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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: October 1, 2004
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
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(Exact name of Registrant as specified in its charter)
Delaware 84-1032638
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4100 N. Mulberry Drive, Suite 200, Kansas City, Missouri 64116
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(Address of principal executive office and Zip Code)
816-584-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A Convertible Common Stock: $.001 par value per share
Registered: New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) 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]
Indicate by check mark whether the registrant is an accelerated filed (as
defined in Rule 12b-2 of Securities Exchange Act). Yes [X] No [ ]
As of April 2, 2004 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 $694,250,856.
The number of shares outstanding as of December 10, 2004 of the Registrant's
Class A Convertible Common Stock was 18,114,523 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 2005 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 October 1, 2004.
Certain Cautionary Statements
Certain portions of this annual report on Form 10-K ("Annual Report"), including
"Business Strategy", in Item 1, contain 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,
estimates, intends, projects, may, will, predicts, 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 Item 7 "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.
PART I
ITEM 1. BUSINESS
General
American Italian Pasta Company is a Delaware corporation and was incorporated
and commenced operations in 1988. Unless the context otherwise indicates, all
references in this Annual Report to "the Company", "we", "us", "our", and
similar words are to American Italian Pasta Company. The Company believes it is
the largest producer and marketer of dry pasta in North America, based on data
available from A.C. Nielsen, published competitor financial information,
industry sources such as the National Pasta Association, suppliers, trade
magazines and our own market research. During the fiscal year ended October 1,
2004, we had revenues of $417.4 million.
We believe that our singular focus on pasta, vertically-integrated facilities,
continued technological improvements and development of a highly-skilled
workforce enable 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
competitive advantages.
The Company's 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. Fiscal 2004 was 52 weeks and ended on October 1, 2004. Fiscal 2003
was 53 weeks and ended on October 3, 2003. Fiscal 2002 was 52 weeks and ended on
September 27, 2002.
We produce more than 220 dry pasta shapes in vertically integrated milling,
production and distribution facilities, located in Excelsior Springs, Missouri,
Columbia, South Carolina, Kenosha, Wisconsin, Tolleson, Arizona, and
Verolanuova, Italy. We have evaluated the operation and efficiency of our plants
in relation to our competitors based on discussions with and information from
industry sources such as suppliers, the National Pasta Association and trade
magazines, public disclosures by other pasta producers and our own internal
research. Based on this information, we believe 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, and the Arizona plant, which
commenced operations in fiscal 2003, serves both retail and institutional
customers. The Wisconsin plant, which commenced operations in 1999, is designed
to produce pasta primarily for sale to food processors that use dry pasta in
their products. The Italy plant, which commenced operations in 2001, serves
private label, branded, foodservice, and industrial markets internationally and
in the United States. In July 2004, we suspended full operations at our Kenosha,
Wisconsin facility. In October 2004, we partially reactivated this facility for
an expected temporary period to improve product availability. The Kenosha plant
will remain in a stand-by mode.
The Company's executive offices are located at 4100 N. Mulberry Drive, Suite
200, Kansas
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City, Missouri 64116, and our telephone number is (816) 584-5000. Our website is
located at http://www.aipc.com. We make available free of charge through our
website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as soon as they are
reasonably available after these materials are electronically filed with or
furnished to the Securities and Exchange Commission. Information contained in
our website is not a part of this Annual Report.
We hold a number of federally registered and common law trademarks, which are
used throughout this Annual Report.
Pasta Industry Environment
The pasta industry continued to experience significant changes during fiscal
year 2004, as retail pasta demand continued to decline during the year resulting
in lower industry sales. Retail grocery consumption of dry pasta (as measured by
A.C. Nielsen) declined significantly in volume by approximately 5% to 6% during
the 12 months ended October 2, 2004. We believe the declines in demand result
primarily from changes in consumer diet trends to lower carbohydrate consumption
awareness. During much of the fiscal year the pasta industry also continued to
have manufacturing overcapacity. The combination of overcapacity and declining
sales demand resulted in increased price competition and declining industry
profit margins. During the latter part of the fiscal year, we reduced our
manufacturing capacity by suspending full operations at one our manufacturing
facilities (as outlined below) and one of our competitors closed one of their
plants. As a result, we believe there have recently been sizeable capacity
reductions in the pasta industry as compared to a year earlier.
Restructuring and Rightsizing Program
During the third quarter of fiscal 2004, the Company announced a Restructuring
and Rightsizing program to better align its production capacity and cost
structure with the Company's current business and operating profile and the
current pasta industry environment. The Restructuring and Rightsizing program
responded to industry-wide reductions in demand related to recent changes in
consumer diet trends and to manufacturing overcapacity in the pasta industry.
The key strategic elements of the Restructuring and Rightsizing program included
reductions in the Company's workforce, manufacturing capacity and inventory
levels and the related reconfiguration of its distribution network. In that
regard, during the fourth quarter of fiscal 2004, we suspended full operations
at our Kenosha, Wisconsin manufacturing facility; temporarily shutdown
production at two of its four domestic manufacturing facilities; and exited
certain leased domestic distribution centers. As a result of the Restructuring
and Rightsizing, production capacity and output will more effectively match
anticipated sales demand, significant cost savings are expected to be generated
and lower inventory levels have been achieved.
During the fiscal year 2004, we recorded $2.9 million of restructuring expenses.
These expenses primarily include employee severance and termination benefits,
lease costs, and supply agreement costs. The severance and benefit costs relate
to the termination of approximately 14% of the Company's workforce, a majority
of whom were employed at manufacturing locations. Lease costs relate to the
commitments and termination costs for certain leased warehouses that will no
longer be required due to the distribution network restructuring facilitated by
reduced inventory levels. Supply agreement costs relate to amounts to be paid
under a raw materials supply agreement for our Kenosha plant that includes a
minimum purchase commitment not expected to be met in fiscal year 2005 due to
the suspension of operations. In addition, $14.1 million of costs were incurred
relating to the inventory reduction strategy, a key part of the restructuring
and rightsizing program.
Production and manufacturing inefficiency and reduced inventory levels and
product availability issues in the initial weeks following the implementation of
the Company's restructuring and rightsizing program resulted in customer
shipment delays.
Business Strategy
The Company's strategic plan is now focused on returning to several of its
historical operating approaches and performance characteristics, including
greater profitability, higher margins and lower production cost. To achieve
these objectives, our plan includes targeted elimination of certain low margin
accounts (primarily private label and ingredient markets) and focused volume
growth in key retail and institutional markets to achieve more profitable
volume. Furthermore, the plan includes profit improvement through
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price increases and/or cost reductions for all strategic business units. The new
pricing strategy is already being implemented with particular emphasis on the
lowest margin volumes. The strategic plan anticipates total revenues in fiscal
year 2005 will be lower than fiscal year 2004, due to the impact of continued
consumption declines in the broad pasta market and the effect of optimizing our
volume portfolio.
Our anticipated smaller, more profitable volume portfolio will be well matched
with our recently adjusted production capacity. We are targeting an operating
model that will return us to the high asset utilization and low cost producer
status that drove our excellent operating profitability in previous years.
In addition, our strategy is to continue to provide our customers with a full
portfolio of pasta products from regional brands, to store brands to authentic
Italian imported products, and specialty products all delivered within the
highest quality standards and with exceptional customer service.
Products and Brands
Our product line, comprising over 3,500 items or 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'
unique specifications. We make over 220 different shapes and sizes of pasta
products in over 225 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 year 2004.
We introduced a portfolio of new reduced carb products in early fiscal 2004,
designed to help mitigate the impact of general pasta consumption declines.
While the early demand was relatively strong, subsequent sales trends have not
met our expectations. This product line has not yet grown to become a
significant component of the pasta market and while we believe reduced carb
products will fulfill a relevant role in the diets of some consumers, the
product line will not be a driver of our sales in the short-term and will not
compensate for recent volume declines in fiscal year 2004 and the associated
profits of traditional pasta. In addition, we developed a "low carb" product
line during fiscal year 2004 under a supply agreement with Atkins Nutritional
Services ("Atkins"). While early sales levels were encouraging, recent trends
and revenues are not achieving the levels originally expected. Under the Atkins
agreement, revenues aggregated $5.7 million during fiscal year 2004; however,
there were no revenues under this agreement in the fourth quarter of the fiscal
year.
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 U.S. production facilities are inspected 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 ("HACCP") 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 HACCP standards have helped us attract new business
and strengthen existing customer relationships.
Our Italian plant is our first ISO 9002 certified production facility. The
facility is inspected by a European representative similar to AIB, EFSIS, one of
the recognized European Food Safety Bodies. Our facility received the "Higher
Level" certification from EFSIS, the only European pasta plant to receive this
accreditation. This is the highest level of certification available and is
similar to the ratings received by our U.S.
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facilities. In addition, we have implemented HACCP and Food Safety Programs
consistent with the U.S. facilities.
Marketing and Distribution
We actively sell and market our domestic products through our sales employees
and the use of 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 over-arching sales and marketing strategy
is to provide superior quality, a complete product offering, competitive pricing
and superior customer service to attract new customers and to maintain and grow
pasta sales to existing customers. In the retail segment, we additionally
provide a focused mass approach supplying consumer preferred regional brands,
private label brands, Italian imports in distinctive packaging and specialty
pasta. The Company works with our retail partners to develop marketing and
promotional programs specifically tailored to stimulate pasta consumption in
their market based upon the retail specific strategy and role for pasta. 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 a primary supplier of pasta to Wal*Mart, Inc. and we supply private label
and branded pasta to many of the largest grocery retailers in the United States.
We also have long-term supply agreements with several private label customers,
and have developed supply relationships with leading food processors, which use
our pasta as an ingredient in their branded food products.
Our Italian plant enables us to offer authentic Italian pasta products. This
facility serves North American, European, and other International markets with
Branded, Private Label, Industrial and Food Service 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 expertise allows us to recommend pricing, SKU assortment
and shelf space allocation 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 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
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 primary distribution centers in North America are strategically located in
South Carolina, Missouri and Arizona to serve the national market. We have
on-site distribution centers at our South Carolina, Arizona, and Missouri
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,
South Carolina and Arizona distribution centers is outsourced under a long-term
agreement with OHL, Inc., a firm specializing in warehouse and logistics
management services.
Our Italian facility uses two public warehouses to serve the European market
(located in the U.K. and Italy) and the U.S. distribution centers for our U.S.
import business.
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.
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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, and to a lesser extent, Mexico.
Durum wheat used in Europe generally originates from Italy, France, Spain,
Canada, U.S., Greece and Syria. 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 purchasing durum
wheat directly from farmer elevators 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 supply for durum wheat. We
occasionally buy and sell semolina to balance our milling and production
requirements. We are one of only three major producers of pasta that own
vertically integrated milling and production facilities.
Durum wheat is a cash crop whose market price fluctuates. 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 12 months in duration.
Durum wheat is shipped to our production facilities in Missouri and South
Carolina directly from Canada, North Dakota, and Montana under long-term rail
contracts with our most significant rail carriers, the Canadian Pacific Rail
System and Norfolk Southern. Under these agreements, 90% of the volume of wheat
shipped into our Missouri mill must be carried by Canadian Pacific and 95% of
the volume of wheat shipped into our South Carolina mill must be carried by
Norfolk Southern. There are no requirements on how much total tonnage must be
shipped and we control which carriers are used. Accordingly, 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 Horizon Milling, LLC (a joint
venture between Harvest States and Cargill) 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
supply agreement are favorable versus other market options.
The Horizon Milling Supply Agreement currently has five years remaining on the
agreement. We are not required to purchase the durum wheat nor carry the grain
inventory. The contract has a "meets competition" clause with respect to tolling
fees over the life of the contract. We are obligated to purchase 90% of our
yearly semolina and flour requirements for our Kenosha manufacturing plant from
Horizon Milling. We paid Horizon Milling $13.3 million, $20.9 million and $15.5
million for our requirements in fiscal years 2004, 2003 and 2002, respectively.
In all three years the volume exceeded the contractual minimum requirement of 70
million pounds.
In July 2004, we suspended full operations at our Kenosha, Wisconsin facility.
We recognized $.7 million in restructuring expense related to the supply agreement
due to the volume requirements for fiscal 2005 that we would not expect to meet
due to our decision to suspend operations for fiscal 2005. In October 2004, we
partially reactivated this facility for an expected temporary period to improve
product availability. The Kenosha plant will remain in a stand-by mode. If the
Kenosha plant remains in a standby mode, or if we permanently shut down the
plant, we will not meet the contractual minimum requirement.
We purchase the raw material requirements (including semolina and semolina/flour
blends) for our Tolleson, Arizona facility from Bay State Milling Company under
the terms of a long-term supply agreement. We also believe the terms of the Bay
State Milling Company supply agreement are favorable versus other market
options.
Similarly, the Bay State Milling Supply Agreement for Tolleson, Arizona is also
a 10-year initial agreement with renewal provisions thereafter. In the event of
ownership changes or sustained under-performance, we have contractual rights to
purchase the mill at an
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established book value less applicable depreciation to that point.
We are obligated to purchase 80% of our annual Tolleson requirements for
semolina from Bay State with an annual minimum of 50 million pounds. We paid Bay
State approximately $10.4 million in fiscal 2004, and $9.4 million in fiscal
2003, and in both years we exceeded the contractual minimum requirement. We
purchased no semolina from Bay State in fiscal 2002 because our plant in
Tolleson was not yet operating.
In Europe, we purchase our semolina requirements from Italian mills to meet our
specific quality and customer needs.
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, Mueller's, R & F, Ronco,
Anthony's, Luxury, Pennsylvania Dutch, Mrs. Grass, Martha Gooch, Golden Grain,
Mission and Pasta Lensi. The Company has also registered other marks. Although
we hold numerous patents, we do not believe any of the patents to be material to
our business.
Dependence on Major Customers
Historically, a limited number of customers has accounted for a substantial
portion of our revenues. During the fiscal years ended October 1, 2004, October
3, 2003, and September 27, 2002, Wal*Mart, Inc. accounted for approximately 17%,
15%, and 13%, respectively, and sales to Sysco Corporation accounted for
approximately 10%, 10%, and 11%, respectively, of our revenues. 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"). We do not have long-term supply contracts with a
substantial number of our other customers, including Wal*Mart, Inc. Accordingly,
we are dependent upon our 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 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 dry pasta to
Sysco and have the exclusive right to supply dry pasta to Sysco for sale under
Sysco's brand names. Sysco, which operates from approximately 146 operating
companies and distribution facilities in the U.S. and Canada, provides products
and services to approximately 415,000 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 December 31,
2006, and has an option to renew the agreement up to a maximum of two additional
three-year terms. Under the Sysco agreement, we may not supply pasta products to
any business other than Sysco in the United Sates 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. The Sysco
agreement may be terminated by Sysco upon certain events, including our
inability to perform our obligations under the agreement, and such inability to
perform persists for three months or more.
Competition
We operate in a highly competitive environment against numerous well-established
national, regional and foreign companies, and many smaller 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 these products.
Some of these companies with which we compete, 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, pricing, packaging and customer service and logistics
capabilities. We believe that we currently compete favorably with respect to
these factors.
Our direct competitors include Barilla (a large multi-national Italian-owned
company with a
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manufacturing facility in the U.S.), U.S. producers of retail and institutional
pasta such as New World Pasta LLC, Dakota Growers Pasta Company, Philadelphia
Macaroni Co. Inc. and A. Zerega's Sons, Inc., each an independent producer, and
foreign companies such as Italian pasta producer De Cecco. For sales in Europe
and other international markets, our Italian plant competes with Barilla and
numerous Italian pasta producers.
Our competitive environment depends to a significant extent on the aggregate
industry capacity relative to aggregate demand for pasta products. Over the past
years, the North American pasta production capacity has contracted. Borden
completed the sale of its pasta business during 2001. We bought seven Borden
pasta brands, while New World Pasta purchased the remainder of the Borden brands
and all of the Borden manufacturing facilities. In 2002, New World Pasta closed
three of its North American pasta manufacturing facilities, and in 2004 closed
another facility. We estimate the capacity of the four plants closed by New
World Pasta to be approximately 350 million pounds. In late 2003, Barilla opened
a plant in Mexico with annual capacity of 150 million pounds through a 50%/50%
joint venture with Grupo de Mexico. In June 2004, we announced the suspension of
full operations at our Kenosha, Wisconsin facility as a response to reductions
in industry-wide consumer demand for pasta. In October 2004, we partially
reactivated this facility for an expected temporary period to improve product
availability.
Several foreign producers, based principally in Italy and Turkey, aggressively
targeted the U.S. pasta market in the mid-nineties. 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"). The
Anti-dumping Order was extended five years through 2006. Accordingly, all
Italian and Turkish producers, (including our Italian subsidiary), are assessed
duties of 15% on U.S. imports, subject to review by Commerce. Once reviewed by
Commerce, an importer's duties may increase or decrease depending on Commerce
findings. The Commerce has ruled our Italian subsidiary was not subject to
duties in fiscal year 2002 and the Company is receiving refunds for duties paid
during that year. Although not yet finalized, the Company expects to receive a
similar ruling for fiscal year 2003. No duties were paid in fiscal year 2004,
and none are expected to be paid, although the Company remains subject to
adverse rulings from Commerce. Such duties enable us and our domestic
competitors to compete more favorably against Italian and Turkish producers in
the U.S. pasta market. Bulk imported pasta and pasta produced in the U.S. by
foreign firms are generally not subject to such anti-dumping and countervailing
duties.
Pasta Markets
Although we have international sales, more than 95% of our revenues in fiscal
2004 were from sales in North America including our Italian produced products.
North American pasta consumption is estimated to have been between 3.5 and 4.0
billion pounds in fiscal 2004. 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 the
lifestyle demands of consumers for convenient at-home meals. Pasta continues to
grow in popularity in restaurants as Americans continue to dine away from home
more frequently. Recent attention to low carbohydrate diets by certain segments
of the U.S. population has significantly impacted the consumption of pasta, and
during fiscal 2004, retail sales of dry pasta sold through grocery outlets
declined by approximately 5% or 6% versus the previous year, as measured by A.
