane Pet Care Enterprises, Inc. owned of record by:  
    
    J.P. Morgan Partners (BHCA), L.P. is 5% or more, then it will have
the right to designate two individuals as directors.
    
    DLJ Merchant Banking Partners, L.P. is 5% or more, then it will have
the right to designate one individual as director.
    
    the former investors in Summit/DPC Partners, L.P. (including after
its dissolution and the distribution of its shares) is 50% or more of
the number of shares of common stock of
Doane Pet Care Enterprises, Inc. it owned as of August 3, 1998, then
Summit Capital, Inc. will have the right to designate one individual as
director.
    
    the Windy Hill investors is 50% or more of the number of shares of
common stock of Doane Pet Care Enterprises, Inc. owned by them as of
August 3, 1998, then Bruckmann, Rosser, Sherrill & Co., L.P. will have
the right to designate one individual. Additionally, one designee as director is required to be the Chief
Executive Officer of Doane Pet Care Enterprises, Inc. and one is required to be
an independent director designated by a majority of the board of directors.   (1)
    
    Affiliates of Credit Suisse First Boston own, in
the aggregate, an approximate 12% non-voting interest in Bruckmann, Rosser, Sherrill
& Co., L.P. Sponsor Facility In March 2001, we refinanced $25.0 million of indebtedness under our
senior credit facility with loans from shareholders of our parent and Messrs.
Cahill, Woodlief, Horton and Hannasch, and certain other executive officers. The sponsor
facility was a senior unsecured loan bearing interest at 15%. Principal and
accrued interest under the loan was due on March 31, 2007. Our parent issued
warrants in connection with the sponsor facility that gave the warrantholders
the right to purchase 30% of the outstanding stock of our parent for a nominal
amount. In February 2003, we used $33.3 million of the net proceeds
of the sale of our senior notes to repay the sponsor facility in full. See Item
7  Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources  Senior Note Offering  Use of Proceeds. 49




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Transactions with DLJ Merchant Banking Partners, L.P. and its Affiliates DLJ Merchant Banking Partners, L.P. and certain other affiliates of Credit
Suisse First Boston LLC are the owners of 351,428 shares of common stock and
warrants to purchase 4,514,928 shares of Doane Pet Care Enterprises, Inc.
Credit Suisse First Boston LLC was one of the joint book-running managers in
the February 2003 offering of our senior notes. Credit Suisse First Boston LLC
and its affiliates have received certain payments of fees, including fees for
various investment banking and commercial banking services provided to us and
to Doane Pet Care Enterprises, Inc. DLJ Capital Funding, Inc., an affiliate of
Credit Suisse First Boston LLC, is the syndication agent and a lender under our
senior credit facility and received a portion of our repayment of loans under
our senior credit facility from the net proceeds of the sale of our senior
notes. In connection with the sale of our senior notes, Credit Suisse First
Boston LLC and its affiliates received fees of approximately $3.3 million.
There are currently no agreements to make any additional payments. DLJ Merchant Banking Partners, L.P. and certain other affiliates of Credit
Suisse First Boston LLC are parties to the investors agreement. In accordance
with the investors agreement, DLJ Merchant Banking Partners, L.P. has
designated Mr. Finney to the boards of directors of Doane and Doane Pet Care
Enterprises, Inc. Transactions with J.P. Morgan Partners (BHCA), L.P. and its Affiliates J.P. Morgan Partners (BHCA), L.P. is an affiliate of JPMorgan Chase Bank
and J.P. Morgan Securities Inc. J.P. Morgan Partners (BHCA), L.P., together
with one of its affiliates, owns:  
    
    200,000 shares of our senior preferred stock;
    
    428,000 shares of Class A Common Stock of Doane Pet Care Enterprises,
Inc. and 2,560,093 shares of Class B (non-voting) Common Stock of Doane
Pet Care Enterprises, Inc.; and
    
    warrants to purchase 6,694,153 shares of common stock of Doane Pet
Care Enterprises, Inc. JPMorgan Chase Bank, J.P. Morgan Securities Inc. and their affiliates
perform various commercial banking and investment banking services from time to
time for us and our affiliates. J.P. Morgan Securities Inc. was one of the
joint book-running managers in the offering of our senior notes. Affiliates of
J.P. Morgan Securities Inc. were holders of promissory notes under our sponsor
facility. These affiliates received $16.9 million of the net
proceeds from the sale of our senior notes as repayment of the promissory
notes in February 2003. JPMorgan Chase Bank serves as the administrative agent
and a lender under our senior credit facility and received a portion of our
repayment of loans under our senior credit facility from the net proceeds of
our recent sale of senior notes. Since the beginning of fiscal 2001
through February 28, 2004,
JPMorgan Chase Bank, J.P. Morgan Securities Inc. and their affiliates received
a total of $1.5 million for acting in the foregoing capacities, excluding
interest and other charges earned generally by all lenders under our senior
credit facility, and such entities received a fee of $0.5 million in connection with
the March 9, 2004 senior credit facility amendment. In connection with the sale
of our senior notes, J.P. Morgan Securities Inc. and its affiliates received
fees of approximately $1.6 million. There are currently no agreements to make
any additional commercial banking or investment banking payments to JPMorgan
Chase Bank, J.P. Morgan Securities Inc. or their affiliates, except that J.P Morgan Securities Inc. may receive investment banking fees in the future, under certain circumstances, if we decide to sell our European business. J.P. Morgan Partners (BHCA), L.P. is a party to the investors agreement.
In accordance with the investors agreement, it has designated Messrs. Walker
and Lori to the boards of directors of Doane and Doane Pet Care Enterprises,
Inc. Repayment of Sponsor Facility Notes Held by Certain Beneficial Owners In addition to the affiliates of J.P. Morgan Securities Inc. that held
promissory notes under our sponsor facility, as discussed above, affiliates of
other persons known to us that beneficially owned more than 5% of the common
stock of Doane Pet Care Enterprises, Inc. also held promissory notes under our
sponsor facility and received payments from us from the net proceeds of our
February 2003 senior note offering. Bruckmann, Rosser, Sherrill & 50




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##### Table of Contents



Co., L.P.
and its affiliates received $7.5 million, Summit Capital, Inc.
and its affiliates received $2.3 million and PNC Capital Corp.
and its affiliates received $1.2 million of the net proceeds from
the sale of our senior notes in February 2003. Additionally, Messrs. Cahill,
Woodlief, Horton and Hannasch each received $0.1 million from the
repayment of their promissory notes under our sponsor facility in
connection with the sale of senior notes. 
 ITEM 14  Principal Accountant Fees and Services  The following table presents fees for professional audit services rendered
by KPMG LLP for the audit of the Companys annual financial statements for 2002 and 2003, and fees
billed for other services rendered by KPMG LLP. 2002
    
    2003Audit Fees
    
    $
    736,800
    
    
    $
    815,600Audit
Related Fees(1)
    
    
    86,700
    
    
    
    52,800Tax
Fees(2)
    
    
    334,500
    
    
    
    350,800All Other
Fees
    
    
    
    
    
    
    Total
Fees(3)
    
    $
    1,158,000
    
    
    $
    1,219,200
   (1)
    
    Audit related fees consisted principally of fees for audits of financial statements of
certain employee benefit plans, due diligence services and consultation on accounting matters.(2)
    
    Tax fees consisted of fees for services for tax consultation and tax compliance services.(3)
    
    Total fees include amounts billed in foreign currencies, and are translated to US Dollars
as of the date of approval of the fees. 51




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##### Table of Contents



PART IV 
 ITEM 15  Exhibits, Financial Statements Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report:  (1)
    
    Financial StatementsThe following financial statements and the Independent Auditors Report
thereon are included on pages F-1 through F-40 of this annual report on
Form 10-K:  
    
    Independent Auditors Report
    
    Consolidated Balance Sheets as of the end of fiscal 2002 and 2003
    
    Consolidated Statements of Operations for fiscal 2001, 2002 and 2003
    
    Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss) for fiscal 2001, 2002 and 2003
    
    Consolidated Statements of Cash Flows for fiscal 2001, 2002 and 2003
    
    Notes to Consolidated Financial Statements  (2)
    
    No financial statement schedules are required to be filed.(3)
    
    Exhibits The following exhibits are filed as part of this report: ExhibitNumber
    
    
    
    Description3.1
    
    -
    
    Certificate of Incorporation of Doane Pet Care
Company (incorporated by reference to Exhibit 3.1 to
Doane Pet Care Companys Registration Statement on
Form S-1, Reg. No. 33-98110 (the Form S-1))3.2
    
    -
    
    Certificate of Designations, Preferences and Rights
of 14.25% Senior Exchangeable Preferred Stock due
2007, dated October 4, 1995 (incorporated by reference
to Exhibit 3.2 to Doane Pet Care Companys Annual
Report on Form 10-K for the year ended December 29,
2001 (the 2001 Form 10-K))3.3
    
    -
    
    Certificate of Amendment to Certificate of
Incorporation of Doane Pet Care Company  dated
February 4, 1998 (incorporated by reference to Exhibit
3.2 to Doane Pet Care Companys Annual Report on Form
10-K for the year ended December 31, 1997 (the 1997
Form 10-K))3.4
    
    -
    
    Certificate of Amendment of Certificate of
Incorporation of Doane Pet Care Company dated November
10, 1998 (incorporated by reference to Exhibit 3.4 to
the 2001 Form 10-K)3.5
    
    -
    
    Certificate of Amendment of Certificate of
Designations, Preferences and Rights of 14.25% Senior
Exchangeable Preferred Stock due 2007 dated November
11, 1998 (incorporated by reference to Exhibit 3.5 to
the 2001 Form 10-K)3.6
    
    -
    
    Amended and Restated Bylaws of Doane Pet Care
Company (incorporated by reference to Exhibit 3.6 to
the 2001 Form 10-K)
 52




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ExhibitNumber
    
    
    
    Description4.1
    
    -
    
    Indenture dated November 12, 1998 between Doane Pet
Care Company and Wilmington Trust Company
(incorporated by reference to Exhibit 10.12 of Doane
Pet Care Enterprises, Inc.s Registration Statement on
Form S-1, Reg. No. 333-61027 (Enterprises Form
S-1))4.2
    
    -
    
    Registration Agreement among Doane Pet Care Company,
Donaldson, Lufkin & Jenrette Securities Corporation
and Chase Securities Inc. dated November 12, 1998
(incorporated by reference to Exhibit 4.2 to Doane Pet
Care Companys Registration Statement on Form S-4,
Reg. No. 333-70759 (the Form S-4))4.3
    
    -
    
    Indenture dated February 28, 2003 between Doane Pet
Care Company and Wilmington Trust Company (incorporated by reference to Exhibit 4.3 to Doane Pet Care Companys
Annual Report on Form 10-K for the year ended December 28, 2002 (the 2002 Form 10-K))4.4
    
    -
    
    Registration Rights Agreement dated as of February
28, 2003 between Doane Pet Care Company, DPC
Investment Corp., Doane/Windy Hill Joint Venture
L.L.C., Credit Suisse First Boston LLP and J.P. Morgan
Securities Inc. (incorporated by reference to Exhibit 4.3 to the 2002 Form 10-K)9.1
    
    -
    
    Second Amended and Restated Investors Agreement
dated as of March 26, 2001 among Doane Pet Care
Company, Doane Pet Care Enterprises, Inc., Summit
Capital Inc., Summit/DPC Partners Inc., J. P. Morgan
Partners (BHCA), L.P., Baseball Partners, DLJ Merchant
Banking Partners, L.P., DLJ International Partners,
C.V., DLJ Offshore Partners, C.V., DLJ Merchant
Banking Funding, Inc., DLJ First ESC, L.P., Bruckmann,
Rosser, Sherrill & Co., L.P., PNC Capital Corp., and
certain other persons name therein (incorporated by
reference to Exhibit 9.1 to Doane Pet Care Companys
Annual Report on Form 10-K/A for the year ended
December 30, 2000 (the 2000 Form 10-K/A))10.1
    
    -
    
    Employment Agreement dated January 1, 1998, between
Doane Pet Care Company and Douglas J. Cahill
(incorporated by reference to Exhibit 10.3 to the 1997
Form 10-K)10.2
    
    -
    
    Employment Agreement dated February 15, 1999,
between Doane Pet Care Company and Philip K. Woodlief
(incorporated by reference to Exhibit 10.14 to
Enterprises Form S-1)10.3
    
    -
    
    First Amendment to Employment Agreement dated as of
January 1, 2001, between Doane Pet Care Company and
Philip K. Woodlief (incorporated by reference to
Exhibit 10.4 to the 2000 Form 10-K/A)10.4
    
    -
    
    Employment Agreement dated January 1, 1998, between
Doane Pet Care Company and David L. Horton
(incorporated by reference to Exhibit 10.6 to the Form
S-4)10.5
    
    -
    
    First Amendment to Employment Agreement dated as of
January 1, 2001, between Doane Pet Care Company and
David L. Horton (incorporated by reference to Exhibit
10.6 to the 2000 Form 10-K/A)10.6
    
    -
    
    Employment Agreement dated August 17, 1998 between
Doane Pet Care Company and Joseph J. Meyers
(incorporated by reference to Exhibit 10.7 to the 2000
Form 10-K/A)10.7
    
    -
    
    First Amendment to Employment Agreement dated as of
January 1, 2001, between Doane Pet Care Company and
Joseph J. Meyers (incorporated by reference to Exhibit
10.8 to the 2000 from 10-K/A)10.8
    
    -
    
    Employment Agreement dated January 1, 1998 between
Doane Pet Care Company and Richard A. Hannasch
(incorporated by reference to Exhibit  10.8 to the Form S-4)
 53




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ExhibitNumber
    
    
    
    Description10.9
    
    -
    
    Doane Pet Care Enterprises Inc.s, 1996 Stock Option
Plan (incorporated by reference to Exhibit 10.7 to
Doane Pet Care Companys Annual Report on Form 10-K
for the year ended December 31, 1996)10.10
    
    -
    
    First Amendment to Doane Pet Care Enterprises,
Inc.s 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.8 to the 1997 Form 10-K)10.11
    
    -
    
    Second Amendment to Doane Pet Care Enterprises,
Inc.s, 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.9 to the 1997 Form 10-K)10.12
    
    -
    
    Doane Pet Care Enterprises, Inc.s 1999 Stock
Incentive Plan (incorporated by reference to Exhibit
10.10 to Doane Pet Care Companys Annual Report on
Form 10-K for the fiscal year ended January 1, 2000)10.13
    
    -
    
    Amended and Restated Credit Agreement dated as of
May 8, 2000 among Doane Pet Care Company, as borrower,
The Chase Manhattan Bank, as administrative agent, DLJ
Capital Funding, Inc, as syndication agent, and
Firstar Bank, N.A., as documentation agent, and the
banks named therein (incorporated by reference to
Exhibit 10.1 to Doane Pet Care Companys Quarterly
Report on Form 10-Q for the quarterly period ended
July 1, 2000)10.14
    
    -
    
    Amendment No. 1 to Amended and Restated Credit
Agreement dated as of March 26, 2001 among Doane Pet
Care Company, as borrower, The Chase Manhattan Bank,
as administrative agent, DLJ Capital Funding, Inc, as
syndication agent, and Firstar Bank, N.A., as
documentation agent and the banks named therein
(incorporated by reference to Exhibit 10.14 to the
2000 Form 10-K/A)10.15
    
