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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
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 December 31, 1999
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 No. 333-76763
NEW WORLD PASTA COMPANY
(Exact name of registrant as specified in its charter)
Delaware 52-2006441
(state or other jurisdiction (IRS employer identification number)
of incorporation or organization)
85 Shannon Road, Harrisburg, PA 17112
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (717) 526-2200
Securities registered pursuant to Section 12(g) of the Act:
9 1/4% Senior Subordinated Exchange Notes Due 2009
--------------------------------------------------
(Title of Class)
Guarantees of the 9 1/4% Senior Subordinated Exchange Notes
-----------------------------------------------------------
(Title of Class)
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 and 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]
The aggregate market value of voting stock of the Registrant has not been
determined, as there is no established market for such stock. As of March 15,
2000, the registrant had 5,000,000 shares of common stock, par value $0.01 per
share, outstanding.
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NEW WORLD PASTA COMPANY
INDEX
Page
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PART I
ITEM 1. Business........................................................ 1
ITEM 2. Properties...................................................... 7
ITEM 3. Legal Proceedings............................................... 7
ITEM 4. Submission of Matters to a Vote of Security Holders............. 7
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder 7
Matters.........................................................
ITEM 6. Selected Financial Data......................................... 8
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 9
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risks..... 12
ITEM 8. Financial Statements............................................ 12
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 12
PART III
ITEM 10. Directors and Executive Officers................................ 13
ITEM 11. Executive Compensation.......................................... 15
ITEM 12. Security Stock Ownership of Certain Beneficial Owners and 19
Management......................................................
ITEM 13. Certain Relationships and Related Transactions.................. 20
PART IV
ITEM 14. Financial Statements, Schedules, Exhibits and Report on Form 8-K 24
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FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by or on behalf of our Company.
Our Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in this report and in
our other filings with the Securities and Exchange Commission. All statements
which address operating performance, events or developments that we expect or
anticipate will occur in the future, including statements relating to our
strategy, expectations about future events, volume growth, share of sales or
statements expressing general optimism about future operating results, are
forward-looking statements within the meaning of the Act. The forward-looking
statements are and will be based on management's then current views and
assumptions regarding future events and operating performance.
In the discussion set forth below, readers can identify forward-looking
statements by their use of such verbs as expects, anticipates, believes or
similar verbs or conjugations of such verbs. If our assumptions prove incorrect
or should unanticipated circumstances arise, the Company's actual results could
materially differ from those anticipated by such forward-looking statements.
Differences could be the result of any number or combination of factors,
including the following:
. Our high level of indebtedness;
. Possible conflicts of interest;
. Our reliance on a single vendor for our raw material
procurement;
. Price volatility of our raw materials;
. Transportation risks;
. Changes in laws, government regulations or trade
policies;
. Declines in retail pasta sales;
. Labor relations;
. Product liability;
. Environmental liability; and
. Dependence on key personnel.
You are strongly encouraged to consider these factors and others mentioned
in our Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999, when evaluating forward-looking statements in this
annual report. We undertake no responsibility to update any forward-looking
statements contained in this report.
MARKET DATA
The market data and some of the industry forecasts used throughout this
Form 10- K were obtained from internal surveys, market research, publicly
available information and industry publications. Industry publications generally
state that the information they present has been obtained from sources believed
to be reliable, but that the accuracy and completeness of the information are
not guaranteed. Similarly, internal surveys, industry forecasts and market
research, while believed to be reliable, have not been independently verified,
and we make no representation as to the accuracy of this information. All market
share statistics are from Information Resources, Inc., an independent marketing
research firm that provides us with information regarding the pasta industry.
Information Resources, Inc. is located at 150 Clinton Street, Chicago, Illinois
60661 and has no affiliation with us or any of our affiliates. The industry data
were compiled by our management from a series of industry and government
reports, including the United States Department of Commerce, Business Trends
Analysis and Find SVP Research Publications.