C. Nielsen.
Customer Markets - Retail: The U.S. retail market includes traditional grocery
retailers and fast-growing club store and mass merchants. We are one of the
leading producers of
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retail dry pasta in the U.S. with a market share of approximately one-third on a
volumetric basis consisting of the Company's brands and the Private Label
businesses of our customers. The second and third largest purveyors of retail
pasta are New World Pasta and Barilla, respectively. Our strategy is to provide
our retail partners with a full portfolio of pasta products from regional brands
to store brands to authentic italian imported products and speciality products
all delivered within the highest quality standards and with exceptional customer
service.
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 include businesses and organizations, 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
14% of the food service customers in the United States.
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. 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 the success of their products. 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 by food processors in their own products.
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 ("FDA") and
the Occupational Safety and Health Administration, as well as various state
agencies.
Our facilities are subject to air permitting by the U.S. Environmental
Protection Agency and/or authorized States under federal and/or state
regulations implementing the federal Clean Air Act. Each of our facilities is
currently operating under valid permits. Costs to renew these permits are
immaterial.
Our facilities are subject to certain safety regulations including regulations
issued pursuant to the U.S. Occupational Safety and Health Act. These
regulations require us to comply with certain manufacturing safety standards to
protect our employees from accidents. We believe that we are in material
compliance with all employee safety regulations.
Our facilities are also subject to annual reporting requirements under the
Emergency Planning and Community Right-to-Know Act and its implementing
regulations. No permit is required, but we do submit Tier II reports to federal
and/or state regulators, local emergency planning organizations, and the local
fire department with jurisdiction over the facilities quantifying all hazardous
materials stored on our property that meet or exceed threshold quantities. Costs
associated with this annual reporting are minimal.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), as amended, and other similar state laws require the cleanup of
hazardous waste disposal sites. Parties that may be liable under CERCLA for the
cleanup of a hazardous waste disposal site include the current property owner,
the operator, owners and operators of the property at the time of a release of
hazardous substances, the arranger of the disposal, and the transporter of
hazardous substances. To date, we have not been notified by the U.S.
Environmental Protection Agency, any state agency, or any other private party
that we are considered responsible or potentially responsible for some aspect of
the cleanup of any hazardous waste disposal site under CERCLA or any other
similar state laws.
In fiscal year 2004, we received the Customs Trade Partnership Against Terrorism
("C-TPAT")
9
certification from the United States Customs and Border Protection ("CBP")
division of the Department of Homeland Security. CBP developed CTPAT after the
September 11, 2001 terrorist attacks as a way to identify low risk importers and
facilitate the efficient release of goods, even under heightened security
conditions. To become a participant of C-TPAT, our security measures were
reviewed and certified by CBP. C-TPAT certification includes certain benefits to
participants and may help reduce the risk of significant delays in the
importation of our product.
We believe we are in compliance with all applicable environmental laws and
regulations.
Employees
As of October 1, 2004, we employed 589 full-time persons worldwide, of whom 139
were exempt, 32 salaried non-exempt, 209 manufacturing non-exempt, and 209
manufacturing hourly employees. Our U.S. 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 in Excelsior
Springs, Missouri, Columbia, South Carolina, Kenosha, Wisconsin, Tolleson,
Arizona, 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 October 1, 2004, our facilities had
combined annual milling and production capacity of approximately 1.0 billion
pounds.
Distribution Centers: We own the distribution centers adjoining our Missouri,
South Carolina, Wisconsin, and Arizona plants. In addition, as of October 1,
2004, we leased space in public warehouses located in Northern California,
Missouri, South Carolina, Arizona, and Indiana. The Indiana lease was terminated in
November 2004 as part of our Restructuring and Rightsizing program.
On November 9, 2004, as part of an amendment to our credit facility, we agreed
to provide a collateral interest to our lenders in substantially all of our
tangible and intangible domestic assets.
ITEM 3. LEGAL PROCEEDINGS
From time to time and in the ordinary course of our business, we are named as a
defendant in legal proceedings related to various issues, including worker's
compensation claims, tort claims and contractual disputes. Other than such
routine litigation, we are not currently involved in any material legal
proceedings. In addition, we are not aware of other material potential claims.
While the resolution of the matters described above may have an impact on our
financial results for the period in which they are resolved, we believe that the
ultimate disposition of these matters will not, individually or in the
aggregate, have a material adverse effect upon our business or consolidated
financial statements.
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.
10
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
October 1, 2004. All executive officers are elected annually and serve at the
discretion of the Board of Directors. We have employment agreements with all of
the executive officers and certain other executive officers.
The following table sets forth certain information about each of our executive
officers as of October 1, 2004.
NAME AGE POSITION
Horst W. Schroeder......... 63 Chairman of the Board of Directors
Timothy S. Webster......... 42 President and Chief Executive Officer; Director
Daniel W. Trott............ 43 President - AIPC Sales Co.
Executive Vice President - Sales and Marketing
George D. Shadid........... 50 Executive Vice President and Chief Financial Officer
Walter N. George........... 48 Executive Vice President - Operations and Supply Chain
Warren B. Schmidgall....... 54 Executive Vice President
Jerry H. Dear.............. 56 Executive Vice President - Special Channels and
Private Label
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.
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.
Daniel W. Trott joined us in August 2003 as Executive Vice President - Sales and
Marketing. Prior to joining the Company, Mr. Trott had worked at PepsiCo from
July 1989 to August 2003, most recently as Vice President, Pepsi-Cola North
America Sales Strategy and Development and Vice President of Sales, Pepsi-Cola
Non-carbonated Beverages.
George D. Shadid began providing consulting services to the Company in May 2004,
and in August 2004 joined us as Executive Vice President and Chief Financial
Officer. Previously, Mr. Shadid held various executive positions at Applebee's
International, Inc., a restaurant company, from 1992 to 2003, including Chief
Financial Officer and Chief Operating Officer.
Walter N. George joined us in January 2001 as Senior Vice President - Supply
Chain and Logistics. He was promoted to Executive Vice President - Operations
and Supply Chain in January 2003. Prior to joining the Company, Mr. George was
Vice President of Supply Chain for Hill's Pet Nutrition, Inc., a pet food
producer, from February 1989 to January 2001.
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. In August 2004, he assumed accountability
for Human Resources, Information Technology and other Administrative
responsibility. Prior to joining the Company, Mr. Schmidgall worked in various
executive positions at Hill's Pet Nutrition, Inc., a pet food producer, from
February 1980 to October 1998, including Chief Financial Officer and Executive
Vice President of Operations.
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.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER REPURCHASES OF EQUITY SECURITIES
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
2004 and 2003 was as follows:
Year Ended Year Ended
October 1, 2004 October 3, 2003
High Low High Low
---- --- ---- ---
First Quarter $43.10 $36.08 $41.88 $31.50
Second Quarter $41.95 $37.00 $46.01 $34.15
Third Quarter $38.99 $27.88 $47.28 $41.23
Fourth Quarter $31.13 $25.61 $46.71 $36.88
As of November 22, 2004, there were approximately 7,000 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 declared and paid dividends on our common stock in the amount of $6.8
million during fiscal 2004. We intend to use our earnings for the foreseeable
future to provide funds for the operation of our business, for the repayment of
indebtedness, and for the payment of dividends. Our current credit facility
contains certain provisions, which limit the amount we can pay in 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 October 1, 2004.
On November 9, 2004, the Company's Board of Directors declared a quarterly
dividend of 18.75 cents per share, payable to shareholders of record as of
November 22, 2004, to be paid on December 8, 2004.
During the fourth quarter of fiscal 2004, the Company received 2,235 shares as
payment for taxes related to vesting of restricted stock at an average price of
$26.85 per share.
For information on our equity compensation plans, refer to Item 12, "Security
Ownership of Certain Beneficial Owners and Management".
Our Board of Directors has adopted a set of Corporate Governance Principles and
has established three standing committees: Audit, Compensation, and
Nominating/Governance. Our lead independent director is Robert Niehaus. A copy
of the Corporate Governance Principles and the Charter of each of these
Committees is available on the Company's website at http://www.aipc.com, and
will be mailed to any stockholder upon written request delivered to the
Corporate Secretary of AIPC, 4100 N. Mulberry Drive, Suite 200, Kansas City,
Missouri 64116.
ITEM 6. SELECTED FINANCIAL DATA
The selected statement of operations data for the fiscal years ended October 1,
2004, October 3, 2003, and September 27, 2002 and the selected balance sheet
data as of October 1, 2004 and October 3, 2003 are derived from our Consolidated
Financial Statements including the Notes thereto audited by Ernst & Young LLP,
Independent Registered Public Accountants, appearing elsewhere in this Annual
Report. The selected statement of operations data for the fiscal years ended
September 28, 2001 and September 29, 2000, and the selected balance sheet data
as of September 27, 2002, September 28, 2001, and September 29, 2000, have been
derived from our financial statements not included herein, which have been
audited by Ernst & Young LLP. The selected financial data set forth below should
be read in conjunction with, and is qualified by reference to, "Management's
Discussion
12
and Analysis of Financial Condition and Results of Operations" and our
Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere in this Annual Report.
FISCAL YEARS ENDED
2 Sept. 29,
Oct. 1, 2004 Oct. 3, 2003 Sept. 27, 200 Sept. 28, 2001 2000
------------- ------------- ------------- ---------------- -----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues(1) $417,354 $438,844 $380,799 $310,789 $248,795
Cost of goods sold 319,621 295,114 249,000 213,086 178,810
New product development and start-up costs (2) 3,906 -- -- - --
-------- -------- -------- -------- --------
Gross profit 93,827 143,730 131,799 97,703 69,985
Selling and marketing expense 58,668 51,078 48,013 30,844 16,065
General and administrative expense (5) 15,078 12,880 11,201 9,939 6,263
Provision for restructuring expense (3) 2,868 -- -- -- --
Provision for acquisition and plant start-up expenses (4) -- 4,939 -- 5,537 --
---------- ----------- -------- -------- --------
Operating profit 17,213 74,833 72,585 51,383 47,657
Interest expense, net (5) 13,053 11,183 9,915 8,830 4,777
Other -- -- _ -- 2,356 --
---------- ----------- -------- -------- --------
Income before income taxes 4,160 63,650 62,670 40,197 42,880
Income tax provision 1,171 21,017 21,371 13,867 15,426
---------- ----------- -------- -------- --------
Net income $2,989 $42,633 $41,299 $26,330 $27,454
========== =========== ======== ======== ========
Net income per common share (basic): $0.17 $2.39 $2.31 $1.51 $1.53
========== =========== ======== ======== ========
Weighted average common shares outstanding 18,043 17,833 17,879 17,404 17,895
========== =========== ======== ======== ========
Net income per common share (assuming dilution): $0.16 $2.31 $2.21 $1.45 $1.50
========== =========== ======== ======== ========
Weighted average common shares outstanding
(including dilutive securities) 18,544 18,490 18,695 18,186 18,298
========== =========== ======== ======== ========
Cash dividends per share $0.375 $ -- $ -- $ -- $ --
========== =========== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and temporary investments $4,350 $6,465 $8,247 $5,284 $ 6,677
Working capital $ 66,663 $ 87,536 $ 79,589 $ 53,781 $ 46,941
Current ratio 220% 236% 306% 221% 304%
Property, plant and equipment - net $427,591 $424,120 $395,940 $339,162 $311,668
Total assets $748,410 $770,495 $640,609 $560,143 $383,771
Long-term debt, less current maturities $286,795 $300,778 $258,193 $236,783 $138,502
Stockholders' equity $342,486 $343,505 $297,106 $245,192 $198,404
Total debt/total capitalization 46% 47% 47% 49% 41%
(1)- On October 28, 2000, the U.S. Government enacted the "Continued
Dumping and Subsidy Offset Act of 2000" which provides that assessed
anti-dumping and subsidy duties liquidated by the Department of Commerce
after October 1, 2000 will be distributed to affected domestic producers.
Accordingly, revenues in fiscal years 2002, 2003 and 2004 include payments
received from the Department of Commerce of $7.6 million, $2.4 million, and
$1.5 million, respectively, as our calculated share, based on tariffs
liquidated by the government from October 1, 2000 to September 30, 2001,
October 1, 2001 to September 30, 2002 and October 1, 2002 to September 30,
2003, respectively, on Italian and Turkish imported pasta.
(2)- New product development and start-up costs represent the upfront costs
incurred to produce a portfolio of new products expected to address
carbohydrate awareness among consumers. These costs included formulation
development and product testing of a portfolio of low and reduced carb
products; incremental manufacturing and logistics costs including unplanned
downtime on dedicated lines, efficiency losses, and excess product waste,
overcoming limited short-term raw material availability and sourcing issues
(blending, transportation, etc.); and quality assurance, outside testing
and other direct product development costs.
(3)- Provision for restructuring expense relates to our Restructuring and
Rightsizing Program and includes employee severance and termination
benefits, lease costs, supply agreement costs and other miscellaneous
costs, discussed in Item 1 and in Note 2 to the Company's Consolidated
Financial Statements, included in Item 8.
(4)- Provision for acquisition expenses in fiscal year 2001 includes
incremental costs associated with the Mueller's brand acquisition ($1.8
million) and the acquisition of the seven brands from Borden Foods ($3.7
million), and in fiscal year 2003, incremental costs associated with brand
acquisitions (primarily Golden Grain) and plant start-up costs related to
our new Arizona facility ($4.9 million).
(5)- Deferred debt issuance cost amortization expense has been reclassified
from general and administrative expense to interest expense for fiscal
years 2003, 2002, 2001 and 2000 totaling $828,000, $600,000, $339,000 and
$0, respectively.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain data from our consolidated statements of
operations, expressed as a percentage of revenues, for each of the periods
presented.
FISCAL YEARS ENDED
October 1, October 3, September 27,
2004 2003 2002
---- ---- ----
Revenues:
Retail 72.8% 75.1% 74.1%
Institutional 27.2% 24.9% 25.9%
----- ------ ------
Total revenues 100.0% 100.0% 100.0%
Cost of goods sold 76.6 67.2 65.4
New product development and start-up costs 0.9 -- --
------ ------ ------
Gross profit 22.5 32.8 34.6
Selling and marketing expense 14.1 11.7 12.6
General and administrative expense 3.6 2.9 3.0
Provision for restructuring expense 0.7 -- --
Provision for acquisition and plant start-up expenses -- 1.1 --
----- ------ ------
Operating profit 4.1 17.1 19.0
Interest expense, net 3.1 2.6 2.6
Income tax expense 0.3 4.8 5.6
------ ------ ------
Net income 0.7% 9.7% 10.8%
====== ====== =====
Overview
We believe we are the largest producer of dry pasta in North America. We began
operations in 1988. We believe our singular focus on pasta, our
vertically-integrated facilities and highly efficient production facilities
focused primarily on specific market segments and our highly skilled workforce
make us a more efficient company and enable us to produce high-quality pasta at
historically very competitive costs. We believe that the combination of our low
cost structure, our product strategy of offering branded, private label,
imported and specialty products, our scalable production facilities and our key
customer relationships create competitive advantages.
We generate revenues in two customer markets: retail and institutional. Retail
market revenues include the sales of our pasta products to customers who resell
the pasta in retail channels (including sales to grocery, club, mass merchant
and discount stores) and encompasses sales of our branded, private label,
imported and specialty products. These revenues represented 72.8% and 75.1% of
our total revenue for the years ended October 1, 2004 and October 3, 2003,
respectively. Institutional market revenues include revenues from product sales
to customers who use our pasta as an ingredient in food products or who resell
our pasta in the foodservice (meals away from home) market. It also includes
revenues from sales to government agencies and other customers that we pursue
periodically. The institutional market represented 27.2% and 24.9% of our total
revenue for the years ended October 1, 2004 and October 3, 2003, respectively.
During the fiscal year 2004, the retail dry pasta category in the United States
experienced year-over-year declines in consumption of approximately 5%
to 6%. In our view this category decline, which had significant impact on the
Company's results for the 2004 year versus the prior year, is attributable to
dietary changes by the American consumer to reduce their intake of
carbohydrates. As discussed more fully below, these consumption declines have
resulted in significant revenue declines for the Company, which in turn
contributed to the necessity for the restructuring and rightsizing program
initiated in the third quarter of fiscal 2004 (as discussed below).
Average sales prices for our non-branded products vary depending on
customer-specific packaging and raw material requirements, product manufacturing
complexity and other service requirements. Average prices for our branded
products are also based on competitive market factors. Average retail and
institutional prices will also vary due to changes in the relative share of
customer revenues and item specific sales volumes (i.e.,
14
product sales mix). Generally, average retail sales prices are higher than
institutional sales prices. Selling prices of our branded products are
significantly higher than selling prices in our other business units, including
private label. This results in higher revenues and gross profits than our
non-branded businesses. Revenues are reported net of cash discounts, product
returns, and certain promotional and slotting allowances.
We introduced a portfolio of new reduced carb products in early fiscal 2004,
designed to help mitigate the impact of general pasta consumption declines. With
the introduction of our reduced carb product line, we have incurred $3.9 million
of new product development and start-up costs. These costs represent the upfront
costs incurred to produce a portfolio of new products expected to address
carbohydrate awareness among consumers. These costs included formulation
development and product testing of a portfolio of low and reduced carb products;
incremental manufacturing and logistics costs including unplanned downtime on
dedicated lines, efficiency losses, and excess product waste; overcoming limited
short-term raw material availability and sourcing issues (blending,
transportation, etc.); and quality assurance, outside testing and other direct
product development costs. We have also incurred $6.0 million of introductory
marketing costs related to the new reduced carb product line. While the early
demand for these products was relatively strong, subsequent sales trends have
not met our expectations. This product line has not yet grown to become a
significant component of the pasta market and while we believe reduced carb
products will fulfill a relevant role in the diets of some consumers, the
product line will not be a driver of our sales in the short-term.
We also developed a "low carb" product line under a supply agreement with Atkins
Nutritional Services during fiscal year 2004. While early sales levels were
encouraging, recent trends and revenues are not achieving the levels originally
expected. Revenues under the agreement in fiscal year 2004 were $5.7 million
(with no sales under the agreement in the fourth quarter of fiscal 2004). As the
sales outlook for the Atkins product line has become substantially diminished in
the fourth quarter, recoverability of $0.8 million of certain assets relating to
the agreement became uncertain and was expensed in the fourth quarter of fiscal
2004. We expect that inventories currently on hand relating to our reduced carb
product line and the Atkins agreement will either be sold in the normal course
of business, or in the case of Atkins related inventory, repurchased by Atkins
under the terms of the agreement; however the ultimate disposition of these
inventories without additional cost to the Company is dependent upon such factors.