    -
    
    Amendment No. 2 to Amended and Restated Credit
Agreement dated as of March 22, 2002 among Doane Pet
Care Company, as borrower, JPMorgan Chase Bank, as
administrative agent, Wachovia Bank N.A., as co-agent,
J.P. Morgan Securities Inc., as lead arranger,
Wachovia Bank N.A. and Danske Bank A/S, as
co-arrangers, and the banks named therein
(incorporated by reference to Exhibit 10.15 to the
2001 Form 10-K)10.16
    
    -
    
    Amendment No. 3 to Amended and Restated Credit
Agreement dated as of February 10, 2003 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 10.16 to the 2002 Form 10-K)10.17
    
    -
    
    Amendment No. 4 to Amended and Restated Credit
Agreement dated as of February 26, 2003 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 10.17 to the 2002 Form 10-K)*10.18
    
    -
    
    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 thereto10.19
    
    -
    
    Loan and Warrant Agreement dated as of March 26,
2001 among Doane Pet Care Enterprises, Inc., Doane Pet
Care Company and each of the lenders named therein
(incorporated by reference to Exhibit 10.15 to the
2000 Form 10-K/A)*21.1
    
    -
    
    List of Subsidiaries of Doane Pet Care Company*23.1
    
    -
    
    Consent of KPMG LLP
 54




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##### Table of Contents



ExhibitNumber
    
    
    
    Description*31.1
    
    -
    
    Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) / 15(d)-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    -
    
    Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) / 15(d)-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    -
    
    Certification of Chief Executive Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*32.2
    
    -
    
    Certification of Chief Financial Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith
    
    Management contracts or compensatory plans or arrangements.  (b)
    
    Reports on Form 8-K from fourth quarter of fiscal 2003. A report on Form 8-K, dated October 30, 2003, was furnished pursuant to
Item 9 of Form 8-K in connection with our issuance of a press release
announcing our fiscal 2003 third quarter results. We also announced that we
provided the SEC with certifications from our Chief Executive Officer and
Chief Financial Officer on October 30, 2003 in accordance with Section 906 of
the Sarbanes-Oxley Act of 2002. Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant
to Section 12 of the Act. No annual report or proxy material has been sent to our security holder as
of the date hereof. We do not expect to furnish our security holder with an
annual shareholders report or proxy soliciting material subsequent to the
filing of this Form 10-K. 55




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##### Table of Contents



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: March 11, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the registrant
and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ GEORGE B. KELLY
George B. Kelly
    
    Chairman of the Board and Director
    
    March 11, 2004/s/ DOUGLAS J. CAHILL
Douglas J. Cahill
    
    Chief Executive Officer, President and
Director (Principal Executive Officer)
    
    March 11, 2004/s/ PHILIP K. WOODLIEF
Philip K. Woodlief
    
    Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
    
    March 11, 2004/s/ STEPHEN P. HAVALA
Stephen P. Havala
    
    Corporate Controller and Principal Accounting Officer
    
    March 11, 2004Lawrence S. Benjamin
    
    Director/s/ EDWARD H. DALELIO
Edward H. DAlelio
    
    Director
    
    March 11, 2004/s/ JERRY W. FINNEY, JR.
Jerry W. Finney, Jr.
    
    Director
    
    March 11, 2004/s/ MATHEW J. LORI
Mathew J. Lori
    
    Director
    
    March 11, 2004/s/ TERRY R. PEETS
Terry R. Peets
    
    Director
    
    March 11, 2004/s/ STEPHEN C. SHERRILL
Stephen C. Sherrill
    
    Director
    
    March 11, 2004/s/ PAUL E. SUCKOW
Paul E. Suckow
    
    Director
    
    March 11, 2004/s/ JEFFREY C. WALKER
Jeffrey C. Walker
    
    Director
    
    March 11, 2004
 56




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DOANE PET CARE COMPANY AND SUBSIDIARIES FINANCIAL INFORMATION INDEX TO FINANCIAL STATEMENTS PageIndependent Auditors Report
    
    
    F-2Consolidated Balance Sheets as of the end of fiscal 2002 and 2003
    
    
    F-3Consolidated Statements of Operations for fiscal 2001, 2002 and 2003
    
    
    F-4Consolidated
Statements of Stockholders Equity and Comprehensive Income
(Loss) for fiscal 2001, 2002 and 2003
    
    
    F-5Consolidated Statements of Cash Flows for fiscal 2001, 2002 and 2003
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7




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##### Table of Contents



INDEPENDENT AUDITORS REPORT The Board of Directors
Doane Pet Care Company: We have audited the accompanying consolidated balance sheets of Doane Pet Care
Company and subsidiaries as of December 28, 2002 and January 3, 2004 and the
related consolidated statements of operations, stockholders equity and
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended January 3, 2004. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Doane Pet Care
Company and subsidiaries as of December 28, 2002 and January 3, 2004 and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 3, 2004 in conformity with accounting
principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective
December 30, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. /s/ KPMG LLP
 Nashville, Tennessee
February 25, 2004, except as to Note 6, which is as of March 9, 2004 F-2




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts) End of fiscal2002
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,596
    
    
    $
    29,293Accounts receivable, net
    
    
    129,347
    
    
    
    91,569Inventories, net
    
    
    63,631
    
    
    
    68,619Deferred tax asset
    
    
    5,859
    
    
    
    1,898Prepaid expenses and other current assets
    
    
    8,143
    
    
    
    14,390Total current assets
    
    
    214,576
    
    
    
    205,769Property, plant and equipment, net
    
    
    260,092
    
    
    
    266,457Goodwill and trademarks
    
    
    363,080
    
    
    
    380,418Other assets
    
    
    32,919
    
    
    
    33,270Total assets
    
    $
    870,667
    
    
    $
    885,914LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    5,720
    
    
    $
    13,185Accounts payable
    
    
    93,528
    
    
    
    100,512Accrued liabilities
    
    
    56,113
    
    
    
    51,719Total current liabilities
    
    
    155,361
    
    
    
    165,416Long-term debt, excluding current maturities
    
    
    548,300
    
    
    
    560,861Other long-term liabilities
    
    
    23,692
    
    
    
    8,863Deferred tax liability
    
    
    7,261
    
    
    
    28,524Total liabilities
    
    
    734,614
    
    
    
    763,664Senior Preferred Stock (Redeemable), 3,000,000 shares authorized,
1,200,000 shares issued and outstanding
    
    
    77,550
    
    
    
    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
    
    
    9,558
    
    
    
    50,185Accumulated deficit
    
    
    (66,729
    )
    
    
    (134,661
    )Total stockholders equity
    
    
    58,503
    
    
    
    31,198Total liabilities and stockholders equity
    
    $
    870,667
    
    
    $
    885,914
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts) Fiscal2001
    
    2002
    
    2003Net sales
    
    $
    895,830
    
    
    $
    887,333
    
    
    $
    1,013,865Cost of goods sold
    
    
    749,092
    
    
    
    701,418
    
    
    
    851,578Gross profit
    
    
    146,738
    
    
    
    185,915
    
    
    
    162,287Operating expenses:Promotion and distribution
    
    
    58,241
    
    
    
    52,445
    
    
    
    57,616Selling, general and administrative
    
    
    47,945
    
    
    
    48,712
    
    
    
    52,015Amortization
    
    
    13,743
    
    
    
    4,583
    
    
    
    4,989Other operating expenses
    
    
    8,655
    
    
    
    1,447
    
    
    
    7,227Income from operations
    
    
    18,154
    
    
    
    78,728
    
    
    
    40,440Interest expense, net
    
    
    57,020
    
    
    
    62,395
    
    
    
    58,845Debt extinguishments
    
    
    
    
    
    
    
    
    
    
    12,142Other income, net
    
    
    (757
    )
    
    
    (724
    )
    
    
    (1,156
    )Income (loss) before income taxes
    
    
    (38,109
    )
    
    
    17,057
    
    
    
    (29,391
    )Income tax expense (benefit)
    
    
    (16,171
    )
    
    
    1,786
    
    
    
    25,039Net income (loss)
    
    
    (21,938
    )
    
    
    15,271
    
    
    
    (54,430
    )Preferred stock dividends and accretion
    
    
    (10,467
    )
    
    
    (11,878
    )
    
    
    (13,502
    )Net income (loss) available to common shares
    
    $
    (32,405
    )
    
    $
    3,393
    
    
    $
    (67,932
    )
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except share amounts) AccumulatedCommon stock
    
    Additionalpaid-in
    
    othercomprehensive
    
    AccumulatedShares
    
    Amount
    
    capital
    
    income (loss)
    
    deficit
    
    TotalBalances at end of fiscal 2000
    
    
    1,000
    
    
    $
    
    
    
    $
    107,280
    
    
    $
    1,318
    
    
    $
    (37,717
    )
    
    $
    70,881Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,938
    )
    
    
    (21,938
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,352
    )
    
    
    
    
    
    
    (7,352
    )Unrealized loss, net of deferred
tax benefit of $1,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,573
    )
    
    
    
    
    
    
    (1,573
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,863
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,390
    )
    
    
    (9,390
    )Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,077
    )
    
    
    (1,077
    )Parent capital contribution
    
    
    
    
    
    
    
    
    
    
    8,375
    
    
    
    
    
    
    
    
    
    
    
    8,375Balances at end of fiscal 2001
    
    
    1,000
    
    
    $
    
    
    
    $
    115,655
    
    
    $
    (7,607
    )
    
    $
    (70,122
    )
    
    $
    37,926Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,271
    
    
    
    15,271Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,792
    
    
    
    
    
    
    
    22,792Unrealized loss, net of deferred
tax benefit of $313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )Increase in minimum pension liability,
net of deferred tax benefit of $3,556
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,584
    )
    
    
    
    
    
    
    (5,584
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,436Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,801
    )
    
    
    (10,801
    )Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,077
    )
    
    
    (1,077
    )Parent capital contribution
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Balances at end of fiscal 2002
    
    
    1,000
    
    
    $
    
    
    
    $
    115,674
    
    
    $
    9,558
    
    
    $
    (66,729
    )
    
    $
    58,503Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54,430
    )
    
    
    (54,430
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,725
    
    
    
    
    
    
    
    38,725Reclassification
of realized loss, net of deferred
tax benefit of $849
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,333
    
    
    
    
    
    
    
    1,333Decrease in minimum pension liability,
net of deferred tax expense of $362
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    569
    
    
    
    
    
    
    
    569Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,803
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,425
    )
    
    
    (12,425
    )Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,077
    )
    
    
    (1,077
    )Balances at end of fiscal 2003
    
    
    1,000
    
    
    $
    
    
    
    $
    115,674
    
    
    $
    50,185
    
    
    $
    (134,661
    )
    
    $
    31,198
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Fiscal2001
    
    2002
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (21,938
    )
    
    $
    15,271
    
    
    $
    (54,430
    )Items not requiring (providing) cash:Depreciation
    
    
    27,687
    
    
    
    26,586
    
    
    
    31,178Amortization
    
    
    13,743
    
    
    
    5,578
    
    
    
    5,983Deferred tax expense (benefit)
    
    
    (18,082
    )
    
    
    1,258
    
    
    
    23,644Non-cash interest expense
    
    
    5,844
    
    
    
    15,058
    
    
    
    4,906Equity in joint ventures
    
    
    (788
    )
    
    
    (705
    )
    
    
    (616
    )Debt extinguishments
    
    
    
    
    
    
    
    
    
    
    12,142Asset
impairments and Project Focus
    
    
    8,866
    
    
    
    
    
    
    
    7,727Divestitures
    
    
    4,660
    
    
    
    
    
    
    
    Other non-cash charges (income), net
    
    
    500
    
    
    
    2,352
    
    
    
    (372
    )Changes in current assets and liabilities:Accounts
receivable, net
    
    
    (661
    )
    
    
    (2,669
    )
    
    
    45,653Inventories
    
    
    5,112
    
    
    
    (5,587
    )
    
    
    (1,323
    )Prepaid expenses and other current assets
    
    
    154
    
    
    
    (1,632
    )
    
    
    (5,310
    )Accounts payable
    
    
    (44,479
    )
    
    
    25,541
    
    
    
    (1,462
    )Accrued liabilities
    
    
    (4,554
    )
    
    
    (2,278
    )
    
    
    (12,057
    )Net cash provided by (used in) operating activities
    
    
    (23,936
    )
    
    
    78,773
    
    
    
    55,663Cash flows from investing activities:Capital expenditures
    
    
    (17,316
    )
    
    
    (24,348
    )
    
    
    (28,062
    )Proceeds from sale of assets
    
    
    20,884
    
    
    
    1,766
    
    
    
    1,378Other, net
    
    
    (2,102
    )
    
    
    (3,320
    )
    
    
    (3,501
    )Net cash provided by (used in) investing activities
    
    
    1,466
    
    
    
    (25,902
    )
    
    
    (30,185
    )Cash flows from financing activities:Net borrowings (repayments) under revolving credit agreements
    
    
    30,400
    
    
    
    (23,000
    )
    
    
    1,000Proceeds from issuance of long-term debt
    
    
    17,511
    
    
    
    9,738
    
    
    
    210,444Principal payments on long-term debt
    
    
    (27,925
    )
    
    
    (36,172
    )
    
    
    (208,255
    )Payments for debt issuance costs
    
    
    (2,928
    )
    
    
    (2,316
    )
    
    
    (7,761
    )Parent capital contribution
    
    
    8,375
    
    
    
    19
    
    
    
    Net cash provided by (used in) financing activities
    
    
    25,433
    
    
    
    (51,731
    )
    
    
    (4,572
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    (89
    )
    
    
    424
    
    
    
    791Increase in cash and cash equivalents
    
    
    2,874
    
    
    
    1,564
    
    
    
    21,697Cash and cash equivalents, beginning of year
    
    
    3,158
    
    
    
    6,032
    
    
    
    7,596Cash and cash equivalents, end of year
    
    $
    6,032
    
    
    $
    7,596
    
    
    $
    29,293
 See accompanying notes to consolidated financial statements. F-6




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Nature of Business Doane Pet Care Company, or the Company, is a wholly-owned subsidiary of
Doane Pet Care Enterprises, Inc., or Parent. The Company is a leading global
provider of pet food, primarily private label, with 29 combined manufacturing
and distribution facilities in the United States and Europe. The Company
manufactures pet food products primarily for dogs and cats, including dry, wet,
semi-moist, soft dry, soft treats and biscuits. The Company supplies retailers
of all types with these various products, and purchases and packages those
products for nationally advertised brand pet food companies. The Company also operates a machine
shop and a structural steel fabrication plant that sells to third parties and
supports the Companys facilities. Principles of Consolidation The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated. The
Companys 50% joint venture investments are accounted for under the equity
method. Equity from the joint venture investments is recorded in other income,
net, in the accompanying consolidated statements of operations. 52-53 Week Fiscal Year The Companys fiscal year ends on the Saturday nearest to the end of
December; and therefore, fiscal 2001, 2002 and 2003 ended on December 29, 2001,
December 28, 2002 and January 3, 2004, respectively. Fiscal 2001 and 2002 were
each 52-week years and fiscal 2003 was a 53-week year. Reclassifications Certain fiscal 2001 and 2002 amounts have been reclassified to conform
with the fiscal 2003 presentation. Use of Estimates In conformity with accounting principles generally accepted in the United
States, preparation of the Companys consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the consolidated financial statements; and therefore, actual
results could ultimately differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include all liquid investments with original
maturities of three months or less. Accounts Receivable Accounts receivable are stated at net realizable value through the
recording of allowances for outstanding deductions with customers, doubtful
accounts and cash discounts. The Companys policy is to estimate its
allowances by applying a recovery percentage based on historical collection
experience and performing a specific identification review of customer account
balances. The Company had allowances against accounts receivable of $5.3
million and $2.6 million as of the end of fiscal 2002 and 2003, respectively.
See Note 18  Major Customer related to the Companys concentration of net
sales with one customer. The
Company extends unsecured
credit in the form of accounts receivable, principally to retailers
and nationally advertised brand companies throughout the United States and
Europe, with credit extended to one customer representing 24% of
accounts receivable, net, as of the end of fiscal 2003. F-7




