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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: September 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-13403
American Italian Pasta Company
(Exact name of Registrant as specified in its charter)
Delaware 84-1032638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 N. Mulberry Drive, Suite 200, Kansas City, Missouri 64116
(Address of principal executive office and Zip Code)
Registrant's telephone number, including area code: (816) 584-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Convertible Common Stock:
$.001 par value per share New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of December 12, 2000 the aggregate market value of the Registrant's
Class A Convertible Common Stock held by non-affiliates (using the New York
Stock Exchange's closing price) was approximately $427,033,700.
The number of shares outstanding as of December 12, 2000 of the
Registrant's Class A Convertible Common Stock was 17,400,238 and there were no
shares outstanding of the Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2000
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report. The Definitive Proxy Statement will be filed no later than 120 days
after September 29, 2000.
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Introduction and Certain Cautionary Statements
American Italian Pasta Company's ("we" or the "Company") fiscal year end
is the last Friday of September or the first Friday of October. This results in
a 52- or 53-week year depending on the calendar. Our first three fiscal quarters
end on the Friday last preceding December 31, March 31, and June 30 or the first
Friday of the following month of each quarter. For purposes of this Annual
Report on Form 10-K (this "Annual Report"), all fiscal years are described as
having ended on September 30.
The discussion set forth below, as well as other portions of this Annual
Report, contains statements concerning potential future events. Such
forward-looking statements are based upon assumptions by our management, as of
the date of this Annual Report, including assumptions about risks and
uncertainties faced by us. Readers can identify these forward-looking statements
by their use of such verbs as expects, anticipates, believes or similar verbs or
conjugations of such verbs. If any of our assumptions prove incorrect or should
unanticipated circumstances arise, our actual results could materially differ
from those anticipated by such forward-looking statements. The differences could
be caused by a number of factors or combination of factors including, but not
limited to, those factors described below under "Risk Factors." Readers are
strongly encouraged to consider those factors when evaluating any such
forward-looking statement. We will not update any forward-looking statements in
this Annual Report to reflect future events or developments.
We hold a number of federally registered and common law trademarks, which
are used throughout this Annual Report. We have registered the following marks
with the U.S. Patent and Trademark Office: AIPC, American Italian Pasta Company,
Pasta LaBella, Montalcino, Calabria and Heartland. In addition, as a result of
the Mueller's acquisition (see "Recent Developments"), we now own several
additional trademarks, including the Mueller's mark.
Additionally, a number of federally registered trademarks are used
throughout this Annual Report that are not owned by the Company. San Giorgio and
Ronzoni are registered trademarks of New World Pasta LLC, ("New World Pasta").
Prince and Creamette are registered trademarks of Borden Foods Holdings
Corporation ("Borden").
RISK FACTORS
You should carefully consider the risks described below regarding an
investment in our common stock. The risks described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently believe to be immaterial may also impair our business
operations. If any of the following risks occur, our business, financial
condition or operating results could be materially adversely affected.
Our business is dependent on several major customers.
Historically, a limited number of customers have accounted for a
substantial portion of our revenues. We expect that we will continue to rely on
a limited number of major customers for a substantial portion of our revenues in
the future. We have an exclusive supply contract with Sysco (the "Sysco
Agreement") that is effective through June 2003, and Sysco has a renewal option
for one additional three-year period. Under the Sysco Agreement, we are
restricted from supplying pasta products to food service businesses other than
Sysco without Sysco's consent.
We do not have supply contracts with a substantial number of our
customers, including Sam's Club. We depend on our customers to sell our products
and to assist us in promoting customer acceptance of, and creating demand for,
our products. If our relationship with one or more of our major customers
changes or ends, it could have a material adverse effect on our business,
financial condition and results of operations.
We may experience difficulty in managing our growth.
We have experienced rapid growth and we expect to continue significant
growth in the future. Successful management of any such future growth will
require us to continue
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to invest in and enhance our operational, financial and management information
resources and systems, accurately forecast and meet sales demand, accurately
forecast retail sales, control our overhead, and attract, train, motivate and
manage our employees effectively. There can be no assurance that we will
continue to grow, or that we will be effective in managing our future growth.
Any failure to effectively manage growth could have a material adverse effect on
our business, financial condition and results of operations.
Cost increases or crop shortages in durum wheat and cost increases in packaging
materials could adversely affect us.
The principal raw material in our products is durum wheat. Durum wheat is
used almost exclusively in pasta production and is a narrowly traded, cash only
commodity crop. We attempt to minimize the effects of durum wheat cost
fluctuations through forward purchase contracts and agreements with many of our
customers that include durum cost adjustment provisions. Our commodity
procurement and pricing practices are intended to reduce the risk of durum wheat
cost increases on our profitability, but by doing so we may temporarily affect
our ability to benefit from possible durum wheat cost decreases. The supply and
price of durum wheat is subject to market conditions and is influenced by
several factors beyond our control, including general economic conditions,
natural disasters and weather conditions, competition, and governmental programs
and regulations. The supply and cost of durum wheat may also be adversely
affected by insects and plant diseases.
We also rely on the supply of plastic, corrugated and other packaging
materials. Many of these items fluctuate in price due to market conditions
beyond our control. The costs of durum wheat and packaging materials have varied
widely in recent years and future changes in such costs may cause the Company's
results of operations and our operating margins to fluctuate significantly.
Increases in the cost of durum wheat or packaging materials could have a
material adverse effect on our operating profit and margins unless and until we
are able to pass the increased cost along to our customers. Historically,
changes in sale prices of our pasta products have lagged changes in our
materials costs. Competitive pressures may also limit our ability to raise
prices in response to increased raw or packaging material costs. Accordingly,
there can be no assurance as to whether, or the extent to which, we will be able
to offset durum wheat or packaging material cost increases with increased
product prices.
The market for pasta products is intensely competitive and we face
competition from many established domestic and foreign producers.
We compete against numerous well-established national, regional and
foreign companies, and many smaller companies in the procurement of raw
materials, the development of new pasta products and product lines, the
improvement and expansion of previously introduced pasta products and product
lines and the production, marketing and distribution of pasta products. Some of
our competitors have longer operating histories, significantly greater brand
recognition and financial and other resources than we do. Our direct competitors
include large multi-national companies such as Borden with brands such as
Prince(R), Creamette(R), and New World Pasta LLC with brands such as American
Beauty(R), San Giorgio(R), and Ronzoni(R), regional U.S. producers of retail and
institutional pasta such as Dakota Growers Pasta Company, a farmer-owned
cooperative in North Dakota, Philadelphia Macaroni Co. Inc. and A. Zerega's
Sons, Inc., each an independent producer. We also compete with Italian producers
such as De Cecco, and with Barilla, an Italian-owned company with manufacturing
facilities in the U.S.
Our competitive environment depends to a significant extent on the
relationship between aggregate industry production capacity and aggregate market
demand for pasta products. Over the past several years, domestic pasta producers
have completed increases in domestic production capacity. In addition to our
capital expansions, we believe that these capacity additions represent more than
200 million pounds in aggregate. Dakota Growers recently increased the capacity
of its durum wheat mill. Barilla recently completed a pasta production plant
near Ames, Iowa with an estimated annual pasta capacity of over 150 to 200
million pounds. Two major pasta producers have also recently announced planned
reductions in pasta production capacity. Borden has closed or sold five of its
ten North American pasta plants, and Bestfoods eliminated its capacity of
approximately 180 million pounds in 1997. Increases in production capacity above
market
4
demand for pasta products could have a material adverse effect on our business,
financial condition and results of operations.
Several foreign producers, based principally in Italy and Turkey, have
aggressively targeted the U.S. pasta market in recent years. In 1996, a U.S.
Department of Commerce ("Commerce") investigation revealed that several Italian
and Turkish producers were engaging in unfair trade practices by selling pasta
at less than fair value in the U.S. markets and benefiting from subsidies from
their respective governments. Effective July 1996, Commerce imposed anti-dumping
and countervailing duties on Italian and Turkish imports (the "1996 Anti-dumping
Order"). In December 1998, Commerce announced the final results of its review of
1996 Anti-dumping Order for three Turkish producers. Commerce indicated that one
of the producers had not had any shipments during the review period (January 19,
1996 to June 30, 1997), maintained the anti-dumping and countervailing duties
for another Turkish producer and repealed such duties for the third. In
addition, Commerce conducted an administrative review of its 1996 Anti-dumping
Order relating to eight Italian pasta producers and maintained the anti-dumping
duties for most of the Italian pasta producers. While such duties may enable us
and our domestic competitors to compete more favorably against Italian and
Turkish producers in the U.S. pasta market, there can be no assurance that the
duties will be maintained for any length of time, or that these or other foreign
producers will not sell competing products in the United States at prices lower
than ours. Bulk imported pasta, and pasta produced in the U.S. by foreign firms,
are generally not subject to such anti-dumping and countervailing duties.
Foreign pasta producers generally may avoid such duties by importing bulk pasta
into the United States and repackaging it in U.S. facilities for distribution.
We have just begun operations in Italy to produce pasta that we intend to
sell in the U.S. and in the United Kingdom and Europe. Competition in these
international markets is also intense and comes primarily from major Italian
pasta companies such as De Cecco and Barilla, and from scores of small, locally
recognized producers. We believe that we will be able to compete effectively in
these foreign markets, but as yet we have no established customer relationship
and no significant sales levels.
Our business is completely dependent upon dry pasta as our only product line.
We focus exclusively on producing and selling dry pasta. We expect to
continue to receive substantially all of our revenues from the wholesale and
retail sale of pasta and pasta-related products. In addition, our pasta
production equipment is highly specialized and is not adaptable to the
production of non-pasta food products. From time to time, consumer preference
for pasta and other grain-based foods has been affected by diet "fads"
de-emphasizing carbohydrates and starches. Because of our product concentration,
any decline in consumer demand or preference for dry pasta, or any other factor
that adversely affects the pasta market, could have a more significant adverse
effect on our business, financial condition and results of operations than on
pasta producers that also produce other products.
The purchase of the Mueller's business moves us into the branded retail pasta
business where we have relatively little experience.
Our purchase of the Mueller's pasta business significantly increases our
branded retail market share, a market in which we have relatively little direct
experience. Retail pasta sales are subject to intense competition, changes in
consumer preferences, the effects of changing prices for raw materials and local
economic conditions. The results of our Mueller's business will be dependent
upon our ability to manage the brand successfully (including implementing
effective marketing and trade promotion programs), to anticipate and respond to
new consumer trends, and to maintain key customer relationships in order to
compete effectively with lower priced products in a consolidating environment.
Our success is dependent on the efforts of several key executives.
Our operations and prospects depend in large part on the performance of
our senior management team. The loss of the services of one or more members of
our senior management team could have a material adverse effect on our business,
financial condition and results of operations. No assurance can be given that we
would be able to find
5
qualified replacements for any of these individuals if their services were no
longer available. We do not maintain key person life insurance on any of our key
employees.
Disruptions in transportation of raw materials or finished products or
increases in transportation costs could adversely affect our financial
results.
Durum wheat is shipped to our production facility in Missouri directly
from North Dakota, Montana and Canada under a long-term rail contract with our
most significant rail carrier, the Canadian Pacific Rail System. Under this
agreement, we are obligated to transport specified wheat volumes and, in the
event we do not, we must reimburse the carrier for certain of its costs. We also
have a rail contract to ship semolina, milled and processed at the Missouri
facility, to our South Carolina facility. An extended interruption in our
ability to ship durum wheat by railroad to the Missouri plant, or semolina to
our South Carolina facility, could have a material adverse affect on our
business, financial condition and results of operations. For example, in 1994 we
experienced a significant interruption in railroad shipments due to a railroad
strike. While we would attempt to find alternative transportation if we were to
experience another interruption due to a strike, or other event, such as a
natural disaster, there can be no assurance that we would be able to do so in a
timely and cost-effective manner. We must manage our production and inventory
levels in order to operate cost effectively.
Most of our customers use, to some extent, inventory management systems
which track sales of particular products and rely on reorders being rapidly
filled by suppliers to meet consumer demand rather than on large inventories
being maintained by retailers. Although these systems reduce a retailer's
investment in inventory, they increase pressure on suppliers like us to fill
orders promptly and thereby shift a portion of the retailer's inventory
management cost to the supplier. Our production of excess inventory to meet
anticipated retailer demand could result in markdowns and increased inventory
carrying costs. In addition, if we underestimate the demand for our products, we
may be unable to provide adequate supplies of pasta products to retailers in a
timely fashion, and may consequently lose sales.
Fluctuations in our quarterly operating results may negatively impact and
cause volatility in our stock price.
Our results of operations may fluctuate on a quarterly basis and may be
below expectations of analysts and investors, and, as a result, the price of our
common stock may fall or become volatile. Factors that could cause quarterly
fluctuations include total sales volumes, the timing and scope of new customer
volumes, the timing and amounts of price adjustments due to durum wheat and
other cost changes, the cost of raw materials, including durum wheat, plant
expansion costs and interest expenses.
Because we produce food products, we may be subject to product liability
claims.
Although we have never been involved in a product liability lawsuit, the
sale of food products for human consumption involves the risk of injury to
consumers as a result of tampering by unauthorized third parties, product
contamination or spoilage, including the presence of foreign objects,
substances, chemicals, aflatoxin and other agents, or residues introduced during
the growing, storage, handling or transportation phases. While we are subject to
U.S. Food & Drug Administration inspection and regulations and we believe our
facilities comply in all material respects with all applicable laws and
regulations, there can be no assurance that we will not be subject to claims or
lawsuits for injuries related to the consumption of our products. We maintain
product liability insurance in an amount which we believe to be adequate.
However, there can be no assurance that we will not incur claims or liabilities
for which we are not insured or that exceed the amount of its insurance
coverage.