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PART I
NEW WORLD PASTA COMPANY
ITEM 1. Business
In General
New World Pasta Company is the leading manufacturer and distributor of
retail branded dry pasta in the United States. We are also a leading supplier of
pasta to the private label, industrial and foodservice sectors in the United
States. Our 1999 net sales were approximately $354.0 million.
Our primary business is the production of dry pasta, which we market and
sell under regional brands through supermarkets and foodstores. Three of our
four principal brands, RONZONI, SAN GIORGIO, and AMERICAN BEAUTY, are among the
top six brands in the United States according to Information Resources, Inc. Our
fourth largest brand, SKINNER, is a strong brand in the Midwestern and
Southwestern markets. We also own several other brands including: P&R, IDEAL,
and MRS. WEISS'.
On a combined basis, these brands give us a national market share of
approximately 26%, which is about 45% greater than our closest competitor. Our
noodle products also have the largest market share in the United States with a
19% share of the retail egg noodle market. Our noodle product brands include
LIGHT 'N FLUFFY, AMERICAN BEAUTY, SKINNER, MRS. WEISS', P&R, IDEAL and SAN
GIORGIO.
Our executive offices are located at 85 Shannon Road, Harrisburg,
Pennsylvania 17112 and our telephone number is (717) 526-2200.
History
New World Pasta Company is the successor corporation of Hershey Pasta
Manufacturing, Inc. ("HPMI") and was incorporated in Delaware in 1996. Our
current stockholders acquired our predecessor, Hershey Pasta Group ("HPG"), in a
recapitalization with Hershey Foods Corporation ("HFC") on January 28, 1999. HPG
included HPMI and various other pasta related corporations and assets owned by
HFC.
Recent Development
On February 4, 2000, John E. Denton was named Chairman of the Board and
Chief Executive Officer of the Company, replacing C. Mickey Skinner who assumed
the position of Chairman Emeritus.
Industry
Overview. We believe that the dry pasta industry in the United States is a
$2.6 billion non-cyclical industry that is both stable and growing. We estimate
that total pasta consumption in the United States has grown about 3% to 4% per
year over the last decade. We believe that this growth has been driven primarily
by increased per capita consumption, which, according to the United States
Department of Commerce, increased at a compound annual growth rate of 3.9% from
1986 to 1996. According to the American Pasta Report, Americans are eating more
pasta today than they did five years ago. Approximately 77% of Americans eat
pasta at least once a week, and almost one-third of Americans consume pasta
three or more times a week.
Customer Markets. The Pasta industry has two primary customer markets:
retail, which includes both branded and private label sales, and institutional,
which is comprised of industrial and foodservice sales.
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. Retail. The retail sector includes domestic and imported branded pasta and
private label pasta sold to grocery stores, club stores and mass merchandisers.
We believe that, in 1998 the retail dry pasta sector accounted for approximately
$1.3 billion, or approximately 50%, of dry pasta sold in the United States. The
largest sellers of branded pasta are:
. New World Pasta
. Borden Food Holdings Corporation
. Bestfoods, Inc.
. Barilla G.E.R.F. LLI S.p.A.
The largest sellers of private label pasta are:
. American Italian Pasta Company
. Dakota Growers Pasta Company
. Industrial and Foodservice. The industrial and foodservice sectors
include food processors that use pasta as a food ingredient and foodservice
distributors that supply restaurants, hotels, schools and hospitals. We believe
that, in 1998, the industrial and foodservice pasta sectors accounted for
approximately $1.3 billion, or approximately 50% of dry pasta sold in the United
States. Although many food processors in the industrial sector choose to
produce pasta internally, an increasing number are expected to outsource their
production. Examples of food processors that use pasta include:
. Kraft Foods
. International Home Foods
. Stouffers Corporation0
. Campbell Soup Company
. ConAgra, Inc.
. Pillsbury
. Lipton
. General Mills
The foodservice sector is served by numerous regional and local food
distributors and includes traditional foodservice customers and restaurant
chains.
Products
We provide a full range of pasta products to our customers. Our products
can be separated into five broad categories for selling and marketing purposes:
branded pasta, egg noodle products, private label products, industrial and
foodservice products, and miscellaneous products.
