<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from xxx to xxx
Commission File Number 333-76763
New World Pasta Company
(Exact name of registrant as specified in its charter)
Delaware 52-2006441
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
85 Shannon Road, Harrisburg, PA 17112
(Address of principal executive office) (zip code)
(717) 526-2200
(Registrant's telephone number, including area code)
100 Crystal A Drive, Hershey PA 17033
(Former Address of principal executive office) (zip code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- ----
As of October 3, 1999, the registrant had 5,000,000 shares of common stock
outstanding, par value $10, and 113,485 shares of preferred stock outstanding.
<PAGE>
NEW WORLD PASTA COMPANY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
<S> <C> <C>
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at October 3, 1999 (unaudited),
and December 31, 1998 1
Consolidated Statements of Income (Loss) (unaudited) for the
Three Months ended October 3, 1999, and October 4, 1998, and 2
Nine Months Ended October 3, 1999, and October 4, 1998
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended October 3, 1999 and October 4, 1998 3
Consolidated Statement of Stockholders' Equity (Deficit)
(unaudited) for the Nine Months Ended October 3, 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
NEW WORLD PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
As of October 3, 1999 and December 31, 1998
(in thousands, except share data)
October 3, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,176 $ -
Trade and other receivables, net 24,349 18,447
Inventories, net 22,407 22,547
Prepaid expenses and other current assets 1,795 4,793
Deferred income taxes 8,264 3,275
----------------- ---------------
Total current assets 63,991 49,062
----------------- ---------------
Property, plant and equipment, net 103,058 108,928
Deferred income taxes 97,831 -
Intangible assets, net 65,184 67,027
Deferred debt costs, net 8,833 -
----------------- ---------------
Total assets $ 338,897 $225,017
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 1,400 $ -
Loans payable 146 -
Accounts payable 11,742 9,657
Accrued marketing costs 12,338 10,932
Accrued interest 4,990 -
Accrued cost of restructuring 2,114 -
Other accrued liabilities 12,875 7,675
----------------- ---------------
Total current liabilities 45,605 28,264
Long term-debt, less current maturities 297,900 -
Deferred income taxes - 21,937
Employee benefit liabilities 7,872 7,872
----------------- ---------------
Total liabilities 351,377 58,073
----------------- ---------------
Mandatorily redeemable cumulative preferred stock, $1,000 par
value; 115,000 shares authorized; 113,485 shares issued and
outstanding as of October 3, 1999 122,722 -
----------------- ---------------
Stockholders' equity (deficit):
Common Stock, $10 par value; 5,000,000 shares authorized;
5,000,000 shares issued and outstanding as of October 3, 1999 50,000 -
Additional paid-in capital 106,900 -
Retained earnings (deficit) (292,102) 166,944
----------------- ---------------
Total stockholders' equity (deficit) (135,202) 166,944
----------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 338,897 $225,017
================= ===============
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated financial statements.
(1)
<PAGE>
<TABLE>
<CAPTION>
Part I - Financial Information
Item 1 - Financial Statements
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
for the periods ended October 3, 1999 and October 4, 1998
(in thousands)
(unaudited) (unaudited)
Three Months Ended Nine Months Ended
October 3, October 4, October 3, October 4,
---------- ---------- ---------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $86,956 $89,242 $267,758 $282,152
Cost of sales 45,491 49,522 143,335 154,632
--------------- -------------- ------------ -----------
Gross profit 41,465 39,720 124,423 127,520
Selling and marketing expenses 26,955 24,064 85,147 84,863
General and administrative expenses 4,288 3,732 10,928 9,743
Non-recurring transaction expenses 217 - 7,964 -
Cost of restructuring - - 2,700 -
--------------- -------------- ------------ -----------
Income from operations 10,005 11,924 17,684 32,914
Interest expense, net 7,052 - 19,463 -
--------------- -------------- ------------ -----------
Income (loss) before income taxes 2,953 11,924 (1,779) 32,914
Income tax expense (benefit) 1,441 4,543 805 12,540
--------------- -------------- ------------ -----------
Net income (loss) 1,512 7,381 (2,584) 20,374
Dividends on preferred stock 3,405 - 9,237 -
--------------- -------------- ------------ -----------
Net income (loss) attributable to common stock $(1,893) $ 7,381 $(11,821) $ 20,374