In addition, we often indemnify our customers against product liability
claims related to our products and for the costs related to product recalls. We
carry insurance against these matters and we believe that we would have claims
against our suppliers in situations where their products were the cause of the
recall or product liability claim. However, there can be no assurance that our
insurance coverage would be adequate or that we would be able to recover against
our suppliers.
6
Our business could be subject to technological obsolescence.
We believe that one of our current competitive advantages is our state of
the art production equipment, which reduces our production costs when compared
with production facilities using less advanced equipment. If other pasta
producers acquire similar or more advanced equipment that provide greater
efficiencies, our current perceived competitive advantage might be diminished or
eliminated. This could have a material adverse effect on our business, financial
condition and results of operations. We could lose a competitive advantage if
the technologically advanced production equipment we use is adopted by our
competitors.
Our international expansion efforts may not be successful
We recently completed the building of a pasta-producing facility in Italy.
To date, we have no experience in operating or distributing products on an
international basis. We cannot assure you that our international efforts will be
successful. We expect to incur significant costs in:
o establishing international distribution networks;
o complying with local regulations;
o overseeing the distribution of products in foreign markets; and
o modifying our business/accounting processing system for each
international market we enter.
If our international revenues are inadequate to offset the expense of
establishing and maintaining foreign operations, our business could be harmed.
In addition, there are several risks inherent in doing business on an
international level. These risks include:
o potentially complex regulatory requirements;
o export and import restrictions;
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o fluctuations in currency exchange rates and inflation risks;
o seasonal fluctuations in business activity in other parts of the world;
o changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
o potentially adverse tax consequences;
o difficulty in securing or transporting raw materials or transporting
finished product; and
o competitive activity.
Any of these risks could adversely impact the success of our international
operations.
Our business requires substantial capital and we carry a significant amount of
debt that restricts our operating and financial flexibility.
Our business requires a substantial capital investment, which we currently
finance, and expect to continue to finance, through third-party lenders. The
amount of debt we carry and the terms of our indebtedness could affect us in
several ways, including:
7
o the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, and general corporate purposes may
be impaired;
o a substantial portion of the Company's cash flow from operations may
have to be dedicated to the payment of the principal of and interest on
its indebtedness
o the terms of such indebtedness may restrict the Company's ability to
pay dividends; and
o the Company may be more highly leveraged than many of its competitors, which
may place the Company at a competitive disadvantage.
We may borrow additional amounts of variable rate indebtedness in the
future. If we do, and if interest rates were to significantly increase
thereafter, our operating results and our ability to pay the interest on our
debt may be materially and adversely affected. We have used, and may continue to
use, interest rate protection agreements covering our variable rate debt to
limit our exposure to variable rates. There can be no assurance, however, that
we will be able to enter into such agreements or that such agreements will not
adversely affect our financial performance.
Our loan agreements limit our ability to pay dividends, limit our ability
to borrow more funds, and raise funds through sales of stock. The level of debt
we carry could restrict our corporate activities, including our ability to
respond to competitive market conditions, to provide for capital expenditures
beyond those permitted by our loan agreements, or to take advantage of business
opportunities.
8
PART I
ITEM 1. BUSINESS.
General
- -------
American Italian Pasta Company is the largest producer and one of the
fastest-growing marketers of dry pasta in North America. We commenced operations
in 1988 with the North American introduction of new, highly-efficient durum
wheat milling and pasta production technology. We believe that our singular
focus on pasta, vertically-integrated facilities, continued technological
improvements and development of a highly-skilled workforce enables us to produce
high-quality pasta at costs below those of many of our competitors. We believe
that the combination of our cost structure, the age of competitive production
capacity and our key customer relationships create significant opportunities for
continued growth. During the fiscal year ended September 30, 2000, we had
revenue of $248.8 million and net income of $27.5 million.
We produce more than 80 dry pasta shapes in vertically-integrated milling,
production and distribution facilities, strategically located in Excelsior
Springs, Missouri, Columbia, South Carolina, Kenosha, Wisconsin, and will
commence operations in Verolanuova, Italy in 2001. The construction of the
Missouri plant in 1988 represented the first use in North America of a
vertically-integrated, high-capacity pasta plant using Italian milling and pasta
production technology. We believe that this plant continues to be among the most
efficient and highly-automated pasta facilities in North America. The South
Carolina plant, which commenced operations in 1995, produces only pasta shapes
conducive to high-volume production and employs a highly-skilled, self-managed
work force. We believe that the South Carolina plant is the most efficient
retail pasta facility in North America in terms of productivity and conversion
cost per pound. The Wisconsin plant, which commenced operations in 1999,
produces industrial pasta for the ingredient business segment. We believe the
Wisconsin plant is the only pasta production facility in North America which is
singularly focused on serving the rapidly growing ingredient pasta segment. The
Italy plant, which will commence operations in 2001, will serve private label
markets in continental Europe and the United States.
The Company is incorporated in Delaware, our executive offices are located
at 4100 N. Mulberry Drive, Suite 200, Kansas City, Missouri 64116, and our
telephone number is (816)584-5000. Our web site is located at
http://www.aipc.com. Information contained in our web site is not a part of this
Annual Report.
Recent Developments
- -------------------
On November 13, 2000, we purchased the Mueller's brand pasta business from
Bestfoods. Mueller's is the largest single pasta brand in the United States,
with particularly strong distribution in the eastern part of the country. The
acquisition encompassed the trademarks and goodwill associated with the brand,
the customer accounts and relationships, and certain tangible assets, primarily
inventory.
Total consideration for the purchased assets, excluding tangible assets,
was approximately $38.2 million, consisting of $17.6 million in cash and 686,666
shares of common stock valued at $30 per share. At November 13, 2000, the value
of the consideration was $33.6 million based on a share price of $23.25.
The transaction calls for a target price of $30 per share to be realized
by Bestfoods from sale of the shares. We agreed to register the shares shortly
after the closing, Bestfoods may then sell the shares in open market or
negotiated transactions, and is contractually obligated after one year from the
closing date to use reasonable best efforts to sell the shares for the target
price of $30 per share. For shares sold by Bestfoods after two years, but less
than three years after the closing date, we have agreed to a make-whole cash
payment to Bestfoods related to any shares sold for less than the target price
of $30. Any payments made by us under this provision will lead to adjustments
9
to equity accounts and will not affect purchase price, goodwill, or our
earnings. We may call the shares at any time for $30 per share. We financed the
cash portion of the acquisition price from our current debt facility.
To assure Mueller's business value is protected and successfully
transitioned to AIPC, Bestfoods has agreed, for up to 90 days after closing, to
provide us certain transition services. We have agreed to honor Bestfoods'
marketing commitments through April 2001; therefore, any major strategic changes
to the business will not occur until the second half of our fiscal year 2001.
The discussion of our business, assets and operations in this Annual
Report does not include the acquired Mueller's business.
Products and Brands
- -------------------
Our product line, comprising over 2,500 stock-keeping units ("SKUs"),
includes long goods such as spaghetti, linguine, fettuccine, angel hair and
lasagna, and short goods such as elbow macaroni, mostaccioli, rigatoni, rotini,
ziti and egg noodles. In many instances, we produce pasta to our customers'
specifications. We make over 80 different shapes and sizes of pasta products in
over 170 package configurations, including bulk packages for institutional
customers and smaller individually-wrapped packages for retail consumers. We
contract with third parties for the production of certain specialized pasta
shapes, such as stuffing shells and manicotti, which are necessary to offer
customers a full range of pasta products. Purchased pasta represented less than
1% of our total unit volume in fiscal period 2000.
We believe that our state-of-the-art, Italian pasta production equipment
is capable of producing the highest quality pasta. Our products are produced to
satisfy the specifications of our customers as well as our own product
specifications, which we believe are among the highest in the industry. Our
pasta is distinguished by a rich, natural "wheaty" taste and a consistently
smooth and firm ("al dente") texture with a minimum amount of white spots or
dark specks. We evaluate the quality of our products in two ways. We conduct
internal laboratory evaluation against competitive products on physical
characteristics, including color, speck count, shape and consistency, and
cooking performance, including starch release, protein content and texture, and
our customers perform competitive product comparisons on a regular basis.
Our production facilities are inspected twice each year by the American
Institute of Baking ("AIB"), the leading United States baking, food processing
and allied industries evaluation agency for sanitation and food safety. Our
plants consistently achieve the AIB's highest "Superior" rating. We also
implemented a comprehensive Hazard Analysis Critical Control Point ("HAACP")
program in 1994 to continuously monitor and improve the safety, quality and
cost-effectiveness of the Company's facilities and products. We believe that
having an AIB rating of "Superior" and meeting HAACP standards have helped us
attract new business and strengthen existing customer relationships.
Marketing and Distribution
- --------------------------
We actively sell and market our products through approximately 22
employees and approximately 30 food brokers and distributors throughout the
United States, Canada and Mexico. Our senior management is directly involved in
the selling process in all customer markets. Our sales and marketing strategy is
to provide superior quality, a complete product offering, distinctive packaging,
marketing and promotional plans specifically tailored to the customers' needs,
competitive pricing and superior customer service to attract new customers and
grow existing customers' pasta sales. We have established a significant market
presence in North America by developing strategic customer relationships with
food industry leaders that have substantial pasta requirements. We have a
long-term supply agreement with Sysco, the nation's largest marketer and
distributor of food service products. We are also the primary supplier of pasta
to Sam's Wholesale Club ("Sam's Club"), the largest club store chain in the
United States, and we supply private label and branded
10
pasta to 16 of the 20 largest grocery retailers in the United States, including
Kroger, Albertson's, Ahold, Wal-Mart, Winn Dixie, Publix, Delhaize America, A &
P, and H.E. Butt. We also have long-term supply agreements with several private
label customers, and have developed supply relationships with leading food
processors, such as Pillsbury, General Mills and Kraft Foods, which use our
pasta as an ingredient in their branded food products.
One of our core strengths has been the development of strong customer
relationships and the establishment of a reputation as a technical and service
expert in the pasta field. As part of our overall customer development strategy,
we use our category management expertise to assist customers in their
distribution and supply management decisions regarding pasta and new products.
Our category management experts use on-line A.C. Nielsen's supermarket data to
recommend pricing, SKU sets and shelf spacing to both private label and branded
customers. Our representatives also assist food processors in incorporating our
pasta as an ingredient in their customers' food products. We sponsor an annual
"Pasta Technology Forum" which is a training and development program for our
customers' production and new product personnel. In addition to technical
education, we provide dedicated technical support to our institutional customers
by making recommendations regarding the processing of pasta in their facilities.
We believe that these value-added activities provide customers with a better
appreciation and awareness of our products.
We consistently demonstrate our commitment to customer service through the
development of enhanced customer service programs. Examples of these programs
include our creation of an Efficient Customer Response ("ECR") model which uses
Electronic Data Interchange ("EDI") and vendor replenishment programs to assist
its key customers, and category management services for our private label and
branded customers. These programs also enable us to more accurately forecast
production and sales demand, enabling higher utilization of production
capacities and lower average unit costs.
Our four primary distribution centers in North America are strategically
located in South Carolina, Wisconsin, Missouri and Southern California to serve
the national market. Additionally, we use public warehouses to facilitate the
warehousing and distribution of our products. Our South Carolina and Missouri
distribution centers are integrated with our production facilities. Finished
products are automatically conveyed via enclosed case conveying systems from the
production facilities to the distribution centers for automated palletization
and storage until shipping. The combination of integrated facilities and
multiple distribution centers enables us to realize significant distribution
cost savings and provides lead time, fill rate and inventory management
advantages to our customers. The operation of the Missouri and South Carolina
distribution centers is outsourced under a long-term agreement with Lanter
Company, a firm specializing in warehouse and logistics management services.
Most of our customers use inventory management systems which track sales
of particular products and rely on reorders being rapidly filled by suppliers.
We work with our customers to forecast consumer demand which allows us to
cost-effectively produce inventory stocks to the forecasted demand levels.
Pasta Production
- ----------------
Pasta's primary ingredient is semolina, which is extracted from durum
wheat through a milling process. Durum wheat is used exclusively for pasta.
Durum wheat used in United States pasta production generally originates from
Canada, North Dakota, Montana, Arizona and California. Each variety of durum
wheat has its own unique set of protein, gluten content, moisture, density,
color and other attributes which affect the quality and other characteristics of
the semolina. We blend semolina from different wheat varieties as needed to meet
customer specifications.
Our ability to produce high-quality pasta generally begins with our
purchasing durum wheat directly from farmers and grower-owned cooperatives in
Canada, North Dakota, Montana, Arizona and California. This purchasing method
ensures that the extracted semolina meets our specifications. We have several
sources for durum wheat and are not dependent on any one supplier or sourcing
area. As a result, we believe that we have adequate sources of
11
supply for durum wheat. We occasionally buy and sell semolina to balance our
milling and production requirements. We are one of only two major producers of
pasta in North America that own vertically integrated milling and production
facilities.
Durum wheat is a cash crop whose average monthly market price has
fluctuated from a low of $3.82 per bushel to a high of $7.49 per bushel in the
last six years. Between October 1, 1999 and September 29, 2000, the market price
of durum wheat increased by approximately 21% from $4.15 per bushel to $5.00 per
bushel. Until February 1998 durum wheat did not have a related futures market to
hedge against such price fluctuations. As of February 12, 1998, durum futures
began trading on the Minneapolis grain exchange. Because in our view, these
futures contracts have limited liquidity and other less desirable quality
specifications we have not used them as a durum cost hedge. We manage our durum
wheat cost risk through cost pass-through mechanisms and other arrangements with
our customers and advance purchase contracts for durum wheat which are generally
less than twelve months' duration. Long-term supply agreements and other
customer arrangements which allow for the pass-through of durum wheat cost
changes in certain circumstances represented approximately 80% of our total
revenue base.