We seek to develop strategic customer relationships with food industry leaders
that have substantial pasta requirements. We have a long-term supply agreement
through December 31, 2006 with Sysco, and other non-contractual arrangements
with food industry leaders that provide for the "pass-through" of direct
material cost and certain other cost changes as pricing adjustments. The
pass-throughs are generally limited to actual changes in cost and, as a result,
impact margins in periods of changing costs and prices. The pass-throughs are
generally effective 30 to 90 days following such cost changes and thereby
significantly reduce the long-term exposure of our operating results to the
volatility of raw material costs. These pass-through arrangements also require
us to pass on the benefits of any price decreases in raw material costs.
Our cost of goods sold consists primarily of raw materials, packaging,
manufacturing costs (including depreciation) and distribution costs. A
significant portion of our cost of goods sold is durum wheat. We purchase durum
wheat on the open market and, consequently, those purchases are subject to
fluctuations in cost. We manage our durum wheat cost risk through durum wheat
cost "pass-through" agreements in long-term contracts and other non-contractual
arrangements with our customers as discussed above and advance purchase
contracts for durum wheat which are generally less than twelve months in
duration. Our new reduced carb product line includes significantly higher costs
for raw materials and manufacturing than our other pasta products.
Our capital asset strategy is to achieve low-cost production through vertical
integration and investment in the most current pasta-making assets and
technologies. The manufacturing- and distribution-related capital assets that
have been or will be acquired to support this strategy are depreciated over
their respective economic lives. Because of the capital-intensive nature of our
business, we believe our depreciation expense for production and distribution
assets may be higher than that of many of our competitors. Depreciation expense
is a component of inventory cost and cost of goods sold.
Selling and marketing costs constituted 14.1% and 11.7% of revenues for the
years ended October 1, 2004 and October 3, 2003, respectively. The Company
recorded $6.0 million of
15
introductory marketing costs related to the new reduced carb product line in
fiscal year 2004.
Critical Accounting Policies
This discussion and analysis discusses our results of operations and financial
condition as reflected in our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. As discussed in Note 1 to our consolidated financial statements,
the preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting periods. On an ongoing basis, our management evaluates its
estimates and judgments, including those related to the impairment of long-lived
and intangible assets, the method of accounting for stock options, and the
estimates used to record allowances for doubtful accounts, reserve for
slow-moving, damaged and discontinued inventory and derivatives. Our management
bases its estimates and judgments on its substantial historical experience and
other relevant factors, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. See Note 1 to our consolidated financial statements
for a complete listing of our significant accounting policies. Our most critical
accounting policies are described below.
Impairment Testing of Intangible Assets: In accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," we do not amortize the cost of intangible assets with indefinite lives,
such as our brands and trademarks. SFAS No. 142 requires that we perform certain
fair value based tests of the carrying value of indefinite lived intangible
assets at least annually and more frequently should events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. We completed our impairment testing at the end of fiscal year 2004
and determined that no material impairment exists. These impairment tests are
impacted by judgments as to future cash flows and other considerations. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Future events could cause
our management to conclude that impairment indicators exist and that the value
of intangible assets is impaired.
Long Lived Assets: In accordance with SFAS No. 144, "Accounting For Impairment
or Disposal of Long-lived Assets," we review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. We evaluate recoverability of assets to be held
and used by comparing the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
In conjunction with our restructuring and rightsizing program, we suspended full
operations at our Kenosha, Wisconsin manufacturing facility. Although we
partially reactivated this facility in October 2004, for a temporary period, we
currently anticipate operations to be substantially suspended into fiscal 2006.
We have reviewed this facility for impairment and have determined that this
asset is not impaired.
Stock Options: We have elected to follow Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for our 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 our
employee stock options is equal to the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if we had accounted for our 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 rate of 2.00% for fiscal 2002, and 1.33% for
16
fiscal years 2003 and 2004; dividend yield of zero for fiscal year 2002 and
fiscal year 2003 and 2.00% for fiscal year 2004; a volatility factor of the
expected market price of our common stock of .408 for fiscal year 2002, .354 for
fiscal year 2003 and .350 for fiscal year 2004; and a weighted-average expected
life of the options of 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
our employee stock options have characteristics significantly different from
those 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 our employee stock options.
On October 13, 2004, the Financial Accounting Standards Board (FASB) stated that
Statement 123R, Share-Based Payment, is proposed for issuance and would be
effective for public companies for interim or annual periods beginning after
June 15, 2005. This Statement would require all companies to measure
compensation cost for all share-based payments (including employee stock
options) at fair value. Retroactive application of the requirements of SFAS No.
123 (not Statement 123R) to the beginning of the fiscal year that includes the
effective date would be permitted, but not required. Early adoption of Statement
123R is encouraged.
Accounts Receivable - Significant Customers: During fiscal year 2004, we
generated 27% of our revenues and corresponding accounts receivable from sales
to two multi-national customers. If our primary customers experience significant
adverse conditions in their industry or operations, our customers may not be
able to meet their ongoing financial obligations to us for prior sales or
complete the purchase of additional products from us under the terms of our
existing purchase and sale commitments.
Allowance for Doubtful Accounts - Methodology: We evaluate the collectibility of
our accounts receivable based on a combination of factors. In circumstances
where we are aware of a specific customer's inability to meet its financial
obligations to us (e.g. bankruptcy filings, and substantial down-grading of
credit scores), we record a specific reserve for bad debts against amounts due
to reduce the net recognized receivable to the amount we reasonably believe will
be collected. For all other customers, we recognize reserves for bad debts based
on the length of time the receivables are past due, and our historical
experience. If circumstances change (i.e., higher than expected defaults or an
unexpected material adverse change in a major customer's ability to meet its
financial obligations to us), our estimates of the recoverability of amounts due
us could be reduced by a material amount.
Reserve for Slow-Moving, Damaged and Discontinued Inventory: We carry our
inventory at standard costs, adjusted for capitalized variances, which
approximate the lower of cost, determined on a first in, first-out (FIFO) basis,
or market. We periodically review our inventory for slow-moving, damaged and
discontinued items and provide reserves to reduce such items identified to their
recoverable amounts.
Promotional Allowance: Promotional allowances related to our sales are
recoded at the time revenue is recognized. Such allowances, where applicable,
are estimated based on anticipated volume and promotional spending with specific
customers.
Derivatives: We hold derivative financial instruments to hedge a variety of risk
exposures including interest rate risks associated with variable rate long-term
debt and foreign currency risks associated with our Italian operations. These
derivatives qualify for hedge accounting as discussed in detail in Note 1 to our
consolidated financial statements. We do not participate in speculative
derivatives trading. Hedge accounting results when we designate and document the
hedging relationships involving these derivative instruments. While we intend to
continue to meet the conditions for hedge accounting, if hedges did not qualify
as highly effective or if we did not believe that forecasted transactions would
occur, the changes in the fair value of the derivatives used as hedges would be
reflected in earnings.
To hedge foreign currency risks, we use futures contracts. The fair values of
these instruments are determined from market quotes. These forward contracts are
valued in a manner similar to that used by the market to value exchange-traded
contracts; that is, using standard valuation formulas with assumptions about
future foreign currency exchange rates derived from existing exchange rates, and
interest rates observed in the market. To hedge interest rate risks, an interest
rate swap is used to effectively convert a portion of variable rate debt to
fixed rate. This instrument is valued using the market standard methodology of
netting the discounted future fixed cash receipts and the discounted expected
variable cash payments. The variable cash payments are based on an
17
expectation of future interest rates derived from observed market interest rate
curves. We have not changed our methods of calculating these fair values or
developing the underlying assumptions. The values of these derivatives will
change over time as cash receipts and payments are made and as market conditions
change. Our derivative instruments are not subject to multiples or leverage on
the underlying commodity or price index. Information about the fair values,
notional amounts, and contractual terms of these instruments can be found in
Note 1 to our consolidated financial statements and the section titled
"Quantitative and Qualitative Disclosures About Market Risk."
We consider our historical business patterns and our regularly updated forecasts
in determining the amounts of our foreign inventory purchases to hedge. We
combine the forecasts with historical observations to establish the percentage
of our forecast we are assuming to be probable of occurring, and therefore
eligible to be hedged. The purchases are hedged for exposures to fluctuations in
foreign currency exchange rates.
We do not believe we are exposed to more than a nominal amount of credit risk in
our interest rate and foreign currency hedges as the counter parties are
established, well-capitalized financial institutions. Our exposure is in liquid
currency (Euros), so there is minimal risk that appropriate derivatives to
maintain our hedging program would not be available in the future.
Restructuring and Rightsizing Program
The pasta industry continued to experience the significant changes that have
been seen over the last 15-18 months, with U.S. pasta consumption continuing to
decrease as a result of recent changes in consumer diet trends. During this
period, we estimate the decline in industry-wide consumption to be over 100
million annualized pounds. Retail consumption of dry pasta (as measured by AC
Nielsen) declined by approximately 5% to 6% in volume for the 12 months ended
October 2, 2004. The production overcapacity that existed within the pasta
industry, combined with decreasing consumer demand, has resulted in a highly
competitive market share battle with pricing levels and operating margins coming
under increasing pressure.
During the third fiscal quarter of 2004, we announced a Restructuring and
Rightsizing program to better align our production capacity and cost structure
with our current business and operating profile and the current pasta industry
environment. The restructuring and rightsizing program responds to industry-wide
reductions in demand related to recent changes in consumer diet trends and to
manufacturing overcapacity in the pasta industry.
The key strategic elements of the Restructuring and Rightsizing program include
reductions in our workforce, manufacturing capacity and inventory levels and the
related reconfiguration of our distribution network. In that regard, in July
2004 we suspended full operations at one of our manufacturing facilities
(Kenosha, Wisconsin); temporarily shutdown production at two of our four
domestic manufacturing facilities (Excelsior Springs, Missouri and Columbia,
South Carolina); and began preparing to exit eight of our leased domestic
distribution centers. As a result of the restructuring and rightsizing, our
production capacity and output will more effectively match our anticipated sales
demand and we expect to generate significant cost savings and lower our
inventory levels. We recognized restructuring expenses relating to this program
in the third and fourth quarters of fiscal year 2004, in the amount of $0.9
million and $1.9 million, respectively.
A key strategic element of our restructuring and rightsizing program was the
reduction of inventory levels. As noted above, this was accomplished through the
suspension of one plant's operations and the temporary shutdowns of two other
plants, as well as reducing our slow moving and discontinued inventory. As of
October 1, 2004, inventory levels decreased $18.1 million from fiscal year-end
2003. Related to this element of the strategy, we recognized certain expenses of
$14.1 million in the third and fourth quarters of fiscal year 2004, as discussed
further below.
18
FISCAL YEAR ENDED OCTOBER 1, 2004 COMPARED TO FISCAL YEAR ENDED OCTOBER 3, 2003
Revenues: Revenues decreased $21.5 million, or 4.9%, to $417.4 million for the
fiscal year ended October 1, 2004, from $438.8 million for the fiscal year ended
October 3, 2003. Revenues decreased $20.5 million, or 4.6%, due to volume
decline, and $1.0 million, or 0.3%, due to lower average selling prices
resulting from overall competitive pressures in the pasta industry. Revenues
declined by $0.9 million, or 0.4%, due to a reduction in payments received from
the U.S. government under the Continued Dumping and Subsidy Offset Act of 2000.
Revenues for 2004 are based on a 52-week year, while revenues for 2003 were
based on a 53-week year.
Revenues for the Retail market decreased $26.0 million, or 7.9%, to $303.7
million for the fiscal year ended October 1, 2004, from $329.7 million for the
fiscal year ended October 3, 2003. Revenues decreased $25.4 million, or 7.7%,
due to volume decline, and $0.6 million, or 0.2%, due to lower average selling
prices resulting from competitive pressures and increased promotional support
relating to branded sales. Revenues also declined by $0.7 million, or 0.2%, as a
result of the amortization of slotting fees related to our reduced carb product
introduction. Revenues declined by $0.9 million, due to a reduction in payments
received from the U.S. government under the Continued Dumping and Subsidy Offset
Act of 2000.
Revenues for the Institutional market increased $4.6 million, or 4.2%, to $113.7
million for the fiscal year ended October 1, 2004, from $109.1 million for the
fiscal year ended October 3, 2003. Revenues increased $1.4 million, or 1.2%, due
to volume growth and $3.2 million, or 3.0%, due to higher average selling prices
and changes in sales mix. Our European and Contract businesses performed well
and drove the volume growth in fiscal year 2004.
Cost of Goods Sold: Included in costs of goods sold are the costs of our
inventory reduction strategy, a key component of our Restructuring and
Rightsizing Program. Such costs totaled $14.1 million during the year ended 2004
and include costs relating to the Kenosha plant's suspended operations, costs
incurred at two plants while temporarily shut down during July and the
liquidation and write-downs of certain slower moving or higher valued inventory.
The Kenosha expenses include manufacturing costs that were incurred during the
fiscal year which were expected to be absorbed as production costs during the
year. We set inventory cost standards based upon our expected annual production
levels. As a result of the actions taken to implement the restructuring and
rightsizing program, including the suspension of production at the Kenosha
facility and the other temporary shutdowns, we determined that these costs would
not be absorbed through production as inventory costs and we recognized these
costs in the third and fourth quarters of fiscal 2004. The Kenosha plant also
incurred costs as the plant's operations and production levels wound down, while
preparing the plant for suspended operations. Temporary plant shutdown expenses
include the ongoing expenses during shutdowns, which would normally be treated
as production costs and charged to inventory but, in the absence of production
to absorb the costs, have been charged to cost of goods sold as period costs.
The inventory adjustments were made to reflect expected recovery under our
revised sales forecasts pursuant to the rightsizing strategy.
In addition to the inventory reduction costs of $14.1 million, costs of goods
sold increased by $10.4 million reflecting higher per unit manufacturing costs,
reduced by the impact of decreased sales volume of (4.6%) during fiscal year
2004. Per unit manufacturing cost increased primarily due to lower actual
production volumes than expected in original operating plans, which assumed an
increase in production and sales over the prior year. The lower utilization of
production capacity, combined with a larger manufacturing and logistics cost
structure in fiscal 2004 (that includes proportionately higher levels of fixed
costs), resulted in the substantial increase in cost of goods sold and lower
gross profit. The larger manufacturing and logistics cost structure in fiscal
2004 reflected higher anticipated production and increased sales than in fiscal
2003. In addition, increased operating costs, including higher utilities and
freight costs, negatively impacted cost of goods sold.
New Product Development and Start-up Costs: The new product development and
start-up costs of $3.9 million for the year ended October 1, 2004 related to our
newly introduced reduced carb products. These costs included formulation
development and product testing of a portfolio of low and reduced carb products;
incremental manufacturing and logistics costs including unplanned downtime on
dedicated lines, efficiency losses, and excess
19
product waste; overcoming limited short-term raw material availability and
sourcing issues (blending, transportation, etc.); and quality assurance, outside
testing and other direct product development costs.
Gross Profit: Gross profit decreased $49.9 million, or 34.7%, to $93.8 million
for the fiscal year ended October 1, 2004, from $143.7 million for the fiscal
year ended October 3, 2003. Gross profit as a percentage of revenues decreased
to 22.5% for the fiscal year ended October 1, 2004 from 32.8% for the fiscal
year ended October 3, 2003. Gross profit was impacted by a number of factors as
compared to the prior year, (as discussed above) including revenue decreases of
$21.5 million without corresponding decreases in cost of goods sold due to
unabsorbed production costs expensed in fiscal 2004, and the costs of our
inventory reduction strategy and the temporary shut downs. Also affecting the
decrease in the 2004 gross profit is the impact of the $3.9 million charge for
incremental costs associated with new product development and start-up costs on
the reduced carb products.
Selling and Marketing Expense: Selling and marketing expense increased $7.6
million, or 14.9%, to $58.7 million for the fiscal year ended October 1, 2004,
from $51.1 million reported for the fiscal year ended October 3, 2003. The
increase in selling and marketing relates primarily to our introductory
marketing support for the new reduced carb product line of $6.0 million. Selling
and marketing expense as a percentage of revenues increased to 14.1% for the
fiscal year ended October 1, 2004, from 11.7% for the comparable prior period
due primarily to these reduced carb marketing costs and the effect of certain
fixed selling and marketing costs being incurred on reduced sales.
General and Administrative Expense: General and administrative expense increased
$2.2 million, or 17.1%, to $15.1 million for the fiscal year ended October 1,
2004, from $12.9 million reported for the comparable period last year. This is
attributable primarily to increased costs of information technology,
organization-related costs, regulatory compliance costs and additional reserves
for doubtful accounts related to specifically identified uncollectable accounts
and customer deductions. General and administrative expenses as a percentage of
revenues increased to 3.6% for the year ended October 1, 2004, from 2.9% for the
year ended October 3, 2003 due to the effect of these relatively fixed costs
being incurred on reduced sales.
Provision for Restructuring Expense: During the year ended October 1, 2004, $2.9
million of restructuring expenses were recorded relating to the restructuring
and rightsizing program announced in the third quarter of 2004. These expenses
include employee severance and termination benefits, lease costs, supply
agreement costs and other miscellaneous costs. There were no such costs incurred
in fiscal year 2003.
Provision for Acquisition and Plant Start-Up Expenses: For the year ended
October 3, 2003, the provision for acquisition and plant start-up expenses of
$4.9 million consisted of incremental costs associated with the brand
acquisitions and plant start-up costs related to the Arizona facility. There was
no such expense in fiscal year 2004.
Operating Profit: Operating profit for the fiscal year ended October 1, 2004,
was $17.2 million, a decrease of 77.0% from the $74.8 million reported for the
fiscal year ended October 3, 2003. Operating profit decreased as a percentage of
revenues to 4.1% for the fiscal year ended October 1, 2004, from 17.1% for the
fiscal year ended October 3, 2003, as a result of the factors discussed above.
Interest Expense: Interest expense for the fiscal year ended October 1, 2004,
was $13.1 million, increasing 16.7% from the $11.2 million reported for the
fiscal year ended October 3, 2003. The effect of higher interest rates and lower
capitalized interest of $1.0 million was partially offset by lower borrowings in
fiscal 2004.