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Inventories Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories are stated net of a
valuation allowance for obsolescence, primarily related to packaging
inventories. The Companys policy is to estimate its allowance based on
specific identification of obsolete stock keeping units, or SKUs, or probable
SKUs to be rationalized. The Company had allowances against inventories of $4.9
million and $4.4 million as of the end of fiscal 2002 and 2003, respectively. Property, Plant and Equipment Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of 20 to 40 years for buildings and
improvements and 3 to 12 years for machinery and equipment. Goodwill and Trademarks Goodwill has been recorded under the purchase accounting method and
represents the excess of the purchase price over the fair value of assets
acquired and liabilities assumed. The Companys only intangible asset with an
indefinite useful life other than goodwill is its trademarks. As of the
beginning of fiscal 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, or SFAS 142. SFAS 142 requires goodwill and other intangible
assets with indefinite lives no longer be amortized. SFAS 142 further requires
that the fair value of goodwill and other intangible assets with indefinite
lives be tested for impairment upon adoption of this statement, annually and
upon the occurrence of certain events, and be written down to fair value if
considered impaired. In the first quarter of fiscal 2002, the Company
reassessed the useful lives and residual values of all intangible assets
acquired in purchase business combinations, including those intangible assets
having estimable useful lives that are classified as other assets in the
Companys balance sheets which resulted in no impact on its consolidated
financial statements. In the second quarter of fiscal 2002, the Company
completed the required transitional impairment tests of goodwill and other
intangible assets with indefinite lives and, based on the results of the tests,
determined no impairment to the carrying values of these assets existed as of
the beginning of fiscal 2002. In the fourth quarters of fiscal 2002 and 2003,
the Company performed its required annual assessment of impairment of goodwill
and other intangible assets and determined no impairment was evident at
either assessment date. Results of operations of the Company, as adjusted to give effect to SFAS
142 as if it were adopted as of the beginning of fiscal 2001, follows (in
thousands): Fiscal 2001Net loss, as reported
    
    $
    (21,938
    )Add back: Amortization, net of income tax benefit
    
    
    7,591Net loss, as adjusted
    
    $
    (14,347
    )Net loss available to common shares
    
    $
    (24,814
    )
 Prior to the adoption of SFAS 142, the Company amortized goodwill over 20
and 40 years and trademarks over 30 years using the straight-line method. The
recovery of the carrying value of goodwill and trademarks was periodically
evaluated for impairment in relation to the operating performance and expected
future operating cash flows of the Company on an undiscounted basis. If the
carrying value of such assets exceeded the expected undiscounted future
operating cash flows, an impairment loss was recognized to the extent the
carrying amount of the acquired net assets exceeded the fair value and was
calculated using expected discounted future operating cash flows. Other Assets Other assets on the accompanying consolidated balance sheets of the
Company include: (1) debt issuance costs; (2) other intangible assets with
estimable useful lives; (3) investments in joint ventures; and (4) other
miscellaneous F-8




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) long-term assets. The Company amortizes debt issuance costs into
interest expense over the life of the related indebtedness. Other intangible
assets with estimable useful lives, primarily consisting of plate costs and
software, are being amortized over three to five years. Impairment of Long-Lived Assets As of the beginning of fiscal 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144,
which requires that long-lived assets to be disposed of by sale be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. SFAS 144 also broadens
the reporting of discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The adoption of SFAS 144 had no material impact on the Companys
financial position or results of operations in the year of adoption. In accordance with SFAS 144, long-lived assets, including property, plant
and equipment and intangible assets with estimable useful lives, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
recognized to the extent that the carrying amount exceeds the assets fair
value. Prior to adoption of SFAS 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. Financial Instruments The fair value of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates book value. The fair value of
long-term debt is based upon market value, if traded, or discounted at the
estimated rate the Company would currently incur on similar debt. See Note 8 -
Fair Value of Financial Instruments. Income Taxes Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are determined based upon differences
between the financial reporting and tax bases of assets and liabilities. The
differences are measured by applying enacted tax rates and laws to taxable
years in which such differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of any change in tax rates is
recognized in the period that includes the enactment date. The Company
assesses the likelihood that net deferred tax assets will be realized in future
periods and records a valuation allowance against its net deferred tax assets
accordingly. Revenue Recognition The Company recognizes revenue when products are shipped and the customer
takes ownership and assumes risk of loss, collection of the relevant receivable
is probable, persuasive evidence of an arrangement exists and the sales price
is fixed or determinable. Promotion and Distribution Promotion and distribution expenses primarily consist of promotions,
freight, brokerage fees, and warehousing expenses. Distribution expenses were
$34.7 million, $33.7 million and $39.8 million in fiscal 2001, 2002 and 2003,
respectively. Commodity Derivative Instruments The Company has in the past and may continue to seek to manage its
commodity price risk associated with market fluctuations by using derivative
instruments for portions of its corn, soybean meal, alternative proteins and F-9




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) natural gas purchases, principally through exchange traded futures and options
contracts. The terms of these contracts are generally less than one year.
During the term of the contract, the Company balances positions daily with cash
payments to or from the exchanges. At the termination of a contract, the
Company has the ability to settle financially or by exchange for the physical
commodity, in which case, the Company would deliver the contract against the
acquisition of the physical commodity. The Companys policy does not permit
speculative commodity trading. All changes in the fair value of the Companys
commodity derivative instruments are included in cost of goods sold in the
accompanying consolidated statements of operations. Interest Rates Swap and Cap Contracts The Company periodically uses interest rate swap and cap contracts to
limit its exposure to the interest rate risk associated with its domestic
floating rate debt. The Companys policy does not permit speculative trading
related to its debt. 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 contracts. The Companys interest rate swap
contracts have been designated as cash flow hedges with changes in fair value
recognized in accumulated other comprehensive income (loss), net of deferred
taxes, in the accompanying consolidated balance sheets until they are realized,
at which point they are recognized in interest expense, net, in the
accompanying consolidated statements of operations. Amounts received or paid
under interest rate swap contracts and on interest rate cap contracts are
recorded as interest income (expense) in the accompanying consolidated
statements of operations. Foreign Currency Derivative Instruments The Company periodically uses foreign currency forward contracts to seek
to manage its exposure to exchange rate fluctuations on foreign currency
transactions. The Companys policy does not permit speculative trading related
to foreign currency. 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 contracts. Changes in fair value of gains
and losses on foreign currency forward contracts that qualify for hedge
accounting are recorded in accumulated other comprehensive income (loss), net
of deferred taxes, in the accompanying consolidated balance sheets until they
are realized, at which point, they are recognized in other income, net, in the
accompanying consolidated statements of operations. All other gains and losses
on foreign currency forward contracts are recorded as an increase or reduction
in net sales in the accompanying consolidated statements of operations as they
occur. Comprehensive Income (Loss) Comprehensive income (loss) includes: (1) net income (loss); (2) foreign
currency translation, including changes in the fair value of the Companys
Euro-denominated debt designated as a hedge of the Companys net investment in
Europe; (3) changes in the fair value of interest rate swap contracts and
foreign currency derivative instruments designated as hedges; and (4) changes
in the minimum pension liability. Comprehensive income (loss) is presented in
the accompanying consolidated statements of stockholders equity and
comprehensive income (loss). Foreign Currency Gains and Losses The Companys foreign-owned assets and liabilities have been translated to
U.S. dollars using the exchange rates in effect at the period end dates in the
accompanying consolidated balance sheets. Results of foreign operations have
been translated using the average exchange rates during the periods presented
in the accompanying consolidated statements of operations. The cumulative
translation adjustment for the Companys net investment in foreign operations
has been recognized in accumulated other comprehensive income (loss) in the
accompanying consolidated financial statements. Foreign currency transaction
gains and losses are recognized in the accompanying consolidated statements of
operations as they occur. Recently Issued Accounting Pronouncements Effective as of the beginning of fiscal 2003, the Company adopted SFAS No.
145, Rescission of FASB Statement Nos. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, or SFAS 145, F-10




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) which amends existing
authoritative pronouncements to make various technical corrections, clarify
meanings and describe their applicability under the changed conditions. SFAS
145 requires gains and losses from the extinguishment of debt to be classified
as extraordinary items only if they meet the criteria of unusual or infrequent
or they meet the criteria for classification as an extraordinary item. In
accordance with SFAS 145, the Company recognized charges to net income in the
first and third quarters of fiscal 2003 associated with its debt which are
reflected as losses from debt extinguishment in the accompanying consolidated
statement of operations. See Note 6  Long-Term Debt and Liquidity. Effective as of the beginning of fiscal 2003, the Company adopted SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities, or SFAS
146, which addresses significant issues regarding the recognition, measurement
and reporting of costs associated with exit and disposal activities, including
restructuring activities that were accounted for pursuant to the guidance that
the Emerging Issues Task Force, or EITF, set forth in EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring).
SFAS 146 requires companies to recognize costs associated with exit or disposal
activities when these costs are incurred rather than at the date of a
commitment to an exit or disposal plan. The scope of SFAS 146 also includes
costs related to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred compensation contract. SFAS 146
applies to exit or disposal activities initiated after December 31, 2002. The
Company has not incurred any such exit or disposal costs since the effective
date. Effective as of the end of the second quarter of fiscal 2003, the Company
adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51, or FIN 46. FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. In December 2003, the FASB
revised FIN 46 to add clarification to existing requirements, ease
implementation, add new scope exceptions and add certain new requirements. The
unmodified provisions of FIN 46 were effective for the first interim or annual
period ending after December 15, 2003 for all variable interest entities
created or acquired prior to January 31, 2003, provided that certain conditions
were met. For variable interest entities created or acquired after February 1,
2003, the requirements of FIN 46 were effective for the first interim or annual
period ending after June 15, 2003. The revised FIN 46 provisions are required
by the end of the first reporting period beginning after December 15, 2003.
The adoption of the unmodified provisions of FIN 46 did not have a material effect
on the Companys results of operations or financial position and the Company
does not anticipate any material effects related to the December 2003
revisions. Effective as of the end of fiscal 2003, the Company adopted SFAS No. 132
(revised 2003), Employers Disclosures about Pensions and Other Postretirement
Benefits, or SFAS 132  Revised. SFAS 132  Revised retains the disclosures
required by the original SFAS 132, but requires additional disclosures
including information describing the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods. These additional
disclosures have been added in response to concerns expressed by users of
financial statements, such as the significance of pensions for many entities
and the need for more information about economic resources and obligations
related to pension plans. The Company has included these additional
disclosures related to its pension plans and postretirement healthcare plan in
Note 15  Employee Benefit Plans  Pension Plans and
Postretirement Plan. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity, or
SFAS 150. SFAS 150 requires issuers to classify as liabilities, or assets in
some circumstances, three classes of free-standing financial instruments that
embody obligations of the issuer. Generally, SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and is
otherwise effective for interim periods beginning after June 15, 2003. For
mandatorily redeemable financial instruments of a nonpublic entity, as defined
by SFAS 150, the statement is effective for fiscal periods beginning after
December 15,
2003. In the opinion of management, the Company meets the nonpublic
entity criteria of SFAS 150. As a result, the Company will reflect its Senior
Preferred Stock (Redeemable) as long-term debt on its consolidated balance
sheets F-11




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) and the related dividends and accretion as interest expense in its
consolidated statements of operations beginning in fiscal 2004. (2) Inventories A summary of inventories, net of valuation allowance, follows (in
thousands): End of fiscal2002
    
    2003Raw materials
    
    $
    14,580
    
    
    $
    15,508Packaging materials
    
    
    23,217
    
    
    
    23,237Finished goods
    
    
    30,731
    
    
    
    34,23568,528
    
    
    
    72,980Allowances
    
    
    (4,897
    )
    
    
    (4,361
    )Total
    
    $
    63,631
    
    
    $
    68,619
 (3) Property, Plant and Equipment A summary of property, plant and equipment follows (in thousands): End of fiscal2002
    
    2003Land
    
    $
    11,136
    
    
    $
    11,415Buildings and improvements
    
    
    90,444
    
    
    
    100,661Machinery and equipment
    
    
    243,738
    
    
    
    292,682Construction in progress
    
    
    14,465
    
    
    
    13,333359,783
    
    
    
    418,091Less: Accumulated depreciation
    
    
    (99,691
    )
    
    
    (151,634
    )Total
    
    $
    260,092
    
    
    $
    266,457
 (4) Goodwill and Trademarks A summary of goodwill and trademarks follows (in thousands): End of fiscal2002
    
    2003Goodwill
    
    $
    303,058
    
    
    $
    318,656Trademarks
    
    
    60,022
    
    
    
    61,762Total
    
    $
    363,080
    
    
    $
    380,418
 F-12




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (5) Accrued Liabilities A summary of accrued liabilities follows (in thousands): End of fiscal2002
    
    2003Rebates and promotions
    
    $
    14,465
    
    
    $
    15,033Interest
    
    
    5,620
    
    
    
    12,591Compensation
    
    
    12,868
    
    
    
    10,765Derivative instruments
    
    
    8,196
    
    
    
    370Other
    
    
    14,964
    
    
    
    12,960Total
    
    $
    56,113
    
    
    $
    51,719
 (6) Long-Term Debt and Liquidity A summary of long-term debt follows (in thousands): End of fiscal2002
    
    2003Revolving credit facility
    
    $
    15,000
    
    
    $
    16,000Term loan facilities
    
    
    340,924
    
    
    
    169,322Senior notes
    
    
    
    
    
    
    210,779Senior subordinated notes
    
    
    148,430
    
    
    
    148,789Debt of foreign subsidiaries
    
    
    17,950
    
    
    
    14,674Industrial development revenue bonds
    
    
    14,471
    
    
    
    14,482Sponsor facility
    
    
    17,245
    
    
    
    554,020
    
    
    
    574,046Less: Current maturities
    
    
    (5,720
    )
    
    
    (13,185
    )Total
    
    $
    548,300
    
    
    $
    560,861
 Current maturities of long-term debt at the end of fiscal 2002 reflect the
refinancing in February 2003. Senior Notes Effective February 28, 2003, the Company issued $213.0 million in
aggregate principal amount of 10 3⁄4% senior unsecured notes due March 1, 2010
at a price of 98.8% of par with interest payable semi-annually on March 1 and
September 1 of each year, commencing on September 1, 2003. The senior unsecured
notes are general unsecured obligations and are subordinated in right of
payment to all senior secured indebtedness and senior in right of payment to
any current or future indebtedness of the Company that, by its terms, is
subordinated to the senior unsecured notes. The payments of obligations of each
subsidiary guarantor are subordinated to the payment of senior indebtedness of
such subsidiary guarantor. The Company may redeem the senior unsecured notes at any time on or after
March 1, 2007, in whole or in part, at the option of the Company, at the
redemption prices set forth below, plus accrued and unpaid interest, if any, to
the redemption date: F-13