=============== ============== ============ ===========
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated financial statements
(2)
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
Nine Months Ended
October 3, October 4,
---------- ----------
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (2,584) $ 20,374
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 11,573 11,086
Loss from disposal of property, plant and equipment 42 (11)
Deferred income taxes 805 -
Changes in assets and liabilities:
Trade and other receivables (5,902) (2,127)
Inventories 140 (815)
Prepaid expenses and other current assets 2,998 (2,083)
Accounts payable 2,085 (3,336)
Accrued marketing costs and other accrued liabilities 13,710 (1,794)
-------------------- -------------
Net cash provided by operating activities 22,867 21,294
-------------------- -------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (3,108) (4,398)
-------------------- -------------
Net cash used in investing activities (3,108) (4,398)
-------------------- -------------
Cash flows from financing activities:
Proceeds from issuance of debt 470,481 -
Proceeds from issuance of preferred stock 113,485 -
Proceeds from issuance of common stock 50,000 -
Repayment of debt (171,035) -
Deferred debt costs (9,627) -
Advances and withdrawals with former parent prior to
Recapitalization, net (5,887) (16,896)
Repurchase of common stock (460,000) -
-------------------- -------------
Net cash used in financing activities (12,583) (16,896)
-------------------- -------------
Net increase in cash and cash equivalents 7,176 -
Cash and cash equivalents at beginning of period - -
-------------------- -------------
Cash and cash equivalents at end of period $ 7,176 $ -
==================== =============
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 13,692 $ -
Income taxes 65 -
Noncash investing and financing activities:
Deferred tax assets $ 106,900 $ -
Preferred stock dividend 9,237 -
Deferred tax liabilities 18,662 -
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated financial statements
(3)
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Nine Months Ended October 3, 1999
(unaudited)
Additional Retained
Common Stock paid-in Earnings
Shares Amount capital (deficit) Total
------ ------ ------- --------- -----
<S> <C> <C> <C>
Balance at January 1, 1999 - $ - $ - $ 166,944 $ 166,944
Net loss - - - (2,584) (2,584)
Issuance of common stock 5,000,000 50,000 - - 50,000
Preferred stock dividend - - - (9,237) (9,237)
Advances and withdrawals with former
parent prior to recapitalization, net - - - (5,887) (5,887)
Repurchase of stockholders' common stock
and recapitalization followed by
cancellation
of treasury stock including income tax
effects - - 106,900 (441,338) (334,438)
-----------------------------------------------------------------
Balance at October 3, 1999 5,000,000 $50,000 $106,900 $(292,102) $(135,202)
=================================================================
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated financial statements.
(4)
<PAGE>
NEW WORLD PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter ended October 3, 1999 or for the nine months
ended October 3, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. These financial statements
should be read in conjunction with management's discussion and analysis of
financial condition and results of operations included in Item 2. In addition,
for further disclosures, see the audited financial statements for the year ended
December 31, 1998 included in the Company's Registration Statement on Form S-4
declared effective August 3, 1999 (Reg. No. 333-76763).
New World Pasta Company (New World Pasta or the Company) uses a calendar
year annual reporting period, with interim reporting broken down into 4-4-5 (4
week - 4 week - 5 week) monthly periods within each quarterly period. The
Company's quarterly periods in 1999 end on April 4, July 4, and October 3
compared to April 5, July 5, and October 4 during 1998.
2. Description of Business
On January 28, 1999, Hershey Foods Corporation (HFC) effected a
recapitalization whereby New World Pasta LLC and Miller Pasta LLC acquired a
controlling interest in Hershey Pasta Group (HPG), a division of HFC and the
predecessor of New World Pasta. In the recapitalization, Hershey Chocolate &
Confectionery Corporation (HCCC), an HFC wholly-owned subsidiary, retained a
substantial minority ownership interest. Prior to the recapitalization, HFC
completed a reorganization in which Hershey Pasta Manufacturing Company (HPMC)
became a wholly-owned subsidiary of HCCC and the net assets of HPG were
transferred into HPMC. HPMC subsequently changed its name to New World Pasta
Company.