Income Tax Expense: Income tax expense for the fiscal year ended October 1,
2004, was $1.2 million, decreasing $19.8 million from the $21.0 million reported
for the fiscal year ended October 3, 2003, and reflects effective income tax
rates of approximately 28.2% and 33.0%, respectively. The reduced income tax
provision and the lower effective rate in fiscal 2004 is primarily due to the
effects of reduced taxable income and the foreign tax rate differential having a
larger impact on the income tax provision in 2004 than the prior year.
Net Income: Net income for the fiscal year ended October 1, 2004, was $3.0
million, decreasing from the $42.6 million reported for the fiscal year ended
October 3, 2003, as a
20
result of the factors discussed above. Net income as a percentage of net
revenues was 0.7% versus 9.7% in the prior year.
Diluted earnings per common share were $0.16 per share for the year ended
October 1, 2004 compared to $2.31 per share for the year ended October 3, 2003,
also primarily due to the factors described above.
FISCAL YEAR ENDED OCTOBER 3, 2003 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 27, 2002
Revenues: Revenues increased $58.0 million, or 15.2%, to $438.8 million for the
fiscal year ended October 3, 2003, from $380.8 million for the fiscal year ended
September 27, 2002. Revenues increased $48.4 million, or 12.7%, due to volume
growth, and $14.8 million, or 3.9%, due to higher average selling prices.
Revenues declined by $5.2 million, or 1.4%, due to a reduction in payments
received from the U.S. government under the Continued Dumping and Subsidy Offset
Act of 2000. Revenues for 2003 are based on a 53-week year, while revenues for
2002 were based on a 52-week year.
Revenues for the Retail market increased $43.6 million, or 15.2%, to $329.7
million for the fiscal year ended October 3, 2003, from $286.1 million for the
fiscal year ended September 27, 2002. Revenues increased $32.4 million, or
11.3%, due to volume growth, and $16.4 million, or 5.7%, due to higher average
selling prices. Revenues declined by $5.2 million, or 1.8%, due to a reduction
in payments received from the U.S. government under the Continued Dumping and
Subsidy Offset Act of 2000.
Revenues for the Institutional market increased $14.4 million, or 15.2%, to
$109.1 million for the fiscal year ended October 3, 2003, from $94.7 million for
the fiscal year ended September 27, 2002. Revenues increased $14.1 million, or
13.4%, due to volume growth and $0.3 million, or 1.8%, due to higher average
selling prices and changes in sales mix.
Gross Profit: Gross profit increased $11.9 million, or 9.1%, to $143.7 million
for the fiscal year ended October 3, 2003, from $131.8 million for the fiscal
year ended September 27, 2002. This increase was primarily due to revenue growth
associated with increased volumes and higher selling prices. These increases
were partially offset by higher raw material costs, principally durum wheat.
Gross profit as a percentage of revenues decreased to 32.8% for the fiscal year
ended October 3, 2003 from 34.6% for the fiscal year ended September 27, 2002.
This change in gross margin percentage is due to a number of offsetting factors.
Factors putting downward pressure on margins included sales mix changes (greater
growth in private label and ingredient versus branded), the inherent margin
reduction that mathematically occurs with the pass through of durum cost
increases, and lower net revenues associated with the Department of Commerce
payments. Factors having a positive impact on gross margins included branded
acquisitions, and lower costs resulting from the Company's "Funding the Growth"
cost reduction initiative, generally related to production and logistics costs.
Selling and Marketing Expense: Selling and marketing expense increased $3.1
million, or 6.4%, to $51.1 million for the fiscal year ended October 3, 2003,
from $48.0 million reported for the fiscal year ended September 27, 2002. The
increase in selling and marketing relates primarily to our increased branded
business. Selling and marketing expense as a percentage of revenues decreased to
11.7% for the fiscal year ended October 3, 2003, from 12.6% for the comparable
prior period. The lower selling and marketing expense as a percentage of revenue
is attributable primarily to higher rates of revenue growth in the businesses
which require less selling and marketing support, and the leverage benefits of
controlling our overhead costs.
General and Administrative Expense: General and administrative expense increased
$1.7 million, or 15.0%, to $12.9 million for the fiscal year ended October 3,
2003, from $11.2 million reported for the comparable period last year. This is
attributable primarily to increased MIS cost, and the cost associated with
Sarbanes-Oxley compliance, including legal and insurance costs. General and
administrative expense as a percentage of revenues was 2.9% for both periods.
Provision for Acquisition and Plant Start-Up Expenses: For the year ended
October 3, 2003, the provision for acquisition and plant start-up expenses of
$4.9 million consisted of incremental costs associated with the brand
acquisitions and plant start-up costs related to the Arizona facility. There
were no such costs incurred in fiscal 2002.
Operating Profit: Operating profit for the fiscal year ended October 3, 2003,
was
21
$74.8 million, an increase of 3.1% over the $72.6 million reported for the
fiscal year ended September 27, 2002. Operating profit decreased as a percentage
of revenues to 17.1% for the fiscal year ended October 3, 2003, from 19.0% for
the fiscal year ended September 27, 2002, as a result of the factors discussed
above. Included in operating profit is the impact of the $4.9 million charge for
incremental costs associated with the acquisitions and plant start-up expenses
discussed above.
Interest Expense: Interest expense for the fiscal year ended October 3, 2003,
was $11.2 million, increasing 12.8% from the $9.9 million reported for the
fiscal year ended September 27, 2002. The effect of higher borrowings and lower
capitalized interest was partially offset by lower interest rates in fiscal
2003.
Income Tax Expense: Income tax expense for the fiscal year ended October 3,
2003, was $21.0 million, decreasing $0.4 million from the $21.4 million reported
for the fiscal year ended September 27, 2002, and reflects effective income tax
rates of approximately 33.0% and 34.1%, respectively.
Net Income: Net income for the fiscal year ended October 3, 2003, was $42.6
million, increasing from the $41.3 million reported for the fiscal year ended
September 27, 2002. Included in net income is the impact of the $4.9 million
($3.3 million after tax) charge for incremental costs associated with the
acquisitions and plant start-up costs. Diluted earnings per common share were
$2.31 per share for the year ended October 3, 2003 compared to $2.21 per share
for the year ended September 27, 2002. Included in the diluted earnings per
share is the ($0.18 after tax) per share effect of incremental costs related to
acquisitions and plant start-up costs. Net income as a percentage of net
revenues was 9.7% versus 10.8% in the prior year.
Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by operations and borrowings
under our credit facility. Cash and temporary investments totaled $4.4 million
and net working capital totaled $66.7 million at October 1, 2004. At October 3,
2003, cash and temporary cash investments totaled $6.5 million and working
capital totaled $87.5 million. The $20.8 million decrease in working capital in
fiscal year 2004 relates primarily to the $18.0 million decrease in inventory
related to our inventory reduction strategy implemented with the Restructuring
and Rightsizing Program.
Our net cash provided by operating activities totaled $50.4 million for the
fiscal year ended October 1, 2004 compared to $72.2 million for the fiscal year
ended October 3, 2003 and $55.5 million for the fiscal year ended September 27,
2002.
Cash flow used in investing activities principally relates to investments in
production and distribution, milling and management information system assets
and our branded product acquisitions related to Golden Grain/Mission and Martha
Gooch/LaRosa brands (primarily in fiscal 2003). Capital expenditures were $22.7
million for fiscal year 2004, $40.3 million for fiscal year 2003 and $72.8
million for fiscal year 2002. The higher capital spending in fiscal year 2003
and 2002 relates to the completion of the Arizona facility.
Net cash used by financing activities was $25.8 million for fiscal year 2004
compared to net cash provided by financing activities of $24.9 million for
fiscal year 2003, and $24.7 million for fiscal year 2002. The $25.8 million of
cash used in fiscal 2004 is primarily a result of $41.2 million principal
payment on debt and capital lease obligations, and the payment of $6.8 million
in dividends partially offset by $21.9 million proceeds from issuance of debt.
The $24.9 million of cash provided in fiscal 2003 is primarily a result of $87.0
million proceeds from issuance of debt (primarily to fund the brand acquisitions
discussed above), offset by $55.5 million principal payment on debt and capital
lease obligations and $12.2 million used to purchase treasury stock. The $24.7
million of cash provided in fiscal year 2002 is primarily a result of $60.1
million proceeds from issuance of debt (primarily to fund capital expenditures),
offset by $41.4 million principal payment on debt and capital lease obligations.
We currently use cash generated from operations to fund capital expenditures,
repayment of debt, working capital requirements and dividend payments. We expect
that future cash requirements will principally be the same.
At October 1, 2004, we had a $400 million unsecured credit facility consisting
of a $300 million revolving credit facility (including availability for issuance
of letters of credit) and a $100 million term loan facility (that was added in
fiscal 2003). The $400
22
million facility includes $100 million dual currency availability in Euros or
U.S. dollars to finance our international business in Italy.
The facility provides for annual commitment reductions between October 1, 2002
and October 2, 2005 totaling $110 million. The credit facility matures on
October 2, 2006. The total capacity of the credit facility was $320 million as
of October 1, 2004 and there were approximately $36.9 million of borrowings
available at that time. At October 1, 2004, we had $50,000 of outstanding
letters of credit.
In January 2004, the credit facility was amended to increase the permitted
restricted payments for dividends and for share repurchases, to $40 million plus
25% of consolidated net income. In addition, the amendment revised the "Maximum
Leverage Ratio" allowable under the original credit agreement. With respect to
previous amendments, there are no material differences between the terms of the
original credit facility and the amended credit facility.
In June 2004, the credit facility was further amended to revise the definitions
of "Consolidated EBITDA" and "Fixed Charge Coverage Ratio" and to increase the
"Maximum Leverage Ratio" and to decrease the Minimum Consolidated EBITDA allowed
under the credit agreement. Other than as addressed above, with respect to
previous amendments, there are no material differences between the terms of the
original credit facility and the amended credit facility.
On November 9, 2004, our credit facility was further amended to revise the
definitions of "Consolidated EBITDA" and "Fixed Charge Coverage Ratio" and to
increase the "Maximum Leverage Ratio" and to decrease the "Minimum Consolidated
EBITDA". In addition, the lenders were granted a collateral interest in
substantially all of our tangible and intangible domestic assets. Other than as
addressed above, with respect to previous amendments, there are no material
differences between the terms of the original credit facility and the amended
credit facility.
The principal maturity terms of our $400 million revolving credit facility are
as follows (in thousands):
Amount Date
------ ----
Scheduled Commitment Reduction $25,000 October 1, 2002
Scheduled Commitment Reduction 25,000 October 1, 2003
Scheduled Commitment Reduction 30,000 October 1, 2004
Scheduled Commitment Reduction 30,000 October 1, 2005
Final Maturity 290,000 October 2, 2006
-------
$400,000
Interest is charged at 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 per the credit facility plus the commitment fee is classified as
interest expense.
At October 1, 2004, the three-month LIBOR rate was 2.0275%, the three-month
Euribor rate was 2.148%, and our weighted average bank debt borrowing rate per
the credit facility was 3.8%. The weighted average bank debt borrowing rate at
October 3, 2003 was 2.79%. We expect interest costs to increase in fiscal year
2005, as compared to fiscal year 2004, due to increased LIBOR rates, and the
increased margin spread over LIBOR under our credit agreement (pursuant to the
sliding scale discussed above) that we expect to result from our decreased level
of EBITDA.
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 currently expect these
limitations to have a material effect on business or results of operations.
Pursuant to an amendment to the credit facility agreement on November 9, 2004,
which modified certain financial covenants that were in effect in fiscal year
2004, the Company was in compliance with the restrictive covenants as of October
1, 2004.
We utilize interest rate swap agreements and foreign exchange contracts to
manage
23
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 simple 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
2, 2006 and we anticipate that any borrowings outstanding at that time will be
refinanced. We have no other material borrowing commitments.
We believe that net cash expected to be provided by operating activities and the
cash available through our existing credit facility will be sufficient to meet
our expected capital and liquidity needs for the foreseeable future.
The following table shows our contractual payment obligations for our long-term
debt, capital lease obligations and future purchase obligations as of October 1,
2004 (in thousands):
Payments Due by Period
----------------- ------------------- ------------------ ------------------ -----------------
Certain Contractual Obligations Total Less than 1-3 years 4-5 years After
------------------------------- 1 year 5 years
----------------- ------------------- ------------------ ------------------ -----------------
Long-term debt $288,758 $2,000 $286,758 $ -- $ --
Capital lease obligations 81 40 41 -- --
Unconditional durum wheat and semolina
purchase obligations 36,927 28,927 3,000 2,000 3,000
-------- ------- -------- ----- -----
Total contractual cash obligations $325,766 $30,967 $289,799 $2,000 $3,000
======== ======= ======== ====== ======
Off-Balance Sheet Arrangements
At October 1, 2004, we had no off-balance sheet arrangements that have or are
likely to have a material current or future effect on our financial condition,
revenues, expenses, results of operations, liquidity, capital expenditures, or
capital resources.
Other Matters
None.
Effect of Inflation
During fiscal years 2003 and 2002, inflation did not have a material effect on
our business. In fiscal year 2004, we experienced inflationary cost increases in
certain operating costs, including raw materials, utilities, freight, insurance
and benefit costs. The competitive environment in fiscal year 2004 did not allow
us to pass all of these cost increases to our customers or consumers through
sales price increases.
Risk Factors
You should carefully consider the risks described below, as well as the other
information included or incorporated by reference in this Annual Report. The
risks described below are not the only ones we face. 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 harmed.
Our business is dependent on several major customers.
Historically, a limited number of customers has accounted for a substantial
portion of our revenues. If our relationship with one or more of our major
customers changes or ends, our sales could suffer, which could have a material
adverse effect on our business, financial condition and results of operations.
We expect that we will continue to rely
24
on a limited number of major customers for a substantial portion of our revenues
in the future.
During fiscal years 2004, 2003 and 2002, Wal*Mart, Inc. accounted for
approximately 17%, 15%, and 13% of our revenues, respectively, and Sysco
Corporation accounted for approximately 10%, 10%, and 11% of our revenues,
respectively, over the same periods. We do not have long-term supply agreements
with a substantial number of our customers, including Wal*Mart. We have a
mutually exclusive supply contract with Sysco (the "Sysco Agreement") that runs
through December 2006. The Sysco Agreement may be terminated by Sysco upon
certain events, including a substantial casualty to or condemnation of our
Missouri plant. Under the Sysco Agreement, we are restricted from supplying
pasta products to foodservice businesses other than Sysco without Sysco's
consent. If we are not able to successfully continue our relationship with
Sysco, our business would be materially and adversely affected.
Our business is impacted by the economic environment.
As a result of the recent economic environment in this country, and due to the
highly competitive environment currently existing in the food retailing and
foodservice industries, some of our retail and foodservice customers have
experienced economic difficulty. A number of our customers have been forced to
close stores and certain others have sought bankruptcy protection. This trend
could have a material adverse effect on us if a material number of our
customers, or any one large customer, were to be forced to close a significant
number of stores or file for bankruptcy protection.
As dry pasta is our only product line, any continued decline in demand for dry
pasta could adversely affect us.
We focus exclusively on producing and selling dry pasta. We expect to continue
this focus. Because of our product concentration, any decline in consumer demand
or preference for dry pasta, such as diets focused on low carbohydrate foods, or
any other factor that adversely affects the pasta market, could have a
significant adverse effect on our business, financial condition and results of
operations. During fiscal 2004, we experienced a significant decline in retail
demand for dry pasta products which adversely affected our profitability. If
demand continues to materially decline, we could experience additional material
adverse impact on our business, financial condition and results of operations.
If aggregate production capacity in the U.S. pasta industry increases or is
under-utilized, we may have to adopt a more aggressive pricing strategy, which
would negatively affect our results of operations.
Our competitive environment depends on the relationship between aggregate
industry production capacity and aggregate market demand for pasta products.
Production capacity above market demand can have a material adverse effect on
our business, financial condition and results of operations.
During the latter part of fiscal year 2004, we reduced our manufacturing
capacity by suspending full operations at one our manufacturing facilities and
one of our competitors closed one of their plants. As a result, we believe there
have recently been sizeable capacity reductions in the pasta industry as
compared to a year earlier. Our pricing strategy in fiscal year 2005 is to
increase sales prices, primarily in our private label and ingredient businesses,
which we believe we will be able to achieve while increasing our overall
profitability as industry capacity has been significantly reduced for these
product areas.
The market for pasta products is highly competitive, and we face competition
from many established domestic and foreign producers. We may not be able to
compete effectively with these producers.
The markets in which we operate are highly competitive. We compete against
numerous well-established national, regional, local and foreign companies in
every aspect of our business. Our customers may not continue to buy our products
and we may not be able to compete effectively with all of these competitors.
25
Some of our competitors have longer operating histories, significantly greater
brand recognition and financial and other resources than we do. Our direct
competitors include Barilla, (a large multi-national, Italian-owned company with
manufacturing facilities in the U.S.) and U.S. producers such as New World Pasta
LLC, Dakota Growers Pasta Company, Philadelphia Macaroni Co. Inc. and A.
Zerega's Sons, Inc., each an independent producer. We also compete against food
processors such as Kraft Foods, General Mills, ConAgra, Campbell Soup Company
and Stouffers Corp., that produce pasta internally as an ingredient for use in
food products. We also compete with Italian producers such as De Cecco and
Italian food processors.
In 2000 we commenced operations in Italy to produce pasta to sell in the U.S.,
the United Kingdom, continental Europe and other international markets.
Competition in these international markets is also intense and comes primarily
from major Italian pasta companies such as De Cecco and Barilla, and from
several locally recognized producers. We have significantly more experience in
U.S. markets than in European markets and we have not been, and we may not be,
able to achieve a significant presence in European markets.
We must manage our production and inventory levels in order to operate cost
effectively and to maintain high customer service standards.
Unanticipated fluctuations in demand make it difficult to manage production
schedules, plant operations and inventories. Also, customer inventory management
systems that are intended to reduce a retailer's inventory investment 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. Any
production of excess inventory to meet anticipated demand could result in
markdowns and increased inventory carrying costs. Any temporary plant
suspensions or shutdowns may cause inventory shortfalls. 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. If product availability issues result in our not
maintaining high customer service standards, our customers may not continue to
purchase our products.