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Years
    
    Percentage2007
    
    
    105.375
    %2008
    
    
    102.688
    %2009 and thereafter
    
    
    100.000
    %
 At any time prior to March 1, 2007, the senior unsecured notes may also be
redeemed in whole, but not in part, at the option of the Company upon the
occurrence of a Change in Control (as defined in the Note Indenture) at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium (as defined in the Note Indenture) and the unpaid accrued
interest, if any, to the date of redemption. Upon a Change in Control, holders
of the senior unsecured notes may require the Company to purchase all or a
portion of the senior unsecured notes at a purchase price equal to 101% of
their principal amount plus accrued interest, if any. Before March 1, 2007, up
to 35% of the senior unsecured notes may also be redeemed at the option of the
Company with the proceeds of one or more equity offerings of our common stock
at a purchase price equal to 110.75% of their principal amount plus accrued
interest, if any. In connection with certain asset dispositions, the Company
may be required to use the proceeds from those asset dispositions to make an
offer to repurchase the notes at 100% of their principal amount plus accrued
interest, if any, if the proceeds are not otherwise used to repay senior
secured indebtedness or to repay indebtedness under our senior credit facility
or to invest in assets related to our business. The senior unsecured notes
have certain covenants that have restrictions on dividends, distributions,
indebtedness, affiliate transactions and lines of business. Bank Loans In May 2000, the Company entered into a new senior credit facility with a
syndicate of banks and other institutional investors, as lenders, and JPMorgan
Chase Bank, as administrative agent, as amended in March 2001, March 2002,
February 2003 and March 2004, referred to as the Amended Credit Facility. The Company has pledged substantially all of its assets as collateral to secure its indebtedness under the senior credit facility. Effective February 28, 2003, the Company amended its senior credit
facility concurrent with the issuance of the 10 3⁄4% senior notes described
above. This amendment provided for, among other things (1) issuance of the
10 3⁄4% senior notes and repayment of the Sponsor Facility; (2) repayment of a
portion of the Term Loan Facilities and Revolving Credit Facility under the
Companys senior credit facility in order of forward maturity; (3) less
restrictive covenants on capital expenditures, investments and other
activities; (4) elimination of certain financial covenants and revision of
other financial covenants; (5) elimination of the Excess Leverage Fee; (6)
elimination of the fixed rate debt percentage requirement; and (7) permanent
reduction of the Revolving Credit Facility from $75.0 million to $60.0 million. 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-compliance with certain financial covenants at 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. As of the end of fiscal 2003 after taking into consideration the March 9,
2004 amendment, the Companys senior credit facility provided for total
commitments of a Euro 30.1 million Euro Term Loan Facility ($37.6 million
assuming a Euro to USD exchange rate of 1.2495) and $181.7 million, consisting
of a $131.7 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 fiscal 2003, all loans under the Companys senior credit
facility bore interest at the higher of the Euro dollar rate plus 4.75%, or the
prime rate of the administrative agent plus 3.75%, until maturity. As of the
end of fiscal 2003, the Euro Term Loan Facility bore interest at 6.95%, the USD
Term Loan Facility bore interest at F-14




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 5.94% and the Revolving Credit Facility bore interest at 7.75%. Effective
March 9, 2004, 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
administration agent plus 4.00%. These rates will increase 0.25% on September
30, 2004 and 1.00% on March 31, 2005. In connection with the repayments made by the Company on its senior credit
facility concurrent with the issuance of the 10 3⁄4% senior notes and
repayment of the Sponsor Facility as described above, the Company incurred a
loss from debt extinguishment in the first quarter of fiscal 2003 of $11.1
million. This pre-tax charge included: (1) a $4.0 million write-off of
deferred financing costs, primarily related to the Companys senior credit
facility; (2) a charge of $7.6 million for the accretion of the 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 the 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. In the third quarter of fiscal 2003, the Company made a $15.0 million
optional prepayment on its senior credit facility. The prepayment was applied
ratably to the Euro Term Loan Facility and the USD Term Loan Facility and has
been reflected in the maturities schedule below. In connection with the
prepayment, the Company recorded a loss on debt extinguishment of $1.0 million
consisting of (1) $0.7 million realized foreign currency translation loss as a
result of retiring a portion of the Euro Term Loan Facility and (2) $0.3
million write-off of a pro-rata percentage of deferred financing costs
associated with the senior credit facility. 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. The Companys senior
credit facility, including the financial covenants, was amended in February
2003 concurrently with the sale of its senior notes and was last amended on 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, without further price increases, current
commodity prices may affect the Companys results of operations and cash flows
to an extent that it may not be able to comply with these covenants. If the
Company is unable to negotiate an amendment to secure a waiver from its lenders
for any potential default, it could result in an event of default under its
senior credit facility and permit a majority of the lenders to accelerate
outstanding debt under its senior credit facility and permit a majority of its
lenders under its Revolving Credit Facility to terminate the Companys revolving
credit commitment (without acceleration of such debt) and seize the cash in its
operating accounts. Such acceleration would result in cross-defaults under the
Companys senior notes and senior subordinated notes. Sponsor Facility The sponsor facility, or the Sponsor Facility, was a senior unsecured loan
bearing interest at 15.0%. The Parent issued warrants in connection with the
Sponsor Facility that gave the warrantholders the right to purchase 30.0% of
the outstanding stock of the Parent for a nominal amount. The cash proceeds of
$25.0 million were allocated between the warrants and the Sponsor Facility,
based on their relative fair values. As a result, $8.4 million was allocated to
the warrants and recognized as a capital contribution from the Parent in the
accompanying consolidated statement of stockholders equity and comprehensive
income (loss). In February 2003, in connection with the senior note
offering, the Company repaid the Sponsor Facility and accrued interest in full. Senior Subordinated Notes On November 12, 1998, the Company issued $150.0 million in aggregate
principal amount of its 9 3⁄4% Senior Subordinated Notes due May 15, 2007 with
interest payable semi-annually. The senior subordinated notes were F-15




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DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) issued at a discount that is being amortized as interest expense on a
straight-line basis over the term of the notes. The senior subordinated notes
are general unsecured obligations and are subordinated in right of payment to
all senior indebtedness and senior in right of payment to any current or future
indebtedness of the Company that, by its terms, is subordinated to the senior
subordinated notes. The payment of obligations of each subsidiary guarantor are
subordinated to the payment of senior indebtedness of such subsidiary
guarantor. The senior subordinated notes have certain covenants that have
restrictions on dividends, distributions, indebtedness, affiliate transactions
and lines of business. The Company may redeem the senior subordinated notes at any time, in whole
or in part, at the option of the Company, at the redemption prices set forth
below, plus accrued and unpaid interest, if any, to the redemption date: Years
    
    Percentage2004
    
    
    101.625
    %2005 and thereafter
    
    
    100.000
    %
 Industrial Development Revenue Bonds On March 12, 1997, the Company issued $6.0 million of 7.25% Ottawa County
Finance Authority Industrial Development Revenue Bonds, or the Miami Bonds. The
Miami Bonds are subject to mandatory redemption, under certain circumstances,
prior to maturity at a redemption price of 110% of the principal amount
thereof, plus accrued interest to the redemption date, in varying principal
amounts on June 1 of each year from 2007 through 2017. The Miami Bonds are
senior secured obligations of the Company and effectively rank senior to the
Companys unsecured debt to the extent of the value of the assets that serve as
collateral and otherwise rank on a parity in right of payment with all other
senior indebtedness of the Company. On July 24, 1998, the Company issued $9.0 million of 6.25% Oklahoma
Development Finance Authority Industrial Development Revenue Bonds, Series
1998, or the Clinton Bonds, through the Oklahoma Development Finance Authority.
The Clinton Bonds are subject to mandatory redemption prior to maturity, under
certain circumstances, at a redemption price of 105% of the principal amount
thereof, plus accrued interest to the redemption date, in varying principal
amounts on July 15 of each year from 2018 through 2023. The Clinton Bonds are
senior secured obligations of the Company and effectively rank senior to the
Companys unsecured debt to the extent of the value of the assets that serve as
collateral and otherwise rank on a parity in right of payment with all other
senior indebtedness of the Company. On July 24, 1998, the Clinton Bonds were
purchased by the Companys wholly-owned subsidiary, DPC Investment Corp., which sold the bonds on May 6, 1999 at a net price of $8.7
million. Debt of Foreign Subsidiaries Debt of foreign subsidiaries as of the end of fiscal 2001 consisted of
peseta, or ESP, denominated borrowings for which the HSBC Branch in Spain was the facility agent. As of the end of fiscal 2001, the borrowings were comprised of
Tranche A of $5.7 million (ESP 1,069 million) outstanding and amortizing
semi-annually until maturity in April 2005 and Tranche B of
$3.0 million (ESP
554 million) outstanding and payable in full in April 2006. The interest rates
were 5.78% on Tranche A and 6.78% on Tranche B at the end of fiscal 2001, and
adjust with changes in MIBOR (Madrid Inter-Bank Offer Rate). The peseta denominated loan was refinanced in fiscal 2002. The new loan is
with FIH (Finansierings Instituttet for Industri og Handvaerk A/S), a Danish
lender, and denominated in Euro. As of the end of fiscal 2003, the outstanding
balance was Euro 7.8 million ($9.8 million assuming a Euro to USD exchange rate
of 1.2495). The loan amortizes evenly on a quarterly basis until the final
maturity in 2008. The interest rate on the loan was 5.4% at the end of fiscal
2002 and 2003 and is fixed at this rate until the end of the third year, at
which point it resets to the then current three year rate plus interest margin. F-16




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Debt of foreign subsidiaries also consists of Danish Krona, or DKK,
denominated borrowings from various financial institutions of DKK 37.5 million
as of the end of fiscal 2002 and DKK 28.7 million as of the end of fiscal 2003
($5.3 million and $4.8 million, respectively, assuming DKK to USD exchange
rates of 7.0820 and 5.9579, respectively). These borrowings are comprised of
both fixed and variable rate loans with interest rates ranging from 4.14% to
7.80% and maturity dates ranging from 2004 to 2014. Annual Maturities of Long-Term Debt A summary of the annual maturities of long-term debt as of the end of
fiscal 2003 after taking into consideration the March 9, 2004 amendment to the
senior credit facility follows (in thousands): Maturities by fiscal year2009 andFinal maturity
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    thereafter
    
    TotalSenior credit facility:Revolving credit facility
    
    December 29, 2005
    
    $
    
    
    
    $
    16,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    16,000Euro term loan facility
    
    December 30, 2005
    
    
    
    
    
    
    37,613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,613USD term loan facility:Tranche A
    
    March 31, 2005
    
    
    8,952
    
    
    
    4,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,539Tranche B
    
    December 31, 2005
    
    
    
    
    
    
    79,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,102Tranche C
    
    December 31, 2006
    
    
    
    
    
    
    
    
    
    
    39,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,068Subtotal
    
    
    
    
    
    
    8,952
    
    
    
    137,302
    
    
    
    39,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185,322Senior notes
    
    March 1, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210,779
    
    
    
    210,779Senior subordinated notes
    
    May 15, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148,789
    
    
    
    
    
    
    
    
    
    
    
    148,789Other
    
    Various
    
    
    4,233
    
    
    
    3,690
    
    
    
    2,506
    
    
    
    2,857
    
    
    
    1,218
    
    
    
    14,652
    
    
    
    29,156Total
    
    
    
    
    
    $
    13,185
    
    
    $
    140,992
    
    
    $
    41,574
    
    
    $
    151,646
    
    
    $
    1,218
    
    
    $
    225,431
    
    
    $
    574,046
 (7) Senior Preferred Stock (Redeemable) The Senior Preferred Stock has an initial liquidation preference of $25
per share (aggregate initial liquidation preference is $30.0 million). The
Senior Preferred Stock was recorded at the net proceeds of $17.1 million at
October 5, 1995 after deducting $12.9 million paid to the Company for 1,354,478
warrants of Parent, which were issued in conjunction with the Senior Preferred
Stock. The excess of the liquidation preference over the carrying value is
being accreted quarterly by a direct reduction to retained earnings over a
12-year period that ends September 30, 2007. Dividends on the Senior Preferred Stock are payable quarterly at the rate
of 14.25% per annum on the most recent quarterly liquidation value of each
share. Dividends on the Senior Preferred Stock accrete to the liquidation value
of the Senior Preferred Stock. The Company has not paid dividends in cash or
additional shares of Senior Preferred Stock since the initial issuance of the
Senior Preferred Stock. Cumulative dividends on Senior Preferred Stock that
had not been paid at the end of fiscal 2002 and 2003 were $52.6 million and
$65.1 million, respectively, and are included in the carrying amount of the
Senior Preferred Stock in the accompanying consolidated balance sheets. As of the
end of fiscal 2002 and 2003, the cumulative accretion to redemption value on
the Senior Preferred Stock was $7.8 million and $8.9 million, respectively. The Company may, at its option, redeem the Senior Preferred Stock, in
whole or in part, at redemption prices per share, together with accrued and
unpaid dividends as follows: F-17




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Percentage ofYears beginning
    
    liquidationSeptember 30,
    
    value2004
    
    
    101.425
    %2005
    
    
    100.000
    %2006
    
    
    100.000
    %
 The Company is required to redeem all outstanding shares of Senior
Preferred Stock on September 30, 2007 at 100% of the liquidation value at this
date, together with accrued and unpaid dividends. As of the end of
fiscal 2003, the Company had outstanding $95.1 million of
current redemption value, excluding future dividends, for its senior
preferred stock which has a scheduled redemption date of
September 30, 2007. In the event of a Change of Control, as defined, the holders of Senior
Preferred Stock have the right to require the Company to redeem such Senior
Preferred Stock, in whole or in part, at a price equal to 101% of liquidation
value at the Change of Control date together with any unpaid dividends. The terms of the Senior Preferred Stock prohibit (1) the payment of
dividends on securities ranking on parity with or junior to the Senior
Preferred Stock; and (2) redemption, repurchase or acquisition of any Junior
Securities with certain exceptions, in each case, unless full cumulative
dividends have been paid on the Senior Preferred Stock. Holders of the Senior Preferred Stock have limited voting rights customary
for preferred stock and the right to elect two additional directors to the
Companys board of directors upon certain events such as the Company failing to
declare and pay dividends on any six consecutive dividend payment dates. Upon adoption of SFAS 150, the Company will reflect its Senior Preferred
Stock in long-term debt on its consolidated balance sheets and the related
dividends and accretion as interest expense in its consolidated statements of
operations beginning in fiscal 2004. (8) Fair Value of Financial Instruments A summary of the estimated fair value of financial instruments, other than
current assets and liabilities, follows (in thousands): End of fiscal 2002
    
    End of fiscal 2003Estimated
    
    
    
    
    
    EstimatedBook value
    
    fair value
    
    Book value
    
    fair valueDebt  liability:Revolving credit facility
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    16,000
    
    
    $
    16,000Term loan facilities
    
    
    340,924
    
    
    
    328,138
    
    
    
    169,322
    
    
    
    169,766Senior notes
    
    
    
    
    
    
    
    
    
    
    210,779
    
    
    
    219,210Senior subordinated notes
    
    
    148,430
    
    
    
    118,744
    
    
    
    148,789
    
    
    
    133,910Sponsor facility
    
    
    17,245
    
    
    
    16,598
    
    
    
    
    
    
    
    Other
    
    
    32,421
    
    
    
    32,421
    
    
    
    29,156
    
    
    
    29,156$
    554,020
    
    
    $
    510,901
    
    
    $
    574,046
    
    
    $
    568,042Derivative instruments and
hedges  asset (liability):Commodities
    
    $
    (5,730
    )
    
    $
    (5,730
    )
    
    $
    1,395
    
    
    $
    1,395Interest rate
    
    
    (2,181
    )
    
    
    (2,181
    )
    
    
    
    
    
    
    Foreign currency
    
    
    (178
    )
    