Branded Pasta. Branded pasta accounts for the bulk of our revenue and
includes brands such as RONZONI, SAN GIORGIO, AMERICAN BEAUTY, SKINNER, IDEAL,
MRS. WEISS' and P&R. Our regional brands are described below:
. Ronzoni. The RONZONI brand is one of the most established pasta
brands in the United States with its origins dating back to 1915.
RONZONI is the largest selling brand in the New York City
metropolitan area, which is the largest pasta-consumption area in
the United States. RONZONI is also popular in the New England, Mid-
Atlantic and Florida markets, and is recognized as a premium brand
west of the Mississippi River. RONZONI is also the leading brand in
the Miami/Ft. Lauderdale and Hartford/Springfield metropolitan
areas, and is the second leading brand in the Philadelphia
metropolitan area.
. San Giorgio. SAN GIORGIO is presently the sixth most popular pasta
brand in the United States. SAN GIORGIO's origins date back to 1914.
We primarily distribute this brand in New York, New Jersey,
Pennsylvania, Maryland, Delaware, Connecticut, Indiana, Illinois,
Michigan, Virginia and Ohio. SAN GIORGIO is the best selling brand
in the Philadelphia, Baltimore/Washington, Harrisburg/Scranton,
Columbus, Pittsburgh and Cincinnati/Dayton markets.
. American Beauty. AMERICAN BEAUTY was founded in 1916 and is the
leading brand in states west of the Mississippi River. AMERICAN
BEAUTY is strongest in the Phoenix/Tucson, Wichita and Kansas City
markets.
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AMERICAN BEAUTY is also the leading brand in the Denver and Salt Lake
City markets, and the second leading brand in the Oklahoma City and
San Antonio/Corpus Christi markets.
. Skinner. SKINNER is a leading pasta brand in the Midwestern and
Southwestern regions of the United States. The SKINNER brand was
introduced in Omaha, Nebraska in 1911. In metropolitan areas such as
Dallas, Oklahoma City, Houston and San Antonio/Corpus Christi, SKINNER
is particularly prominent, holding the number one branded share
position and a significant share lead over its nearest competitor.
. Other Brands. Our other pasta brands include IDEAL and MRS. WEISS',
which are sold in the Cleveland, Ohio market and P&R, which is the
leading brand in the Syracuse and Albany, New York markets.
Egg Noodle Products. We also manufacture egg noodle products for sale
alongside our pasta brands. Collectively, our egg noodle brands have the largest
market share in the United States and include the LIGHT 'N FLUFFY, AMERICAN
BEAUTY, SKINNER, RONZONI, MRS. WEISS' and P&R brands. We account for
approximately 19% of all retail egg noodle sales in the United States. We hold
brand leadership positions in 14 market areas and produce seven of the top 25
brands in the United States.
Private Label Products. We have historically sold private label pasta to
selected accounts that also purchase a full-line of our branded products. We
compete with other private label suppliers based on the ability to provide a
broad line of products at a low cost.
Industrial and Foodservice Products. We also sell products to various
industrial and foodservice clients. A few large food distributors control the
foodservice sector and buy on the basis of price, quality and service
reliability.
Miscellaneous Products. We sell a variety of miscellaneous dry grocery
products which were acquired as part of the 1984 acquisition of the AMERICAN
BEAUTY brand. These items account for less than 1% of our sales and include
instant mashed potatoes, dry beans, popcorn and rice. We sell these products in
a very limited geographic area.
Product Quality. We have a tradition of producing high quality products for
customers and consumers. Our products are manufactured using a comprehensive
Hazard Analysis Critical Control Point (HACCP) program to ensure food safety.
This program requires strict monitoring in every facet of the manufacturing
operations. We also use a toll-free number, which we print on our packaging, to
maintain direct contact with the public.
Competition
In General. The dry pasta industry is highly competitive. We compete
against well-established national, regional and foreign companies, and many
smaller companies. These companies include independent pasta producers and pasta
divisions and subsidiaries of large food products companies. Our largest
competitors are:
. American Italian Pasta Company
. Barilla G.E.R.F. LLI S.p.A.