In fiscal year 2004, we experienced significant declines in demand resulting
from what we believe to be the impact of consumer's dietary trends towards lower
carbohydrate intake. We also introduced new low- and reduced-carb product lines
for which we produced inventory in excess of customer acceptance. We incurred
significant costs relating to the implementation of our Restructuring and
Rightsizing program and the transition also negatively impacted our production
efficiency and manufacturing costs. Some short-term product availability
shortages resulted late in fiscal 2004 as a result of the transition
inefficiencies and related effects on inventory levels.
Our business requires substantial capital and we carry a significant amount of
debt that restrict our operating and financial flexibility.
Our business requires a substantial capital investment, which we have
historically financed through third-party lenders and public equity offerings.
As of October 1, 2004, we had approximately $289 million of long-term debt
outstanding. The amount of debt we carry and the terms of our indebtedness could
adversely affect us in several ways, including:
o our ability to obtain additional financing in the future for working
capital, capital expenditures, and general corporate purposes,
including strategic acquisitions, may be impaired;
o our ability to use operating cash flow in other areas of our business
may be limited because a substantial portion of our cash flow from
operations may have to be dedicated to the payment of the principal
and interest on our indebtedness;
o the terms of such indebtedness may restrict our ability to continue to
pay dividends;
o we may be more highly leveraged than some of our competitors, which
may place us at a competitive disadvantage;
o the level of debt we carry could restrict our corporate activities,
including our
26
ability to respond to competitive market conditions, to provide for
capital expenditures beyond those permitted by our loan agreements, or
to take advantage of acquisition opportunities and grow our business;
and
o because substantially all of our assets are now pledged as collateral
for our debt, an uncured default could allow our lenders to sell our
assets to satisfy our debt obligations.
In the event that we fail to comply with the covenants in our credit facility,
as amended on November 9, 2004, or any future loan agreements, there could be an
event of default under the applicable instrument. As a result, all amounts
outstanding under our current or any future debt instruments may become
immediately due and payable.
We have used, and may continue to use, interest rate protection agreements
covering our variable rate debt to limit our exposure to variable rates.
However, we may not be able to enter into such agreements or such agreements may
adversely affect our financial performance, as was the case in fiscal years
2004, 2003 and 2002.
If interest rates were to significantly increase or if we are unable to generate
sufficient cash flow from operations in the future, we may not be able to
service our debt and may have to refinance all or a portion of our debt,
structure our debt differently, obtain additional financing or sell assets to
repay such debt. We may not be able to affect such refinancing, additional
financing or asset sales on favorable terms or at all.
If existing anti-dumping measures imposed against certain foreign imports
terminate, we will face increased competition from foreign companies that are
subsidized by their governments and could sell their products at significantly
lower prices than we, which could negatively affect our profit margins or market
shares.
Anti-dumping and countervailing duties on Italian and Turkish imports imposed by
the U.S. Department of Commerce in 1996 may enable us and our domestic
competitors to compete more favorably against Italian and Turkish producers in
the U.S. pasta market. If these duties are not maintained, or foreign producers
sell competing products in the United States at prices lower than ours or enter
the U.S. market by establishing production facilities in the United States, this
would further increase competition in the U.S. pasta market. We may be unable to
compete effectively with these competitors. This could have a material adverse
effect on our business, financial condition and results of operations.
We may not be able to regain our historical growth rate.
Until fiscal 2004, we had grown our revenues and unit volumes rapidly over the
prior years. This growth came primarily from gaining market share at the expense
of our competitors and expansion through acquisitions. We do not expect to be
able to grow our business at the rates we have experienced in the past.
Cost increases or crop shortages in durum wheat or cost increases in packaging
materials could adversely affect us.
The costs of durum wheat and packaging materials have varied widely in recent
years and future changes in such costs may cause our 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, we do not know whether, or the extent to which, we
will be able to offset durum wheat or packaging material cost increases with
increased product prices.
The principal raw material in our products is durum wheat. During fiscal 2004
and 2003, the cost of durum wheat represented more than 30% of our total cost of
goods sold. Durum wheat is used almost exclusively in pasta production and is a
narrowly traded, cash-only commodity crop. 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
27
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,
trade relations, and governmental programs and regulations. The supply,
quantity, and cost of durum wheat may also be adversely affected by insects,
plant diseases, and weather conditions. We also rely on the supply of plastic,
corrugated and other packaging materials, which fluctuate in price due to market
conditions beyond our control. During fiscal years 2004 and 2003, the cost of
packaging materials represented less than 10% of our total cost of goods sold.
The costs associated with any strategic acquisitions we make may outweigh the
benefits we expect to receive from the acquired business or assets.
Since November 2000, we have completed three significant brand acquisitions for
aggregate consideration of approximately $163 million, plus additional, smaller,
acquisitions. The integration process of these and future acquisitions may
result in unforeseen difficulties and could require significant time and
attention from our management that would otherwise be directed at developing our
existing business. In addition, we could discover undisclosed liabilities
resulting from any acquisitions for which we may become responsible. Further,
the benefits that we anticipate from these acquisitions may not develop. For
example, our acquisition of the Mueller's pasta brand, the Golden Grain/Mission
pasta brand or the seven pasta brands we acquired from Borden Foods or the
integration of those brands into our existing business may not be successful, or
yield the expected benefits to us or may adversely affect our business. We may
acquire additional pasta brands or other pasta-related businesses, products or
processes. If we cannot do so cost-effectively, our business and financial
results may be adversely affected.
Our future growth rate depends in part on our acquisition of additional pasta
brands or other pasta-related businesses, products or processes consistent with
stated strategy. We may not be able to find suitable acquisitions available for
purchase or be able to make acquisitions at favorable prices. In addition, if we
do successfully identify and complete acquisitions in the future, the
acquisitions may involve the following risks:
o increases in our debt and contingent liabilities;
o entering geographic markets in which we have little or no direct prior
experience;
o unanticipated or undiscovered legal liabilities or other obligations
of acquired businesses; and
o the integration of acquired businesses into our existing business may
not be successful.
A write-off of our intangible assets could materially affect our results of
operations.
Our total assets reflect substantial intangible assets. A determination
requiring the write-off of a significant portion of our intangible assets would
have a material negative effect on our results of operations and total
capitalization. At October 1, 2004, intangible assets totaled $190 million
compared to $342.5 million of stockholders' equity. The intangibles represent
the value of our brands and trademarks resulting primarily from our acquisitions
of the Mueller's and Golden Grain/Mission brands and the seven pasta brands from
Borden Foods. Annually, we review long-lived assets for impairment or whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. We evaluate recoverability of assets to be held and used
by comparing the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. If future operating performance of one or more of our acquired brands were
to fall significantly below current or expected levels, we would reflect, under
current applicable accounting rules, a non-cash charge to operations for
impairment of intangible assets.
28
Because we produce food products, we may be subject to product liability claims
and have costs related to product recalls.
We may need to recall some of our products if they become adulterated, infested
or misbranded. We may also be subject to claims or lawsuits if the consumption
of any of our products causes injury. A widespread product recall or a
significant product liability judgment against us could cause products to be
unavailable for a period of time and a loss of consumer confidence in our food
products and could have a material adverse effect on our business. We carry
insurance against most of these matters, however, our insurance coverage may not
be adequate. The cost of commercially available insurance has increased
significantly and such insurance may not be available in the future at prices
that we can afford. In addition, because we often indemnify our customers for
costs related to product recalls, we could be subject to additional expenses and
any significant expenses not covered by insurance would negatively impact our
operating results.
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. We may not be able to find
qualified replacements for any of these individuals if their services were no
longer available. We do not currently maintain key person life insurance on any
of our key employees. We do, however, have employment agreements with Horst
Schroeder, Timothy Webster, Daniel Trott, George Shadid, Warren Schmidgall,
Walter George, Jerry Dear, and other officers.
Our business could be subject to technological obsolescence.
If other pasta producers acquire equipment similar to our equipment or more
advanced equipment that provides greater efficiencies, what we believe to be our
current competitive advantage might be diminished or eliminated, potentially
causing pressure on profit margins or reducing our market shares. Erosion of
this advantage could have a material adverse effect on our business, financial
condition and results of operations.
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 facilities in Missouri and South
Carolina directly from North Dakota, Montana and Canada under long-term rail
contracts. Under these agreements, 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 or
South Carolina plants, or semolina to our South Carolina facility, could cause
us to incur significantly higher costs and longer lead times associated with the
distribution of our pasta to our customers. If we are unable to provide adequate
supplies of pasta products to our customers in a timely fashion due to such
delays, we may subsequently lose sales. This could have a material adverse
effect on our business, financial condition and results of operations. In
addition, continued increases in transportation costs of our finished products,
could have a material adverse effect on our business, financial condition and
results of operations.
Our international expansion efforts may not be successful.
We completed the construction of a pasta-producing facility in Italy in 2000.
Prior to opening this plant, we had no experience in operating or distributing
products on an international basis. We also do not have the same competitive
advantages in these overseas markets that we do in the U.S. Our international
efforts may not be successful. We incur significant costs in:
o establishing international distribution networks;
o complying with local regulations;
29
o overseeing the distribution of products in foreign markets; and
o modifying our business and accounting processing system for each
international market we enter.
If our international revenues continue to be inadequate to offset the expense of
establishing and maintaining foreign operations, our business and results of
operations could be harmed. In addition, there are several risks inherent in
doing business on an international level. These risks include:
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; and
o difficulty in securing or transporting raw materials or transporting
finished product.
Any of these risks could adversely impact the success of our international
operations.
Our competitive position could be adversely impacted if we are unable to protect
our intellectual property.
Our brand trademarks are important to our success and our competitive position.
Our actions to establish and protect our brand trademarks and other proprietary
rights may be inadequate to prevent imitation of our products by others.
Moreover, we may face claims by a third party that we violate their intellectual
property rights. Any litigation or claims against us, whether or not successful,
could result in substantial cost, divert management's time and attention from
our core business, and harm our reputation.
Our operations are subject to significant government and environmental laws and
regulations.
We are subject to various laws and regulations administered by federal, state,
and other governmental agencies relating to the operation of our production
facilities, the production, packaging, labeling and marketing of our products
and pollution control, including air emissions. Any determination by the FDA or
other agencies that our facilities are not in compliance with applicable
regulations could interfere with the continued manufacture and distribution of
the affected products, up to the entire output of the facility or facilities
involved, and, in some cases, might also require the recall of previously
distributed products. Any such determination could have a material adverse
effect on our business, financial condition and results of operations.
Under environmental laws, we are exposed to liability primarily as an owner and
operator of real property, and as such, we may be responsible for the clean-up
or other remediation of contaminated property. Environmental laws and
regulations can change rapidly and we may become subject to more stringent
environmental laws and regulations in the future that may be retroactively
applied to earlier events. In addition, compliance with more stringent
environmental laws and regulations could involve significant capital
investments. Additional information is provided in this Form 10-K under the
heading "Business - Governmental Regulation; Environmental Matters."
30
We currently pay dividends to shareholders but we have no obligation to
continue.
We began paying quarterly dividends in fiscal year 2004. We anticipate that
future earnings will be used principally to fund capital expenditures, repayment
of debt, working capital requirements and dividend payments. Payment of
dividends is restricted by provisions in our credit facility. Dividend amounts,
if any, will be determined by our board. Our board will consider a number of
factors, including our financial condition, capital requirements, funds
generated from operations, future business prospects, applicable contractual
restrictions and any other factors our board may deem relevant. There can be no
assurance that dividend payments will continue in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk associated with financial instruments
relates to interest rate risk associated with variable rate borrowings and
foreign currency exchange rate risk associated with borrowings and purchases
from foreign subsidiaries denominated in a foreign currency. We occasionally
utilize simple derivative instruments such as interest rate swaps to manage our
mix of fixed and floating rate debt. We had various fixed interest rate swap
agreements with an aggregate notional amount of $110.0 million outstanding at
October 1, 2004. The estimated fair value of the interest rate swap agreements
was ($1.7) million and approximates the amount we would be required to pay to
terminate the swap agreements at October 1, 2004. If interest rates for our
long-term debt under our credit facility had averaged 10% more and the full
amount available under our credit facility had been outstanding for the entire
year, our interest expense would have increased, and income before taxes would
have decreased by $0.8 million for the fiscal year ended October 1, 2004.
At October 1, 2004, we had a net investment in our Italy operations of
(euro)43.8 million ($52.2 million). We hedge our net investment in our foreign
subsidiaries with euro borrowings under our credit facility in the U.S. At
October 1, 2004, long-term debt includes obligations of (euro)37.5 million
($46.6 million). Interest on our Euro debt is at variable rates and based on
Euribor market rates. Changes in the U.S. dollar equivalent of euro-based
borrowings are recorded as a component of the net foreign currency translation
adjustment in the consolidated statement of stockholder's equity.
The functional currency for our Italy operations is the Euro. Our net annual
transactional exposure is approximately (euro)16.4 million ($20.4 million). We
have transactional exposure to various other European currencies, primarily the
British pound. We frequently use forward purchase contracts to hedge this
exposure. At October 1, 2004, we have outstanding forward contracts of (euro)7.3
million and (pound)1.4 million.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN ITALIAN PASTA COMPANY
Index to Audited Consolidated Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm 33
Consolidated Balance Sheets at October 1, 2004 and October 3, 2003 34
Consolidated Statements of Operations for the years ended
October 1, 2004, October 3, 2003, and September 27, 2002 35
Consolidated Statements of Stockholders' Equity for the years ended
October 1, 2004, October 3, 2003, and September 27, 2002 36
Consolidated Statements of Comprehensive Income for the years ended
October 1, 2004, October 3, 2003, and September 27, 2002 37
Consolidated Statements of Cash Flows for the years ended
October 1, 2004, October 3, 2003, and September 27, 2002 38
Notes to Consolidated Financial Statements 39
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 October 1, 2004 and October 3, 2003, and the
related consolidated statements of operations, stockholders' equity,
comprehensive income, and cash flows for each of the three years in the period
ended October 1, 2004. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 October 1, 2004 and October 3, 2003, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended October 1, 2004, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/S/ ERNST & YOUNG LLP
Kansas City, Missouri
November 10, 2004
33
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
October 1, October 3,
2004 2003
---- ----
ASSETS
Current assets:
Cash and temporary investments $4,350 $6,465
Trade and other receivables 45,704 51,730
Prepaid expenses and deposits 10,554 12,692
Inventories 60,704 78,760
Deferred income taxes 789 2,435
-------- --------
Total current assets 122,101 152,082
Property, plant and equipment - net 427,591 424,120
Brands and trademarks 189,984 186,147
Other assets 8,734 8,146
-------- --------
Total assets $748,410 $770,495
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,264 $ 42,416
Accrued expenses 17,134 18,480
Income tax payable -- 1,096
Current maturities of long-term debt 2,040 2,554
-------- --------
Total current liabilities 55,438 64,546
Long-term debt, less current maturities 286,795 300,778
Deferred income taxes 63,691 61,666
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 10,000,000 -- --
Issued and outstanding shares - none
Class A common stock, $.001 par value:
Authorized shares - 75,000,000 20 20
Issued and outstanding shares - 20,233,835 and
18,108,139, respectively, at October 1, 2004;
20,063,827 and 18,040,709, respectively,
at October 3, 2003
Class B common stock, $.001 par value:
Authorized shares - 25,000,000 -- --
Issued and outstanding shares - none
Additional paid-in capital 232,184 227,234
Treasury stock, 2,125,696 shares in 2004 and
2,023,118 shares in 2003, at cost (51,657) (46,585)
Unearned compensation (2,556) (891)
Retained earnings 160,720 164,495
Accumulated other comprehensive income (loss) 3,775 (768)
-------- --------
Total stockholders' equity 342,486 343,505
-------- --------
Total liabilities and stockholders' equity $748,410 $770,495
======== ========
See accompanying notes to consolidated financial Statements.
34
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year ended Year ended Year ended
October 1, October 3, September 27,
2004 2003 2002
---- ---- ----
Revenues $417,354 $438,844 $380,799
-------- -------- --------
Cost of goods sold 319,621 295,114 249,000
New product development and start-up costs 3,906 -- --
-------- -------- --------
323,527 295,114 249,000
-------- -------- --------
Gross profit 93,827 143,730 131,799
Selling and marketing expense 58,668 51,078 48,013
General and administrative expense 15,078 12,880 11,201
Provision for restructuring expense 2,868 -- --
Provision for acquisition and
plant start-up expenses -- 4,939 --
-------- -------- --------
Operating profit 17,213 74,833 72,585
Interest expense, net 13,053 11,183 9,915
-------- -------- --------
Income before income taxes 4,160 63,650 62,670
Income tax provision 1,171 21,017 21,371
-------- -------- --------
Net income $2,989 $ 42,633 $ 41,299
====== ======== ========
Net income per common share (basic) $ 0.17 $ 2.39 $ 2.31
Weighted-average common shares outstanding 18,043 17,833 17,879
====== ======== ========
Net income per common share (assuming dilution) $ 0.16 $ 2.31 $ 2.21
Weighted-average common shares outstanding
(including dilutive securities) 18,544 18,490 18,695
====== ======== ========
Cash dividend declared per common share $0.375 $ -- $ --
====== ==== ====
See accompanying notes to consolidated financial statements.