    
    (178
    )
    
    
    
    
    
    
    
 The fair value of debt is, where available, based on the traded market
price on the date closest to the Companys year end. The Company considers the Revolving Credit Facility and other
long-term debt, as recorded in the F-18




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) accompanying consolidated balance sheets, to
approximate fair value. The Company periodically uses interest rate swap and cap contracts to seek
to manage its exposure to the interest rate risk associated with its domestic
floating rate debt, which was $355.9 million and $185.3 million at the end of
fiscal 2002 and 2003, respectively. At the end of fiscal 2002, $110.0 million
of the Companys domestic floating rate debt was hedged by interest rate swap
and cap contracts. The Company had a cumulative unrealized loss of $2.2
million, or $1.3 million net of deferred tax benefit, at the end of fiscal
2002. At the end of fiscal 2003, the Company had no open interest rate swap
or cap contracts. As of the end of fiscal 2002, the Company had a foreign currency forward
contract with a notional value of $3.1 million and a fair value loss of $0.2
million that was recognized in the accompanying consolidated statements of
operations. At the end of fiscal 2003, the Company had no open foreign
currency forward contracts. (9) Common Stock of Parent The Parents common stock consists of two classes, Class A Common Stock
and Class B Common Stock. The Class A and Class B Common Stock are identical
except the Class B Common Stock has no voting rights. The Class B Common Stock
is convertible into shares of Class A Common Stock at any time at the option of
the holder thereof. Each holder of Class A Common Stock is entitled to one vote
for each share of Class A Common Stock held of record on all matters submitted
to a vote of stockholders. The holders of Class A Common Stock do not have
cumulative voting rights in the election of directors to the Parents board of
directors. The holders of Common Stock have no preemptive, subscription,
redemptive or conversion rights, except that holders of Class B Common Stock
may at their option, convert their shares into Class A Common Stock. (10) Stock Option Plan of Parent Effective November 1, 1996, Parent adopted its 1996 Stock Option Plan, as
amended. Certain employees of the Company are covered under this plan. Each
stock option granted under this plan allows for the purchase of one share of
Parents Class A common stock. Under the 1996 Stock Option Plan, options
covering 594,200 and 442,200 shares were outstanding as of the end of fiscal
2002 and 2003, respectively. On July 14, 1999, Parent adopted the 1999 Stock Incentive Plan. In
connection with the adoption of the 1999 Stock Incentive Plan, no new grants
could be made under the 1996 Stock Option Plan. Effective October 31, 2001, Parent approved the repricing of all vested
and unvested stock options under the 1996 Stock Option Plan and the 1999 Stock
Incentive Plan that had an exercise price exceeding $2.50 per share. All such
eligible stock options were given a new exercise price of $2.50 per share and
the vesting period was re-started. The repricing involved a surrender of the
eligible stock options in exchange for a grant of new stock options covering an
equivalent number of shares at the new exercise price. Stock options covering
a total of 1,516,300 shares were granted at the $2.50 per share exercise price,
and all such grants were made under the 1999 Stock Incentive Plan and are
accounted for as variable plan awards. Since the fair value of Parents Class
A common stock was less than $2.50 per share at the end of fiscal 2001 and
2003, no compensation expense was recorded in fiscal 2001 or 2003 on the
variable plan awards. While the estimated fair value of the Parents Class A
common stock exceeded $2.50 per share at the end of fiscal 2002, the
compensation expense in fiscal 2002 was minimal. All of the grants have a
time-vesting schedule pursuant to which 50% of an individuals stock options
will vest two years after the grant date, 25% will vest after the third year,
and the remaining 25% will vest after the fourth year. Under the 1999 Stock
Incentive Plan, 4,200,000 shares are authorized for issuance, and at the end of
fiscal 2002 and 2003, options covering 3,209,800 and 3,788,150 shares,
respectively, had been granted and remained outstanding. The Company and its Parent have elected to continue to follow APB Opinion
No. 25, Accounting for Stock Issued to Employees, or APB Opinion No. 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 income
(loss) for fiscal 2001, 2002 and 2003 would
have been reduced as follows (in thousands): F-19




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Fiscal2001
    
    2002
    
    2003Net income (loss) available to common shares
    
    $
    (32,405
    )
    
    $
    3,393
    
    
    $
    (67,932
    )Less: Total stock-based employee
compensation expense determined based on
the fair value method for all awards,
net of income tax expense (benefit)
    
    
    896
    
    
    
    (128
    )
    
    
    (8
    )Pro forma net income (loss) available to common shares
    
    $
    (31,509
    )
    
    $
    3,265
    
    
    $
    (67,940
    )
 In fiscal 2001, the pro forma net loss available to common shares is lower
than the net loss available to common shares primarily due to the reversal of
compensation expense associated with unvested stock options cancelled during
fiscal 2001. Pro forma information regarding net income (loss) and basic and
diluted net income (loss) available to common shares 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
5.02%, 3.60% and 3.70% for fiscal 2001, 2002 and 2003, respectively, 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. (11) Accumulated Other Comprehensive Income (Loss) A summary of accumulated other comprehensive income (loss) follows (in
thousands): Unrealized and
    
    Accumulated otherForeign currency
    
    Minimum pension
    
    realized gains (losses),
    
    comprehensivetranslation
    
    liability
    
    net
    
    income (loss)Balances at end of fiscal 2000
    
    $
    1,035
    
    
    $
    
    
    
    $
    283
    
    
    $
    1,318Other comprehensive loss
    
    
    (7,352
    )
    
    
    
    
    
    
    (1,573
    )
    
    
    (8,925
    )Balances at end of fiscal 2001
    
    
    (6,317
    )
    
    
    
    
    
    
    (1,290
    )
    
    
    (7,607
    )Other comprehensive income (loss)
    
    
    22,792
    
    
    
    (5,584
    )
    
    
    (43
    )
    
    
    17,165Balances at end of 2002
    
    
    16,475
    
    
    
    (5,584
    )
    
    
    (1,333
    )
    
    
    9,558Other comprehensive income
    
    
    38,725
    
    
    
    569
    
    
    
    1,333
    
    
    
    40,627Balances at end of fiscal 2003
    
    $
    55,200
    
    
    $
    (5,015
    )
    
    $
    
    
    
    $
    50,185
 (12) Operating Leases The Company leases certain facilities, machinery and equipment under
operating lease agreements with varying terms and conditions. A summary of the
future annual minimum lease payments under these leases follows (in thousands): MinimumYears ending
    
    annual payments2004
    
    $
    4,8212005
    
    
    4,6592006
    
    
    2,5942007
    
    
    1,9282008
    
    
    1,9142009 and thereafter
    
    
    1,227
 F-20




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Rent expense was $5.8 million, $6.0 million and $7.2 million for fiscal
2001, 2002 and 2003, respectively. (13) Other Operating and Project Focus Implementation Expenses In October 2001, the Company initiated a new market and operational
strategy, or Project Focus, designed to provide more focused service to its
customers by simplifying and distinguishing its product offerings and
associated pricing, improving its planning and marketing support services, and
reducing the complexity of its operations. The Company has permanently reduced
its cost structure by streamlining its available product offerings, optimizing
its production facilities and reducing its workforce. In connection with
Project Focus, the Company closed one manufacturing facility and reduced its
corporate workforce, resulting in the termination of 45 employees in the fourth
quarter of fiscal 2001. The Company recognized Project Focus related costs of
$10.2 million, consisting of $2.0 million of restructuring charges and $8.2
million of implementation expenses. The major components of these charges are
included in the table below. A summary of other operating and Project Focus implementation expenses
follows (in thousands): Fiscal year2001
    
    2002
    
    2003Other operating expenses:Divestitures
    
    $
    4,660
    
    
    $
    
    
    
    $
    Transaction costs
    
    
    
    
    
    
    1,447
    
    
    
    Restructuring costs:Asset impairments
    
    
    618
    
    
    
    
    
    
    
    7,727Plant closure costs
    
    
    541
    
    
    
    
    
    
    
    Severance
    
    
    2,836
    
    
    
    
    
    
    
    Revisions to estimates
    
    
    
    
    
    
    
    
    
    
    (500
    )Total restructuring costs
    
    
    3,995
    
    
    
    
    
    
    
    7,227Total other operating expenses
    
    
    8,655
    
    
    
    1,447
    
    
    
    7,227Project Focus implementation expenses:Allowances for inventories
    
    
    6,609
    
    
    
    
    
    
    
    Allowances for accounts receivable
    
    
    1,639
    
    
    
    
    
    
    
    Total Project Focus implementation expenses
    
    
    8,248
    
    
    
    
    
    
    
    Total other operating expenses and Project
Focus implementation expenses
    
    $
    16,903
    
    
    $
    1,447
    
    
    $
    7,227
 Divestitures On April 27, 2001, the Company sold its Perham, Minnesota dry dog and cat
food facility and related assets, including the Tuffys brand, for $7.0
million. On May 3, 2001, the Company sold its Deep Run domestic wet pet food
business and related assets, other than real estate, for $13.9 million
(collectively, the Divestitures). The Company recognized a $4.7 million net
loss on the sale of these businesses. F-21




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Transaction Costs Fiscal 2002 transaction costs of $1.4 million included a $0.8 million
charge related to the write-off of costs for the Companys postponed bond
offering and a $0.6 million charge related to the Companys abandoned European sale
process. Restructuring Costs Fiscal 2001 restructuring costs included: (1) severance costs of $2.0
million for the elimination of corporate positions following the Divestitures,
$0.8 million for additional corporate headcount reductions in connection with
Project Focus and $0.2 million for restructuring at the Companys foreign
operations; (2) asset impairment costs, primarily related to property, plant
and equipment, associated with the closure of a manufacturing and distribution
facility in connection with Project Focus; and (3) related plant shutdown
expenses of $0.4 million for this facility closure. These 2001 restructuring
costs were offset by adjustments to previously accrued restructuring charges. The Company terminated 330 employees in fiscal 2001 as a
result of plant closings and corporate headcount reductions. Fiscal 2003 net restructuring costs included asset impairments relating to the Vrä,
Denmark facility, asset impairments relating to the Crona manufacturing facility in Tver, Russia and the Company's revised estimates to previously
accrued restructuring costs.  In December 2003, the Company finalized its plans, which the Company refers to as Project 3-to-2, to consolidate the
production and most of the equipment from the manufacturing facility in Vrä, Denmark into its facility in Esbjerg, Denmark and its recently expanded
facility in Carat, Austria during fiscal 2004.  As a result, the Company will close the Vrä facility in fiscal 2004, which will result in a net workforce
reduction of approximately 40 employees.  In conjunction with Project 3-to-2, the Company evaluated the long-lived assets of the Vrä facility and
recorded asset impairments of $5.3 million in the fourth quarter of fiscal 2003 for the building and certain equipment
that the Company anticipates will not be utilized, but instead disposed of or sold.  In January 2004, the Company divested its 51% interest in
Crona, which owns a manufacturing facility in Tver, Russia.  In the fourth quarter of fiscal 2003, the Company evaluated the net assets of this
facility for impairment and recorded asset impairments of $2.4 million.  Finally, the Company had net positive revisions of $0.5 million to estimates of
previously accrued restructuring costs primarily
related to plant closures in prior years. A rollforward of the Companys accrued restructuring costs for fiscal
2001, 2002 and 2003 follows (in thousands): Balance at end of fiscal 2000
    
    $
    4,605Restructuring costs:Plant closure costs
    
    
    541Severance
    
    
    2,836Total restructuring costs
    
    
    3,377Cash payments
    
    
    (3,198
    )Balance at end of fiscal 2001
    
    
    4,784Cash payments
    
    
    (2,032
    )Balance at end of fiscal 2002
    
    
    2,752Revisions to estimates of accrued restructuring costs
    
    
    (500
    )Cash payments and other
    
    
    (1,098
    )Balance at end of fiscal 2003
    
    $
    1,154
 The Company expects to payout the remainder of its accrued restructuring
costs in fiscal 2004. F-22




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Project Focus Implementation Expenses Project Focus implementation expenses in fiscal 2001 consist of valuation
allowances against packaging inventories and accounts receivable associated
with SKU reduction and customer mix shift. These expenses totaling $8.2
million are in addition to the $2.0 million of other operating expenses
discussed above and were classified in the accompanying consolidated statements
of operations as follows: (1) $0.3 million as a reduction in net sales; (2)
$6.6 million as cost of goods sold; (3) $0.9 million as promotion and
distribution expenses; and (4) $0.4 million as selling, general and
administrative expenses. (14) Income Taxes A summary of income tax expense (benefit) follows (in thousands): Fiscal year2001
    
    2002
    
    2003Current:Federal
    
    $
    
    
    
    $
    (625
    )
    
    $
    State and local
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    1,911
    
    
    
    1,153
    
    
    
    1,395Total current tax expense
    
    
    1,911
    
    
    
    528
    
    
    
    1,395Deferred:Federal
    
    
    (11,130
    )
    
    
    2,603
    
    
    
    19,740State and local
    
    
    (1,952
    )
    
    
    363
    
    
    
    3,600Foreign
    
    
    (5,000
    )
    
    
    (1,708
    )
    
    
    304Total deferred tax expense (benefit)
    
    
    (18,082
    )
    
    
    1,258
    
    
    
    23,644Total income tax expense (benefit)
    
    $
    (16,171
    )
    
    $
    1,786
    
    
    $
    25,039
 A summary of income (loss) before income taxes by domestic and foreign
source follows (in thousands): Fiscal year2001
    
    2002
    
    2003Domestic
    
    $
    (20,852
    )
    
    $
    22,404
    
    
    $
    (11,266
    )Foreign
    
    
    (17,257
    )
    
    
    (5,347
    )
    
    
    (18,125
    )$
    (38,109
    )
    
    $
    17,057
    
    
    $
    (29,391
    )
 Income tax expense (benefit) differs from the amount computed by applying
the U.S. federal statutory rate of 35.0% to pre-tax income (loss) as follows
(in thousands): Fiscal year2001
    
    2002
    
    2003Computed expected federal tax expense (benefit)
    
    $
    (13,338
    )
    
    $
    5,970
    
    
    $
    (10,287
    )State and local tax expense
    
    
    (1,269
    )
    
    
    236
    
    
    
    2,340Foreign tax expense (benefit)
    
    
    (2,776
    )
    
    
    (4,462
    )
    
    
    1,271Non-deductible amortization of goodwill
    
    
    1,156
    
    
    
    
    
    
    
    Meals and entertainment, and other
    
    
    56
    
    
    
    42
    
    
    
    84Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    31,631$
    (16,171
    )
    
    $
    1,786
    
    
    $
    25,039
 A summary of the income tax effects of temporary differences that give
rise to significant portions of the
deferred tax assets and liabilities follows (in thousands): F-23




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

End of fiscal2002
    
    2003Current deferred tax assets:Accounts receivable, net
    
    $
    1,183
    
    
    $
    683Inventories, net
    
    
    801
    
    
    
    1,255Accrued liabilities and other allowances
    
    
    3,875
    
    
    
    2,860Valuation allowance
    
    
    
    
    
    
    (2,900
    )Net current deferred tax asset
    
    $
    5,859
    
    
    $
    1,898Noncurrent deferred tax assets (liabilities):Net operating loss carryforwards
    
    $
    30,392
    
    
    $
    49,543Property, plant and equipment
    
    
    (19,239
    )
    
    
    (24,393
    )Goodwill and other intangible assets
    
    
    (21,616
    )
    
    
    (22,747
    )Accumulated other comprehensive income
    
    
    4,405
    
    
    
    3,194Foreign assets
    
    
    10,906
    
    
    