Durum wheat is shipped to our production facility in Missouri directly
from North Dakota, Montana and Canada under a long-term rail contract with our
most significant rail carrier, the Canadian Pacific Rail System. Under the
agreement, we are obligated to transport specified wheat volumes. If we do not
meet the volumes, we must reimburse the carrier for certain of its costs.
Currently, we are in compliance with such volume obligations.
We purchase the raw material requirements (including semolina and
semolina/flour blends) for our Kenosha, Wisconsin facility from CENEX/Harvest
States under the terms of a long-term supply agreement. We believe the quality
of the purchased raw materials is consistent with our internally milled
products. We also believe the terms of the CENEX/Harvest States supply agreement
are favorable versus other market options.
We purchase our packaging supplies, including poly-cellophane, paperboard
cartons, boxes and totes from third parties. We believe we have adequate sources
of packaging supplies.
Trademarks and Patents
- ----------------------
We hold a number of federally registered and common law trademarks which
we consider to be of considerable value and importance to our business
including: AIPC American Italian Pasta Company, American Italian, and Pasta
LaBella. The Company has registered the AIPC, American Italian Pasta Company,
Pasta LaBella, Montalcino, Calabria, Heartland and other trademarks with the
U.S. Patent and Trademark Office. Additionally, the Company has registered the
proprietary flavoring process for Pasta LaBella flavored pasta.
Dependence on Major Customers
- -----------------------------
Historically, a limited number of customers have accounted for a
substantial portion of our revenues. During the fiscal years ended September 30,
2000, 1999 and 1998, Sysco accounted for approximately 15%, 16% and 19%,
respectively, and sales to Sam's Club accounted for approximately 12%, 13% and
15%, respectively, of our revenues. During fiscals 2000, 1999, and 1998, sales
to Bestfoods accounted for approximately 23%, 29%, and 24% of our revenues. With
our acquisition of the Mueller's brand on November 14, 2000, we no longer have
revenues arising from transactions with Bestfoods. We expect to continue to rely
on a limited number of major customers for a substantial portion of our revenues
in the future. We have an exclusive supply contract with Sysco (the "Sysco
Agreement") through June 2003, with a renewal option by Sysco for one additional
three-year period. We do not have long-term supply contracts with a substantial
number of our other customers, including Sam's Club. Accordingly, we are
dependent upon our other customers to sell our products and to assist us in
promoting market acceptance of, and creating demand for, our products. An
adverse change in, or termination or expiration without renewal of, our
relationships
12
with or the financial viability of one or more of our major customers could have
a material adverse effect on our business, financial condition and results of
operations.
Pursuant to the Sysco Agreement, we are the primary supplier of pasta for
Sysco and have the exclusive right to supply pasta to Sysco for sale under
Sysco's name. Sysco, which operates from approximately 65 operations and
distribution facilities nationwide, provides products and services to
approximately 350,000 restaurants, hotels, schools, hospitals, and other
institutions, as well as the U.S. government. Sysco exercised its option to
renew its agreement for an additional three years through June 30, 2003, and has
an option to renew the agreement for one additional three-year period. Our
products are sold to Sysco on a cost-plus basis, with annual adjustments based
on the prior year's costs. Under the Sysco Agreement, we may not supply pasta
products to any business other than Sysco in the United States, Mexico or Canada
that operates as, or sells to, institutions and businesses which provide food
for consumption away from home (i.e. food service businesses) without Sysco's
prior consent. Sysco has honored us as one of its top 10 suppliers out of its
over 1,500 supplier base for five consecutive years. The Sysco Agreement may be
terminated by Sysco upon certain events, including a substantial casualty to or
condemnation of our Missouri plant.
Competition
- -----------
We operate in a highly competitive environment against numerous
well-established national, regional and foreign companies, and many smaller
companies. Our competitors include both independent pasta producers and pasta
divisions and subsidiaries of large food products companies. We compete in the
procurement of raw materials, the development of new products and product lines,
the improvement and expansion of previously introduced products and product
lines and the production, marketing and distribution of its products. Some of
these companies have longer operating histories, significantly greater brand
recognition and financial and other resources. Our products compete with a broad
range of food products, both in the retail and institutional customer markets.
Competition in these markets generally is based on product quality and taste,
pricing, packaging and customer service and logistics capabilities. We believe
that we currently compete favorably with respect to these factors.
Our direct competitors include large multi-national companies such as
Borden Foods Co. with brands such as Prince and Creamette; and New World
Pasta LLC with brands such as American Beauty, San Giorgio and Ronzoni, and
regional U.S. producers of retail and institutional pasta such as Dakota
Growers Pasta Co., Philadelphia Macaroni Co. Inc. and A. Zerega's Sons, Inc.,
each an independent producer, and foreign companies such as Italian pasta
producers De Cecco ("De Cecco") and Barilla. Barilla owns a plant in Iowa for
its U.S. production. We also compete against food processors such as Kraft
Foods, General Mills, Inc., American Home Food Products Corporation, Campbell
Soup Company and Stouffers Corp., that produce pasta internally as an
ingredient for use in their food products.
Our competitive environment depends to a significant extent on the
aggregate industry capacity relative to aggregate demand for pasta products.
Several domestic pasta producers have completed production capacity additions.
In addition to our capital expansions, we believe our competitors have added
more than 200 million pounds of pasta production capacity in aggregate.
Several foreign producers, based principally in Italy and Turkey, have
aggressively targeted the U.S. pasta market in recent years. In 1996, a U.S.
Department of Commerce investigation revealed that several Italian and Turkish
producers were engaging in unfair trade practices by selling pasta at less than
fair value in the U.S. markets and benefiting from subsidies from their
respective governments. Effective July 1996, the U.S. International Trade
Commission of the Department of Commerce ("Commerce"), imposed anti-dumping and
countervailing duties on Italian and Turkish imports ("the 1996 Anti-dumping
Order"). In December 1998, Commerce announced the final results of its review of
1996 Anti-dumping Order for three Turkish producers. Commerce indicated that one
of the producers had not had any shipments during the review period (January 19,
1996 to June 30, 1997), maintained the anti-dumping and countervailing duties
for another Turkish producer and repealed such duties for the third. In
addition, Commerce is conducting an
13
administrative review of its 1996 Anti-dumping Order relating to 8 Italian pasta
producers, including Barilla and De Cecco. Commerce maintained the anti-dumping
duties for most of the Italian pasta producers, including Barilla. While such
duties may enable us and our domestic competitors to compete more favorably
against Italian and Turkish producers in the U.S. pasta market, there can be no
assurance that the duties will be maintained for any length of time, or that
these or other foreign producers will not sell competing products in the United
States at prices lower than ours. Bulk imported pasta and pasta produced in the
U.S. by foreign firms are generally not subject to such anti-dumping and
countervailing duties. Foreign pasta producers generally may avoid such duties
by importing bulk pasta into the United States and repackaging it in U.S.
facilities for distribution. A leading branded Italian producer, Barilla,
completed a pasta production plant in Ames, Iowa in 1999.
Pasta Industry and Markets
- --------------------------
North American pasta consumption was approximately 5.0 billion pounds in
1999. The pasta industry consists of two primary customer markets: (i) Retail,
which includes grocery stores, club stores and mass merchants that sell branded
and private label pasta to consumers; and (ii) Institutional, which includes
both food service distributors that supply restaurants, hotels, schools and
hospitals, as well as food processors that use pasta as a food ingredient.
Pasta is a staple of the North American diet. It is widely recognized that
pasta is an inexpensive, convenient and nutritious food. The U.S. Department of
Agriculture places pasta on the foundation level of its pyramid of recommended
food groups. Products such as flavored pasta, prepared sauces, boxed pasta
dinners, and both frozen and shelf-stable prepared pasta entrees support
consumers' lifestyle demands for convenient at-home meals. Pasta continues to
grow in popularity in restaurants as Americans continue to dine away from home
more frequently.
Customer Markets - Retail. New World Pasta, Borden, Barilla, and Bestfoods
together represented a majority of the branded Retail market in 2000. New World
Pasta, which primarily competes in the branded Retail market and whose retail
brands include Ronzoni, San Giorgio, Skinner and American Beauty, is the
industry's branded leader and sold 23.2% of the total pounds sold in the branded
Retail market for the year ended September 30, 2000. Borden, which sold 16.1% of
the total pounds in the Retail market for the year ended September 30, 2000,
shifted its strategy to focus on its branded pasta and sauce products, which
include Creamette, Prince, Catelli, Merlino's and Anthony's, and to exit private
label pasta production and sales. Bestfoods participated in the Retail market
with Mueller's, the oldest and largest pasta brand in the United States. We
directly participate in the branded Retail market by producing and distributing
Pasta LaBella flavored pasta and indirectly participated in such market by
processing and distributing Mueller's brand pasta for Bestfoods in the fiscal
year ended September 30, 2000.
Between our first fiscal quarter of 1994 and the fourth fiscal quarter of
2000, sales of private label pasta products increased from 18.6% to 24.4% of the
total pounds of pasta sold in the Retail market according to A.C. Nielsen. We
believe that sales of private label pasta products will continue to grow at a
rate in excess of the overall Retail pasta market. We are the leading supplier
of private label retail pasta, and we believe that the private label category
continues to offer significant growth and profit opportunities to retailers and
efficient producers. Retailers often prefer high-quality private label products
to branded products because private label products typically enable retailers to
generate higher margins and maintain greater control of in-store merchandising.
While consumers traditionally have viewed private label products as having lower
quality than branded products, we believe that new high-quality private label
products have begun to change this perception. We attribute some of this change
in the private label market to the increasingly upscale image, improved
packaging, higher product quality and competitive prices of private label
products.
Customer Markets - Institutional. The Institutional market includes both
food service distributors that supply restaurants, hotels, schools and
hospitals, as well as food processors that use pasta as a food ingredient.
Traditional food service customers
14
include businesses and organizations, such as Sysco and US Food service, Inc.,
that sell products to restaurants, healthcare facilities, schools, hotels and
industrial caterers. Most food service distributors obtain their supply of pasta
from third party producers like us. The food service market is highly-fragmented
and is served by numerous regional and local food distributors, including both
"traditional" food service customers and chain restaurant customers. Sysco, the
nation's largest food service marketer and distributor of food service products
and one of the nation's largest commercial purchasers of pasta products, serves
approximately 10% of the food service customers in the United States and has
more than double the revenues of the next largest food service distributor.
The Institutional market also includes sales to food processors who use
pasta as an ingredient in their food products such as frozen dinner entrees and
side dishes, dry side dish mixes, canned soups and single-serve meals. Large
food processors that use pasta as a food ingredient include Kraft Foods,
American Home Food Products Corporation, Stouffers Corp., Campbell Soup Company,
ConAgra, Inc., Pillsbury and General Mills. The consistency and quality of the
color, starch release, texture, cooking consistency, and gluten and protein
content of pasta produced for food processors is crucial to their products'
success. As a result, food processors have stringent specifications for these
attributes.
The size of the Institutional market is affected by the number of food
processors that elect to produce pasta internally rather than outsourcing their
production. Historically, most pasta used by food processors was manufactured
internally for use in food processors' own products. We believe, however, that
an increasing number of food processors may discontinue the internal production
of their own pasta and outsource their production to efficient producers
including us.
Government Regulation; Environmental Matters
- --------------------------------------------
We are subject to various laws and regulations relating to the operation
of our production facilities, the production, packaging, labeling and marketing
of our products and pollution control, including air emissions, which are
administered by federal, state, and other governmental agencies. Our production
facilities are subject to inspection by the U.S. Food and Drug Administration
and Occupational Safety and Health Administration, the various state agencies.
Employees
- ---------
As of September 30, 2000, we employed 511 full-time persons, of whom 95
were exempt, 45 salaried non-exempt, 141 manufacturing non-exempt, and 230
manufacturing hourly employees. Our employees are not represented by any labor
unions. We consider our employee relations to be excellent.
ITEM 2. PROPERTIES.
Production Facilities. Our pasta production plants are located near Kansas
City in Excelsior Springs, Missouri, Columbia, South Carolina, Kenosha,
Wisconsin, and Verolanuova, Italy. Our U.S. facilities are strategically located
to support North American distribution of our products and benefit from the rail
and interstate highway infrastructure. At September 30, 2000, our U.S.
facilities had combined annual milling and production capacity of approximately
900 million pounds of durum semolina and approximately 800 million pounds of
pasta.
Distribution Centers. We own the distribution center adjoining our
Missouri plant and lease under a capital lease our distribution center in South
Carolina. In addition, we lease space in public warehouses located in California
and Missouri.
15
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any litigation, and we know of no litigation
threatened against us which, if commenced and adversely determined, we expect
would likely have a material adverse effect upon our business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to the vote of our stockholders during the
fourth quarter of the most recent fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to
paragraph (b) of Item 401 of Regulation S-K, the following list is included as
an unnumbered Item in Part I of this Annual Report in lieu of being included in
our Definitive Proxy Statement which will be filed no later than 120 days after
September 30, 2000. All executive officers are elected annually and serve at the
discretion of the Board of Directors. We have employment agreements with certain
of our executive officers.
The following table sets forth certain information about each of our
executive officers as of September 30, 2000.