. Bestfoods, Inc.
. Borden Food Holdings Corporation
. Dakota Growers Pasta Company
In the last few years, the corporate parents of many leading brands have
significantly reduced their investment in and promotion of their labels. In
addition, many companies have discontinued products in the private label and
industrial sectors. Accordingly, many of these companies have lost market share
in the dry pasta industry. At the same time, imported pasta makers and private
label producers have expanded their production capabilities, have aggressively
sought additional business and have picked up a significant portion of this lost
market share. We believe that these trends provide an opportunity for us to
increase both our branded pasta market share and our private label business.
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Brand Sector Competition. We compete primarily in the branded sector of the
retail consumer market. Competition in this market generally is based upon
product quality and taste, pricing, packaging, customer service and the
capability to deliver products efficiently. Our branded pasta competitors
include:
. Borden Food Holdings Corporation (Creamette) (approximately a 17.7%
market share)
. Bestfoods, Inc. (Muellers) (approximately a 9.4% market share)
. Barilla G.E.R.F. LLI S.p.A. (approximately a 8.3% market share)
Private Label Competition. The competition in this market is predominately
on price. Our major private label competitors are:
. American Italian Pasta Company
. Dakota Growers Pasta Company
Industrial and Foodservice Sectors. On a more limited basis, we compete in
the industrial and foodservice sectors. The competition in this market is based
primarily on price, quality and also on reliability. Our main competitors are:
. American Italian Pasta Company
. Dakota Growers Pasta Company
Marketing and Sales
Our marketing strategy is based on consistent quality products and superior
customer service. We seek growth through a combination of marketing and
promotional programs, the introduction of new products and the geographic
expansion of our regional brands. In those markets where we are a leader, our
promotional spending is focused on existing products, volume growth,
distribution of new items and consumer trial. We also intend to use innovative
marketing, advertising and merchandising programs to enhance brand awareness in
regions where we do not have as strong a presence and to build market share.
Our sales staff consists of Sales Directors, Zone Sales Managers, Regional
Sales Managers, District Managers and numerous support staff at our
headquarters, whose primary responsibility is the sale of our branded pasta
products. In addition, we have sales professionals responsible for our private
label, industrial and foodservice sales. The overall sales organization is led
by a vice president with over 20 years of pasta sales management experience. The
marketing staff is comprised of professionals who are responsible for the
development and implementation of our go-to-market programs and work closely
with our sales personnel. Our branded products are marketed through a network of
retail brokers. In addition to our retail brokers, we have a network of
foodservice brokers. The majority of our brokers work exclusively for us with
respect to pasta products.
Customers
Our branded, private label and egg noodle products are sold primarily
through grocery store chains and grocery wholesalers. In addition, we sell our
products through wholesale clubs, mass merchandisers, chain drug stores,
convenience stores and food distributors. Mass merchandisers, wholesale clubs
and chain drug stores are growing distribution channels and represent
significant revenue enhancement opportunities for us. Our ten largest customers
accounted for approximately 48.8% of 1999 gross sales, with no single customer
accounting for more than 7.1%.
Production
Pasta Production. Semolina and water are the two main ingredients used to
produce a quality pasta product. Egg is the main additional ingredient included
in noodles. Each variety of durum, which is milled into semolina, has its own
unique set of protein, gluten content, moisture, density, color and other
attributes that affect the quality and character of the semolina. To produce
pasta, we mix semolina with water and other ingredients and then extrude or roll
the mixture into the desired shapes. The mixture then travels through a series
of state-of-the-art dryers before being stabilized at room temperature. After
the stabilization process, we package the pasta in a variety of configurations
and forward it through an automated palletizing system. We then load the
finished product on trucks for transport to our distribution centers or for
shipment directly to customers.
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Production Facilities. We have structured our manufacturing organization
with regional production facilities and regional distribution centers. Our
suppliers supply semolina from their mills to our five manufacturing plants.