    14,257Foreign liabilities


    (11,989
)


    (8,676
)Other
    
    
    486
    
    
    
    498Valuation allowance
    
    
    (606
    )
    
    
    (40,200
    )Net noncurrent deferred tax liability
    
    
    (7,261
    )
    
    
    (28,524
    )Total net deferred tax liability
    
    $
    (1,402
    )
    
    $
    (26,626
    ) In assessing the realizable value of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which these temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Due
primarily to the magnitude of the operating losses in fiscal 2003, coupled with
the variability of our historical earnings, we determined that we no longer met
the more likely than not recoverability criteria necessary to recognize
deferred tax assets, except for those assets which will be recovered through
known reversals of deferred tax liabilities. As
of the end of fiscal 2003, the Company had federal net operating loss
carryforwards of $126.5 million, that are available to offset future taxable
income through 2023. The deferred tax assets resulting from the Companys
federal and state net operating loss carryforwards totaled $49.5 million. The
Companys foreign subsidiaries had net operating loss carryforwards of $2.2
million, which resulted in a deferred tax asset of $0.7 million. The Company
has a valuation allowance of $43.1 million against its foreign and domestic
deferred tax assets. The
Company does not provide deferred income taxes on undistributed
earnings of its foreign operations, as such earnings are considered to be permanently invested.
Cumulative undistributed earnings of foreign operations were $18.7 million and $18.2 million as of the end of fiscal 2002 and 2003, respectively. A deferred tax liability will be recognized when the Company is no longer able to demonstrate that it plans to permanently reinvest
undistributed earnings. (15) Employee Benefit Plans Pension Plans The Company had a defined benefit, non-contributory pension plan covering
hourly and salaried employees of the former Hubbard Milling Company, 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
was 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 F-24




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Companys only active pension plan covers 50 union employees at one of its
facilities. The pension plan information below has been determined based on
the calendar years ending December 31, 2001, 2002 and 2003. Under federal law, the Company was not required to make any cash
contributions to its inactive plan in fiscal 2001, 2002 and 2003. The
Companys contributions to its active plan in fiscal 2001, 2002 and 2003 were
less than $0.1 million each year. The Company expects to contribute
approximately $0.1 million to its active plan in fiscal 2004. A summary of the benefit obligations and funded status for the Companys
pension plans follows (in thousands): Fiscal2002
    
    2003Change in benefit obligation:Benefit obligation, beginning of year
    
    $
    15,189
    
    
    $
    16,485Service cost
    
    
    20
    
    
    
    29Interest cost
    
    
    1,104
    
    
    
    1,072Benefits paid
    
    
    (1,175
    )
    
    
    (1,273
    )Actuarial loss
    
    
    1,347
    
    
    
    848Amendments
    
    
    
    
    
    
    101Benefit obligation, end of year
    
    
    16,485
    
    
    
    17,262Change in plan assets:Fair value of plan assets, beginning of year
    
    
    18,301
    
    
    
    15,406Employer contributions
    
    
    48
    
    
    
    140Actual return (loss) on plan assets
    
    
    (1,770
    )
    
    
    2,289Benefits paid
    
    
    (1,173
    )
    
    
    (1,273
    )Fair value of plan assets, end of year
    
    
    15,406
    
    
    
    16,562Funded status
    
    
    (1,079
    )
    
    
    (700
    )Unrecognized net loss
    
    
    9,140
    
    
    
    8,209Unrecognized prior service cost
    
    
    81
    
    
    
    173Unrecognized transition obligation
    
    
    57
    
    
    
    53Net amount recognized
    
    $
    8,199
    
    
    $
    7,735
 A summary of the amounts recognized in the accompanying consolidated
balance sheets follows (in thousands): End of fiscal2002
    
    2003Accrued benefit cost
    
    $
    (1,079
    )
    
    $
    (700
    )Intangible asset
    
    
    138
    
    
    
    226Accumulated other comprehensive loss
    
    
    9,140
    
    
    
    8,209Net amount recognized
    
    $
    8,199
    
    
    $
    7,735
 F-25




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) A summary of the Companys benefit obligation in excess of the fair value
of plan assets follows (in thousands): End of fiscal2002
    
    2003Projected benefit obligation
    
    $
    16,485
    
    
    $
    17,262Accumulated benefit obligation
    
    
    16,485
    
    
    
    17,262Fair value of plan assets
    
    
    15,406
    
    
    
    16,562
 A summary of weighted-average assumptions used by the Company to determine
benefit obligations as of the end of the year follows: End of fiscal2002
    
    2003Discount rate
    
    
    6.75
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    N/A
    
    
    
    N/A
 A summary of net periodic pension (income) cost for the Companys pension
plans follows (in thousands): Fiscal2001
    
    2002
    
    2003Service cost
    
    $
    19
    
    
    $
    20
    
    
    $
    29Interest cost
    
    
    1,115
    
    
    
    1,104
    
    
    
    1,072Expected return (loss) on plan assets
    
    
    (1,670
    )
    
    
    (1,494
    )
    
    
    (1,246
    )Recognition of actuarial loss
    
    
    
    
    
    
    291
    
    
    
    736Amortization
    
    
    8
    
    
    
    9
    
    
    
    13Net periodic pension (income) cost
    
    $
    (528
    )
    
    $
    (70
    )
    
    $
    604Increase (decrease) in minimum liability included in
other comprehensive income
    
    $
    
    
    
    $
    9,140
    
    
    $
    (931
    )
 A summary of the weighted average assumptions used by the Company to
determine net periodic pension (income) cost for fiscal 2001, 2002 and 2003
follows: Fiscal2001
    
    2002
    
    2003Discount rate
    
    
    7.90
    %
    
    
    7.60
    %
    
    
    6.75
    %Expected long-term return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %Rate of compensation increase
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 The Companys weighted-average asset allocations by asset category for
fiscal 2002 and 2003 follows: Percentageof plan assets atend of fiscalTarget assetallocation
    
    2002
    
    2003Asset categories:Equity securities
    
    
    40-65
    %
    
    
    64
    %
    
    
    65
    %Debt securities
    
    
    25-40
    %
    
    
    35
    %
    
    
    34
    %Other
    
    
    0-5
    %
    
    
    1
    %
    
    
    1
    %Total
    
    
    
    
    
    
    100
    %
    
    
    100
    %
 F-26




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) The expected long-term rate of return for the Companys pension plan
assets is weighted based on the target allocation for each asset category.
Equity securities are expected to return between 10% and 11% and debt
securities are expected to return between 4% and 7%. The Company expects its
pension plan asset managers will provide a premium (0.5% to 1.0% per annum) to
the respective market benchmark indices. The Companys investment policy related to its pension plans is to provide
for growth of capital with a moderate level of volatility by investing in
accordance with the target asset allocations stated above. The Company reviews
its investment policy, including its target asset allocations, on a semi-annual
basis to determine whether any changes in market conditions or amendments to
its pension plans require a revision to its investment policy. 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 postretirement plan information below has been determined based on the
calendar years ending December 31, 2001, 2002 and 2003. The Company expects to
contribute $0.5 million to the plan in fiscal 2004. A summary of the benefit obligations and funded status for the Companys
postretirement plan follows (in thousands): Fiscal2002
    
    2003Change in benefit obligation:Benefit obligation, beginning of year
    
    $
    3,994
    
    
    $
    5,038Service cost
    
    
    15
    
    
    
    19Interest cost
    
    
    308
    
    
    
    313Plan participants contributions
    
    
    168
    
    
    
    168Benefits paid
    
    
    (407
    )
    
    
    (605
    )Actuarial loss
    
    
    960
    
    
    
    225Amendments
    
    
    
    
    
    
    (144
    )Benefit obligation, end of year
    
    
    5,038
    
    
    
    5,014Change in plan assets:Fair value of plan assets, beginning of year
    
    
    
    
    
    
    Employer contributions
    
    
    239
    
    
    
    437Plan participants contributions
    
    
    168
    
    
    
    168Benefits paid
    
    
    (407
    )
    
    
    (605
    )Fair value of plan assets, end of year
    
    
    
    
    
    
    Funded status
    
    
    (5,038
    )
    
    
    (5,014
    )Unrecognized net loss
    
    
    1,515
    
    
    
    1,662Unrecognized prior service cost
    
    
    (292
    )
    
    
    (383
    )Net amount recognized
    
    $
    (3,815
    )
    
    $
    (3,735
    )
 A summary of the amounts recognized in the Companys accompanying
consolidated balance sheets follows (in thousands): End of fiscal2002
    
    2003Net amount recognized for accrued benefit cost
    
    $
    (3,815
    )
    
    $
    (3,735
    )
 F-27




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) A summary of the weighted-average assumptions used by the Company to
determine benefit obligations as of the end of the year follows (in thousands): End of fiscal2002
    
    2003Discount rate
    
    
    6.75
    %
    
    
    6.25
    %
 A summary of net periodic postretirement cost for the Companys
postretirement plan follows (in thousands): Fiscal2001
    
    2002
    
    2003Service cost
    
    $
    15
    
    
    $
    15
    
    
    $
    19Interest cost
    
    
    294
    
    
    
    308
    
    
    
    313Amortization
    
    
    (35
    )
    
    
    (10
    )
    
    
    26Net periodic postretirement cost
    
    $
    274
    
    
    $
    313
    
    
    $
    358
 A summary of the weighted-average assumptions used by the Company to
determine net periodic postretirement cost for fiscal 2001, 2002 and 2003
follows: Fiscal2001
    
    2002
    
    2003Discount rate
    
    
    7.90
    %
    
    
    7.60
    %
    
    
    6.75
    %
 A summary of the health care cost trend rate assumptions used by the
Company to determine benefit obligations as of the end of the year follows: End of fiscal2002
    
    2003Healthcare cost trend rate assumed for next year
    
    
    12.50
    %
    
    
    12.50
    %Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)
    
    
    4.50
    %
    
    
    4.50
    %Year that the rate reaches the ultimate trend rate
    
    
    2008
    
    
    
    2008
 Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the Companys postretirement healthcare plan. A one
percentage point change in assumed healthcare cost trend rates would have the
following impact (in thousands): Fiscal 2001
    
    Fiscal 2002
    
    Fiscal 2003One percentage point
    
    One percentage point
    
    One percentage pointIncrease
    
    Decrease
    
    Increase
    
    Decrease
    
    Increase
    
    DecreaseImpact on service and interest costs
    
    $
    32
    
    
    $
    (28
    )
    
    $
    34
    
    
    $
    (29
    )
    
    $
    36
    
    
    $
    (30
    )Impact on postretirement benefit obligation
    
    
    429
    
    
    
    (370
    )
    
    
    430
    
    
    
    (371
    )
    
    
    530
    
    
    
    (443
    )
 Defined Contribution Plans The Company has a defined contribution plan called the Doane Pet Care
Retirement Savings Plan which was adopted on January 1, 2000 and was formed
through the merger of two predecessor plans. The merged plan was amended and
restated and is intended to be a qualified plan under the Internal Revenue
Code. The plan provides coverage for eligible employees and permits employee
contributions from 1% to 60% of pre-tax earnings, subject to annual dollar
limits set by the IRS. The Company matches 50% of the first 6% of the employee
contribution with a provision for other contributions at the discretion of the
board of directors of the Company. Participant vesting for F-28




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) the employers
matching contributions are 25% per year for each full year of service. In
fiscal 2001, 2002 and 2003, the Company contributed $1.2 million, $1.0 million
and $1.0 million, respectively, to the Doane Pet Care Retirement Savings Plan. The Company also has a plan called the Doane Pet Care Savings and
Investment Plan  Union Plan which was adopted on June 1, 1998 and covers
eligible union employees at the Joplin, Missouri and Muscatine, Iowa
facilities. This plan is intended to be a qualified retirement plan under the
Internal Revenue Code. The plan permits employee contributions between 1% and
60% of pre-tax earnings, subject to annual dollar limits set by the IRS, and
provides for a variety of investment options. The Company does not contribute
to this plan. (16) Deferred Compensation Agreements and Salary Continuation Plan The Company has a deferred compensation agreement with an individual that
provides for annual payments upon retirement to be paid over 10 consecutive
years. The Company had a liability of $0.6 million and $0.5 million at the end
of fiscal 2002 and 2003, respectively. The Company also has a salary continuation plan with 19 participants at
the end of fiscal 2003. Participants in
the plan who reach age 55 and have 10 years of service with the Company
begin vesting in their benefits, which are payable in 10 equal annual
installments after retirement. The Company had an expected future liability
equal to the present value of future payments under this plan of $2.2 million
and $2.1 million as of the end of fiscal 2002 and 2003, respectively. The
liabilities associated with the Companys deferred compensation agreements and
salary continuation plan are recognized in other long-term liabilities in the
accompanying consolidated balance sheets. (17) Segment Data The Company has combined manufacturing and distribution facilities in two
distinct geographical markets, the United States, or Domestic, and Europe, or
International; however, its operations in both of these markets have similar
manufacturing processes, as well as products and services. Long-lived assets of
the Company are attributed to individual countries on the basis of where these
assets are domiciled. The Companys net sales are attributed to individual
countries on the basis of where its products are manufactured and distributed.
A summary of long-lived assets and net sales by geographical segment follows
(in thousands): End of fiscal2002
    
    2003Long-lived assets:Domestic
    
    $
    428,133
    
    
    $
    424,477International :Denmark
    
    
    159,902
    
    
    
    181,753Spain
    
    
    27,764
    
    
    
    33,472United Kingdom
    
    
    7,373
    
    
    
    7,173Total international
    
    
    195,039
    
    
    
    222,398Total long-lived assets
    
    $
    623,172
    
    
    $
    646,875
 F-29




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Fiscal2001
    
    2002
    
    2003Domestic
    
    $
    697,597
    
    
    $
    692,237
    
    
    $
    758,459International:Denmark
    
    
    155,071
    
    
    
    151,354
    
    
    
    201,827Spain
    
    
    28,905
    
    
    
    33,676
    
    
    
    38,897United Kingdom
    
    
    14,257
    
    
    
    10,066
    
    
    
    14,682Total international
    
    
    198,233
    
    
    
    195,096
    
    
    
    255,406Total net sales
    
    $
    895,830
    
    
    $
    887,333
    
    
    $
    1,013,865
 (18) Major Customer In fiscal 2001, 2002 and 2003, the same customer accounted for 40%, 44%
and 42%, respectively, of the Companys net sales. The Company does not have a
long-term contract with this customer. The loss of this customer would have a
material adverse impact on the Companys financial position, results of
operations and liquidity. (19) Supplemental Cash Flow Information Supplemental cash flow information for fiscal 2001, 2002 and 2003 follows
(in thousands): Fiscal2001
    
    2002
    
    2003Cash paid during the year for:Interest paid
    
    $
    50,591
    
    
    $
    48,226
    
    
    $
    55,584Income taxes paid
    
    
    2,184
    
    
    
    236
    
    
    
    1,447Schedule of non-cash investing and financing activities:Fair value adjustment for interest rate swap agreements
    
    
    (4,097
    )
    
    
    2,347
    
    
    
    (2,182
    )Fair value adjustment for foreign currency derivatives
    
    
    1,327
    
    
    
    625
    
    
    
    Exchange rate effect on Euro-denominated debt
    
    
    (4,414
    )
    
    
    (11,553
    )
    