As part of the recapitalization, New World Pasta repurchased $307.7 million
of its common stock from HCCC, and New World Pasta LLC directly purchased from
HCCC $100.6 million of mandatorily redeemable non-voting preferred stock and
$41.7 million of common stock. New World Pasta issued $12.8 million of
mandatorily redeemable non-voting preferred stock and $5.3 million of common
stock directly to Miller Pasta LLC. Upon completion of the recapitalization,
HCCC retained 6.0% of the voting equity of New World Pasta, and New World Pasta
LLC and Miller Pasta LLC held 83.4% and 10.6%, respectively. The historical
basis of accounting for New World Pasta has
(5)
<PAGE>
been maintained. The recapitalization transaction was finalized with a final
settlement payment of $7.0 million paid to HFC in September, 1999, in accordance
with the recapitalization agreement.
New World Pasta manufactures and sells quality pasta products in a variety
of shapes, sizes, flavors and packages throughout the United States. New World
Pasta markets its products on a regional basis under several brand names,
including AMERICAN BEAUTY, LIGHT N'FLUFFY, MRS. WEISS', P&R, RONZONI, SAN
GIORGIO and SKINNER. The company also manufactures certain private label brands
as well as products for industrial and foodservice customers.
3. Inventories
New World Pasta values much of the raw material components of its inventories
under the last-in, first-out (LIFO) method and the remaining inventories at the
lower of first-in, first-out (FIFO) cost or market. Inventories valued using
the LIFO method totaled $7.8 million as of October 3, 1999 and $7.9 million as
of December 31, 1998. All inventories were stated at amounts that did not
exceed realizable values. Total inventories were as follows:
October 3, December 31,
1999 1998
---------- -----------
(in thousands)
Raw materials.................................... $ 4,315 $ 5,901
Work in process.................................. 286 320
Finished goods................................... 17,925 17,309
----------------------
Inventories at FIFO.............................. 22,526 23,530
Adjustment to LIFO............................... (119) (983)
----------------------
Total inventories................................ $22,407 $22,547
======================
4. Long-Term Debt
The Company's long-term debt is summarized as follows:
October 3, 1999
(in thousands)
9 1/4% Senior Subordinated Notes due 2009 ("Notes") $160,000
Term Loan................................................. 139,300
--------
299,300
Less current portion......................................... 1,400
--------
$297,900
========
The Company has entered into a senior Credit Facility (the "Credit
Facility") that currently provides for a term loan that bears interest at either
an alternate base rate plus 2.25% or a reserve-adjusted LIBOR rate plus 3.25%.
On October 3, 1999, the effective interest rate on the term loan was 8.25%. The
term loan matures in 2006. The term loan
(6)
<PAGE>
is repaid in quarterly payments of $350,000 through March 2005, $32,900,000 on
June 30, September 30 and December 31, 2005, with the balance paid at maturity.
The Company has fixed the interest rate on $50.0 million of the outstanding debt
at a base rate of 5.645%, plus the credit agreement interest spread, by entering
into an interest rate swap agreement. The Credit Facility provides for a
revolving loan of up to $50.0 million. This portion of the Credit Facility
bears interest at variable rates as provided in the terms of the Credit
Facility. No amount has been borrowed under this portion of the facility at
October 3, 1999.
The Credit Facility requires the Company to comply with specified
financial tests, to maintain specified financial ratios and restricts the
Company's ability to undertake certain actions. The Company is in compliance
with the provisions of the Credit Facility.
5. Restructuring Charge
This action was contemplated during the time the business was being
recapitalized by HFC and the affected personnel were notified in February of
1999 that this action may be necessary if replacement of the industrial business
was not obtained in the intervening period.
In the second quarter of 1999, the Company recorded a restructuring
charge, including related asset writedowns of $2.7 million. The restructuring
involved closure of the Kansas City, Kansas plant, which was a dedicated
facility for industrial business. The major industrial customer serviced by
this facility did not renew its contract, resulting in the decision to close the
facility. The closing of the plant was announced May 20, 1999, and the plant
ceased operations on August 20, 1999, when 61 of the 62 personnel employed at
the facility were displaced.
Included in the restructuring charge is a non-cash charge of approximately
$1.6 million and accruals for cash charges for approximately $1.1 million as
follows:
Utilized
Original --------------------- Balance at
(In millions) Balance Cash Noncash October 3, 1999
- --------------------------------------------------------------------------------
Severance & other
employee related costs $0.6 $0.5 $ --- $0.1
Other facility exit costs $0.5 $0.1 $ --- $0.4
- --------------------------------------------------------------------------------
Total costs $1.1 $0.6 $ --- $0.5
- --------------------------------------------------------------------------------
6. Subsidiary Financial Information
The Company has two wholly-owned subsidiaries, Pasta Group L.L.C. and
Winchester Pasta, L.L.C. (collectively, the "Subsidiaries"). Set forth below is
summarized financial information attributed to the combined Subsidiaries.