35
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Year ended Year ended Year ended
October 1, October 3, September 27,
2004 2003 2002
---- ---- ----
Class A Common Shares
Balance, beginning of year 20,064 19,677 19,218
Issuance of shares of Class A Common stock to option holders
and other issuances 170 387 459
------ ------ ------
Balance, end of year 20,234 20,064 19,677
====== ====== ======
Class A Common Stock
Balance, beginning of year $ 20 $ 20 $ 19
Issuance of shares of Class A Common stock to option holders
and other issuances -- -- 1
------ ------ ------
Balance, end of year $ 20 $ 20 $ 20
===== ===== =====
Additional Paid-in Capital
Balance, beginning of year $ 227,234 $ 213,671 $ 202,674
Issuance of shares of Class A Common stock to option holders
and other issuances 4,512 11,760 6,612
Tax benefit from stock compensation 438 1,803 4,385
------ ------ ------
Balance, end of year $ 232,184 $ 227,234 $ 213,671
========= ========= =========
Treasury Stock
Balance, beginning of year $ (46,585) $ (34,394) $ (34,394)
Purchases of treasury stock (5,072) (12,191) --
------ ------ ------
Balance, end of year $ (51,657) $ (46,585) $ (34,394)
========== ========= =========
Notes Receivable from Officers
Balance, beginning of year $ -- $ -- $ (61)
Payments -- -- 61
------ ------ ------
Balance, end of year $ -- $ -- $ --
===== ===== =====
Unearned Compensation
Balance, beginning of year $ (891) $ (940) $ (223)
Cancellation of common stock 151 400 --
Issuance of common stock (2,411) (515) (890)
Earned compensation 595 164 173
------ ------ ------
Balance, end of year $(2,556) $ (891) $ (940)
======= ====== ======
Accumulated Other Comprehensive Income (Loss)
Foreign currency translation adjustment:
Balance, beginning of year $ 1,751 $(1,611) $(2,957)
Change during the period 2,954 3,362 1,346
------ ------ ------
Balance, end of year 4,705 1,751 (1,611)
------ ------ ------
Interest rate swaps and forward exchange contract fair value
adjustments:
Balance, beginning of year (2,519) (1,502) (429)
Change during the period 1,589 (1,017) (1,073)
------ ------ ------
Balance, end of year (930) (2,519) (1,502)
------ ------ ------
Total accumulated other comprehensive income (loss) $ 3,775 $ (768) $(3,113)
======= ======= ========
Retained Earnings
Balance, beginning of year $ 164,495 $ 121,862 $80,563
Dividends declared (6,764) -- --
Net income 2,989 42,633 41,299
------ ------ ------
Balance, end of year $ 160,720 $ 164,495 $ 121,862
--------- --------- ---------
Total Stockholders' Equity $ 342,486 $ 343,505 $ 297,106
========= ========= =========
See accompanying notes to consolidated financial statements.
36
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year ended Year ended Year ended
October 1, October 3, September 27,
2004 2003 2002
---- ---- ----
Net income $ 2,989 $42,633 $41,299
Other comprehensive income (loss):
Net unrealized gains (losses) on qualifying cash flow
hedges (net of income tax benefit (expense)
of ($810), $501 and $553, respectively) 1,589 (1,017) (1,073)
Foreign currency translation adjustment (net of
income tax benefit of $947, $2,497, and $915,
respectively) 2,954 3,362 1,346
----- ----- -----
Total other comprehensive income 4,543 2,345 273
----- ----- -----
Comprehensive income $ 7,532 $44,978 $41,572
======= ======= =======
See accompanying notes to consolidated financial statements.
37
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended Year ended Year ended
October 1, October 3, September 27,
2004 2003 2002
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 2,989 $42,633 $41,299
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization 25,689 24,630 20,791
Deferred income tax expense 3,806 17,882 17,059
Changes in operating assets and liabilities:
Trade and other receivables, net 6,366 (4,877) (9,117)
Prepaid expenses and deposits 2,527 (1,716) (2,836)
Inventory 18,004 (25,671) (5,710)
Accounts payable and accrued expenses (6,382) 19,405 (7,888)
Income taxes 196 1,044 5,122
Other (2,784) (1,167) (3,195)
------ ------ ------
Net cash provided by operating activities 50,411 72,163 55,525
------ ------ ------
INVESTING ACTIVITIES:
Purchase of pasta brands (4,276) (59,023) (3,973)
Additions to property, plant and equipment (22,718) (40,312) (72,773)
------- -------- -------
Net cash used in investing activities (26,994) (99,335) (76,746)
------- -------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 21,900 87,028 60,055
Principal payments on debt and capital lease obligations (41,205) (55,492) (41,368)
Proceeds from issuance of common stock, net of
issuance costs 2,252 6,641 5,699
Dividends declared (6,764) -- --
Purchases of treasury stock (1,072) (12,191) --
Other (877) (1,106) --
------ ------ ------
Net cash provided by (used in) financing activities (25,766) 24,880 24,650
------- ------ ------
Effect of exchange rate changes on cash 234 510 (466)
--- --- ----
Net increase (decrease) in cash and temporary investments (2,115) (1,782) 2,963
Cash and temporary investments at beginning of year 6,465 8,247 5,284
----- ----- -----
Cash and temporary investments at end of year $4,350 $6,465 $8,247
====== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 12,175 $ 12,166 $ 11,899
======== ======== ========
Cash paid for income taxes $2,168 $2,214 $ 789
====== ====== =====
Cash received from income taxes $2,380 $ -- $ --
====== ==== ====
Pasta brands acquired in exchange for common stock $ -- $5,000 $ --
==== ====== ====
Note payable exchanged for treasury stock $4,000 $ -- $ --
====== ==== ====
See accompanying notes to consolidated financial statements.
38
AMERICAN ITALIAN PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 believes it 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, Tolleson, Arizona, and
Verolanuova, Italy.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and all majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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 depending on
the calendar. The Company's first three 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. Fiscal 2004 was 52 weeks and ended on October 1, 2004.
The 2003 fiscal year was 53 weeks and the fiscal 2002 year was 52 weeks.
Revenue Recognition - Sales of the Company's products are recognized in revenues
upon shipment of goods. Promotional allowances related to our sales are recorded
at the time revenue is recognized. Such allowances, where applicable, are estimated
based on anticipated volume and promotional spending with specific customers.
Foreign Currency - The Company's functional currency is the U.S. dollar,
whereas, the Company's foreign operations utilize the Euro as their functional
currency. Accordingly, for purposes of translating foreign subsidiary financial
statements to the U.S. dollar reporting currency, assets and liabilities of the
Company's foreign operations are translated at fiscal year-end exchange rates
and income and expenses are translated at the weighted-average exchange rates
for the fiscal year. Foreign currency gains and losses resulting from foreign
currency transactions are included in consolidated operations in the year of
occurrence.
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 when trade credit is granted to customers. Credit
losses are provided for in the financial statements when determined and have
generally been within management's expectations. The allowance for doubtful
accounts at October 1, 2004 and October 3, 2003 was $2,438,000 and $1,553,000,
respectively. For the fiscal years 2004, 2003 and 2002, bad debt expense was
$1,799,000, $625,000 and $295,000, respectively. At October 1, 2004 and October
3, 2003, approximately 16% and 13%, respectively, of trade and other receivables
were due from two customers.
Pasta is made from semolina milled from durum wheat and the Company mills the
wheat into semolina at certain of its 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.
Derivative Instruments - Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities", requires
companies to recognize all of their derivative instruments as either assets or
liabilities in the balance sheet at fair value. The accounting for changes in
the fair value (i.e. gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and further, on the type of hedging relationship. For
39
those derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, based upon the
exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge
of a net investment in a foreign operation.
For derivative instruments that are designated and qualify as a fair value hedge
(i.e. hedging the exposure to changes in the fair value of an asset or a
liability or an identified portion thereof that is attributable to a particular
risk), the gain or loss on the derivative instrument as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk are recognized
in current earnings during the period of the change in fair values. For
derivative instruments that are designated and qualify as a cash flow hedge
(i.e. hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized in current earnings
during the period of change. For derivative instruments that are designated and
qualify as a hedge of a net investment in a foreign currency, the gain or loss
is reported in other comprehensive income as part of the cumulative translation
adjustment to the extent it is effective. For derivative instruments not
designated as hedging instruments, the gain or loss is recognized in current
earnings during the period of change.
Cash Flow Hedging Strategy: To protect against changes in the value of
forecasted foreign currency cash inflows and outflows, the Company has initiated
cash flow hedging programs for the Euro and British Pound. The Company hedges
portions of its financial transactions with forward contracts.
The Company has entered into interest rate swap agreements that effectively
convert a portion of its floating-rate debt to a fixed-rate basis over the term
of the related debt, thus minimizing the impact of interest rate changes on
future interest expense. In fiscal years 2004, 2003 and 2002, the Company
reclassified net losses from accumulated other comprehensive income to current
earnings of $2,868,000, $2,639,000 and $1,223,000, respectively. Approximately
38% ($110,000,000) of the Company's outstanding debt was designated as being
hedged with the interest rate swap agreements at October 1, 2004.
At October 1, 2004, the Company expects to reclassify $835,000 of net losses on
derivative instruments from accumulated other comprehensive income to earnings
during the next 12 months due to the payment of variable interest associated
with the floating rate debt.
Hedge of Net Investment in Foreign Operations: The Company uses foreign
denominated variable-rate debt to protect the value of its investments in its
foreign subsidiaries in Italy. Realized and unrealized gains and losses from
these hedges are not included in the statement of operations, but are shown in
the foreign currency translation adjustment account included in accumulated
other comprehensive income, with the related amounts due to or from counter
parties included in long-term debt.
At October 1, 2004, the Company had a net investment in its Italy operations of
(euro)43,800,000 ($52,200,000). The Company hedges its net investment in its
foreign subsidiaries with euro borrowings under its credit facility in the U.S.
At October 1, 2004, long-term debt includes obligations of (euro)37,500,000
($46,6000,000) designated as a hedge of this net investment. As such, changes in
these euro-based borrowings are recorded as a component of the net translation
adjustment in the consolidated statement of stockholders' equity.
Financial Instruments - The carrying value of the Company's financial
instruments, including cash and temporary investments, trade and other
receivables, accounts payable and long-term debt, as reported in the
accompanying consolidated balance sheets at October 1, 2004 and October 3, 2003,
approximates fair value. The estimated fair value of the interest rate swap
agreement outstanding at October 1, 2004 and October 3, 2003 of approximately
($1,670,000) and ($3,792,000), respectively, is the amount the Company would be
required to pay to terminate the swap agreement at October 1, 2004 and October
3, 2003, respectively.
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.
40
Inventories - Inventories are carried at standard costs adjusted for capitalized
variances, which approximate the lower of cost, determined on a first-in,
first-out (FIFO) basis, or market. The Company periodically reviews its
inventory for slow-moving, damaged or discontinued items and provides reserves
to reduce such items identified to their recoverable amount.
Property, Plant and Equipment - Capital additions and improvements 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 28 - 40
Buildings 30 - 40
Plant and mill equipment 10 - 30
Furniture, fixtures and equipment 5 - 10
Intangible Assets - In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," the Company does not amortize the cost of intangible assets
with indefinite lives, such as our brands and trademarks. SFAS No. 142 requires
that we perform certain fair value based tests of the carrying value of
indefinite lived intangible assets at least annually and more frequently should
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. The Company completed its impairment testing at
the end of fiscal year 2004 and determined that no material impairment exists.
These impairment tests are impacted by judgments as to future cash flows and
other considerations. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Future events could cause our management to conclude that impairment
indicators exist and that the value of intangible assets is impaired.
Long Lived Assets - In accordance with SFAS No. 144, "Accounting For Impairment
or Disposal of Long-lived Assets," we review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. We evaluate recoverability of assets to be held
and used by comparing the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
In conjunction with our restructuring and rightsizing program, we suspended full
operations at our Kenosha, Wisconsin, manufacturing facility. Although we
partially reactivated this facility in October 2004, for a temporary period, we
currently anticipate operations to be substantially suspended into fiscal 2006.
We have reviewed this facility for impairment and have determined that no
impairment exists at this time. Income Taxes - The Company accounts for income
taxes in accordance with the method prescribed by 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 our 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 the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
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
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 rate of 2.00% for fiscal
41
2002, 1.33% for fiscal 2003 and 2004; dividend yield of zero for fiscal 2002 and
fiscal 2003 and 2% for fiscal 2004; a volatility factor of the expected market
price of the Company's common stock of .408 for fiscal 2002, .354 for fiscal
2003 and .350 for fiscal 2004; and a weighted-average expected life of the
options of 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 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 the Company's employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The Company's
pro forma information follows (in thousands, except for per share information):
Year-ended Year-ended Year-ended
October 1, October 3, September 27,
2004 2003 2002
---- ---- ----
Net income $ 2,989 $42,633 $41,299
Compensation cost under the fair value method 3,345 5,162 2,888
------- ------- -------
Pro forma net income (loss) $ (356) $37,471 $38,411
======= ======= =======
Earnings per share as reported:
Basic $0.17 $2.39 $2.31
Diluted $0.16 $2.31 $2.21
Pro forma earnings (loss) per share:
Basic ($0.02) $2.10 $2.15
Diluted ($0.02) $2.03 $2.05
Advertising Costs - Advertising and promotion costs are expensed as incurred.
Advertising costs were $3,598,000 in fiscal 2004, $512,000 in fiscal 2003, and
$2,153,000 in fiscal 2002.
Shipping and Handling Costs - Costs incurred related to shipping and handling
are included in cost of goods sold in the Company's consolidated statements of
operations.
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 12), included in the
calculation of diluted weighted average common shares were 501,000 shares in
fiscal 2004, 657,000 shares in fiscal 2003 and 816,000 shares in fiscal 2002.
Antidilutive shares for fiscal 2004 were 808,782, with prices ranging from
$34.62 - $44.30. Antidilutive shares for fiscal 2003 were 414,166, with prices
ranging from $40.10 - $48.30. Antidilutive shares for fiscal 2002 were 177,000,
with prices ranging from $44.30 - $48.30.
Impact of Recent Accounting Pronouncements - In November 2004, the FASB issued
SFAS No. 151, "Inventory Costs, an amendment of ARB 43, Chapter 4". This
Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) so as to require such costs to be
treated as current period charges. In addition, this Statement requires that the
allocation of fixed overhead costs to the inventoriable production costs be
based on the normal capacity of the production facilities. The provisions of
this Statement are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company is currently assessing the effect
adopting SFAS No. 151 will have on its consolidated financial statements.
On October 13, 2004, the Financial Accounting Standards Board (FASB) stated that
Statement 123R, Share-Based Payment, is proposed for issuance and would be
effective for public companies for interim or annual periods beginning after
June 15, 2005. This Statement would require all companies to measure
compensation cost for all share-based
42
payments (including employee stock options) at fair value. Retroactive
application of the requirements of SFAS No. 123 (not Statement 123R) to the
beginning of the fiscal year that includes the effective date would be
permitted, but not required. Early adoption of Statement 123R is encouraged.
Reclassifications - Certain amounts from prior years have been reclassified to
conform to the current year's presentation. Deferred debt issuance cost
amortization expense totaling $838,000 and $600,000 has been reclassified from
general and administrative expense to interest expense for fiscal 2003 and 2002,
respectively.
2. RESTRUCTURING AND RIGHTSIZING PROGRAM
During the third quarter of fiscal 2004, the Company announced a restructuring
and rightsizing program to better align its production capacity and cost
structure with the Company's current business and operating profile and the
current pasta industry environment. The restructuring program responded to
industry-wide reductions in demand related to recent changes in consumer diet
trends and to manufacturing overcapacity in the pasta industry. The key
strategic elements of the restructuring and rightsizing program included
reductions in the Company's workforce, manufacturing capacity and inventory
levels and the related reconfiguration of its distribution network. In that
regard, during the fourth quarter of fiscal 2004, the Company suspended full
operations at one of its manufacturing facilities; temporarily shutdown
production at two of its four domestic manufacturing facilities; and exited
certain leased domestic distribution centers. As a result of the restructuring
and rightsizing, production capacity and output will more effectively match
anticipated sales demand, significant cost savings are expected to be generated
and lower inventory levels have been achieved.
During fiscal 2004, the Company recorded $2,868,000 of restructuring expenses.
These expenses primarily include employee severance and termination benefits,
lease costs, and supply agreement costs. The severance and benefit costs relate
to the termination of approximately 14% of the Company's workforce, a majority
of whom were employed at manufacturing locations. Lease costs relate to the
commitment and termination costs for certain leased warehouses that will no
longer be required due to the distribution network restructuring facilitated by
reduced inventory levels. Supply agreement costs relate to amounts to be paid
under a raw materials supply agreement that includes a minimum purchase
commitment not expected to be met in fiscal year 2005 due to the suspension of
operations at one plant beginning in fiscal year 2004.
The table below sets forth the significant cost components and related activity
in the restructuring program during fiscal year 2004; such costs being reflected
in the accompanying 2004 consolidated statement of operations in the line item
entitled "Provision for restructuring expense"(in thousands):
Balance at
Restructuring Non-Cash Cash October 1,
Charges Charges Payments 2004
------- ------- -------- ----
Employee severance and
termination benefits $659 $-- $ (380) $279
Lease costs 1,172 -- (613) 559
Supply agreement costs 700 -- -- 700
Other 337 -- (243) 94
------ ---- -------- ------
Total $2,868 $-- $(1,236) $1,632
====== === ======== ======
As of October 1, 2004, the remaining liability related to the accrual of the
restructuring costs was $1,632,000 and is included in "Accrued expenses" on the
accompanying 2004 consolidated balance sheet.
43
3. INVENTORIES
Inventories consist of the following (in thousands):
October 1, October 3,
2004 2003
---- ----
Finished goods, net of reserve $43,564 $65,024
Raw materials, additives, packaging materials and
work-in-process 17,140 13,736
------ ------
$60,704 $78,760
======= =======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
October 1, October 3,
2004 2003
---- ----
Land and improvements $15,050 $14,867
Buildings 133,534 132,035
Plant and mill equipment 384,020 355,767
Furniture, fixtures and equipment 29,990 25,266
------ ------
562,594 527,935
Accumulated depreciation (145,836) (122,811)
-------- --------
416,758 405,124
Construction in progress 10,833 18,996
------ ------
$ 427,591 $ 424,120
========= =========
The Company capitalizes interest costs associated with the construction and
installation of property, plant and equipment. During the years ended October 1,
2004, October 3, 2003, and September 27, 2002, $570,000, $1,480,000, and
$1,898,000, respectively, of interest costs were capitalized.
Depreciation expense for the years ended October 1, 2004, October 3, 2003, and
September 27, 2002 was $22,719,000, $22,804,000, and $19,302,000, respectively.
The Company maintains certain property, plant and equipment in Italy with a net
book value totaling $52,200,000 and $50,300,000 at October 1, 2004 and October
3, 2003, respectively.