    
    (7,491
    )
 Interest paid in fiscal 2003 includes $8.3 million of interest paid in
connection with the repayment of the Sponsor Facility in full. (20) Related Party Transactions DLJ Merchant Banking Partners, L.P. and certain other affiliates of Credit
Suisse First Boston LLC own shares of common stock of the Company and warrants
to purchase common stock of Parent. Credit Suisse First Boston LLC and its
affiliates have received certain payments of fees, including fees for various
investment banking and commercial banking services provided to the Company and
Parent. DLJ Merchant Banking Partners, L.P. and certain other affiliates of Credit
Suisse First Boston LLC are parties to the investors agreement. In accordance
with the investors agreement, DLJ Merchant Banking Partners, L.P. has
designated one individual to the boards of directors of the Company and Parent. J.P. Morgan Partners (BHCA), L.P. is an affiliate of JPMorgan Chase Bank
and J.P. Morgan Securities Inc. J.P. Morgan Partners (BHCA), L.P. and one of
its affiliates own senior preferred stock in the Company and common stock and
warrants to purchase common stock of Parent. F-30




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) JPMorgan Chase Bank, J.P. Morgan Securities Inc. and their affiliates
perform various commercial banking and investment banking services from time to
time for the Company and its affiliates. Since the beginning of fiscal 2001
through February 28, 2004, JPMorgan Chase Bank, J.P. Morgan Securities Inc. and
their affiliates received a total of $1.5 million for acting in the
foregoing capacities, excluding interest and other charges earned generally by
all lenders under the senior credit facility. J.P. Morgan Partners (BHCA), L.P. is a party to the investors agreement.
In accordance with the investors agreement, it has designated two individuals
to the boards of directors of the Company and Parent. Credit Suisse First Boston LLC was one of the joint book-running managers
in the Companys offering of 10 3⁄4% senior notes. DLJ Capital Funding, Inc.,
an affiliate of Credit Suisse First Boston LLC, is the syndication agent and a
lender under the senior credit facility and received a portion of the repayment
of loans under the senior credit facility from the net proceeds of the sale of
the 10 3⁄4% senior notes. In connection with the sale of the 10 3⁄4% senior
notes, Credit Suisse First Boston LLC and its affiliates received fees of
$3.3 million. J.P. Morgan Securities Inc. was also a joint
book-running manager in the offering of the 10 3⁄4% senior notes. Affiliates
of J.P. Morgan Securities Inc. were holders of promissory notes under the
Sponsor Facility. These affiliates received $16.9 million of the net proceeds
from the sale of the 10 3⁄4% senior notes. JPMorgan Chase Bank serves as the
administrative agent and a lender under the senior credit facility and received
a portion of the repayment of loans under the senior credit facility from the
net proceeds of the sale of 10 3⁄4% senior notes. JPMorgan Chase Bank
received a $0.5 million fee in connection with the amendments to the senior
credit facility effected contemporaneously with the sale of the 10 3⁄4% senior
notes. In connection with the sale of the 10 3⁄4% senior notes, J.P. Morgan
Securities Inc. and its affiliates received fees of $1.6 million.
JPMorgan Chase Bank also received a fee of $0.5 million in connection with the
March 9, 2004 amendment to the Companys senior credit
facility. In addition to the affiliates of J.P. Morgan Securities Inc. that held
promissory notes under the Sponsor Facility, as discussed above, affiliates of
other persons known to the Company to beneficially own more than 5% of the
common stock of Parent also held promissory notes under the Sponsor Facility.
Bruckmann, Rosser, Sherrill & Co., L.P. received $7.5 million, Summit Capital Inc.
received $2.3 million and PNC Capital Corp. received $1.2 million of the net
proceeds from the sale of the 10 3⁄4% senior notes. Additionally, certain
executive officers of the Company each received $0.1 million from the repayment
of their promissory notes under the Sponsor Facility in connection with the
sale of the 10 3⁄4% senior notes. (21) Commitments and Contingencies The Company is party, in the ordinary course of business, to claims and
litigation. In managements opinion, the resolution of such matters is not
expected to have a material impact on the future financial condition, results
of operations or cash flows of the Company. (22) Quarterly Financial Data (Unaudited) A summary of quarterly results follows (in thousands): Fiscal 2002First quarter
    
    Second quarter
    
    Third quarter
    
    Fourth quarterNet sales
    
    $
    220,106
    
    
    $
    204,298
    
    
    $
    216,334
    
    
    $
    246,595Gross profit
    
    
    50,914
    
    
    
    48,766
    
    
    
    44,469
    
    
    
    41,766Net income (loss)
    
    
    8,473
    
    
    
    5,187
    
    
    
    2,760
    
    
    
    (1,149
    )Net income (loss) available to common shares
    
    
    5,643
    
    
    
    2,267
    
    
    
    (255
    )
    
    
    (4,262
    )
 F-31




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Fiscal 2003First quarter
    
    Second quarter
    
    Third quarter
    Fourth quarterNet sales
    
    $
    259,949
    
    
    $
    234,476
    
    
    $
    243,810
    
    
    $
    275,630Gross profit
    
    
    45,360
    
    
    
    38,509
    
    
    
    36,840
    
    
    
    41,578Net loss
    
    
    (7,874
    )
    
    
    (3,404
    )
    
    
    (10,636
    )
    
    
    (32,516
    )Net loss available to common shares
    
    
    (11,089
    )
    
    
    (6,723
    )
    
    
    (14,064
    )
    
    
    (36,056
    )
 In the fourth quarter of fiscal 2003, the Company recognized $7.2 million
of other operating expenses. See Note 13  Other Operating and Project Focus
Implementation Expenses. In addition, the Company recorded valuation
allowances of $27.6 against its deferred tax assets. See Note 14  Income
Taxes. (23) Financial Information Related to Guarantor Subsidiaries Consolidated financial information related to the Company and its
guarantor subsidiaries and non-guarantor subsidiaries as of the end of fiscal
2002 and 2003, and for fiscal 2001, 2002 and 2003 is disclosed to comply with
the reporting requirements of the guarantor subsidiaries. The guarantor
subsidiaries are wholly-owned domestic subsidiaries of the Company who have
fully and unconditionally guaranteed the Companys 9 3⁄4% Senior
Subordinated Notes due May 15, 2007. See Note 6 
Long-Term Debt and
Liquidity. Condensed consolidated financial information follows (in
thousands, except share and par value amounts): F-32




---



##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED CONSOLIDATED BALANCE SHEET End of fiscal 2002IntercompanyGuarantor
    
    Non-guarantor
    
    eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    57
    
    
    $
    7,539
    
    
    $
    
    
    
    $
    7,596Accounts receivable, net
    
    
    86,190
    
    
    
    43,157
    
    
    
    
    
    
    
    129,347Inventories, net
    
    
    43,068
    
    
    
    20,563
    
    
    
    
    
    
    
    63,631Deferred tax asset
    
    
    5,859
    
    
    
    
    
    
    
    
    
    
    
    5,859Prepaid expenses and other current assets
    
    
    6,853
    
    
    
    1,290
    
    
    
    
    
    
    
    8,143Total current assets
    
    
    142,027
    
    
    
    72,549
    
    
    
    
    
    
    
    214,576Property, plant and equipment, net
    
    
    160,757
    
    
    
    99,335
    
    
    
    
    
    
    
    260,092Goodwill and trademarks, net
    
    
    267,376
    
    
    
    95,704
    
    
    
    
    
    
    
    363,080Other assets
    
    
    230,170
    
    
    
    10,709
    
    
    
    (207,960
    )
    
    
    32,919Total assets
    
    $
    800,330
    
    
    $
    278,297
    
    
    $
    (207,960
    )
    
    $
    870,667LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    5,720
    
    
    $
    
    
    
    $
    5,720Accounts payable
    
    
    59,218
    
    
    
    34,310
    
    
    
    
    
    
    
    93,528Accrued liabilities
    
    
    44,758
    
    
    
    11,355
    
    
    
    
    
    
    
    56,113Total current liabilities
    
    
    103,976
    
    
    
    51,385
    
    
    
    
    
    
    
    155,361Long-term debt, excluding current maturities
    
    
    536,069
    
    
    
    172,636
    
    
    
    (160,405
    )
    
    
    548,300Other long-term liabilities
    
    
    23,692
    
    
    
    
    
    
    
    
    
    
    
    23,692Deferred tax liability
    
    
    5,571
    
    
    
    1,690
    
    
    
    
    
    
    
    7,261Total liabilities
    
    
    669,308
    
    
    
    225,711
    
    
    
    (160,405
    )
    
    
    734,614Senior Preferred Stock (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding
    
    
    77,550
    
    
    
    
    
    
    
    
    
    
    
    77,550Commitments and contingenciesStockholders equity:Common stock, $0.01 par value; 1,000 shares
authorized, issued and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional paid-in-capital
    
    
    115,674
    
    
    
    47,690
    
    
    
    (47,690
    )
    
    
    115,674Accumulated other comprehensive income (loss)
    
    
    (16,868
    )
    
    
    26,291
    
    
    
    135
    
    
    
    9,558Accumulated deficit
    
    
    (45,334
    )
    
    
    (21,395
    )
    
    
    
    
    
    
    (66,729
    )Total stockholders equity
    
    
    53,472
    
    
    
    52,586
    
    
    
    (47,555
    )
    
    
    58,503Total liabilities and stockholders equity
    
    $
    800,330
    
    
    $
    278,297
    
    
    $
    (207,960
    )
    
    $
    870,667
 F-33




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED CONSOLIDATED BALANCE SHEET End of fiscal 2003IntercompanyGuarantor
    
    Non-guarantor
    
    eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,939
    
    
    $
    3,354
    
    
    $
    
    
    
    $
    29,293Accounts receivable, net
    
    
    35,639
    
    
    
    55,930
    
    
    
    
    
    
    
    91,569Inventories, net
    
    
    43,616
    
    
    
    25,003
    
    
    
    
    
    
    
    68,619Deferred tax asset
    
    
    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, net
    
    
    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
    )
    
    
    560,861Other long-term liabilities
    
    
    8,863
    
    
    
    
    
    
    
    
    
    
    
    8,863Deferred tax liability
    
    
    26,161
    
    
    
    2,363
    
    
    
    
    
    
    
    28,524Total liabilities
    
    
    686,323
    
    
    
    232,151
    
    
    
    (154,810
    )
    
    
    763,664Senior Preferred Stock (Redeemable), 3,000,000 shares
authorized, 1,200,000 shares issued and outstanding
    
    
    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
 F-34




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Fiscal 2001Guarantor
    
    Non-guarantor
    
    ConsolidatedNet sales
    
    $
    697,597
    
    
    $
    198,233
    
    
    $
    895,830Cost of goods sold
    
    
    592,525
    
    
    
    156,567
    
    
    
    749,092Gross profit
    
    
    105,072
    
    
    
    41,666
    
    
    
    146,738Operating expenses:Promotion and distribution
    
    
    36,890
    
    
    
    21,351
    
    
    
    58,241Selling, general and administrative
    
    
    34,573
    
    
    
    13,372
    
    
    
    47,945Amortization
    
    
    11,038
    
    
    
    2,705
    
    
    
    13,743Other operating expenses
    
    
    8,440
    
    
    
    215
    
    
    
    8,655Income from operations
    
    
    14,131
    
    
    
    4,023
    
    
    
    18,154Interest expense, net
    
    
    37,237
    
    
    
    19,783
    
    
    
    57,020Other
expense (income), net
    
    
    (2,254
    )
    
    
    1,497
    
    
    
    (757
    )Loss before income taxes
    
    
    (20,852
    )
    
    
    (17,257
    )
    
    
    (38,109
    )Income tax benefit
    
    
    (13,082
    )
    
    
    (3,089
    )
    
    
    (16,171
    )Net loss
    
    
    (7,770
    )
    
    
    (14,168
    )
    
    
    (21,938
    )Preferred stock dividends and accretion
    
    
    (10,467
    )
    
    
    
    
    
    
    (10,467
    )Net loss available to common shares
    
    $
    (18,237
    )
    
    $
    (14,168
    )
    
    $
    (32,405
    )
 F-35




---



##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Fiscal 2002Guarantor
    
    Non-guarantor
    
    ConsolidatedNet sales
    
    $
    692,237
    
    
    $
    195,096
    
    
    $
    887,333Cost of goods sold
    
    
    556,967
    
    
    
    144,451
    
    
    
    701,418Gross profit
    
    
    135,270
    
    
    
    50,645
    
    
    
    185,915Operating expenses:Promotion and distribution
    
    
    31,493
    
    
    
    20,952
    
    
    
    52,445Selling, general and administrative
    
    
    34,609
    
    
    
    14,103
    
    
    
    48,712Amortization
    
    
    3,903
    
    
    
    680
    
    
    
    4,583Other operating expenses
    
    
    1,447
    
    
    
    
    
    
    
    1,447Income from operations
    
    
    63,818
    
    
    
    14,910
    
    
    
    78,728Interest expense, net
    
    
    42,558
    
    
    
    19,837
    
    
    
    62,395Other
expense (income), net
    
    
    (1,144
    )
    
    
    420
    
    
    
    (724
    )Income (loss) before income taxes
    
    
    22,404
    
    
    
    (5,347
    )
    
    
    17,057Income tax expense (benefit)
    
    
    2,341
    
    
    
    (555
    )
    
    
    1,786Net income (loss)
    
    
    20,063
    
    
    
    (4,792
    )
    
    
    15,271Preferred stock dividends and accretion
    
    
    (11,878
    )
    
    
    
    
    
    
    (11,878
    )Net income (loss) available to common shares
    
    $
    8,185
    
    
    $
    (4,792
    )
    
    $
    3,393
 F-36




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Fiscal 2003Guarantor
    
    Non-guarantor
    
    ConsolidatedNet sales
    
    $
    758,459
    
    
    $
    255,406
    
    
    $
    1,013,865Cost of goods sold
    
    
    653,367
    
    
    
    198,211
    
    
    
    851,578Gross profit
    
    
    105,092
    
    
    
    57,195
    
    
    
    162,287Operating expenses:Promotion and distribution
    
    
    29,642
    
    
    
    27,974
    
    
    
    57,616Selling, general and administrative
    
    
    35,074
    
    
    
    16,941
    
    
    
    52,015Amortization
    
    
    4,229
    
    
    
    760
    
    
    
    4,989Other operating expenses
    
    
    (500
    )
    
    
    7,727
    
    
    
    7,227Income from operations
    
    
    36,647
    
    
    
    3,793
    
    
    
    40,440Interest expense, net
    
    
    37,099
    
    
    
    21,746
    
    
    
    58,845Debt extinguishments
    
    
    12,142
    
    
    
    
    
    
    
    12,142Other
expense (income), net
    
    
    (1,328
    )
    
    
    172
    
    
    
    (1,156
    )Loss before income taxes
    
    
    (11,266
    )
    
    
    (18,125
    )
    
    
    (29,391
    )Income tax expense
    
    
    23,340
    
    
    
    1,699
    
    
    
    25,039Net loss
    
    
    (34,606
    )
    
    
    (19,824
    )
    
    
    (54,430
    )Preferred stock dividends and accretion
    
    
    (13,502
    )
    
    
    
    
    
    
    (13,502
    )Net loss available to common shares
    
    $
    (48,108
    )
    
    $
    (19,824
    )
    
    $
    (67,932
    )
 F-37




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Fiscal 2001Guarantor
    
    Non-guarantor
    
    ConsolidatedCash flows from operating activities:Net loss
    
    $
    (7,770
    )
    
    $
    (14,168
    )
    
    $
    (21,938
    )Items not requiring (providing) cash:Depreciation and amortization
    
    
    28,817
    
    
    
    12,613
    
    
    
    41,430Deferred tax benefit
    
    
    (12,842
    )
    