Upon completion of the manufacturing process, we ship our finished products to
our distribution centers. We have located our plants and distribution centers to
minimize our freight cost and to match our raw material supply to our production
demands.
We own five operating manufacturing plants, which have an annual aggregate
production capacity of approximately 665 million pounds of pasta. With the
exception of the Winchester plant, these plants were acquired as part of the
assets purchased during Hershey Pasta Group's acquisition of regional pasta
brands over the period from 1966 to 1993. Between 1990-1997, Hershey Foods
Corporation spent $140.0 million to modernize and update these plants and to
construct our Winchester plant. As a result, each of our plants is equipped with
modern pasta-making technology. Management believes that the Winchester plant,
constructed in 1993 at a cost of approximately $60.0 million, is a state-
of-the-art facility and one of the most cost-efficient pasta plants in North
America. The other plants have been repeatedly refurbished and their
infrastructure upgraded to ensure their cost competitiveness and the ability to
meet our product-quality standards.
Transportation and Distribution
Our distribution network is an important factor in maintaining our strategy
to produce quality pasta at a low cost. In general, it is cheaper to ship durum
wheat than to ship semolina flour, and cheaper to ship semolina flour than to
ship finished goods.
Durum wheat is shipped to milling sites by rail or truck. After milling the
wheat, our suppliers then ship the semolina flour from their mills to our plants
by either rail, truck or pneumatic tube based on location and financial
considerations. We ship the finished goods from our plant sites to our
distribution centers or to our customers in truckload quantities. We ship over
95% of our tonnage from the distribution centers to the final customers in full
truckload quantities. Contract carriers handle the truck shipments under annual
transportation contracts.
For finished products, we use three primary distribution centers, which are
located in Fresno, California; Omaha, Nebraska; and New Kingston, Pennsylvania,
and two secondary warehouses, which are located in Portland, Oregon and
Louisville, Kentucky. With the exception of the Louisville warehouse, which is
part of our Louisville manufacturing facility, the distribution centers and
warehouses are leased facilities and are run by professional warehousing
companies under multi-year contracts.
Raw Materials
Pasta's primary ingredient is semolina flour, which is extracted from durum
wheat through a milling process. Our suppliers deliver semolina to our
manufacturing plants directly from their milling operations. These mills source
their durum directly from farmers and grower-owned co-operatives in North
Dakota, Montana, Arizona, California and Canada.
Over the last five years, the cost of semolina has typically represented
35% to 40% of our total cost of sales. This percentage is high relative to
historical trends because average durum prices were at historically high levels
from 1993 until 1998. From 1993 to 1997, the average durum price was $5.97 per
bushel versus an average of $4.45 per bushel from 1980 to 1992. Durum prices
dropped to approximately $4.10 per bushel in 1999. We expect modest price
increases in durum during 2000.
Packaging materials typically represent approximately 20% of our total cost
of sales. We expect the costs of these materials to remain constant as a
percentage of cost of sales during 2000.
Relationship with Miller Milling Company
Miller Milling Company was founded in 1985 in response to consolidation in
the pasta industry, rail deregulation and the failure of various competitors to
take advantage of technological innovations. Miller Milling Company then grew
from one mill dedicated to serving Hershey Pasta Group's Lebanon, Pennsylvania
facility into what is now the largest durum/semolina supplier in North America.
Miller Milling Company owns a substantial interest in Miller Pasta LLC, which in
turn owns a 10.6% interest in New World Pasta.
In 1999, we expanded the Miller Milling Company purchasing and milling
arrangements to procure 100% of our durum/semolina requirements. Miller Milling
Company is a supplier of durum/semolina to a number of manufacturers of pasta,
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but we are their largest customer. For a more detailed description of some of
our arrangements with Miller Milling Company, see "ITEM 13 - Certain
Relationships and Related Transactions."
Trademarks and Domain Names
We own numerous registered trademarks in the United States and abroad. Of
the many trademarks we have registered with the United States Patent and
Trademark Office, our AMERICAN BEAUTY, LIGHT 'N FLUFFY, MRS. WEISS', P&R,
RONZONI, SAN GIORGIO and SKINNER marks are the trademarks that are material to
our business. We also own several United States Internet domain names that
incorporate our trademarks.