5. OTHER ASSETS
Other assets consist of the following (in thousands):
October 1, October 3,
2004 2003
---- ----
Package design costs $ 11,587 $8,653
Deferred debt issuance costs 5,163 4,286
Other 3,382 3,635
----- -----
20,132 16,574
Accumulated amortization (11,398) (8,428)
------- ------
$8,734 $8,146
====== ======
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 and customer specifications. 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 $3,707,000 and $2,709,000 at October 1, 2004
and October 3, 2003, respectively.
6. ACQUISITIONS - BRANDS AND TRADEMARKS
During the fiscal year 2001, the Company acquired seven pasta brands from
Borden, Inc. for a purchase price of $72,600,000.
44
In fiscal year 2002, the Company purchased the Lensi pasta brand from Pastificio
Lensi for $2,076,000. In addition, in fiscal year 2003, the Company paid
Pastificio Lensi $600,000 related to a cash earn-out provision in the
acquisition agreement.
In fiscal year 2003, the Company purchased the Golden Grain/Mission pasta brand
plus inventory from PepsiCo for approximately $46,000,000. In addition the
Company purchased the Martha Gooch and LaRosa pasta brands from ADM for
$7,212,000.
In February, 2003, the Company purchased the Mrs. Leeper's specialty pasta
business for 100,000 shares of the Company's common stock, plus a cash earn out
tied to sales and profit growth over the next three years. In January 2004, the
Company repurchased the shares issued pursuant to the acquisition for
$5,000,000, (consisting of a $4,000,000 note payable and $1,000,000 in cash) and
paid $3,000,000 in lieu of all cash earn out consideration tied to future sales
and profit growth.
The purchase price for each of the brand acquisitions was allocated to
trademarks, brand name, and inventory. Effective October 1, 2001, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets", and assigned an
indefinite life to trademarks and brand name and, accordingly, records no
amortization expense related to these assets. The trademarks and brand names
were assigned an indefinite life, and are the Company's only intangible assets.
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
October 1, October 3,
2004 2003
---- ----
Accrued promotional costs $ 4,701 $ 4,086
Other accrued expenses 12,433 14,394
------ ------
$17,134 $18,480
======= =======
8. Long-Term Debt
Long-term debt consists of the following (in thousands):
October 1, October 3,
2004 2003
---- ----
Borrowings under credit facility $284,758 $300,693
Other unsecured notes payable 4,000 2,492
Capital lease obligations 77 147
-- ---
288,835 303,332
Less current portion 2,040 2,554
----- -----
$286,795 $300,778
======== ========
Annual maturities of long-term debt and capital lease obligations for each of
the next three fiscal years are as follows (in thousands):
Long-Term Capital
Fiscal Year Debt Leases Total
----------- ---- ------ -----
2005 $2,000 $40
2006 2,000 41
2007 284,758 --
Thereafter -- --
-- --
288,758 81 $288,839
Less imputed interest -- 4 4
-- - -------
Present value of net minimum payments 288,758 77 288,835
Less current portion 2,000 40 2,040
----- -- --------
Long-term obligations $286,758 $37 $286,795
======== === ========
Credit Facility: At October 1, 2004, the Company had a $400,000,000 unsecured
credit facility consisting of a $300,000,000 revolving credit facility
(including availability for issuance of letters of credit) and a $100,000,000
term loan facility (that was added in fiscal 2003). The $400,000,000 facility
includes $100,000,000 dual currency
45
availability in Euros or U.S. dollars to finance the Company's international
business in Italy.
The facility provides for annual commitment reductions between October 1, 2002
and October 2, 2005 totaling $110,000,000. The credit facility matures on
October 2, 2006. The total capacity of the credit facility was $320,000,000 as
of October 1, 2004 and there was approximately $36,900,000 of borrowings
available at that time. At October 1, 2004, the Company had $50,000 of
outstanding letters of credit.
The principal maturity terms of the revolving credit facility are as follows (in
thousands):
Amount Date
------ ----
Scheduled Commitment Reduction $25,000 October 1, 2002
Scheduled Commitment Reduction 25,000 October 1, 2003
Scheduled Commitment Reduction 30,000 October 1, 2004
Scheduled Commitment Reduction 30,000 October 1, 2005
Final Maturity 290,000 October 2, 2006
-------
$400,000
========
Interest is charged at 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). The
rates in effect at October 1, 2004 and October 3, 2003 were 3.80% and 2.79%,
respectively. 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.
In January 2004, the credit facility was amended to increase the permitted
restricted payments, for dividend and for share repurchases to $40,000,000 plus
25% of consolidated net income. In addition, the amendment revised the "Maximum
Leverage Ratios" allowable under the original credit agreement. With respect to
previous amendments, there are no material differences between the terms of the
original credit facility and the amended credit facility.
In June 2004, the credit facility was amended to revise the definitions of
"Consolidated EBITDA" and "Fixed Charge Coverage Ratio" and to increase the
"Maximum Leverage Ratio" and to decrease the "Minimum Consolidated EBITDA"
allowed under the credit agreement. Other than as addressed above, with respect
to previous amendments, there are no material differences between the terms of
the original credit facility and the amended credit facility.
The 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, purchases of Company stock,
and the Company's ability to enter into certain contractual arrangements.
Pursuant to an amendment to the credit facility agreement as discussed below and
in Note 21, the Company was in compliance with the restrictive covenants as of
October 1, 2004.
As discussed in Note 21, on November 9, 2004, the Company's credit facility was
amended to revise the definitions of "Consolidated EBITDA" and "Fixed Charge
Coverage Ratio" and to increase the "Maximum Leverage Ratio" and to decrease the
minimum required Consolidated EBITDA, all related to certain financial covenants
in effect in fiscal year 2004. In addition, the lenders were granted a
collateral interest in substantially all of the Company's tangible and
intangible domestic assets. Other than as addressed above, with respect to
previous amendments, there are no material differences between the terms of the
original credit facility and the amended credit facility.
9. CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000
On October 28, 2000, the U.S. government enacted the "Continued Dumping and
Subsidy Offset Act of 2000" (the "Act"), commonly known as the Byrd Amendment,
which provides that assessed anti-dumping and subsidy duties liquidated by the
Department of Commerce on Italian and Turkish imported pasta after October 1,
2000 will be distributed to affected domestic producers. The legislation
creating the dumping and subsidy offset payment provides for annual payments
from the U.S. government.
In the first quarter of fiscal years 2002 and 2003, the Company received
$7,600,000 and
46
$2,400,000, respectively under the Act and recognized the revenue
ratably in each quarter over the fiscal year. Beginning with the 2004 fiscal
year, the Company is recognizing the entire Byrd Amendment payment as revenue in
the quarter in which the amount, and the right to receive the payment, can be
reasonably determined. As such, $1,500,000 related to fiscal year 2004 was
recognized as revenue in the second quarter.
Subsequent to October 1, 2004, the Company received notice from the Department
of Commerce that it will receive approximately $1,044,000 in fiscal year 2005.
It is not possible to reasonably estimate the potential amount, if any, to be
received in future periods beyond fiscal year 2005.
10. INCOME TAXES
Significant components of the income tax provision are as follows (in
thousands):
Year ended Year ended Year ended
October 1, October 3, September 27,
2004 2003 2002
---- ---- ----
Current income tax expense (benefit):
U.S. $(3,634) $ 2,321 $ 5,608
Foreign 999 814 47
--- --- --
(2,635) 3,135 5,655
------ ----- -----
Deferred income tax expense (benefit):
U.S. 2,866 17,384 16,502
Foreign 940 498 (786)
--- --- ----
3,806 17,882 15,716
----- ------ ------
Net income tax expense $ 1,171 $21,017 $21,371
======= ======= =======
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 (in thousands):
October 1, October 3,
2004 2003
---- ----
Deferred tax assets:
Tax credit and net operating loss carryforwards $29,015 $10,057
Inventory valuation 2,265 1,471
Other comprehensive income/loss components 5,820 5,686
Other 643 1,095
--- -----
37,743 18,309
Valuation allowance (3,294) (3,294)
------ ------
Total deferred tax assets 34,449 15,015
------ ------
Deferred tax liabilities:
Tangible assets 75,561 61,602
Intangible assets 16,697 11,012
Prepaid expenses and other current assets 3,338 614
Other 1,755 1,018
----- -----
Total deferred tax liabilities 97,351 74,246
------ ------
Net deferred tax liabilities $62,902 $59,231
======= =======
The reconciliation of income tax computed at the U.S. statutory tax rate to
income tax expense is as follows (in thousands):
Year ended Year ended Year ended
October 1, October 3, September 27,
2004 2003 2002
---- ---- ----
Income before income taxes $ 4,160 $63,650 $62,670
U.S. statutory tax rate x 35% x 35% x 35%
------ ------ ------
Federal income tax expense
at U.S. statutory rate 1,456 22,278 21,935
State income tax expense,
net of federal tax effect 35 535 526
Foreign tax rate differential (312) (340) (530)
Foreign tax incentives -- (646) (498)
Other, net (8) (810) (62)
------ ------ ------
Total income tax expense $ 1,171 $21,017 $21,371
======= ======= =======
47
Income tax benefit allocated to other items is as follows (in thousands):
Year ended Year ended Year ended
October 1, October 3, September 27,
2004 2003 2002
---- ---- ----
Stock option arrangements (recorded
directly as an increase to
"Additional Paid-In Capital") $438 $1,803 $4,385
==== ====== ======
The Company has AMT credit carryforwards of $7,643,000 and $5,777,000 at October
1, 2004 and October 3, 2003, respectively, with no expiration date. The Company
has net operating loss carryforwards of $46,990,000 at October 1, 2004, expiring
in 2024, and $0 at October 3, 2003. 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 (including the effect of
reversing taxable temporary differences) and available tax planning strategies.
At October 1, 2004, the Company had state tax credit carryforwards of $4,031,000
that have varying expiration dates from 2010 to 2018. A valuation allowance has
been established against these credits to the extent management does not believe
it is more likely than not that these credits will be utilized prior to
expiration.
No U.S. income taxes have been provided on the undistributed earnings of foreign
subsidiaries that have been retained for reinvestment. Any taxes paid to foreign
governments on those earnings may be used, in whole or in part, as credits
against the U.S. tax on any dividends distributed from earnings. Undistributed
earnings were approximately $10,000,000 at October 1, 2004. Determination of the
amount of unrecognized deferred tax liability on the undistributed earnings is
not practicable.
11. COMMITMENTS AND CONTINGENCIES
Purchase and Supply Agreements: The Company had durum wheat and semolina
purchase commitments totaling approximately $36,900,000 and $27,000,000 at
October 1, 2004 and October 3, 2003, respectively.
Under agreements with its primary rail carriers, 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 October 1,
2004.
The Company purchases its raw material requirements (including semolina and
semolina/flour blends) for its Kenosha, Wisconsin facility from Horizon Milling,
LLC under the terms of a long-term supply agreement that has a remaining term of
five years. The Company is obligated to purchase 90% of its yearly semolina and
flour requirements for the Kenosha plant from Horizon Milling with an annual
minimum payment of $700,000. As discussed in Note 2, in connection with the
Company's restructuring and rightsizing program, $700,000 was recognized as
restructuring expense in fiscal year 2004 related to the purchase commitment not
expected to be met in fiscal year 2005 due to suspension of operations at the
Kenosha facility.
The Company purchases its raw material requirements (including semolina and
semolina/flour blends) for its Tolleson, Arizona facility from Bay State Milling
Company under the terms of a long-term supply agreement (10-year term with
renewal provisions). The Company is obligated to purchase 80% of its annual
Tolleson requirements for semolina from Bay State with an annual minimum of 50
million pounds. In the event Bay State's ownership changes or under performs,
the Company has contractual rights to purchase the mill at an established book
value less applicable depreciation to that point.
Litigation, Claims and Disputes: From time to time and in the ordinary course of
its business, the Company is named as a defendant in legal proceedings related
to various issues, including worker's compensation claims, tort claims and
contractual disputes. Other than such routine litigation, the Company is not
currently involved in any material legal proceedings. In addition, the Company
is not aware of other material potential claims. While the resolution of the
matters described above may have an impact on the Company's financial results
for the period in which they are resolved, the Company believes
48
that the ultimate disposition of these matters will not, individually or in the
aggregate, have a material adverse effect upon its business or consolidated
financial statements.
Employment Agreements: The Company has employment agreements with certain
officers providing for payments to be made in the event the employee is
terminated related to a change in control. The agreements define the
circumstances which will constitute a change in control. If the change of
control payments had been due as of October 1, 2004, pursuant to the terms of
the related agreements, the Company would have been required to make payments
totaling approximately $3,250,000. In addition, the employment agreements
contain severance provisions not related to a change in control. These
provisions would have required aggregate payments of approximately $3,250,000 if
such officers had been terminated as of October 1, 2004.
12. EQUITY INCENTIVE PLANS
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 restricted shares and/or options
to purchase up to 2,000,000 shares of the Company's common stock by certain
officers and key employees. In December 2000, a fourth stock option plan was
established that authorizes the granting of restricted shares and/or options to
purchase up to 1,000,000 shares of the Company's common stock by certain
officers and key employees. In February 2004, shareholders approved an
additional 800,000 shares under the 2000 plan. Of which 200,000 shares may be
issued as restricted shares. The stock options become exercisable over the next
one to five years in varying amounts, depending on the terms of the individual
option agreements, and expire 10 years from the date of grant.
A summary of the Company's stock option activity, and related information, is as
follows:
Weighted
Average
Option Price Exercise
Number of Per Share Price Exercisable
--------- --------- ----- -----------
Shares
Outstanding at September 28, 2001 2,630,864 $4.92-$45.30 $19.25 1,679,454
Exercised (427,966) $4.92-$29.95 $12.49
Granted 521,490 $34.62-$48.30 $40.72
Cancelled/Expired (58,567) $18.00-$45.30 $25.78
---------
Outstanding at September 27, 2002 2,665,821 $4.92-$48.30 $24.39 1,680,274
Exercised (268,876) $12.23-$39.89 $22.86
Granted 508,500 $32.40-$43.27 $38.97
Cancelled/Expired (111,852) $16.63-$48.27 $36.96
---------
Outstanding at October 3, 2003 2,793,593 $4.92-$48.30 $26.68 2,086,618
Exercised (82,363) $12.23-$39.30 $22.05
Granted 348,592 $27.19-$40.16 $30.49
Cancelled/Expired (249,260) $18.50-$48.30 $44.28
---------
Outstanding at October 1, 2004 2,810,562 $4.92-$44.30 $25.73 2,107,913
=========
49
The following table summarizes outstanding and exercisable options at October 1,
2004:
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------
Exercise Prices Number Weighted Average Weighted Average Number Weighted
---------------
Remaining
Contractual Life Average
Outstanding (in years) Exercise Price Exercisable Exercise Price
----------- ---------- -------------- ----------- --------------
$ 4.92 734 0.19 $4.920 734 $ 4.920
$ 7.02 84,622 2.54 $7.020 84,622 $ 7.020
$ 12.23 225,143 0.88 $ 12.230 225,143 $12.230
$ 16.375 8,000 5.97 $ 16.375 4,000 $16.375
$ 18.00-18.50 897,477 3.48 $ 18.080 892,060 $18.080
$ 21.88-26.375 374,704 4.91 $ 24.650 363,657 $24.660
$ 26.69-29.95 326,100 9.17 $ 28.600 34,900 $28.060
$ 32.40-38.00 431,216 8.15 $ 36.070 215,249 $36.000
$ 38.40-44.30 462,566 8.03 $ 39.990 287,548 $39.710
The weighted average fair value of options granted was $9.90, $16.87 and $15.63,
for the years ended October 1, 2004, October 3, 2003 and September 27, 2002,
respectively.
13. 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 currently matches 50% of
the employee contributions, with the Company's match not to exceed 6% - 12% of
the employee's salary, depending on the length of the employee's service to the
Company, and may contribute additional amounts to the plan as determined
annually by the Board of Directors. Employer contributions related to the plan
totaled $747,000, $730,000, and $577,000, for the years ended October 1, 2004,
October 3, 2003, and September 27, 2002, respectively.
The Company sponsors an Employee Stock Purchase Plan (ESPP) which offers all
employees the election to purchase the Company common stock at a price equal to
90% of the market value on the first or last day of the calendar quarter,
whichever is less. For the three years ended October 1, 2004, authorized shares
under this plan were 50,000.
14. STOCK REPURCHASE PLAN AND TREASURY SHARES
In November 2002, the Company's Board of Directors authorized up to $20,000,000
to implement a common stock repurchase plan. The Company purchased 366,398
shares for $12,119,000, at prices ranging from $32.52 to $34.45 per share during
the year ended October 3, 2003. The Company did not purchase any shares in
fiscal year 2004 under this program.
In fiscal year 2004, the Company purchased 100,000 shares of its common stock
for $5,000,000 related to the Mrs. Leeper's acquisition (see Note 6). The
purchase price of the shares was in excess of the market value at the time of
purchase by $835,000.
15. DIVIDENDS
The Company declared dividends in the third and fourth quarters of fiscal year
2004, totaling $6,764,000 (37.50 cents per share).
16. STOCKHOLDER RIGHTS PLANS
On December 3, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan. Under the Plan, each common stockholder at the close of business on
December 16, 1998 received a dividend of one right for each share of Class A
common stock held. Each right entitles the holder to purchase from the Company
one one-hundredth of a share of a new series of participating Preferred Stock at
an initial purchase price of $110.00. The rights will become exercisable and
will detach from the Common stock a specified period of time after any person
has become the beneficial owner of 15% (20% if an institutional investor) or
more of the Company's common stock or commenced a tender or exchange offer
which, if consummated, would result in any person becoming the beneficial owner
of 15% (20% if an institutional investor) or more of the common stock. When
exercisable, each right
50
will entitle the holder, other than the acquiring person, to purchase for the
purchase price the Company's common stock having a value of twice the purchase
price.
If, following an acquisition of 15% (20% if an institutional investor) or more
of the Company's Common Stock, the Company is involved in certain mergers or
other business combinations or sells or transfers more than 50% of its assets or
earning power, each right will entitle the holder to purchase for the purchase
price common stock of the other party to such transaction having a value of
twice the purchase price.
At any time after a person has acquired 15% (20% if an institutional investor)
or more (but before any person has acquired more than 50%) of the Company's
Common Stock, the Company may exchange all or part of the rights for shares of
Common Stock at an exchange ratio of one share of Common Stock per right.