Summarized financial information is presented for the Subsidiaries because the
Company's
(7)
<PAGE>
management does not believe that the information proposed in separate financial
statements would be material to investors.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
October 3, October 4, October 3, October 4,
1999 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales.................... $ 71,911 $75,515 $219,083 $226,570
Gross Profit................. 39,505 40,967 118,777 121,125
Operating income............. 7,971 13,184 23,250 26,560
Net income................... 3,963 7,649 22,502 15,029
Current assets............... 67,932 61,234
Non-current assets........... 209,804 225,568
Current liabilities.......... 30,970 28,190
Non-current liabilities...... 9,581 9,931
</TABLE>
These Subsidiaries have, jointly and severally, fully and unconditionally
guaranteed the obligations of the Company with respect to the Notes. The
covenants of the Notes and the Credit Facility do not restrict the ability of
the Subsidiaries to make cash distributions to the Company.
The summarized financial information for the Subsidiaries has been prepared
from the books and records of the Company. The summarized financial information
may not necessarily be indicative of the results of operations or financial
position had the Subsidiaries operated as independent entities.
(8)
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
The discussion set forth below, as well as other portions of this quarterly
report, and other reports and statements filed by the Company from time-to-time
with the Securities and Exchange Commission contain, or may contain, statements
concerning potential future events. Such forward-looking statements are based
upon the beliefs of, and the information currently available to the Company's
management, as well as estimates and assumptions made by the Company's
management, including assumptions about uncertainties and risks. Readers can
identify these forward-looking statements by the use of such verbs as "expects",
"anticipates", "believes", "estimates", "intends", "plans" or similar verbs or
conjugations of such verbs. If circumstances arise, the Company's actual
results could materially differ from those anticipated by such forward-looking
statements. The differences could be caused by a number of factors or a
combination of these factors. The Company currently believes that the most
important of these factors are a potential increase in the costs of
durum/semolina, the intense levels of competition in the pasta industry and the
risks associated with the Company's new marketing initiatives. Other important
factors include the following:
. the Company's high degree of leverage;
. the Company's ability to implement our Year 2000 compliance plan;
. the Company's ability to successfully integrate any future acquisitions;
. possible conflicts of interest; and
. changes in laws and regulations.
Readers are strongly encouraged to consider these factors and others
mentioned in the Company's Registration Statement on Form S-4 (Reg. No. 333-
76763) declared effective August 3, 1999, when evaluating any such forward-
looking statements in this quarterly report. The Company undertakes no
responsibility to update any forward-looking statements contained in this
report.
General
New World Pasta's primary business is the production of dry pasta, which is
marketed and sold under regional brands through supermarkets and food stores.
Our operations are a continuation of the operations of HPG, which began as a
division of HFC in 1966. In a series of transactions that were completed prior
to the recapitalization in which our current principals acquired control of New
World Pasta, all of HFC's pasta-related operations were combined into HPMC and
its subsidiaries and HPMC's name was changed to New World Pasta Company.
(9)
<PAGE>
Results Of Operations
Three Months Ended October 3, 1999 Compared With Three Months Ended October
4, 1998
Net Sales
Net sales decreased by $2.3 million, or 2.6% for the third quarter
ended October 3, 1999 compared to the third quarter ended October 4, 1998. The
decrease was primarily due to price decreases taken during the second quarter
and a unit volume reduction primarily in the food service/ industrial sector of
the business. Price declines amounted to approximately 2.3% of the 2.6% decline,
with the majority of the reduction occurring in the retail sector. Partially
offsetting the price decline was a 2.0 million pound, or 2.1% growth in retail
sales volume. The net sales decrease was also partially offset by reduced
unsaleables, which were $1.0 million or 27.6% lower than the previous year's
third quarter.
The increased retail sales volume is primarily the result of the
Company's revised marketing strategy that includes promotional program changes
and the price reductions discussed above. Implementation of these changes was
initiated during May 1999 beginning with the Eastern markets. The Company
expects the revised price and promotion strategy will continue to favorably
impact retail sales volumes.