NAME AGE POSITION
- ---- --- --------
Horst W. Schroeder....... 59 Chairman of the Board of Directors
Timothy S. Webster....... 38 President and Chief Executive Officer;
Director
Norman F. Abreo.......... 50 Executive Vice President - Operations
David E. Watson.......... 45 Executive Vice President -
Operations Support and Technology
David B. Potter.......... 41 Executive Vice President and
General Manager - Industrial Markets
Warren B. Schmidgall..... 50 Executive Vice President and
Chief Financial Officer
Jerry H. Dear............ 53 Executive Vice President - Retail Markets
Horst W. Schroeder has served as the Chairman of the Board of Directors
since June 1991, and as a Director since August 1990. Since 1990, Mr. Schroeder
has been President of HWS & Associates, Inc., a Hilton Head, South Carolina
management consulting firm owned by Mr. Schroeder. Prior to founding HWS &
Associates, Mr. Schroeder served the Kellogg Company, a manufacturer and
marketer of ready-to-eat and other convenience food products, in various
capacities for more than 20 years, most recently as President and Chief
Operating Officer. He was a manager of PSF Holdings, L.L.C. and served as
Chairman of the Board of its wholly-owned subsidiary, Premium Standard Farms,
Inc., a vertically-integrated pork producer, from 1996 to May 1998.
Timothy S. Webster has served as our President since June 1991, as
President and Chief Executive Officer of the Company since May 1992, and as a
Director since June 1989. Mr. Webster joined us in April 1989, and served as
Chief Financial Officer from May 1989 to December 1990 and as Chief Operating
Officer from December 1990 to June 1991.
Norman F. Abreo joined us in December 1991, serving initially as the Vice
President - Manufacturing. He became Senior Vice President - Operations in June
1995, and Executive Vice President - Operations in June 1997. Prior to joining
us, he was Plant Manager for the Coca-Cola Enterprises, Inc. plant in New
Orleans, Louisiana, from December 1987 to December 1991; Director of Operations
for Borden Pasta Group from December 1985 to December 1987; and Plant Manager of
the Borden Pasta Group's New Orleans facility from March 1979 to December 1985.
16
David E. Watson joined us in June 1994 as Senior Vice President and
Chief Financial Officer. He was promoted to Executive Vice President and
Chief Financial Officer in June, 1997. He was promoted to Executive Vice
President - Operations Support and Technology in July 1998. Prior to joining
us, Mr. Watson spent 18 years with the accounting firm of Arthur Andersen &
Co., most recently as partner-in-charge of its Kansas City and Omaha Business
Consulting Group practice. Mr. Watson is a certified public accountant.
David B. Potter joined us in 1993 as our Director of Procurement. He was
named Vice President in 1994 and Senior Vice President - Procurement in June
1997. He was promoted to Executive Vice President and General Manager -
Industrial Markets in July 1998. Before joining us, Mr. Potter had worked in
numerous areas of Hallmark Cards and its subsidiary, Graphics International
Trading Company, from 1981 to 1993, most recently as Business Logistics Manager.
Warren B. Schmidgall joined us in October 1998 as Senior Vice President
and Chief Financial Officer. He was promoted to Executive Vice President and
Chief Financial Officer in January 2000. Prior to that, Mr. Schmidgall worked in
various executive positions at Hill's Pet Nutrition, Inc. from February 1980 to
October 1998, including Chief Financial Officer and, most recently, Executive
Vice President, Business Development.
Jerry H. Dear joined us in 1993 as a Business Development Manager. He was
named Vice President - Retail Sales in 1995, Senior Vice President - Retail
Markets in February 1998, and Executive Vice President - Retail Markets in
January 2000. Before joining us, Mr. Dear had worked at Pillsbury from 1983 to
1993, most recently as a Region Business Manager.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our Class A Convertible Common Stock, par value $0.001 per share (the
"common stock") is traded on the New York Stock Exchange under the symbol "PLB".
The range of the high and low prices per share of the common stock for
fiscal 2000 and 1999 was as follows:
Year Ended Year Ended
September 30, 2000 September 30, 1999
High Low High Low
---- --- ---- ---
First Quarter $31.125 $23.00 $26.50 $17.625
Second Quarter $31.625 $16.6875 $29.00 $22.25
Third Quarter $26.4375 $18.625 $30.625 $24.125
Fourth Quarter $22.00 $15.00 $30.625 $25.625
As of December 12, 2000, there were 5,245 holders of the common stock. No
shares of the Company's Class B Convertible Common Stock, par value $0.001 per
share (the "Class B common stock") are outstanding on the date of this Annual
Report.
We have not declared or paid any dividends on our common stock to date and
do not anticipate paying any such dividends in the foreseeable future. We intend
to retain earnings for the foreseeable future to provide funds for the operation
and expansion of its business and for the repayment of indebtedness. Our current
credit facility contains certain provisions which effectively prohibit the
payment of dividends. Future borrowing agreements may also contain limitations
on the payment of dividends. Any determination to pay dividends in the future
will be at the discretion of our Board of Directors and will depend upon our
financial condition, capital requirements, results of operations and other
factors, including any contractual or statutory restrictions. We have no
restricted retained earnings at September 30, 2000.
17
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of operations data for the fiscal years ended
September 30, 2000, 1999 and 1998, and the selected balance sheet data as of
September 30, 2000 and 1999 are derived from our Consolidated Financial
Statements including the Notes thereto audited by Ernst & Young LLP, independent
auditors, appearing elsewhere in this Annual Report. The selected statement of
operations data for the fiscal year ended September 30, 1997, the nine-month
fiscal period ended September 30, 1996 and the selected balance sheet data as of
September 30, 1997, and 1996, have been derived from our financial statements
not included herein, which have been audited by Ernst & Young LLP. The selected
statement of operations data for the twelve-month period ended September 30,
1996 has been derived from our unaudited internal financial statements, which in
the opinion of management, have been prepared on the same basis as the audited
financial statements and reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results of our operations
and financial position. The statement of operations data for the twelve-month
period ended September 30, 1996 is included herein only for comparison purposes.
The selected financial data set forth below should be read in conjunction with,
and is qualified by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements, including the Notes thereto, appearing elsewhere in this Annual
Report.
18
NINE-MONTH
TWELVE-MONTH FISCAL PERIOD
FISCAL YEARS ENDED PERIOD ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998 1997 1996 1996(1)
------------- ------------ ----------- ------------ ------------------ -----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $248,795 $220,149 $189,390 $129,143 $121,149 $92,074
Cost of goods sold 178,810 160,449 140,110 93,467 91,230 68,555
Plant expansion costs(2) -- 130 1,606 -- -- --
-------- -------- -------- ------- -------- -------
Gross profit 69,985 59,570 47,674 35,676 29,919 23,519
Selling and marketing expense,
including product introduction
costs(3) 16,065 14,855 12,984 13,664 18,445 16,798
General and administrative Expense 6,263 5,580 4,948 3,766 3,686 2,805
-------- -------- -------- ------- -------- -------
Operating profit 47,657 39,135 29,742 18,246 7,788 3,916
Interest expense, net 4,777 2,098 1,539 10,119 10,770 8,023
-------- -------- -------- ------- -------- -------
Income (loss) before income tax
Expense (benefit) and
Extraordinary loss 42,880 37,037 28,203 8,127 (2,982) (4,107)
Income tax expense (benefit) 15,426 13,519 10,557 3,070 (1,139) (1,556)
Extraordinary loss, net of
Income taxes(4) -- -- 2,332 -- 1,647 1,647
-------- -------- -------- ------- -------- -------
Net income (loss) $27,454 $23,518 $15,314 $5,057 $(3,490) $(4,198)
======== ======== ======== ======= ======= =======
Net income (loss) per Common share (basic):
Before extraordinary item $1.53 $1.30 $1.03 $0.44 $(0.18) $(0.25)
Extraordinary item -- -- (0.14) -- (0.16) (0.16)
-------- -------- -------- ------- -------- ------
Total $1.53 $1.30 $0.89 $0.44 $(0.34) $(0.41)
======== ======== ======== ======= ======= =======
Weighted average common shares outstanding 17,895 18,108 17,223 11,466 10,219 10,223
Net income (loss) per Common share assuming dilution:
Before extraordinary item $1.50 $1.26 $0.98 $0.42 $(0.18) $(0.25)
Extraordinary item -- -- (0.13) -- (0.16) (0.16)
-------- -------- -------- ------- -------- ------
Total $1.50 $1.26 $0.85 $0.42 $(0.34) $(0.41)
======== ======== ======== ======= ======= =======
Weighted average common shares outstanding 18,298 18,621 17,937 12,119 10,219 10,223
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and temporary investments $6,677 $3,088 $5,442 $2,724 $1,818 $1,818
Working capital 46,941 29,222 23,242 12,188 (1,601) (1,601)
Current ratio 304% 212% 89% 181% 95% 95%
Net property, plant & equipment 311,668 266,124 205,607 125,234 103,753 103,753
Total assets 383,771 322,222 259,381 158,175 141,688 141,688
Long-term debt, less current maturities 138,502 81,467 48,519 100,137 93,284 93,284
Stockholders' equity 198,404 201,730 176,784 42,984 15,969 15,969
Total Debt/Total Capitalization 41% 29% 22% 70% 88% 88%
(1) We adopted a fiscal year ending on the last Friday of September or the
first Friday of October, effective beginning with the nine-month fiscal period
ended September 27, 1996 and for all subsequent fiscal periods. For purposes of
this Form 10-K, the 2000, 1999, 1998 and 1997 fiscal years and the 1996
nine-month fiscal period are shown as having ended on September 30.
19
(2) Plant expansion costs include incremental direct and indirect
manufacturing and distribution costs which are incurred as a result of
construction, commissioning and start-up of new capital assets. These costs are
expensed as incurred but are unrelated to current production and, therefore, are
reported as a separate line item in the statement of operations.
(3) Selling and marketing expense includes incremental product
introduction costs, including payment of product placement or "slotting" fees,
related to our launch of Pasta LaBella flavored pasta products into the U.S.
retail market. We did not incur such product introduction costs prior to the
fiscal period ended September 30, 1996. There were no such costs during the
fiscal year ended September 30, 2000, 1999 and 1998. Product introduction costs
were incurred as follows: $2.9 million for the fiscal year ended September 30,
1997 and $8.1 million for the nine-month and twelve-month periods ended
September 30, 1996.
(4) Represents losses due to early extinguishment of long-term debt,
net of income taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
Introduction and Certain Cautionary Statements
The following discussion and analysis of our financial condition and
results of operations focuses on and is intended to clarify the results of
our operations, certain changes in our financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
financial statements included in this Annual Report. This discussion should be
read in conjunction with, and is qualified by reference to, the other related
information including, but not limited to, the audited consolidated financial
statements (including the notes thereto and the independent auditor's report
thereon), the description of our business, all as set forth in this Annual
Report, as well as the risk factors discussed above (the "Risk Factors").
As previously noted, the discussion set forth below, as well as other
portions of this Annual Report, contains statements concerning potential future
events. Readers can identify these forward-looking statements by their use of
such verbs as expects, anticipates, believes or similar verbs or conjugations of
such verbs. If any of our assumptions on which the statements are based prove
incorrect or should unanticipated circumstances arise, our actual results could
materially differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, the Risk Factors. Readers are strongly encouraged
to consider those factors when evaluating any such forward-looking statement. We
will not update any forward-looking statements in this Annual Report.
We changed our fiscal year end from December 31 to the last Friday of
September or the first Friday of October. This change resulted in a nine-month
fiscal year for 1996 and a 53-week year for fiscal 1997, a 52-week year for
fiscal 1998, and a 52- or 53-week year for all subsequent fiscal years. Our
first three fiscal quarters end on the Friday last preceding December 31, March
31, and June 30 or the first Friday of the following month of each quarter. For
purposes of this Form 10-K, our fiscal years are described as having ended on
September 30.
20
Results of Operations
The following table sets forth certain data from our statement of income,
expressed as a percentage of revenues, for each of the periods presented.
FISCAL YEARS ENDED
SEPTEMBER 30,
2000 1999 1998
---- ---- ----
Revenues:
Retail 71.5% 72.8% 71.0%
Institutional 28.5% 27.2% 29.0%
----- ----- -----
Total Revenues 100.0% 100.0% 100.0%
------ ------ ------
Cost of goods sold 71.9 72.9 74.0
---- ---- ----
Gross profit before plant expansion costs 28.1 27.1 26.0
Plant expansion costs -- -- 0.8
-- -- ---
Gross profit 28.1 27.1 25.2
Selling and marketing expense 6.5 6.8 6.9
General and administrative expense 2.5 2.5 2.6
--- --- ---
Operating profit 19.1 17.8 15.7
Interest expense, net 1.9 1.0 0.8
Income tax expense 6.2 6.1 5.6
Extraordinary loss, net of income tax -- -- 1.2
-- -- ---
Net income 11.0% 10.7% 8.1%
===== ===== ====
21
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1999
Revenues. Revenues increased $28.6 million, or 13.0%, to $248.8 million
for the fiscal year ended September 30, 2000, from $220.1 million for the fiscal
year ended September 30, 1999. The revenue increase was primarily due to volume
growth of 17.7% over the prior year, offset by lower average selling prices. The
pass-through of lower durum wheat costs, along with changes in sales mix,
created a 3.7% reduction in average selling prices. We expect increases in
revenue in fiscal 2001 due to growth with existing customers, new customer
accounts, and the acquisition of the Mueller's brand.
Revenues for the Retail market increased $17.6 million, or 11.0%, to
$177.8 million for the fiscal year ended September 30, 2000, from $160.2 million
for the fiscal year ended September 30, 1999. The increase primarily reflects
volume growth of 12.2% over the prior year, offset by lower average selling
prices. Revenues for the current year were affected by the restructuring of
several private label programs, which lowered revenues and promotional expenses
versus the prior year.
Revenues for the Institutional market increased $11.0 million, or 18.4%,
to $71.0 million for the fiscal year ended September 30, 2000, from $60.0
million for the fiscal year ended September 30, 1999. This increase was
primarily a result of volume growth of 28.4% over the prior year, offset by
lower average selling prices. The pass-through of lower durum wheat costs, along
with changes in sales mix, generated by rapid growth of ingredient volumes,
created a 7.8% reduction in average selling prices.