    
    (5,240
    )
    
    
    (18,082
    )Assets impairments and Project Focus
    
    
    8,866
    
    
    
    
    
    
    
    8,866Divestitures
    
    
    4,660
    
    
    
    
    
    
    
    4,660Other non-cash charges, net
    
    
    3,952
    
    
    
    1,604
    
    
    
    5,556Changes in current assets and liabilities
    
    
    (62,846
    )
    
    
    18,418
    
    
    
    (44,428
    )Net cash provided by (used in) operating activities
    
    
    (37,163
    )
    
    
    13,227
    
    
    
    (23,936
    )Cash flows from investing activities:Capital expenditures
    
    
    (10,383
    )
    
    
    (6,933
    )
    
    
    (17,316
    )Proceeds from sale of assets, net of cash received
    
    
    20,884
    
    
    
    
    
    
    
    20,884Other, net
    
    
    (4,143
    )
    
    
    2,041
    
    
    
    (2,102
    )Net cash provided by (used in) investing activities
    
    
    6,358
    
    
    
    (4,892
    )
    
    
    1,466Cash flows from financing activities:Net borrowings under revolving credit agreements
    
    
    30,400
    
    
    
    
    
    
    
    30,400Proceeds from issuance of long-term debt
    
    
    16,666
    
    
    
    845
    
    
    
    17,511Principal payments on long-term debt
    
    
    (18,910
    )
    
    
    (9,015
    )
    
    
    (27,925
    )Payments for debt issuance costs
    
    
    (2,928
    )
    
    
    
    
    
    
    (2,928
    )Parent capital contribution
    
    
    8,375
    
    
    
    
    
    
    
    8,375Net cash provided by (used in) financing activities
    
    
    33,603
    
    
    
    (8,170
    )
    
    
    25,433Effect of exchange rate changes on cash and cash equivalents
    
    
    (890
    )
    
    
    801
    
    
    
    (89
    )Increase in cash and cash equivalents
    
    
    1,908
    
    
    
    966
    
    
    
    2,874Cash and cash equivalents, beginning of year
    
    
    42
    
    
    
    3,116
    
    
    
    3,158Cash and cash equivalents, end of year
    
    $
    1,950
    
    
    $
    4,082
    
    
    $
    6,032
 F-38




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Fiscal 2002Guarantor
    
    Non-guarantor
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    20,063
    
    
    $
    (4,792
    )
    
    $
    15,271Items not requiring (providing) cash:Depreciation and amortization
    
    
    20,202
    
    
    
    11,962
    
    
    
    32,164Deferred tax expense (benefit)
    
    
    2,966
    
    
    
    (1,708
    )
    
    
    1,258Other non-cash charges (income), net
    
    
    16,740
    
    
    
    (35
    )
    
    
    16,705Changes in current assets and liabilities
    
    
    (1,089
    )
    
    
    14,464
    
    
    
    13,375Net cash provided by operating activities
    
    
    58,882
    
    
    
    19,891
    
    
    
    78,773Cash flows from investing activities:Capital expenditures
    
    
    (14,858
    )
    
    
    (9,490
    )
    
    
    (24,348
    )Proceeds from sale of assets
    
    
    314
    
    
    
    1,452
    
    
    
    1,766Other, net
    
    
    2,502
    
    
    
    (5,822
    )
    
    
    (3,320
    )Net cash used in investing activities
    
    
    (12,042
    )
    
    
    (13,860
    )
    
    
    (25,902
    )Cash flows from financing activities:Net repayments under revolving credit agreements
    
    
    (23,000
    )
    
    
    
    
    
    
    (23,000
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    9,738
    
    
    
    9,738Principal payments on long-term debt
    
    
    (23,436
    )
    
    
    (12,736
    )
    
    
    (36,172
    )Payments for debt issuance costs
    
    
    (2,316
    )
    
    
    
    
    
    
    (2,316
    )Parent capital contribution
    
    
    19
    
    
    
    
    
    
    
    19Net cash used in financing activities
    
    
    (48,733
    )
    
    
    (2,998
    )
    
    
    (51,731
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    424
    
    
    
    424Increase (decrease) in cash and cash equivalents
    
    
    (1,893
    )
    
    
    3,457
    
    
    
    1,564Cash and cash equivalents, beginning of year
    
    
    1,950
    
    
    
    4,082
    
    
    
    6,032Cash and cash equivalents, end of year
    
    $
    57
    
    
    $
    7,539
    
    
    $
    7,596
 F-39




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##### Table of Contents



DOANE PET CARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Fiscal 2003Guarantor
    
    Non-guarantor
    
    ConsolidatedCash flows from operating activities:Net loss
    
    $
    (34,606
    )
    
    $
    (19,824
    )
    
    $
    (54,430
    )Items not requiring (providing) cash:Depreciation and amortization
    
    
    22,607
    
    
    
    14,554
    
    
    
    37,161Deferred tax expense
    
    
    23,340
    
    
    
    304
    
    
    
    23,644Debt extinguishments
    
    
    12,142
    
    
    
    
    
    
    
    12,142Asset impairments
    
    
    
    
    
    
    7,727
    
    
    
    7,727Other non-cash charges (income), net
    
    
    4,633
    
    
    
    (715
    )
    
    
    3,918Changes in current assets and liabilities
    
    
    9,595
    
    
    
    15,906
    
    
    
    25,501Net cash provided by operating activities
    
    
    37,711
    
    
    
    17,952
    
    
    
    55,663Cash flows from investing activities:Capital expenditures
    
    
    (15,653
    )
    
    
    (12,409
    )
    
    
    (28,062
    )Proceeds from sale of assets
    
    
    1,150
    
    
    
    228
    
    
    
    1,378Other, net
    
    
    3,083
    
    
    
    (6,584
    )
    
    
    (3,501
    )Net cash used in investing activities
    
    
    (11,420
    )
    
    
    (18,765
    )
    
    
    (30,185
    )Cash flows from financing activities:Net repayments under revolving credit agreements
    
    
    1,000
    
    
    
    
    
    
    
    1,000Proceeds from issuance of long-term debt
    
    
    210,444
    
    
    
    
    
    
    
    210,444Principal payments on long-term debt
    
    
    (204,092
    )
    
    
    (4,163
    )
    
    
    (208,255
    )Payments for debt issuance costs
    
    
    (7,761
    )
    
    
    
    
    
    
    (7,761
    )Net cash used in financing activities
    
    
    (409
    )
    
    
    (4,163
    )
    
    
    (4,572
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    791
    
    
    
    791Increase (decrease) in cash and cash equivalents
    
    
    25,882
    
    
    
    (4,185
    )
    
    
    21,697Cash and cash equivalents, beginning of year
    
    
    57
    
    
    
    7,539
    
    
    
    7,596Cash and cash equivalents, end of year
    
    $
    25,939
    
    
    $
    3,354
    
    
    $
    29,293
 F-40




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##### Table of Contents



INDEX TO EXHIBITS Exhibit Number
    
    
    
    Description3.1
    
    -
    
    Certificate of Incorporation of Doane Pet Care Company
(incorporated by reference to Exhibit 3.1 to Doane Pet Care
Companys Registration Statement on Form S-1, Reg. No.
33-98110 (the Form S-1))3.2
    
    -
    
    Certificate of Designations, Preferences and Rights of
$14.25% Senior Exchangeable Preferred Stock due 2007, dated
October 4, 1995 (incorporated by reference to Exhibit 3.2
to Doane Pet Care Companys Annual Report on Form 10-K for
the year ended December 29, 2001 (the 2001 Form 10-K))3.3
    
    -
    
    Certificate of Amendment to Certificate of Incorporation
of Doane Pet Care Company dated February 4, 1998
(incorporated by reference to Exhibit 3.2 to Doane Pet Care
Companys Annual Report on Form 10-K for the year ended
December 31, 1997 (the 1997 Form 10-K))3.4
    
    -
    
    Certificate of Amendment of Certificate of Incorporation
of Doane Pet Care Company dated November 10, 1998
(incorporated by reference to Exhibit 3.4 to the 2001 Form
10-K)3.5
    
    -
    
    Certificate of Amendment of Certificate of Designations,
Preferences and Rights of 14.25% Senior Exchangeable
Preferred Stock due 2007 dated November 11, 1998
(incorporated by reference to Exhibit 3.6 to the 2001 Form
10-K)3.6
    
    -
    
    Amended and Restated Bylaws of Doane Pet Care Company
(incorporated by reference to Exhibit 3.5 to the 2001 Form
10-K)4.1
    
    -
    
    Indenture dated November 12, 1998 between Doane Pet Care
Company and Wilmington Trust Company (incorporated by
reference to Exhibit 10.12 of Doane Pet Care Enterprises,
Inc.s Registration Statement on Form S-1, Reg. No.
333-61027 (Enterprises Form S-1))4.2
    
    -
    
    Registration Agreement among Doane Pet Care Company,
Donaldson, Lufkin & Jenrette Securities Corporation and
Chase Securities Inc. dated November 12, 1998 (incorporated
by reference to Exhibit 4.2 to Doane Pet Care Companys
Registration Statement on Form S-4, Reg. No. 333-70759 (the
Form S-4))4.3
    
    -
    
    Indenture dated February 28, 2003 between Doane Pet
Care Company and Wilmington Trust Company (incorporated by reference to Exhibit 4.3 to Doane Pet Care Companys
Annual Report on Form 10-K for the year ended December 28, 2002 (the 2002 Form 10-K))4.4
    
    -
    
    Registration Rights Agreement dated as of February
28, 2003 between Doane Pet Care Company, DPC
Investment Corp., Doane/Windy Hill Joint Venture
L.L.C., Credit Suisse First Boston LLP and J.P. Morgan
Securities Inc. (incorporated by reference to Exhibit 4.3 to the 2002 Form 10-K)9.1
    
    -
    
    Second Amended and Restated Investors Agreement dated as
of March 26, 2001 among Doane Pet Care Company, Doane Pet
Care Enterprises, Inc., Summit Capital Inc., Summit/DPC
Partners Inc., J. P. Morgan Partners (BHCA), L.P., Baseball
Partners, DLJ Merchant Banking Partners, L.P., DLJ
International Partners, C.V., DLJ Offshore Partners, C.V.,
DLJ Merchant Banking Funding, Inc., DLJ First ESC, L.P.,
Bruckmann, Rosser, Sherrill & Co., L.P., PNC Capital Corp.,
and certain other persons name therein (incorporated by
reference to Exhibit 9.1 to Doane Pet Care Companys Annual
Report on Form 10-K/A for the year ended December 30, 2000
(the 2000 Form 10-K/A))
 F-41




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##### Table of Contents



Exhibit Number
    
    
    
    Description10.1
    
    -
    
    Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and Douglas J. Cahill (incorporated by
reference to Exhibit 10.3 to the 1997 Form 10-K)10.2
    
    -
    
    Employment Agreement dated February 15, 1999, between
Doane Pet Care Company and Philip K. Woodlief (incorporated
by reference to Exhibit 10.14 to Enterprises Form S-1)10.3
    
    -
    
    First Amendment to Employment Agreement dated as of
January 1, 2001, between Doane Pet Care Company and Philip
K. Woodlief (incorporated by reference to Exhibit 10.4 to
the 2000 Form 10-K/A)10.4
    
    -
    
    Employment Agreement dated January 1, 1998, between Doane
Pet Care Company and David L. Horton (incorporated by
reference to Exhibit 10.6 to the Form S-4)10.5
    
    -
    
    First Amendment to Employment Agreement dated as of
January 1, 2001, between Doane Pet Care Company and David
L. Horton (incorporated by reference to Exhibit 10.6 to the
2000 Form 10-K/A)10.6
    
    -
    
    Employment Agreement dated August 17, 1998 between Doane
Pet Care Company and Joseph J. Meyers (incorporated by
reference to Exhibit 10.7 to the 2000 Form 10-K/A)10.7
    
    -
    
    First Amendment to Employment Agreement dated as of
January 1, 2001, between Doane Pet Care Company and Joseph
J. Meyers (incorporated by reference to Exhibit 10.8 to the
2000 from 10-K/A)10.8
    
    -
    
    Employment Agreement dated January 1, 1998 between
Doane Pet Care Company and Richard A. Hannasch
(incorporated by reference to Exhibit  10.8 to the Form S-4)10.9
    
    -
    
    Doane Pet Care Enterprises Inc.s, 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to Doane Pet
Care Companys Annual Report on Form 10-K for the year
ended December 31, 1996)10.10
    
    -
    
    First Amendment to Doane Pet Care Enterprises, Inc.s
1996 Stock Option Plan (incorporated by reference to
Exhibit 10.8 to the 1997 Form 10-K)10.11
    
    -
    
    Second Amendment to Doane Pet Care Enterprises, Inc.s,
1996 Stock Option Plan (incorporated by reference to
Exhibit 10.9 to the 1997 Form 10-K)10.12
    
    -
    
    Doane Pet Care Enterprises, Inc.s 1999 Stock Incentive
Plan (incorporated by reference to Exhibit 10.10 to Doane
Pet Care Companys Annual Report on Form 10-K for the
fiscal year ended January 1, 2000)10.13
    
    -
    
    Amended and Restated Credit Agreement dated as of May 8,
2000 among Doane Pet Care Company, as borrower, The Chase
Manhattan Bank, as administrative agent, DLJ Capital
Funding, Inc, as syndication agent, and Firstar Bank, N.A.,
as documentation agent, and the banks named therein
(incorporated by reference to Exhibit 10.1 to Doane Pet
Care Companys Quarterly Report on Form 10-Q for the
quarterly period ended July 1, 2000)10.14
    
    -
    
    Amendment No. 1 to Amended and Restated Credit Agreement
dated as of March 26, 2001 among Doane Pet Care Company, as
borrower, The Chase Manhattan Bank, as administrative
agent, DLJ Capital Funding, Inc, as syndication agent, and
Firstar Bank, N.A., as documentation agent and the banks
named therein (incorporated by reference to Exhibit 10.14
to the 2000 Form 10-K/A)
 F-42




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##### Table of Contents



Exhibit Number
    
    
    
    Description10.15
    
    -
    
    Amendment No. 2 to Amended and Restated Credit Agreement
dated as of March 22, 2002 among Doane Pet Care Company, as
borrower, JPMorgan Chase Bank, as administrative agent,
Wachovia Bank N.A., as co-agent, J.P. Morgan Securities
Inc., as lead arranger, Wachovia Bank N.A. and Danske Bank
A/S, as co-arrangers, and the banks named therein
(incorporated by reference to Exhibit 10.15 to the 2001
Form 10-K)10.16
    
    -
    
    Amendment No. 3 to Amended and Restated Credit
Agreement dated as of February 10, 2003 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 10.16 to the 2002 Form 10-K)10.17
    
    -
    
    Amendment No. 4 to Amended and Restated Credit
Agreement dated as of February 26, 2003 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 10.17 to the 2002 Form 10-K)*10.18
    
    -
    
    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 thereto10.19
    
    -
    
    Loan and Warrant Agreement dated as of March 26,
2001 among Doane Pet Care Enterprises, Inc., Doane Pet
Care Company and each of the lenders named therein
(incorporated by reference to Exhibit 10.15 to the
2000 Form 10-K/A)*21.1
    
    -
    
    List of Subsidiaries of Doane Pet Care Company*23.1
    
    -
    
    Consent of KPMG LLP*31.1
    
    -
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) 15(d)-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*31.2
    
    -
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) 15(d)-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*32.1
    
    -
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*32.2
    
    -
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith
    
    Management contracts or compensatory plans or arrangements. F-43