Operating Expenses:
Cost of Sales
Cost of sales decreased by $4.0 million or 8.1% from the third
quarter of 1998, primarily due to a decrease in raw material prices.
Durum/semolina costs declined 22.7% in the third quarter of 1999 compared to the
third quarter of 1998. Packaging material costs, which decreased 2.6% from the
prior year's third quarter, also had a favorable impact on the quarterly
results. Freight and warehousing cost increases of $0.2 million partially offset
the above decreases. This increase was due to higher freight rates, increased
pallet costs and higher finished goods inventories.
Gross profit improved by $1.7 million as the decrease in net sales was
entirely offset by cost improvements, particularly those related to raw material
prices. Gross margin of $41.5 million was 47.7% of sales for the third quarter
of 1999 compared to $39.7 million, or 44.5% of sales for the third quarter of
1998.
Selling and Marketing Expenses
Selling and marketing costs increased by $2.9 million or 12.0% from
the third quarter of 1998. Selling costs decreased by $0.5 million or 11.5% from
the previous year's third quarter as actual selling expenses incurred in 1999
were lower than the selling expense allocated to the Company in the third
quarter of 1998 when the Company was still a division of HFC. Selling expense
was also impacted by decreased net sales in
(10)
<PAGE>
the quarter as compared to 1998. Trade promotions increased by $4.0 million or
25.0%. Comparisons to the previous year's third quarter trade promotion
expenditures were negatively impacted as a result of incremental marketing
program accrual adjustments of $1.5 million reversed during the third quarter of
1998. The net additional trade support of approximately $2.5 million in the
third quarter of 1999 drove the quarter's 2.1% growth in retail sales volume.
Consumer promotion spending increased by $0.3 million or 49.3%,
primarily due to the execution of fall consumer promotions not run in the
previous year. The execution of additional product promotion using couponing
also played a minor role in the increased spending level. Advertising costs
decreased by $1.1 million or 61.4% due to decreased emphasis on this promotional
vehicle. Other marketing costs increased by $0.2 million or 20.4% from the third
quarter of 1998 due to increased marketing administrative costs, partially
offset by reduced packaging change costs and marketing research.
General and Administrative Expenses
General and administrative costs increased by $0.6 million or 14.9%
primarily due to costs incurred in the transition from HFC to a stand-alone
operation. Reduced building rent and reduced trade association dues partially
offset this increase.
Income From Operations
Income from operations for the quarter ended October 3, 1999 was $10.0
million, a decline of $1.9 million or 16.1% compared to the quarter ended
October 4, 1998. The decrease was primarily due to decreased net sales in
conjunction with increased selling and marketing expenses, offset partially by
decreased cost of sales.
Income Taxes
The income tax expense for the third quarter ended October 3, 1999
reflects adjustment to the effective tax rate expected to be applicable for the
year as well as the tax effect from non-recurring transaction expenses incurred
as part of the recapitalization effected in January, 1999 that may not be
deductible.
Net Income (Loss)
Net Income for the third quarter was $1.5 million in 1999 versus $7.4
million in the third quarter of 1998. The decrease was due primarily to a
decrease in net sales, an increase in selling and marketing expenses, an
increase in non-recurring transaction expenses, and increased interest expense,
all of which were offset partially by decreased cost of sales and reduced income
taxes.
(11)
<PAGE>
Results of Operations
Nine Months Ended October 3, 1999 Compared With the Nine Months Ended
October 4, 1998
Net Sales
Net sales decreased by $14.4 million, or 5.1% for the nine-month
period ended October 3, 1999 compared to the nine-month period ended October 4,
1998. The decrease for the nine-month period ended October 3, 1999 was
primarily due to decreases in unit volume and to a lesser extent net price
declines resulting from the Company's revised marketing strategy. The continued
effect of HFC's strategy, focused on short-term return on investment at the
expense of sales unit growth, was the main reason for the volume shortfall.
Volume was also negatively affected by the loss of a major food service account
late in 1998. Comparison of the results for the first nine months of 1999 to
the first nine months of 1998 is also impacted by the increased competitive
intensity within the industry. Partially offsetting the volume and price
decline were favorable unsaleables charges, which were $1.3 million or 14.1%
lower than the comparable nine months of 1998. Management expects sales unit
growth during the fourth quarter to only partially offset the decline over the
first nine months of 1999.