Gross Profit. Gross profit increased $10.4 million, or 17.5%, to $70.0
million for the fiscal year ended September 30, 2000, from $59.6 million for the
fiscal year ended September 30, 1999. Gross profit increased generally as a
result of the volume and revenue gains referenced above. Gross profit as a
percentage of revenues increased to 28.1% for the fiscal year ended September
30, 2000 from 27.1% for the fiscal year ended September 30, 1999. The increase
in gross profit as a percentage of revenues relates to lower raw material costs
and lower operating costs per unit. We expect increases in gross profit in 2001
as a result of volume and related revenue increases.
Selling and Marketing Expense. Selling and marketing expense increased $1.2
million, or 8.1%, to $16.1 million for the fiscal year ended September 30, 2000,
from $14.9 million reported for the fiscal year ended September 30, 1999.
Selling and marketing expense as a percentage of revenues decreased to 6.5% for
the fiscal year ended September 30, 2000, from 6.8% for the comparable prior
period. As discussed above, certain promotional expenses were lower in the
current period due to the modification of several private label customer
programs.
General and Administrative Expense. General and administrative expense
increased $0.6 million, or 12.2%, to $6.3 million for the fiscal year ended
September 30, 2000, from $5.6 million reported for the comparable period last
year, and remained at 2.5% as a percentage of revenue.
Operating Profit. Operating profit for the fiscal year ended September 30,
2000, was $47.7 million, an increase of 21.8% over the $39.1 million reported
for the fiscal year ended September 30, 1999. Operating profit increased as a
percentage of revenues to 19.2% for the fiscal year ended September 30, 2000,
from 17.8% for the fiscal year ended September 30, 1999.
Interest Expense. Interest expense for the fiscal year ended September 30,
2000, was $4.8 million, increasing 127.7% from the $2.1 million reported for the
fiscal year ended September 30, 1999. The increase is attributable to interest
on higher debt levels, offset by increased interest expense capitalization. The
higher debt levels are attributable to the Company's recent share repurchase
program and Italian expansion.
Income Tax. Income tax for the fiscal year ended September 30, 2000, was
$15.4 million, increasing $1.9 million from the $13.5 million reported for the
fiscal year ended September 30, 1999, and reflects effective income tax rates of
approximately 36% and 36.5%, respectively.
22
Net Income. Net income for the fiscal year ended September 30, 2000, was
$27.5 million, increasing from the $23.5 million reported for the fiscal year
ended September 30, 1999. Net income per common share-assuming dilution was
$1.50 in fiscal 2000 compared to $1.26 per share for the fiscal year ended
September 30, 1999.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998
Revenues. Revenues increased $30.8 million, or 16.2%, to $220.1 million
for the fiscal year ended September 30, 1999, from $189.4 million for the fiscal
year ended September 30, 1998. The revenue increase was primarily due to volume
growth of 28.6% over the prior year, offset by lower average selling prices. The
pass-through of lower durum wheat costs, along with changes in sales mix,
created a 10.2% reduction in average selling prices.
Revenues for the Retail market increased $25.7 million, or 19.1%, to
$160.2 million for the fiscal year ended September 30, 1999, from $134.5 million
for the fiscal year ended September 30, 1998. The increase primarily reflects
volume growth of 27.3% over the prior year, offset by lower average selling
prices. The pass-through of lower durum wheat costs, primarily, created a 7.2%
reduction in average selling prices.
Revenues for the Institutional market increased $5.1 million, or 9.3%, to
$60.0 million for the fiscal year ended September 30, 1999, from $54.9 million
for the fiscal year ended September 30, 1998. This increase was primarily a
result of volume growth of 31.2% over the prior year, offset by lower average
selling prices. The pass-through of lower durum wheat costs, along with changes
in sales mix, generated by rapid growth of ingredient revenues, created an 18.4%
reduction in average selling prices.
Gross Profit. Gross profit increased $11.9 million, or 25.0%, to $59.6
million for the fiscal year ended September 30, 1999, from $47.7 million for the
fiscal year ended September 30, 1998. Gross profit increased generally as a
result of the volume and revenue gains referenced above. Gross profit as a
percentage of revenues increased to 27.1% for the fiscal year ended September
30, 1999 from 25.2% for the fiscal year ended September 30, 1998. The increase
in gross profit as a percentage of revenues relates to lower raw material costs,
lower operating costs per unit and lower plant expansion costs.
Selling and Marketing Expense. Selling and marketing expense increased
$1.9 million, or 14.4%, to $14.9 million for the fiscal year ended September 30,
1999, from $13.0 million reported for the fiscal year ended September 30, 1998.
Selling and marketing expense as a percentage of revenues decreased to 6.8% for
the fiscal year ended September 30, 1999, from 6.9% for the comparable prior
period.
General and Administrative Expense. General and administrative expense
increased $0.6 million, or 12.8%, to $5.6 million for the fiscal year ended
September 30, 1999, from $4.9 million reported for the comparable period last
year, but decreased as a percentage of revenues from 2.6% to 2.5%.
Operating Profit. Operating profit for the fiscal year ended September 30,
1999, was $39.1 million, an increase of 31.6% over the $29.7 million reported
for the fiscal year ended September 30, 1998. Operating profit increased as a
percentage of revenues to 17.8% for the fiscal year ended September 30, 1999,
from 15.7% for the fiscal year ended September 30, 1998.
Interest Expense. Interest expense for the fiscal year ended September 30,
1999, was $2.1 million, increasing 36.3% from the $1.5 million reported for the
fiscal year ended September 30, 1998. The increase was primarily the result of
increased borrowing for the Company's expansion programs, net of capitalized
interest.
Income Tax. Income tax for the fiscal year ended September 30, 1999, was
$13.5 million, increasing $3.0 million from the $10.5 million reported for the
fiscal year ended September 30, 1998, and reflects an effective income tax rate
of approximately 37%.
23
Extraordinary Item. During the fiscal year ended September 30, 1998, the
Company incurred a $2.3 million (net of tax) extraordinary loss due to the
write-off of deferred debt issuance costs in conjunction with the October 1997
extinguishment and restructuring of the Company's principal bank credit
agreement. There was no such item in the 1999 period.
Net Income. Net income for the fiscal year ended September 30, 1999, was
$23.5 million, increasing from the $15.3 million reported for the fiscal year
ended September 30, 1998. Net income per common share-assuming dilution was
$1.26 in fiscal 1999 compared to $0.85 per share for the fiscal year ended
September 30, 1998.
Liquidity and Capital Resources
- -------------------------------
Our primary sources of liquidity are cash provided by operations and
borrowings under our its credit facility. We also generated liquidity through
the sale of equity in 1998, which proceeds were used to reduce debt and to
finance capital expansions. Cash and temporary investments totaled $6.7 million
and net working capital totaled $46.9 million at September 30, 2000. At
September 30, 1999, cash and temporary cash investments totaled $3.1 million and
working capital totaled $29.2 million. The $17.7 million increase in working
capital was financed with the existing credit facility and the increases in our
operating results.
Our net cash provided by operating activities totaled $38.9 million for
the fiscal year ended September 30, 2000 compared to $38.0 million for the
fiscal year ended September 30, 1999 and $28.4 million for the fiscal year ended
September 30, 1998. The increases during these periods are primarily a result of
increases in net income before non-cash charges, offset by volume related
increases in net working capital investment.
Cash flow used in investing activities principally relates to our
investments in production, distribution, milling and MIS assets. Capital
expenditures were $57.7 million for the fiscal year ended September 30, 2000,
$74.0 million for the year ended September 30, 1999 and $84.8 million for the
fiscal year ended September 30, 1998. The increase in spending for the fiscal
years ending September 30, 2000, 1999, and 1998 was planned and is a result of
our previously referenced capital expansion programs.
Net cash provided by financing activities was $21.1 million for the fiscal
year ended September 30, 2000 compared to $33.7 million for the fiscal year
ended September 30, 1999. The $21.1 million is primarily a result of $57.3
million proceeds from issuance of debt offset by $31.3 million used to purchase
treasury stock. The $33.7 million is primarily a result of $34.0 million
proceeds from issuance of debt. Net cash provided by financing activities was
$59.0 million for the year ended September 30, 1998, as a result of (1) $114.5
million in net proceeds from the fiscal 1998 public equity offerings, which were
substantially used for repayment of short-term and long-term borrowings (2)
$60.8 million proceeds from issuance of debt (net of $.3 million deferred debt
issuance costs) partially offset by the $117.1 million principal payments on
debt and capital lease obligations.
Our credit agreement contains restrictive covenants which include, among
other things, financial covenants requiring minimum and cumulative earnings
levels and limitations on the payment of dividends, stock purchases and our
ability to enter into certain contractual arrangements. We do not expect these
limitations to have a material effect on business or results of operations. We
are in compliance with all financial covenants contained in the credit
agreement.
We currently use cash to fund capital expenditures, repayments of debt and
working capital requirements and our stock repurchase program. We expect that
future cash requirements will principally be for capital expenditures,
repayments of indebtedness, working capital requirements, and possible stock
repurchase programs.
On April 26, 2000, we completed an expansion of our revolving credit
facility by adding a multi-currency feature. Available credit under the expanded
credit facility is $190 million compared with $140 million previously. The
expanded facility eliminates the
24
previously scheduled step-downs of available credit and allows us to borrow in
dollars or up to $65.0 million in Euro equivalents. Our new manufacturing
facility in Italy provides the opportunity to borrow in Euros with minimal net
currency exposure at rates well below current dollar-denominated rates.
At September 30, 2000, the three-month LIBOR rate was 6.815%, the
three-month Euribor rate was 4.999%, and our aggregate, weighted average bank
debt borrowing rate was 6.51%.
We utilize interest rate agreements and foreign exchange contracts to
manage interest rate and foreign currency exposures. The principal objective of
such financial derivative contracts is to moderate the effect of fluctuations in
interest rates and foreign exchange rates. We, as a matter of policy, do not
speculate in financial markets and therefore do not hold these contracts for
trading purposes. We utilize what are considered straight-forward instruments,
such as forward foreign exchange contracts and non-leveraged interest rate
swaps, to accomplish our objectives.
At this time, the current and projected borrowings under our credit
facility do not exceed the facility's available commitment. The facility matures
on October 17, 2002. We anticipate that any borrowings outstanding at that time
will be satisfied with funds from operations or will be refinanced. We have no
other material commitments.
We believe that net cash provided by operating activities and net cash
provided by financing activities will be sufficient to meet our expected capital
and liquidity needs for the foreseeable future.
Recently Issued Accounting Pronouncement
- ----------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires all derivatives to be recorded on the balance sheet as either assets or
liabilities and be measured at fair value. Gains or losses from changes in the
derivative values are to be accounted for based on how the derivative was used
and whether it qualifies for hedge accounting. When adopted in October 2000,
this statement will not have a material impact on our consolidated
financial statements.
Other Matters
- -------------
None.
Effect of Inflation
- -------------------
During the last three fiscal periods, inflation has not had a material
effect on our business. We have experienced increases in our cost of borrowing
and raw materials, though generally not related to inflation. In general, we
have increased the majority of customer sales prices to recover significant raw
material cost increases. However, these changes in prices have historically
lagged price increases in our raw material costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our principal exposure to market risk associated with financial instruments
relate to interest rate risk associated with variable rate borrowings and
foreign currency exchange rate risk associated with borrowings denominated in
foreign currency. We occasionally utilize simple derivative instruments such as
interest rate swaps to manage our mix of fixed and floating rate debt. No such
swaps were outstanding at September 30, 2000 and all of our debt was subject to
variable interest rates. If these rates were to change by 10%, the estimated
additional interest expense would have been approximately $500,000 for the year
ended September 30, 2000. The impact was not material for the years ended
September 30, 1999 and 1998. We hedge our net investment in our foreign
subsidiaries with eruo borrowings under our credit facility. Changes in the U.S.
dollar equivalent of euro-based borrowings is recorded as a component of the net
translation adjustment in the consolidated statement of stockholder's equity.
We have operations in Italy. The functional currency for this operation is
the Lira. At September 30, 2000, long-term debt includes foreign subsidiary
obligations of 53.7 million Euros ($49.4 million) under a credit facility which
bears interest at a variable rate based upon the Euribor rate.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN ITALIAN PASTA COMPANY
Index to Audited Consolidated Financial Statements
Page
----
Report of Independent Auditors 27
Consolidated Balance Sheets at September 30, 2000 and 1999 28
Consolidated Statements of Income for the years ended
September 30, 2000, 1999 and 1998 29
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 2000, 1999 and 1998 30
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998 31
Notes to Consolidated Financial Statements 32-41
26
Report of Independent Auditors
The Board of Directors
American Italian Pasta Company
We have audited the accompanying consolidated balance sheets of American
Italian Pasta Company (the Company) as of September 30, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended September 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Italian Pasta Company at September 30, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Kansas City, Missouri
October 25, 2000
27
AMERICAN ITALIAN PASTA COMPANY
Consolidated Balance Sheets
September 30, September 30,
2000 1999
---- ----
(In thousands)
Assets
Current assets:
Cash and temporary investments $6,677 $3,088
Trade and other receivables 27,479 22,018
Prepaid expenses and deposits 4,424 3,952
Inventory 28,390 25,227
Deferred income taxes (Note 3) 2,989 1,031
-------- --------
Total current assets 69,959 55,316
Property, plant and equipment:
Land and improvements 7,159 6,953
Buildings 85,157 75,677
Plant and mill equipment 230,383 219,725
Furniture, fixtures and equipment 10,011 7,239
-------- --------
332,710 309,594
Accumulated depreciation (64,769) (51,156)
-------- -------
267,941 258,438
Construction in progress 43,727 7,686
-------- --------
Total property, plant and equipment 311,668 266,124
Other assets 2,144 782
-------- --------
Total assets $383,771 $322,222
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 12,261 $ 15,187
Accrued expenses 8,352 9,763
Income tax payable 841 --
Current maturities of long-term debt 1,564 1,144
-------- --------
(Note 2)
Total current liabilities 23,018 26,094
Long-term debt (Note 2) 138,502 81,467
Deferred income taxes (Note 3) 23,847 12,931
Commitments and contingencies (Note 4)
Stockholders' equity: (Notes 6 & 11)
Preferred stock, $.001 par value:
Authorized shares - 10,000,000 -- --
Class A common stock, $.001 par
value:
Authorized shares - 75,000,000 18 18
Class B common stock, $.001 par
value:
Authorized shares - 25,000,000 -- --
Additional paid-in capital 177,725 175,030
Treasury stock (31,362) (26)
Notes receivable from officers (61) (71)
Retained earnings 54,233 26,779
Accumulated other comprehensive
income (loss) (2,149) --
Total stockholders' equity 198,404 201,730
-------- --------
Total liabilities and stockholders'
equity $383,771 $322,222
======== ========
See accompanying notes to consolidated financial statements.