Regulation
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, as well as environmental and pollution control, including air
emissions. Our facilities are subject to inspections by the United States Food
and Drug Administration, the United States Occupational Safety and Health
Administration and various state regulatory agencies. We believe that we are in
material compliance with all federal, state and local laws and regulations
governing our products and facilities, and we do not expect to make any material
expenditures in 2000 with respect to compliance with environmental regulations.
Employees
We have approximately 850 employees in our facilities throughout the United
States. With the exception of those at the Winchester plant, all of our hourly
employees are represented by unions. In total, approximately 52% of our
employees are currently unionized. The following unions represent our employees:
. The Bakery, Confectionery, Tobacco Workers' International Union of
America
. Tobacco Workers International Union of America
. United Food and Commercial Workers International Union
. International Union of Operating Engineers
. Teamsters
We generally renegotiate these collective bargaining agreements every three
years.
On November 7, 1999, the extended collective bargaining agreement with
United Food and Commercial Workers International, Local #271 for our Omaha,
Nebraska employees expired. On November 10, 1999, the union initiated a work
stoppage against our Omaha facility. This facility manufactures principally our
AMERICAN BEAUTY and SKINNER branded pasta products and some private label and
industrial products. The work stoppage lasted until January 30, 2000. During the
work stoppage, we were able to use our available capacity at our other
facilities to meet customer demand. The financial impact of the work stoppage
was not significant.
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ITEM 2. Properties
We are headquartered in Harrisburg, Pennsylvania where we lease a 35,000
square foot office building.
We own the following pasta-manufacturing plants:
Location Square Footage
-------- --------------
Fresno, CA 130,000
Louisville, KY 207,415
Omaha, NE 114,000
Lebanon, PA 256,000
Winchester, VA 180,000
Each of our plants is equipped with modern pasta making technology and
process controls. Between 1990-1997, Hershey Foods Corporation invested $60.0
million to construct the Winchester plant and an additional $80.0 million to
modernize our other plants. Our plants are strategically located to lower our
costs in delivery to regional distribution centers.
In 1999, we closed our Kansas City, Kansas plant as a result of the loss of
the primary customer serviced by that facility. We expect to complete the sale
of this property in early April 2000.
We lease distribution centers in Fresno, California; Omaha, Nebraska; and
New Kingston, Pennsylvania. We also lease a warehouse in Portland, Oregon. We
also use a portion of our Louisville, Kentucky facility as a warehouse for our
manufactured products.
ITEM 3. Legal Proceedings
In the ordinary course of our business, we are a party to litigation
involving our operations and employees. We do not believe that the outcome of
any current litigation will have a material adverse effect upon our business,
financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report on Form
10-K, no matters were submitted to a vote of security holders.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for the Company's common
stock. The Company's voting common stock is currently held by 3 holders. For
further detail, see the beneficial ownership table under "ITEM 12. Security
Stock Ownership of Certain Beneficial Owners and Management."
On January 28, 1999, as part of New World Pasta's recapitalization, New
World Pasta issued to Miller Pasta LLC 532,131 shares of its common stock, par
value $0.01, and 12,848.69 shares of its 12% cumulative, redeemable preferred
stock, par value $0.01, liquidation preference value $1,000, for an aggregate
offering price of $18.1 million. There were no underwriters or underwriting
discounts or commissions present in the sale. The common and preferred shares
were issued in a transaction not involving a public offering pursuant to Section
4(2) of the Securities Act of 1933, as amended.
The Company has not paid any dividends on its capital stock since its
inception. The Company does not anticipate paying any cash dividends in the
foreseeable future. Both the indenture pursuant to which our 9 1/4% Senior
Subordinated Exchange Notes, due 2009 (the "Notes"), were issued and our senior
credit facility (the "Credit Facility") restrict our ability and our
subsidiaries' ability to pay dividends.