The Company may redeem the rights at a price of $.01 per right at any time prior
to a specified period of time after a person has become the beneficial owner of
15% (20% if an institutional investor) or more of its Common Stock. The rights
will expire on December 16, 2008, unless earlier exchanged or redeemed.
17. UNEARNED COMPENSATION
During the years ended October 1, 2004 and October 3, 2003, the Company issued
78,812 and 13,000 shares of restricted stock to employees of the Company,
respectively, with a weighted-average grant date values of $30.60 and $39.60,
respectively. The Company recorded the fair value of the awards at the market
price on the grant date as unearned compensation. The awards contained either a
cliff or straight line vesting provision and, therefore, expense is recognized
on a straight-line basis over the vesting period. The unearned compensation is
classified as a reduction to stockholders' equity in the accompanying
consolidated balance sheets at October 1, 2004 and October 3, 2003.
18. MAJOR CUSTOMERS
Sales to Wal*Mart, Inc. during the years ended October 1, 2004, October 3, 2003,
and September 27, 2002 represented 17%, 15% and 13% of revenues, respectively.
Sales to Sysco Corporation during the same periods represented 10%, 10% and 11%
of revenues, respectively.
19. BOARD OF DIRECTORS STOCK REMUNERATION
The Company provides outside directors with an annual retainer amount in common
stock equal to $20,000 per director. These shares are not registered and are
restricted for a 12-month period.
20. QUARTERLY FINANCIAL DATA - UNAUDITED
The following 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. The quarterly
financial data includes reclassifications of deferred debt issuance cost
amortization expense from general and administrative expenses (a component of
operating profit (loss)) to interest expense as discussed in Note 1.
51
Quarterly financial data is as follows (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year ended October 1, 2004:
Revenues $ 101,599 $ 113,347 $ 103,184 $ 99,224
Gross profit 31,854 32,178 21,430 8,365
Operating profit (loss) 15,257 14,103 2,444 (14,591)
Net income (loss) 8,127 7,561 (526) (12,173)
Net income (loss) per common
share (basic) 0.45 0.42 (0.03) (0.67)
Net income (loss) per common share
(assuming dilution) 0.44 0.41 (0.03) (0.67)
Year ended October 3, 2003:
Revenues $ 107,036 $ 110,652 $ 104,302 $116,854
Gross profit 33,577 35,281 36,441 38,431
Operating profit 15,894 15,710 20,970 22,259
Net income 8,923 8,870 12,034 12,806
Net income per common share (basic) 0.50 0.50 0.67 0.71
Net income per common share
(assuming dilution) 0.49 0.48 0.65 0.69
During the third quarter of fiscal 2004, the Company announced a restructuring
and rightsizing program to better align its production capacity and cost
structure with the Company's current business and operating profile and the
current pasta industry environment. In conjunction with this program, during the
third and fourth quarters of fiscal 2004, the Company recorded certain
restructuring costs, and incurred certain costs associated with its inventory
reduction strategy. These costs related to the suspension or temporary shutdown of
operations at certain manufacturing facilities and the liquidation and write-down
of certain slow-moving, damaged, and discontinued inventory. In addition, the
Company's reserve for doubtful accounts was increased in the fourth quarter
of fiscal year 2004 to reflect its revised expectation for the collection of certain
customer accounts and discounts subsequent to the restructuring.
21. SUBSEQUENT EVENTS
On November 9, 2004, the Company's credit facility was amended to revise the
definitions of "Consolidated EBITDA" and "Fixed Charge Coverage Ratio" and to
increase the "Maximum Leverage Ratio" and to decrease the minimum required
Consolidated EBITDA, all related to certain financial covenants in effect in
fiscal year 2004. In addition, the lenders were granted a collateral interest in
substantially all of the Company's tangible and intangible domestic assets.
On November 9, 2004, the Company's Board of Directors declared a quarterly
dividend of 18.75 cents per share, payable to shareholders of record as of
November 22, 2004, to be paid on December 8, 2004.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the periods covered by this Form 10K, Mr. Webster, our CEO, and
Mr. Shadid, our CFO, evaluated our disclosure controls and procedures and, based
on this evaluation, concluded that the Company's disclosure controls and
procedures were appropriate and effective in causing information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934 to be
recorded, processed, summarized and reported within the required time periods.
There have been no changes in our internal control over financial reporting
during our fourth fiscal quarter that has materially affected or is reasonably
likely to materially affect our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
52
PART III
The Company 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. The Company's definitive proxy statement for the 2005 Annual
Meeting of stockholders (the "Definitive Proxy Statement") will be filed no
later than 120 days after October 1, 2004.
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 our Definitive Proxy Statement is incorporated herein by reference in partial
response to this Item 10.
The information set forth under the heading "The Board of Directors" in our
Definitive Proxy Statement regarding our audit committee financial expert 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 our
Definitive Proxy Statement is incorporated herein by reference in partial
response to this Item 10.
(c) Code of Ethics
The Code of Ethics ("the Code") was adopted by the Company's Board of Directors
in fiscal year 2004 and is applicable to all directors, officers and employees.
The Code has been posted on our website at http://www.aipc.com. We will satisfy
any disclosure requirements under Item 5.05 of Form 8-K regarding an amendment
to, or waiver from, any provision of the Code with respect to our principal
executive officer, principal financial officer, principal accounting officer and
persons performing similar functions by disclosing the nature of such amendment
or waiver on our website or in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in response to Item 402 of Regulation S-K under
"Management Compensation" and the subheading "Compensation of Directors" under
"The Board of Directors" in our 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 201(d) (Equity Compensation Plan
table) under the subheading "Equity Compensation Plan Information" under the
heading "Management Compensation" and in response to Item 403 of Regulation S-K
under the headings "Stock Owned Beneficially by Directors, Nominees and Certain
Executive Officers" and "Principal Stockholders" 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.
53
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 regarding information with respect to
principal accountant fees and services under the subheading "Fees and Services
of Ernst & Young LLP" under the heading "Proposal 3 - Ratification of the Board
of Directors Selection of Independent Registered Public Accounting Firm" in our
Definitive Proxy Statement is incorporated by reference in response to this Item
14.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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
operations, cash flows, stockholders' equity, and comprehensive income
for the three fiscal years ended October 1, 2004, October 3, 2003, and
September 27, 2002, and the consolidated balance sheets as of October
1, 2004 and October 3, 2003, and related notes and the Report of
Independent Registered Public Accounting Firm are included under Item 8
of this Annual Report.
2. Valuation and Qualifying Accounts Schedule. Other financial statement
schedules have been omitted because they either are not required, are
immaterial or are not applicable or because equivalent information has
been included in the financial statements, the notes thereto or
elsewhere herein.
3. The list of exhibits following the signature page of this Annual Report
is incorporated by reference herein in partial response to this Item.
54
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 10, 2004
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 George D. Shadid, and each of them singly, with power of
substitution and resubstitution, as his 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 10, 2004
- ------------------------------------ Board of Directors
/s/ Timothy S. Webster President, December 10, 2004
- ------------------------------------ Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ George D. Shadid Executive VicePresident, December 10, 2004
- ------------------------------------ Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Robert H. Niehaus Director December 10, 2004
- ------------------------------------
/s/ Richard C. Thompson Director December 10, 2004
- ------------------------------------
/s/ Jonathan E. Baum Director December 10, 2004
- ------------------------------------
/s/ Tim M. Pollak Director December 10, 2004
- ------------------------------------
/s/ Mark C. Demetree Director December 10, 2004
- ------------------------------------
/s/ William R. Patterson Director December 10, 2004
- ------------------------------------
/s/ James A. Heeter Director December 10, 2004
- ------------------------------------
/s/ Terence C. O'Brien Director December 10, 2004
- ------------------------------------
55
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.
56
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
AMERICAN ITALIAN PASTA COMPANY
Balance at
Beginning of Charged to Costs Balance at End
Description Period and Expenses Deductions of Period
----------- ------ --------------- ---------- ---------
Year Ended October 1, 2004:
Deducted from asset accounts:
Allowance for doubtful accounts $1,553,000 $1,799,000 $ 914,000(1) $2,438,000
Allowance for slow-moving, damaged and
discontinued inventory 1,399,000 3,621,000 2,799,000(2) 2,221,000
---------- ---------- ---------- ----------
Total $2,952,000 $5,420,000 $3,713,000 $4,659,000
========== ========== ========== ==========
Year Ended October 3, 2003:
Deducted from asset accounts:
Allowance for doubtful accounts $1,054,000 $ 625,000 $ 126,000(1) $1,553,000
Allowance for slow-moving, damaged and 861,000 1,146,000 608,000(2) 1,399,000
---------- ---------- ---------- ----------
discontinued inventory
Total $1,915,000 $1,771,000 $ 734,000 $2,952,000
========== ========== ========== ==========
Year Ended September 27, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts $ 847,000 $ 295,000 $ 88,000(1) $1,054,000
Allowance for slow-moving, damaged and 585,000 404,000 128,000(2) 861,000
---------- ---------- ---------- ----------
discontinued inventory
Total $1,432,000 $ 699,000 $ 216,000 $1,915,000
========== ========== ========== ==========
(1) Uncollectible accounts written off, net of recoveries. (2) Disposition of
slow-moving, damaged and discontinued inventory.
57
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
(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.
4.8.1 Credit Agreement, dated July 16, 2001, among American
Italian Pasta Company, Financial Institutions, Firstar
Bank, N.A., as Syndication Agent, Bank One, NA, as
Documentation Agent, Credit Agricole Indosuez, Fleet
National Bank, Keybank National Association,
Cooperative Centrale Raiffeisen-Boerenleenbank B.A.,
"Rabobank Nederland", New York Branch, Wachovia Bank,
N.A., and Wells Fargo Bank, N.A., as Co-Agents, and
Bank of America, N.A., as Administrative Agent, Bank of
America Securities LLC, Sole Lead Arranger and Sole
Book Manager, which is attached as Exhibit 10.4 to the
Company's quarterly report dated August 13, 2001 on
Form 10-Q (Commission File No. 001-13403), is
incorporated by reference herein as Exhibit 4.8.1.
4.8.2 First Amendment to the Credit Agreement, dated
December 12, 2002, among American Italian Pasta
Company, various financial institutions and Bank of
America, N.A. as administrative agent, which is
attached as Exhibit 4.2 to the Company's quarterly
report on Form 10-Q for the period ending December
30, 2002, incorporated by reference herein as Exhibit
4.8.2.
58
4.8.3 Second Amendment to the Credit Agreement, dated
January 16, 2004, among American Italian Pasta
Company and various financial institutions and Bank
of America, N.A., as administrative agent, which is
attached as Exhibit 10.2 to the Company's quarterly
report on Form 10-Q for the period ending April 2,
2004, is incorporated by reference herein as Exhibit
4.8.3.
4.8.4 Third Amendment, dated as of June 29, 2004, to the
Credit Agreement, dated July 16, 2001, among American
Italian Pasta Company, various financial institutions
and Bank of America, N.A., as administrative agent,
which is attached as Exhibit 4.1 to the Company's
quarterly report on Form 10-Q for the period ending
July 2, 2004, is incorporated by reference herein as
Exhibit 4.8.4.
4.9 Shareholders Rights Agreement, dated December 3, 1998,
between American Italian Pasta Company and UMB Bank,
N.A. as Rights Agent, which is attached as Exhibit 1 to
the Company's Registration Statement dated December 14,
1998 on Form 8-A12B (Commission File No. 001-13403), is
incorporated by reference herein as Exhibit 4.9.
4.10 Certificate and First Amendment to Rights Agreement,
which is attached as Exhibit 4 to the Company's Form
8-K filed on January 6, 2003, is incorporated by
reference herein as Exhibit 4.10.
(10) Material Contracts
10.1 Board of Directors Remuneration Policy.
10.5.1* Employment Agreement between the Company and
Timothy S. Webster dated May 30, 2002, which is
attached as Exhibit 10 to the Company's quarterly
report on Form 10-Q for the period ending June
30, 2002, is incorporated by reference herein as
Exhibit 10.5.1.
10.5.2* Employment Agreement dated September 1, 2002
between the Company and Warren B. Schmidgall,
which is attached as Exhibit 10.10 to the
Company's Form 10-K for the period ending
September 30, 2002 is incorporated by reference
herein as Exhibit 10.5.2.
10.5.3* 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
10.5.3.
10.5.4* Employment Agreement dated September 1, 2002
between the Company and Walter George, which is
attached as Exhibit 10.13 to the Company's Form
10-K for the period ending September 30, 2002 is
incorporated by reference herein as Exhibit
10.5.4.
10.5.5* Employment Agreement dated September 1, 2002
between the Company and Jerry H. Dear, which is
attached as Exhibit 10.23 to the Company's Form
10-K for the period ending September 30, 2002 is
incorporated by reference herein as Exhibit
10.5.5.
10.5.6* Employment Agreement by and between American
Italian Pasta Company and Horst W. Schroeder
dated January 14, 2003, which is attached as
Exhibit 10.1 to the Company's quarterly report on
Form 10-Q for the period ending March 31, 2003,
is incorporated by reference herein as Exhibit
10.5.6.
10.5.7* Employment Agreement dated August 25, 2003,
between the Company and Daniel W. Trott, which is
attached as exhibit 10.32 to the Company's Form
10K for the period ending October 3, 2003 is
incorporated by reference herein as Exhibit
10.5.7.
10.5.8* Employment Agreement dated September 10, 2004,
between the Company and George D. Shadid, which
is attached as Exhibit 10.1 to the
59
Company's current report on Form 8-K dated September 15,
2004, incorporated by reference herein as Exhibit 10.5.8.
10.5.9* Consulting Agreement dated January 1, 2004
between the Company and David E. Watson, which is
attached as Exhibit 10.2 to the Company's
quarterly report on Form 10-Q for the period
ending January 2, 2004, is incorporated by
reference herein as Exhibit 10.5.9.
10.5.10* Separation Agreement dates December 12, 2003
between the Company and David B. Potter, which is
attached as Exhibit 10.2 to the Company's
quarterly report on Form 10Q for the period
ending April 2, 2004 and is incorporated by
reference herein as Exhibit 10.5.10.
10.6.1* 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 10.6.1.
10.6.2* 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
10.6.2.
10.6.3* 1996 Salaried Bonus Plan, which is attached as
Exhibit 10.13 to the IPO Registration Statement,
is incorporated by reference herein as Exhibit
10.6.3.
10.6.4* 1997 Equity Incentive Plan, which is attached as
Exhibit 10.14 to the IPO Registration Statement,
is incorporated by reference herein as Exhibit
10.6.4.
10.6.5* 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 10.6.5.
10.6.6* American Italian Pasta Company 2000 Equity
Incentive Plan, as amended, which is attached as
Exhibit 10.5 to the Company's quarterly report
dated August 13, 2001 on Form 10-Q (Commission
File No. 001-13403), is incorporated by reference
herein as Exhibit 10.6.6.
10.6.7* Amendment to the 2000 Equity Incentive Plan which
is attached as Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the period
ending January 2, 2004, is incorporated by
reference herein as Exhibit 10.6.7.
10.6.8* Form of Restricted Stock Agreement for Restricted
Stock Awards granted pursuant to the Company's
2000 Equity Incentive Plan, which is attached as
Exhibit 10.25 to the Company's Form 10-K for the
period ending September 30, 2002 is incorporated
by reference herein as Exhibit 10.6.8.
10.6.9* Form of Stock Option Award Agreement for Stock
Option Awards Pursuant to the Company's 2000
Equity Incentive Plan, which is attached as
Exhibit 10.4 to the Company's quarterly report on
Form 10-Q for the period ending March 31, 2003,
is incorporated by reference herein as Exhibit
10.6.9.
10.18 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 10.18.
10.22 Flour Purchase Agreement by and between American
Italian Pasta Company and Bay State Milling
Company dated August 7, 2002, which is attached
as Exhibit 10.22 to the Company's Form 10-K for
the period ending September 30, 2002 is
incorporated by reference herein as Exhibit
10.22. (We have omitted certain information from
the Agreement and filed it separately with the
Securities and Exchange
60
Commission pursuant to our request for confidential
treatment under Rule 24b-2. We have identified the omitted
confidential information by the following statement,
"Confidential portions of material have been omitted and
filed separately with the Securities and Exchange
Commission," as indicated throughout the document with an
asterisk in brackets ([*])).
10.26 Asset Purchase Agreement, dated September 30,
2002, among American Italian Pasta Company, Gooch
Foods, Inc. and Archer-Daniels-Midland Company,
which is attached as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the
period ending December 30, 2002 is incorporated
by reference herein as Exhibit 10.26.
10.28 Asset Purchase and Sale Agreement by and among
American Italian Pasta Company, PepsiCo Puerto
Rico, Inc. and Golden Grain Company dated January
28, 2003, which is attached as Exhibit 10.2 to
the Company's quarterly report on Form 10-Q for
the period ending March 31, 2003, is incorporated
by reference herein as Exhibit 10.28.
10.29 Asset Purchase Agreement by and between American
Italian Pasta Company, Mrs. Leeper's, Inc. and
Edwin J. Muscat and Michelle M. Muscat dated
February 27, 2003, which is attached as Exhibit
10.3 to the Company's quarterly report on Form
10-Q for the period ending March 31, 2003, is
incorporated by reference herein as Exhibit
10.29.
10.31 Second Amended and Restated Supply Agreement by
and between AIPC Sales Co. and Sysco Corporation
dated July 1, 2003. (We have omitted certain
information from the Agreement and filed it
separately with the Securities and Exchange
Commission pursuant to our request for
confidential treatment under Rule 24b -2. We have
identified the omitted confidential information
by the following statement, "Confidential
portions of material have been omitted and filed
separately with the Securities and Exchange
Commission," as indicated throughout the document
with an asterisk in brackets ([*]), which is
attached as Exhibit 10.0 to the Company's
quarterly report on Form 10-Q for the period
ending June 30, 2003, incorporated by reference
herein as Exhibit 10.31.
21 Subsidiaries of the registrant
List of subsidiaries is attached hereto as Exhibit 21.
23 Consent of Ernst & Young LLP
24 Power of Attorney
The power of attorney is set forth on the signature page of
this Annual Report.
31.1 Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32. Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99 None
* Represents a management contract or a compensatory plan or arrangement.
61