Operating Expenses:
Cost of Sales
Cost of sales declined by $11.3 million or 7.3% from the first nine
months of 1998. In addition to the reduction resulting from the volume decline,
the most significant factor was the impact of lower durum/semolina costs during
the period. Durum/semolina costs declined 16.2% during the first nine months of
1999 versus the first nine months of 1998. Freight costs were also slightly
lower than the first nine months of 1998 due to the decreased volume during this
period.
Gross profit declined by $3.1 million or 2.4% from the first nine
months of 1998, reflecting the lower net sales partially offset by lower raw
material costs. Gross profit of $124.4 million was 46.5% of sales for the first
nine months of 1999 compared to $127.5 million, or 45.2% of sales for the first
nine months of 1998.
Selling and Marketing Costs
Selling and marketing costs increased by $0.3 million or 0.3% as
compared to the first nine months of 1998. Selling costs decreased by $0.4
million or 3.4% from the previous year's first nine months. The majority of the
decrease relates to the volume decline in the first nine months of the year.
Trade promotions increased by $2.7 million or 4.6%, due to restoration of trade
promotions not offered in the previous year, as well as $1.2 million of
incremental favorable marketing accrual adjustments taken in the prior year.
Advertising costs declined $1.6 million or 29.4% due to decreased reliance on
this promotional vehicle. Consumer promotion spending decreased $0.5 million or
21.7%,
(12)
<PAGE>
due to reduced emphasis on this promotional vehicle. Other Marketing costs
increased by $0.1 million, or 3.7% from the comparable period in 1998 due to
higher marketing administrative costs partially offset by decreased marketing
research.
General and Administrative Costs
General and administrative costs increased by $1.2 million, or 12.2%
primarily due to costs incurred to transition to an independent operating
company. Reduced building rent and trade association dues partially offset this
increase.
Cost of Restructuring
The cost of restructuring of $2.7 million is the estimated cost of
executing the closing of the Kansas City, Kansas plant announced May 20, 1999.
Included in this estimate is the cost of severance for plant employees, the
write-off of equipment, as well as other facility exit costs. While the company
expects such charge to be approximately $2.7 million, no assurance can be made
that such cost will not be in excess of the $2.7 million already recorded.
Income from Operations
Income from operations for the nine months ended October 3, 1999
was $17.7 million, a decline of $15.2 million or 46.3% compared to the nine
months ended October 4, 1998. The decrease in income from operations was due
primarily to the cost of restructuring, costs incurred to transition to an
independent operating company, increases in operating expenses and the decrease
in net sales, all of which were offset partially by a decrease in cost of sales.
Income Taxes
The income tax expense for the nine months ended October 3, 1999 of
$0.8 million reflects the tax effect from non-recurring transaction expenses
that may not be deductible, net of the expected future tax benefit from the year
to date loss.
Net Income (Loss)
The Company experienced a net loss of $2.6 million for the first nine
months of 1999 compared to net income of $20.4 million in the first nine months
of 1998. This loss was primarily due to a decrease in net sales, increases in
costs incurred to transition to an independent operating company, expenses
attributable to the Kansas City plant closing and to the interest expense on the
Company's outstanding debt.
(13)
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash provided by
operations and borrowings under its Credit Facility. Cash and cash equivalents
totaled $7.2 million at October 3, 1999 and working capital was $18.4 million as
of October 3, 1999 compared to $20.8 million as of December 31, 1998. The
decrease in working capital was primarily the result of increased accrued
liabilities partially offset by increased cash and accounts receivable. The
current ratio was 1.40 at October 3, 1999 compared to 1.74 at December 31, 1998.
See footnote number 4 to the consolidated financial statements for further
information on the Credit Facility and the Company's debt.
The Company's net cash provided by operating activities was $22.9
million for the nine months ended October 3, 1999 compared to $21.3 million for
the nine months ended October 4, 1998. This increase was due to the transfer
and establishment of accrued liabilities resulting from becoming an independent
entity and from better working capital management offset by one-time costs
related to the recapitalization transaction and interest expense. Trade
Accounts Receivable also grew significantly due to strong sales in the last two
weeks of September 1999.