28
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Income
Year ended Year ended Year ended
September 30, September 30, September 30,
2000 1999 1998
---- ---- ----
(In thousands, except per share amounts)
Revenues (Note 5) $248,795 $220,149 $189,390
Cost of goods sold 178,810 160,449 140,110
Plant expansion costs (Note 8) -- 130 1,606
-------- -------- --------
Gross profit 69,985 59,570 47,674
Selling and marketing expense 16,065 14,855 12,984
General and administrative expense 6,263 5,580 4,948
-------- -------- --------
Operating profit 47,657 39,135 29,742
Interest expense, net 4,777 2,098 1,539
-------- -------- --------
Income before income tax expense
and extraordinary item 42,880 37,037 28,203
Income tax expense (Note 3) 15,426 13,519 10,557
-------- -------- --------
Income before extraordinary item 27,454 23,518 17,646
Extraordinary item:
Loss due to early extinguishment
of long-term debt, net of income
taxes -- -- (2,332)
======== ======== =======
Net income $ 27,454 $ 23,518 $15,314
======== ======== =======
Net income per common share:
Before extraordinary item $ 1.53 $ 1.30 $ 1.03
Extraordinary item -- -- (0.14)
------ ------ ------
Total $ 1.53 $ 1.30 $ 0.89
====== ====== ======
Weighted-average common shares
outstanding 17,895 18,108 17,223
======== ======== =======
Net income per common share assuming dilution:
Before extraordinary item $ 1.50 $ 1.26 $ 0.98
Extraordinary item -- -- (0.13)
-------- -------- --------
Total $ 1.50 $ 1.26 $ 0.85
======== ======== =======
Weighted-average common shares
outstanding 18,298 18,621 17,937
======== ======== =======
See accompanying notes to consolidated financial statements.
29
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Stockholders' Equity
Year ended Year ended Year ended
September 30, September 30, September 30,
2000 1999 1998
------------------ ------------------ ------------------
In thousands
Class A Common Shares
Balance, beginning of year 18,177 18,087 11,466
Issuance of 5,310 shares of Class A Common stock,
net of issuance costs - - 5,310
Issuance of 1,000 shares of Class A Common stock,
net of issuance costs - - 1,000
Issuance of shares of Class A Common stock to
option holders & other issuances 186 90 311
------ ------ ------
Balance, end of year 18,363 18,177 18,087
====== ====== ======
Class A Common Stock
Balance, beginning of year $ 18 $ 18 $ 11
Issuance of 5,310 shares of Class A Common stock,
net of issuance costs - - 5
Issuance of 1,000 shares of Class A Common stock,
net of issuance costs - - 1
Issuance of shares of Class A Common stock to
option holders & other issuances - - 1
------ ------ ------
Balance, end of year $ 18 $ 18 $ 18
====== ====== ======
Additional Paid-in Capital
Balance, beginning of year $175,030 $173,642 $ 55,324
Issuance of 5,310 shares of Class A Common stock,
net of issuance costs - - 86,684
Issuance of 1,000 shares of Class A Common stock,
net of issuance costs - - 27,844
Issuance of shares of Class A Common stock to
option holders & other issuances 2,695 1,388 3,790
------ ------ ------
Balance, end of year $177,725 $175,030 $173,642
======== ======== ========
Treasury Stock
Balance, beginning of year $ (26) $ (13) $ -
Purchase of treasury stock (31,336) (13) (13)
---------- ------ ------
Balance, end of year $ (31,362) $ (26) $ (13)
========== ====== ======
Notes Receivable from Officers
Balance, beginning of year $ (71) $ (124) $ (298)
Paydown of notes receivable from officers 10 53 174
------ ------ ------
Balance, end of year $ (61) $ (71) $ (124)
====== ====== =======
Other Comprehensive Income:
Balance, beginning of year $ - $ - $ -
Foreign currency translation adjustment (2,149) - -
-------- ------ ------
Balance, end of year $(2,149) $ - $ -
-------- ------ ------
Retained Earnings
Balance, beginning of year $ 26,779 $ 3,261 $ (12,053)
Net income 27,454 23,518 15,314
-------- ------ ------
Balance, end of year 54,233 26,779 3,261
-------- ------ ------
Total Stockholders' Equity $198,404 $201,730 $176,784
======== ======== ========
See accompanying notes to consolidated financial statements.
30
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Cash Flows
Year ended Year ended Year ended
September 30, September 30, September 30,
2000 1999 1998
---- ---- ----
(In thousands)
Operating activities:
Net income $ 27,454 $ 23,518 $ 15,314
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization 15,906 13,701 9,576
Deferred income tax expense 8,958 8,384 5,275
Extraordinary loss due to early
extinguishment of long-term debt -- -- 2,332
Changes in operating assets and liabilities:
Trade and other receivables (5,478) (4,520) (7,790)
Prepaid expenses and deposits (472) (2,216) (710)
Inventory (3,180) 2,824 (14,376)
Accounts payable and accrued expenses (3,635) 4,252 7,708
Advance customer payments -- (5,957) 5,957
Income taxes 2,205 (1,214) 5,432
Other (2,864) (805) (290)
------- ----- ----
Net cash provided by operating activities 38,894 37,967 28,428
Investing activities:
Additions to property, plant and equipment (57,706) (73,980) (84,757)
-------- -------- -------
Net cash used in investing activities (57,706) (73,980) (84,757)
Financing activities:
Additions to deferred debt issuance costs (791) -- (325)
Proceeds from issuance of debt 57,304 34,115 60,763
Principal payments on debt and capital lease
obligations (5,452) (1,229) (117,083)
Proceeds from issuance of common stock, net
of issuance costs 1,330 786 115,692
Purchases of Treasury Stock (31,336) -- --
Other 10 (13) --
-- ---- --
Net cash provided by financing activities 21,065 33,659 59,047
Effect of exchange rate changes on cash 1,336 -- --
-------- -------- -------
Net increase (decrease) in cash and
temporary investments 3,589 (2,354) 2,718
Cash and temporary investments at beginning 3,088 5,442 2,724
----- ----- -----
of year
Cash and temporary investments at end of year $ 6,677 $ 3,088 $ 5,442
======== ======= =======
See accompanying notes to consolidated financial statements.
31
AMERICAN ITALIAN PASTA COMPANY
Notes to Consolidated Financial Statements
September 30, 2000
1. Summary of Significant Accounting Policies
Nature of Business
American Italian Pasta Company (the Company) is a Delaware corporation
which began operations in 1988. The Company is the largest producer and marketer
of pasta products in the United States and has manufacturing and distribution
facilities located in Excelsior Springs, Missouri, Columbia, South Carolina,
Kenosha, Wisconsin, and Verolanuova, Italy.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority owned subsidiaries.
Fiscal Year End
The Company's fiscal year ends on the last Friday of September or the
first Friday of October, resulting in a 52- or 53-week year for all subsequent
fiscal years. The Company's other fiscal quarters end on the Friday last
preceding December 31, March 31 and June 30 or the first Friday of the following
month of each quarter. For purposes of the financial statements and notes
thereto, the Company's fiscal year is described as having ended on September 30.
Revenue Recognition
Sales of the Company's products, including pricing terms, are final upon
shipment of the goods, except for certain supply contracts where the
requirements have been met for recognizing revenue upon completion of
production. Revenue is recognized accordingly.
Foreign Currency
The Company's functional currency is the U.S. dollar. Accordingly, assets
and liabilities of the Company's foreign operations are remeasured at year-end
or historical rates depending on their nature; income and expenses are
remeasured at the weighted-average exchange rates for the year. Foreign currency
gains and losses resulting from transactions are included in consolidated
operations in the year of occurrence. The company recorded foreign translation
gains and (losses) of $(2,149,000) in 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Risks and Uncertainties
The Company grants credit to certain customers who meet the Company's
pre-established credit requirements. Generally, the Company does not require
collateral security when trade credit is granted to customers. Credit losses are
provided for in the financial statements and consistently have been within
management's expectations. The allowance for doubtful accounts at September 30,
2000 and 1999 was $178,000 and $184,000, respectively. At September 30, 2000 and
1999, approximately 43% and 35%, respectively, of accounts receivable were due
from three customers.
Pasta is made from semolina milled from durum wheat, a class of hard amber
wheat grown in certain parts of the world and purchased by the Company from
United States and Canadian sources. The Company mills the wheat into semolina at
both the Excelsior Springs and
32
Columbia plants. Durum wheat is a narrowly traded commodity crop. The Company
attempts to minimize the effect of durum wheat cost fluctuations through forward
purchase contracts and raw material cost-based pricing agreements with many of
its customers. The Company's commodity procurement and pricing practices are
intended to reduce the risk of durum wheat cost increases on profitability, but
also may temporarily affect the timing of the Company's ability to benefit from
possible durum wheat cost decreases for such contracted quantities.
Financial Instruments
The carrying value of the Company's financial instruments, including cash
and temporary investments, accounts receivable, accounts payable and long-term
debt, as reported in the accompanying consolidated balance sheets at September
30, 2000 and 1999, approximates fair value. The estimated fair value of the
interest rate swap agreement outstanding at September 30, 1999 of ($34,617) is
the amount the Company would be required to pay to terminate the swap agreement
at September 30, 1999.
Interest Rate Swap Agreement
The Company occasionally uses interest rate swap agreements as part of its
interest rate risk management program. Net interest paid or received related to
these agreements are recorded using the accrual method and are recorded as an
adjustment to interest expense. The Company had an interest rate swap agreement
with a notional amount of $10 million outstanding at September 30, 1999. There
were no deferred gains or losses related to any terminated interest rate swap
agreements at September 30, 1999. The Company was not a party to any interest
rate swap agreements at September 30, 2000.
Cash and Temporary Investments
Cash and temporary investments include cash on hand, amounts due from
banks and highly liquid marketable securities with maturities of three months or
less at the date of purchase.
Inventories
Inventories are stated using product specific standard costs which
approximate the lower of cost or market determined on a first-in, first-out
(FIFO) basis. Inventories consist of the following:
September 30, September 30,
2000 1999
---- ----
(In thousands)
Finished goods $19,701 $18,123
Raw materials, packaging materials and
work-in-process 8,689 7,104
------- -------
$28,390 $25,227
======= =======
Property, Plant and Equipment
Capital additions, improvements and major renewals are classified as
property, plant and equipment and are recorded at cost. Depreciation is
calculated for financial statement purposes using the straight-line method over
the estimated useful life of the related asset for each year as follows:
Number of
Years
-----
Land improvements 40
Buildings 30
Plant and mill equipment 20
Packaging equipment 10
Furniture, fixtures and equipment 5
The Company capitalizes interest costs associated with the construction and
installation of plant and equipment. During the years ended September 30, 2000,
1999 and 1998,
33
approximately $2,086,000, $2,713,000 and $2,032,000, respectively, of interest
cost was capitalized.
34
Other Assets
Other assets consist of the following:
September 30, September 30,
2000 1999
---- ----
(In thousands)
Package design costs $ 4,370 $ 3,385
Deferred debt issuance costs 791 -
Other 1,215 1,010
------- --------
6,376 4,395
Accumulated amortization (4,232) (3,613)
-------- --------
$ 2,144 $ 782
======= =======
Package design costs relate to certain incremental third party costs to
design artwork and produce die plates and negatives necessary to manufacture and
print packaging materials according to the Company's and customers'
specification. These costs are amortized ratably over a two to five year period.
In the event that product packaging is discontinued prior to the end of the
amortization period, the respective package design costs are written off.
Package design costs, net of accumulated amortization, were $1,190,000 and
$736,000 at September 30, 2000 and 1999, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the method
prescribed by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its employee stock options and have adopted
the pro forma disclosure requirements under SFAS No. 123 "Accounting for
Stock-Based Compensation." Under APB No. 25, because the exercise price of the
Company's employee stock options is equal to or greater than the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
Net Income Per Common Share
Net income per common share is calculated using the weighted-average
number of common shares and, in the case of diluted net income per share, common
equivalent shares, to the extent dilutive, outstanding during the periods.
Dilutive securities, consisting of options (see Note 6), included in the
calculation of diluted weighted average common shares were 403,000 shares in
fiscal 2000, 513,000 shares in fiscal 1999 and 714,000 shares in fiscal 1998.
2. Long-Term Debt
On April 26, 2000, the Company completed an expansion to its revolving
credit facility with its bank group and added a multi-currency feature.
Available credit under the expanded credit facility is $190 million compared
with $140 million previously. The expanded facility eliminates the previously
scheduled step-downs of available credit in the agreement, and allows the
Company to borrow in dollars or up to $65.0 million in Euro equivalents. The
credit facility matures on October 17, 2002. Available borrowings under the
credit facility were $66,542,000 at September 30, 2000.
35
Interest is to be charged at either the base rate (higher of prime or 1/2
of 1% in excess of the federal funds effective rate) or LIBOR/Euribor plus an
applicable margin based on a sliding scale of the ratio of the Company's total
indebtedness divided by earnings before interest, taxes, depreciation and
amortization (EBITDA). In addition, a commitment fee is charged on the unused
facility balance based on the sliding scale of the Company's total indebtedness
divided by EBITDA. The stated interest plus the commitment fee is classified as
interest expense.
Long-term debt consists of the following:
September 30, September 30,
2000 1999
---- ----
(In thousands)
Term loans under Credit Facility $123,458 $ 72,000
Capital lease, 12-year term with three,
Five-year renewal options, at an
Imputed interest rate of 7.2% 4,333 4,651
Capital lease, 15-year term with three,
Five-year renewal options, at an
Imputed interest rate of 8.5% 3,024 3,215
Capital lease, 12-year term with three,
five-year renewal options, at an
imputed interest rate of 8.5% 6,661 --
Capital lease, eight-year term at
an imputed interest rate of 8.5% 1,325 1,589
Other 1,265 1,156
-------- --------
140,066 82,611
Less current portion 1,564 1,144
-------- --------
$138,502 $ 81,467
======== ========
36
The Company's weighted average interest rates related to borrowings under the
credit facility for the years ended September 30, 2000, 1999, and 1998, were as
follows:
2000 1999 1998
---- ---- ----
Weighted-average interest rate 6.6% 6.8% 8.6%
Annual maturities of long-term debt and capital lease obligations for
each of the next five years ended September 30, are as follows:
Long-Term Capital Leases
Debt and Other Total
--------- --------- -----
(In thousands)
Year
- ----
2001 $ -- $ 2,847
2002 123,458 2,778
2003 -- 2,945
2004 -- 2,154
2005 -- 2,100
Thereafter -- 10,860
-------- ------
123,458 23,684 $147,142
Less imputed interest -- 7,076 7,076
-------- ------ --------
Present value of net minimum payments 123,458 16,608 140,066
Less current portion -- 1,564 1,564
-------- ------ --------
Long-term obligations $123,458 $15,044 $138,502
======== ======= ========
The revolving credit facility contains various restrictive covenants which
include, among other things, financial covenants requiring minimum and
cumulative earnings levels and limitations on the payment of dividends, stock
purchases, and the Company's ability to enter into certain contractual
arrangements. The Company was in compliance with the restrictive covenants as of
September 30, 2000. The facility is unsecured.
The Company leases certain assets under capital lease agreements. At
September 30, 2000 and 1999, the cost of these assets was $20,010,000 and
$13,210,000, respectively, and related accumulated amortization was $3,244,000
and $2,085,000, respectively.
3. Income Taxes
At September 30, 2000, the Company has net operating loss carryforwards
for federal income tax purposes that expire as follows:
2012 $2,863
2013 90
2014 26
-----
$2,979
Management believes it is more likely than not that deferred tax assets
associated with these items will be realized through the generation of future
taxable income and available tax planning strategies.
The Company also has AMT credit carryforwards of $11,189,000 and
$5,470,000 at September 30, 2000 and 1999, respectively, with no expiration
date.
37
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
September 30, September 30,
2000 1999
---- ----
(In thousands)
Deferred tax assets:
Net operating loss carryforwards $1,161 $6,799
Missouri Expansion Credits 250 250
AMT credit carryforward 11,189 5,470
Inventory valuation 1,364 -
Other 712 1,251
----------- ----------
Total deferred tax assets 14,676 13,770
Deferred tax liabilities:
Book basis of tangible assets greater than tax 35,534 25,670
----------- ----------
Total deferred tax liabilities 35,534 23,670
----------- ----------
Net deferred tax liabilities $(20,858) $(11,900)
============ ===========
Significant components of the provision for income taxes are as follows:
Year ended Year ended Year ended
September 30, September 30, September 30,
2000 1999 1998
---- ---- ----
(In thousands)
Current income tax expense $6,468 $ 5,135 $ 5,282
Deferred tax expense 8,958 8,384 5,275
----------- ----------- ------------
Total income tax expense $15,426 $13,519 $10,557
=========== =========== ============
The reconciliation of income tax computed at the U.S. statutory tax rate
to income tax expense is as follows:
Year ended Year ended Year ended
September 30, September 30, September 30,
2000 1999 1998
---- ----- ----
(In thousands)
Income before income taxes $42,880 $37,037 $28,203
U.S. statutory tax rate X 35% x 35% x 35%
----------- ------------ -------------
Federal income tax expense 15,008 12,963 9,871
at U.S. statutory rate
State income tax expense, 643 741 1,146
net of federal tax effect
Other, net (225) (185) (460)
------------ ------------ -------------
Total income tax expense $15,426 $13,519 $10,557
=========== =========== ============
Income tax benefit allocated to other items was as follows:
Year ended Year ended Year ended
September 30, September 30, September 30,
2000 1999 1998
---- ---- ----
(In thousands)
Extraordinary item $- $- $(1,429)
Stock option arrangements (1) (1,363) (655) (3,024)
(1) This amount has been recorded directly to "Additional Paid-In Capital".
38
4. Commitments and Contingencies
The Company had durum wheat purchase commitments totaling approximately $7
million and $11 million at September 30, 2000 and 1999, respectively.
Under an agreement with its predominant rail carrier, the Company is
obligated to transport specified wheat volumes. In the event the specified
transportation volumes are not met, the Company is required to reimburse certain
rail carrier costs. The Company is in compliance with the volume obligations at
September 30, 2000.
5. Major Customers
Sales to a certain customer during the years ended September 30, 2000,
1999 and 1998 represented 15%, 16% and 19% of revenues, respectively. Sales to a
second customer during the years ended September 30, 2000, 1999 and 1998
represented 12%, 13%, and 15% of revenues, respectively. Sales to a third
customer during fiscal 2000, 1999 and 1998 were 23%, 29% and 24% of revenues,
respectively.
6. Stock Option Plan
In October 1992, a stock option plan was established that authorizes the
granting of options to purchase up to 1,201,880 shares of the Company's common
stock by certain officers and key employees. In October 1993, an additional plan
was established that authorizes the granting of options to purchase up to 82,783
shares of the Company's common stock. In October 1997, a third stock option plan
was established that authorizes the granting of options to purchase up to
2,000,000 shares of the Company's common stock by certain officers and key
employees. The stock options expire 10 years from the date of grant and become
exercisable over the next three to five years in varying amounts depending on
the terms of the individual option agreements.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 6.0%; dividend yields of zero;
volatility factors of the expected market price of the
Company's common stock of .483 for fiscal 2000, .507 for fiscal 1999, and .429
for fiscal 1998; and a weighted-average expected life of the option of one to
five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
2000 1999 1998
---- ---- ----
Pro forma net income $25,543 $22,325 $13,961
Pro forma earnings per share:
Basic $1.43 $1.24 $0.81
Diluted $1.40 $1.20 $0.78
39
A summary of the Company's stock option activity, and related information
is as follows:
Weighted
Average
Number of Option Price Exercise
Shares Per Share Price Exercisable
------ --------- ----- -----------
Outstanding at September 30, 1997 1,179,326 $ 2.33-$12.23 $6.83 734,877
Exercised (309,187) $2.33-$12.23 $3.10
Granted 1,084,145 $12.23-$30.00 $18.98
Canceled/Expired (31,979) $4.92-$18.00 $15.43
--------
Outstanding at September 30, 1998 1,922,305 $4.92-$30.00 $14.14 626,985
Exercised (83,533) $4.92-$18.00 $6.72
Granted 147,416 $22.50-$27.875 $24.32
Canceled/Expired (41,480) $12.23-$27.56 $22.18
--------
Outstanding at September 30, 1999 1,944,708 $4.92-$30.00 $15.06 1,044,066
Exercised (178,508) $4.92-$25.00 $6.66
Granted 863,697 $16.375-$25.00 $22.29
Canceled/Expired (41,373) $12.23-$27.875 $23.87
--------
Outstanding at September 30, 2000 2,588,524 $4.92-$30.00 $17.91 1,445,693
==========
The following table summarizes outstanding and exercisable options at
September 30, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Weighted Average
Number Average Number Exercise
Exercise Prices Outstanding Exercise Price Exercisable Price
- --------------- ----------- --------------- ----------- -----
$ 4.92 150,878 $ 4.92 150,878 $ 4.92
$ 7.02 169,244 $ 7.02 169,244 $ 7.02
$ 12.23 287,289 $ 12.23 278,459 $12.23
$ 16.375-16.625 46,000 $ 16.57 -- --
$ 18.00-18.50 1,223,018 $ 18.12 644,594 $18.12
$ 22.50-26.50 632,345 $ 24.80 168,018 $24.87
$ 26.69-30.00 79,750 $ 28.89 34,500 $28.63
7. Employee Benefit Plans
The Company has a defined contribution plan organized under Section 401(k)
of the Internal Revenue Code covering substantially all employees. The plan
allows all qualifying employees to contribute up to the tax deferred
contribution limit allowable by the Internal Revenue Service. The Company will
match 50% of the employee contributions up to a maximum employee contribution of
6% of the employee's salary and may contribute additional amounts to the plan as
determined annually by the Board of Directors. Employer contributions related to
the plan totaled $450,000, $380,000, and $270,000 for the years ended September
30, 2000 and 1999 and 1998, respectively.
The Company sponsors an Employee Stock Purchase Plan (ESPP) which offers
all employees the election to purchase AIPC common stock at a price equal to 95%
of the market value on the first or last day of the calendar quarter, whichever
is less. At September 30, 2000, 1999, and 1998, authorized shares under this
plan were 50,000.
8. Plant Expansion Costs
Plant expansion costs include incremental direct and indirect
manufacturing and distribution costs which are incurred as a result of
construction, commissioning and start-up of new capital assets. These costs are
expensed as incurred but are unrelated to current production and, therefore,
reported as a separate line item in the consolidated statement of income. Plant
expansion costs amounted to $130,000 and $1,606,000 for the years ended
September 30, 1999 and 1998, respectively. There were no such costs in 2000.
40
9. Supplemental Cash Flow Information
Year ended Year ended Year ended
September 30, September 30, September 30,
2000 1999 1998
---- ---- ----
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,389 $ 4,942 $ 3,670
======= ======= =======
Cash paid for income taxes $ 4,462 $ 5,944 $ 226
======= ======= =======
Warehouse acquired in
exchange for capital lease $ 6,800 $ -- $ 5,079
======= ==== =======
10. Stock Repurchase Plan
On March 20, 2000, the Company's Board of Directors authorized up to $25
million to implement a common stock repurchase program of up to one million
shares during the next twelve months.
On July 14, 2000, the Company's Board of Directors authorized an increase
to its share repurchase programs to cover a total of 1.5 million shares, and
allocated an additional $10.0 million to make these purchases.
During the year ended September 30, 2000, the Company purchased 1,500,000
shares at prices ranging from $16.5701 to $25.9375 per share. Total shares held
in treasury as of September 30, 2000 were 1,500,132.
11. Notes Receivable from Officers
In April 1997, certain officers of the Company acquired 42,366 shares of
common stock. At the same time, the Company loaned these officers $298,000, of
which $61,000 remains outstanding at September 30, 2000. The loans which were
evidenced by promissory notes are payable in equal installments over three years
commencing upon termination of certain transfer restrictions applicable to such
shares under the Stockholders Agreement, not later than December 31, 1998. The
notes are collateralized by the pledge of shares of common stock of the Company,
may be prepaid in part or in full without notice or penalty and bear interest at
the applicable federal rate in effect on the first day of each quarter. These
loans are classified as a reduction to stockholders' equity in the accompanying
consolidated balance sheet at September 30, 2000 and 1999.
12. Board of Directors Remuneration Policy
The Company provides outside directors with an annual retainer amount in
common stock equal to $15,000 per director. The issuance is in lieu of a cash
payment and occurs immediately following the annual meeting of the stockholders.
These shares are not registered and are restricted for a twelve-month period.
41
13. Quarterly Financial Data - Unaudited
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year ended September 30, 2000
Revenues $ 59,141 $ 63,965 $ 60,622 $ 65,067
Gross profit 16,054 18,066 17,713 18,152
Operating profit 10,692 11,991 12,402 12,572
Net income 6,010 6,915 7,260 7,269
Basic net income per 0.33 0.38 0.40 0.42
Common share
Net income per common share
--assuming dilution 0.32 0.37 0.40 0.42
Year ended September 30, 1999
Revenues $ 47,849 $ 55,867 $ 55,278 $ 61,155
Gross profit 12,099 14,435 15,876 17,160
Operating profit 7,748 9,249 10,367 11,771
Net income 4,607 5,526 6,507 6,878
Basic net income per 0.25 0.31 0.36 0.38
Common share
Net income per common share
--assuming dilution 0.25 0.30 0.35 0.37
The above quarterly financial data is unaudited, but in the opinion of
management, all adjustments necessary for a fair presentation of the selected
data for these interim periods presented have been included.
12. Subsequent Event
On November 13, 2000, the Company purchased the Mueller's brand pasta
business from Bestfoods. Mueller's is the largest single pasta brand in the
United States, with particularly strong distribution in the eastern part of the
country. The acquisition encompassed the trademarks and goodwill associated with
the brand, the customer accounts and relationships, and certain tangible assets,
primarily inventory.
Total consideration for the purchased assets, excluding tangible assets,
was approximately $38.2 million, consisting of $17.6 million in cash and 686,666
shares of common stock valued at $30 per share. At November 13, 2000, the value
of the consideration was $33.6 million based on a share price of $23.25.