Net cash used in investing activities totaled $3.1 million for the
nine months ended October 3, 1999 versus $4.4 million for the nine months ended
October 4, 1998 primarily due to lower capital spending levels.
Net cash used in financing activities for the nine months ended
October 3, 1999 reflects the payment of debt proceeds received in conjunction
with the recapitalization, the issuance of debt ($470.5 million), the net
proceeds from issuance of the preferred stock ($113.5 million) and the issuance
of common stock ($50.0 million), offset primarily by the repurchase of common
stock ($453.0 million). Additionally, the Company made an advanced principal
payment of $10.0 million on the Term Loan and the final settlement payment to
HFC of $7.0 million during the nine-month period ended October 3, 1999.
Management believes that net cash provided by operations, together
with availability under the revolving loan portion of its Credit Facility ($50
million at October 3, 1999), will be sufficient to meet the Company's expected
capital and liquidity needs for the foreseeable future.
(14)
<PAGE>
Year 2000 Compliance
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, these systems
will recognize the Year 2000 as "00." This could cause many computer
applications to fail completely or to create erroneous results unless corrective
measures are taken. New World Pasta utilizes software and related computer
technologies essential to its operations that will be affected by the Year 2000
Problem. While it is difficult to assess the exact nature of the consequences
to New World Pasta of a failure to be Year 2000 compliant, it has been
determined that such a failure could have a material adverse effect on New World
Pasta's operations.
New World Pasta's effort to address the Year 2000 Problem has
been divided into five phases.
Assessment
In this first phase, which the Company has completed, the Company
assessed its hardware and software systems, and the embedded systems contained
in the Company's buildings, plants, equipment and other infrastructure. This
identified and prioritized those areas of the business operations affected by
the Year 2000 Problem. As a result of this review, the Company has:
. identified the kind and amount of necessary resources, such as money and
labor needed in our remediation effort,
. determined validation strategies and testing plans on a system-wide basis,
and
. determined the need for contingency plans, particularly for core business
processes.
Renovation
The second phase involves making software and hardware changes,
developing replacement systems, and eliminating non-functional applications or
system components. The Company entered into a contract with a vendor to perform
the remediation of the mission critical software on the AS/400. The project was
completed on schedule in August 1999. The Company has also completed
significant testing of embedded systems and hardware in the plants and has found
its exposure to be minimal. The Company does, however, have to remediate
certain plant systems that interface with the Company's AS/400. This plant
systems remediation is on target for completion during November 1999. The
Company has also engaged an independent third party to review its Year 2000
remediation plans, and actions taken to-date. This review commenced late in the
second quarter of 1999 and is expected to be completed in November.
Validation
As the Company makes changes to applications and components of its
systems, the Company's intention is to validate and test those changes for Year
2000 compliance.
(15)
<PAGE>
The Company has performed validation and testing on a system-wide basis to
ensure that the changes are compatible with other aspects of its information
systems. Acceptance testing has been conducted where deemed necessary. Much of
this testing has been satisfactorily completed, with only a few minor areas to
be finalized during November 1999.
Implementation
This phase involves integrating the changes made as part of the above
process into New World Pasta's overall information system. As the Company
implements and integrates the identified changes, it may discover that its
systems include other non-compliant Year 2000 applications and components. The
Company does not expect this integration to have any significant adverse effect
upon its operations, but will develop appropriate contingency and disaster
recovery plans to reduce the risk of such effects. Much of this implementation
has been completed at this time, without any material adverse consequences. The
Company anticipates completing implementation of Year 2000 applications for our
mission-critical systems during November 1999.
Third-Party Compliance
The Company realizes that third-party suppliers and customers could
affect our Year 2000 readiness. It has made contact with many of its key
suppliers to determine their Year 2000 compliance. The Company is making
additional contacts and taking necessary steps to ensure that our primary
customers and suppliers are Year 2000 compliant.
Contingency Plans
The Company is in the process of finalizing its contingency plans,
including the identification of its most reasonably likely worst-case scenarios
and methods to address any disruption which could occur as a result of these
scenarios. Currently, the Company believes that the most reasonably likely
worst-case scenarios are minor disruptions which could be incurred as a result
of switching to manual processes or switching suppliers as a result of third
party Year 2000 Problems. Contingency plans to deal with the most reasonably
likely worst-case scenarios include stockpiling raw and packaging materials,
increasing finished goods inventory levels, securing alternate suppliers and
developing manual processes to address issues that could result from a company
or third party system failure.
Costs incurred to date to address the Year 2000 Problem have been $0.6
million. The Company expects to incur incremental expenses of approximately
$0.7 million through the end of 1999 to resolve any known Year 2000 Problems
that relate to mission critical systems.
(16)
<PAGE>
New Accounting Standard
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (the Standard). The Standard
establishes comprehensive accounting and reporting standards for derivative
instruments and hedging activities that require a Company to record the
derivative instrument at fair value in the balance sheet.
Furthermore, the derivative instrument must meet specific criteria
or the change in its fair value must be recognized in earnings in the period of
change. To achieve hedge accounting treatment the derivative instrument needs to
be part of a well-documented hedging strategy that describes the exposure to be
hedged, the objective of the hedge and a measurable definition of its
effectiveness in hedging the exposure. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Data of SFAS No. 133." SFAS No. 137 delays the Standard effective
date to the beginning of the first quarter of the fiscal year beginning after
June 15, 2000. Adoption of SFAS No. 133 is not expected to have a material
effect on the Company's financial statements.
(17)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
New World Pasta is subject to market risk associated with some
commodity prices and, effective with the revolving credit agreement it entered
into in January 1999, changes in interest rates. At December 31, 1998 New World
Pasta had open commodity futures contracts with approximately $2.0 million of
deferred losses. During the first nine months of 1999, New World Pasta closed
out these contracts and recognized $1.8 million of losses. At October 3, 1999,
New World Pasta had approximately $0.4 million of deferred losses that will be
recognized during the fourth quarter of 1999. New World Pasta has entered into a
procurement agreement with Miller Milling Company, a related party, pursuant to
which Miller Milling Company will supply all of the Company's raw material
commodities. Accordingly, the Company does not anticipate entering into any
further commodity futures contracts.
To manage the risk of fluctuations in interest rates, New World
Pasta's borrowings are a mix of fixed and floating rate obligations. This
includes the $160.0 million of notes that bear interest at a 9.25% fixed rate
and are due 2009. New World Pasta's $139.3 million term loan bears interest at a
floating rate. In May 1999, New World Pasta entered into an interest rate swap
agreement that converts $50 million of this floating interest rate debt to a
fixed rate. The interest rate under the interest rate swap agreement is
approximately 8.9%, and expires June 2, 2002. The carrying amount of New World
Pasta's debt obligations approximates the fair value of similar debt instruments
of comparable maturity, and the interest rate market risk is currently not
considered significant.
(18)
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Form 8-K's
The company filed a Form 8-K on August 13, 1999 disclosing its
second quarter results.
(19)
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Signatures:
NEW WORLD PASTA COMPANY
Date: November 10, 1999 /s/ James A. Bohenick
--------------------- ---------------------------
James A. Bohenick
Vice President, Finance and
Chief Financial Officer
Date: November 10, 1999 /s/ Thomas P. Boran
--------------------- ---------------------------
Thomas P. Boran
Chief Accounting Officer
(20)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-05-1999 JAN-01-1999
<PERIOD-END> OCT-03-1999 OCT-03-1999
<CASH> 7,176 7,176
<SECURITIES> 0 0
<RECEIVABLES> 24,349 24,349
<ALLOWANCES> 0 0
<INVENTORY> 22,407 22,407
<CURRENT-ASSETS> 63,991 63,991
<PP&E> 228,195 228,195
<DEPRECIATION> 125,137 125,137
<TOTAL-ASSETS> 338,897 338,897
<CURRENT-LIABILITIES> 45,605 45,605
<BONDS> 297,900 297,900
122,722 122,722
0 0
<COMMON> 50,000 50,000
<OTHER-SE> (185,202) (185,202)
<TOTAL-LIABILITY-AND-EQUITY> 338,897 338,897
<SALES> 86,956 267,758
<TOTAL-REVENUES> 86,956 267,758
<CGS> 45,491 143,335
<TOTAL-COSTS> 45,491 143,335
<OTHER-EXPENSES> 31,460 106,739
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,052 19,463
<INCOME-PRETAX> 2,953 (1,779)
<INCOME-TAX> 1,441 805
<INCOME-CONTINUING> 1,512 (2,584)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,512 (2,584)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