The transaction calls for a target price of $30 per share to be realized
by Bestfoods from sale of the shares. The Company agreed to register the shares
shortly after the closing, Bestfoods may then sell the shares in open market or
negotiated transactions, and is contractually obligated after one year from the
closing date to use reasonable best efforts to sell the shares for the target
price of $30 per share. For shares sold by Bestfoods after two years, but less
than three years after the closing date, the Company has agreed to a make-whole
cash payment to Bestfoods related to any shares sold for less than the target
price of $30. Any payments made by the Company under this provision will lead to
adjustments to equity accounts and will not affect purchase price, goodwill, or
the Company's earnings. The Company may call the shares at any time for $30 per
share. The Company financed the cash portion of the acquisition price from the
Company's current debt facility.
To assure Mueller's business value is protected and successfully
transitioned to AIPC, Bestfoods has agreed, for up to 90 days after closing, to
provide the Company certain transition services. The Company has agreed to honor
Bestfoods' marketing commitments through April 2001; therefore, any major
strategic changes to the business will not occur until the second half of the
Company's fiscal year 2001.
42
The discussion of the Company's business, assets and operations in this
Annual Report does not include the acquired Mueller's business.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
AIPC has incorporated by reference certain responses to the Items of this
Part III pursuant to Rule 12b-23 under the Exchange Act and General Instruction
G(3) to Form 10-K. AIPC's definitive proxy statement for the 2000 annual meeting
of stockholders (the "Definitive Proxy Statement") will be filed no later than
120 days after September 29, 2000.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation S-K under
the heading "Proposal 1 - Election of Three Directors" and "The Board of
Directors" in AIPC's Definitive Proxy Statement is incorporated herein by
reference in partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under
"Executive Officers of the Registrant" an unnumbered Item in Part 1 (immediately
following Item 4 Submission of Matters to a Vote of Security Holders) of this
Form 10-K is incorporated herein by reference in partial response to this Item
10.
The information set forth in response to Item 405 of Regulation S-K under
the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in AIPC's
Definitive Proxy Statement is incorporated herein by reference in partial
response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth in response to Item 402 of Regulation S-K under
"Management Compensation" in AIPC's Definitive Proxy Statement, (other than The
Compensation Committee Report on Executive Compensation) is incorporated by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth in response to Item 403 of Regulation S-K under
the heading "Stock Beneficially Owned by Directors, Nominees and Certain
Executive Officers" in our Definitive Proxy Statement is hereby incorporated by
reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in response to Item 404 of Regulation S-K under
the heading "Certain Relationships and Related Transactions" in our Definitive
Proxy Statement is incorporated herein by reference in response to this Item 13.
43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following items are filed as a part of the report:
1. The Company's consolidated financial statements prepared in
accordance with Regulation S-X, including the consolidated
statements of income, cash flows and stockholders' equity for the
three fiscal periods September 30, 2000, September 30, 1999 and
September 30, 1998 and the consolidated balance sheets as of
September 30, 2000 and 1999, and related notes and the
independent auditor's report thereon are included under Item 8 of
this Annual Report.
2. No financial statement schedules are required to be included in
this Annual Report by the Securities and Exchange Commission's
regulations.
3. The list of exhibits following the signature page of this Annual
Report is incorporated by reference herein in partial response to
this Item.
(b) Reports on Form 8-K.
We filed a Form 8-K on October 10, 2000 announcing that we entered into a
definitive agreement to acquire for cash and stock the Mueller's pasta brand
from Bestfoods.
We filed a Form 8-K on October 20, 2000 which included further details of
the transaction entered into with Bestfoods.
44
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.
AMERICAN ITALIAN PASTA COMPANY
By: /s/ Timothy S. Webster
------------------------------------
Timothy S. Webster
President and Chief Executive
Officer
Date December 16, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY AND SIGNATURES
Each of the undersigned hereby severally constitute and appoint Timothy S.
Webster and Warren B. Schmidgall, and each of them singly, with power of
substitution and resubstitution, as his or her true and lawful attorneys, with
full power to them and each of them singly, to sign for us in our names in the
capacities indicted below, all amendments to this Annual Report on Form 10-K and
generally to do all things in our names and on our behalf in such capacities to
enable American Italian Pasta Company to comply with the provisions of the
Securities Exchange Act of 1934, and all requirements of the Securities and
Exchange Commission with respect to this Annual Report on Form 10-K.
/s/ Horst W. Schroeder Chairman of the December 16, 2000
Board of Directors
/s/ Timothy S. Webster President, Chief December 16, 2000
Executive Officer
and Director
(Principal Executive Officer)
/s/ Warren B. Schmidgall Executive Vice December 16, 2000
President-Chief Financial
Officer, (Principal
Financial and Accounting Officer)
/s/ Robert H. Niehaus Director December 16, 2000
/s/ Richard S. Thompson Director December 16, 2000
/s/ Jonathan E. Baum Director December 16, 2000
/s/ David Y. Howe Director December 16, 2000
/s/ Mark C. Demetree Director December 16, 2000
/s/ William R. Patterson Director December 16, 2000
/s/ John P. O'Brien Director December 16, 2000
/s/ James A. Heeter Director December 16, 2000
45
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
Not applicable.
46
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession
Not applicable.
(3) Articles and By-Laws
3.1 The Company's amended and restated Certificate of
Incorporation dated October 7, 1997, which is attached as
Exhibit 3.1 to the Company's registration statement on Form
S-1, as amended (Commission file no. 333-32827) (the "IPO
Registration Statement"), is incorporated by reference herein
as Exhibit 3.1.
3.2 The Company's amended and restated Bylaws dated October 7,
1997, which is attached as Exhibit 3.2 to the IPO Registration
Statement, are incorporated by reference herein as Exhibit
3.2.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
4.1 The specimen certificate representing the Company's Class A
Convertible Common Stock, par value $0.001 per share, which is
attached as Exhibit 4.1 to the IPO Registration Statement, are
incorporated by reference herein as Exhibit 4.1.
4.2 The specimen certificate representing the Company's Class B
Convertible Common Stock, par value $0.001 per share, which is
attached as Exhibit 4.2 to the IPO Registration Statement, are
incorporated by reference herein as Exhibit 4.2.
4.3 Section 7.1 of the Company's amended and restated Certificate
of Incorporation, which is incorporated herein as Exhibit 3.1,
is incorporated by reference herein as Exhibit 4.3.
4.4 Article II of the Company's amended and restated Bylaws, which
is incorporated herein as Exhibit 3.2, is incorporated by
reference herein as Exhibit 4.4.
4.5 Sections 1, 2, 3, 4 of Article III of the Company's amended
and restated Bylaws, which is incorporated herein as Exhibit
3.2, is incorporated by reference herein as Exhibit 4.5.
4.6 Article VII of the Company's amended and restated Bylaws,
which is incorporated herein as Exhibit 3.2, is incorporated
by reference herein as Exhibit 4.6.
4.7 Article IX of the Company's amended and restated Bylaws, which
is incorporated herein as Exhibit 3.2, is incorporated by
reference herein as Exhibit 4.7.
4.8 Amended and Restated $190,000,000 revolving credit facility
dated April 26, 2000 by and between the Company and Banker's
Trust.
47
4.9 First Amendment and Consent to the Amended and Restated
$190,000,000 revolving credit facility dated September 20,
2000 by and between the Company and Banker's Trust.
(9) Voting Trust Agreements
Not applicable.
(10) Material Contracts
10.1 Board of Directors Remuneration Policy, which is attached
as Exhibit 10.1 to the Company's Annual Report on Form
10-K405 for the fiscal year ended October 2, 1998
(Commission file no. 001-13403), is incorporated by
reference herein as Exhibit 10.1.
10.2 Manufacturing and Distribution Agreement dated as of April
15, 1997 between Bestfoods International Inc. and the
Company, which is attached as Exhibit 10.2 to the IPO
Registration Statement, is incorporated by reference herein
as Exhibit 10.2.
10.3 Amended and Restated Supply Agreement dated October 29,
1992, as amended July 1, 1997, between the Company and
Sysco Corporation, which is attached as Exhibit 10.3 to the
IPO Registration Statement, is incorporated by reference
herein as Exhibit 10.3.
10.4 Warehouse Lease dated May 23, 1995 between the Company and
Lanter Company, which is attached as Exhibit 10.4 to the
IPO Registration Statement, is incorporated by reference
herein as Exhibit 10.4.
10.5 Employment Agreement between the Company and Timothy S.
Webster effective October 8, 1997, which is attached as
Exhibit 10.5 to the IPO Registration Statement, is
incorporated by reference herein as Exhibit 10.5.
10.6.1 Employment Agreement dated September 30, 1997 between the
Company and Horst W. Schroeder, which is attached as
Exhibit 10.6 to the IPO Registration Statement, is
incorporated by reference herein as Exhibit 10.6.1.
10.6.2 First Amendment to Employment Agreement between the
Registrant and Horst W. Schroeder dated October 1, 1999,
which is attached as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated November 17, 1999, is incorporated
by reference herein as Exhibit 10.6.2.
10.7.1 Employment Agreement dated September 30, 1997 between the
Company and David E. Watson, which is attached as Exhibit
10.7 to the IPO Registration Statement, is incorporated by
reference herein as Exhibit 10.7.1.
10.7.2 First Amendment to Employment Agreement between the
Registrant and David E. Watson dated September 30, 1999,
which is attached as Exhibit 10.2 to the Company's Current
Report on Form 8-K (Commission File no. 001-13403), dated
November 17, 1999, is incorporated by reference herein as
Exhibit 10.7.2.
10.8.1 Employment Agreement dated September 30, 1997 between the
Company and Norman F. Abreo, which is attached as Exhibit
10.8 to the IPO Registration Statement, is incorporated by
reference herein as Exhibit 10.8.1.
48
10.8.2 First Amendment to Employment Agreement between the
Registrant and Norman F. Abreo dated September 30, 1999,
which is attached as Exhibit 10.3 to the Company's Current
Report on Form 8-K (Commission File no. 001-13403), dated
November 17, 1999, is incorporated by reference herein as
Exhibit 10.8.2.
10.9.1 Employment Agreement dated September 30, 1997 between the
Company and David B. Potter, which is attached as Exhibit
10.9 to the IPO Registration Statement, is incorporated by
reference herein as Exhibit 10.9.1.
10.9.2 First Amendment to Employment Agreement between the Company
and David B. Potter, dated January 21, 1999, which is
attached as Exhibit 10 to the Company's quarterly report
dated January 28, 1999 on Form 10-Q (Commission File no.
001-13403), is incorporated by reference herein as Exhibit
10.9.2.
10.9.3 Second Amendment to Employment Agreement between the
Registrant and David B. Potter dated October 27, 1999,
which is attached as Exhibit 10.4 to the Company's Current
Report on Form 8-K (Commission File no. 001-13403), dated
November 17, 1999, is incorporated by reference herein as
Exhibit 10.9.3.
10.10 Employment Agreement between the Registrant and Warren B.
Schmidgall dated September 30, 1999, which is attached as
Exhibit 10.5 to the Company's Current Report on Form 8-K
(Commission File no. 001-13403), dated November 17, 1999,
is incorporated by reference herein as Exhibit 10.10.
10.11 Letter Agreement between the Registrant and HWS &
Associates, Inc. dated October 1, 1999, which is attached
as Exhibit 10.6 to the Company's Current Report on Form 8-K
(Commission File no. 001-13403), dated November 17, 1999,
is incorporated by reference herein as Exhibit 10.11.
10.12 Second Amended and Restated Shareholders' Agreement dated
April 7, 1998 by and between the parties named therein,
which is attached as Exhibit 10.10 to the registration
statement dated April 9, 1998, as amended (file no.
333-49719), is incorporated by reference herein as Exhibit
10.12.
10.13 American Italian Pasta Company 1992 Stock Option Plan,
which is attached as Exhibit 10.10 to the IPO Registration
Statement, is incorporated by reference herein as Exhibit
10.13.
10.14 American Italian Pasta Company 1993 Non-Qualified Stock
Option Plan, which is attached as Exhibit 10.11 to the IPO
Registration Statement, is incorporated by reference herein
as Exhibit 10.14.
10.15 1996 Salaried Bonus Plan, which is attached as Exhibit
10.13 to the IPO Registration Statement, is incorporated by
reference herein as Exhibit 10.12.
10.16.1 1997 Equity Incentive Plan, which is attached as Exhibit
10.14 to the IPO Registration Statement, is incorporated by
reference herein as Exhibit 10.16.1.
10.16.2 First amendment to 1997 Equity Incentive Plan, which is
attached as Exhibit 10.1 to the Company's July 31, 1998
Form 10-Q (Commission file no. 001-13403), is incorporated
by reference here in as Exhibit 10.16.2.
49
10.17 Product Supply and Pasta Production Cooperation Agreement
dated May 7, 1998 between the Registrant and Harvest States
Cooperatives which is attached as Exhibit 10.2 to the
Company's July 31, 1998 Form 10-Q Commission file no.
001-13403), is incorporated by reference herein as Exhibit
10.17.
10.18 Warehouse lease dated September 2, 1997 between the Company
and Lanter Company, which is attached as Exhibit 10.5 to
the Second Registration Statement, and is incorporated by
reference herein as Exhibit 10.18.
(11) Statement recomputation of per share earnings
Not applicable.
(12) Statements re computation of ratios
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(21) Subsidiaries of the registrant
List of subsidiaries is attached hereto as Exhibit 21.
(24) Power of Attorney
The power of attorney is set forth on the signature page of this
Annual Report.
(27) Financial Data Schedule
The Company's Financial Data Schedule is attached hereto as
Exhibit 27.
(99) Additional Exhibits
Not applicable.
50