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ITEM 6. Selected Financial Data
The following table sets forth selected historical financial data for New
World Pasta or its predecessor, Hershey Pasta Group. The selected historical
financial data for the years ended December 31, 1999, 1998, 1997 and 1996 has
been derived from the audited financial statements of New World Pasta or Hershey
Pasta Group. The selected historical financial data for the year ended December
31, 1995 has been derived from the unaudited financial statements of Hershey
Pasta Group. In the opinion of management, the unaudited data for 1995 reflects
all adjustments necessary for a fair presentation of the information included
therein. The selected historical financial data set forth in the following table
should be read in conjunction with our audited financial statements and notes
thereto appearing as an appendix to this Form 10-K and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
For the years ended
-------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
--------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(in thousands)
STATEMENT OF OPERATIONS DATA
Net sales $ 354,019 373,096 386,218 407,370 419,090
Cost of sales 187,066 205,775 210,003 235,025 241,464
--------------- ------------- ------------- ------------- -------------
Gross profit 166,953 167,321 176,215 172,345 177,626
Selling and marketing expenses 113,259 109,788 121,200 127,409 131,404
General and administrative expenses (1) 21,435 15,665 13,295 13,792 14,597
Cost of restructuring 2,700 -- -- -- --
--------------- ------------- ------------- ------------- -------------
Income from operations 29,559 41,868 41,720 31,144 31,625
Interest expense, net (2) 26,325 -- -- -- --
--------------- ------------- ------------- ------------- -------------
Income before income taxes 3,234 41,868 41,720 31,144 31,625
Income tax expense 2,774 15,954 16,563 12,451 13,188
--------------- ------------- ------------- ------------- -------------
Net income 460 25,914 25,157 18,693 18,437
Dividends on preferred stock 12,611 -- -- -- --
--------------- ------------- ------------- ------------- -------------
Net income (loss) attributable to common stock $ (12,151) 25,914 25,157 18,693 18,437
=============== ============= ============= ============= =============
BALANCE SHEET DATA
(AT END OF PERIOD)
Working capital $ 21,548 20,798 8,183 15,084 14,739
Total assets 328,815 224,142 231,920 246,563 259,731
Long-term debt, (including current portion) 292,995 -- -- -- --
Mandatorily redeemable 12% cumulative
preferred stock 126,096 -- -- -- --
Stockholders' equity (deficit) (135,532) 166,944 162,777 183,698 194,155
OTHER DATA:
EBITDA (3) 56,611 56,515 57,157 47,136 47,558
Net cash provided by operating activities 36,140 26,407 47,928 38,056 44,288
Depreciation and amortization expense 15,468 14,647 15,437 15,992 15,933
Capital expenditures 3,960 4,660 1,850 8,906 5,952
Deficiency of earnings to combined fixed
charges and preferred stock dividends 9,377 -- -- -- --
</TABLE>
(1) Includes $7.8 million of non-recurring expenses incurred in connection with
the recapitalization in which our current principals acquired control of
New World Pasta and related financing transactions and $2.2 million of
non-recurring start-up expenses.
(2) Historically, Hershey Pasta Group did not incur indebtedness or related
interest expense as a division of Hershey Foods Corporation. As an
independent company, New World Pasta is required to service the interest
expense on any borrowings incurred by it including the debt associated with
the recapitalization in which our current principals acquired control of
New World Pasta.
8
<PAGE>
(3) EBITDA represents earnings before interest, taxes, depreciation and
amortization. For year 2000 EBITDA also is adjusted for non-recurring items
including cash transaction expenses, one-time asset write-off, cash
restructuring costs and other non-recurring charges. We believe that EBITDA
provides useful information regarding our ability to service our debt.
EBITDA is not a measure of operating performance computed in accordance
with GAAP and should not be considered as a substitute for operating
income, net income, cash flows from operations, or other statement of
operations or cash flow data prepared in conformity with GAAP, or as a
measure of profitability or liquidity. In addition, EBITDA may not be
comparable to similarly titled measures of other companies. EBITDA may not
be indicative of the historical operating results of New World Pasta, and
is not meant to be predictive of future results of operation or cash flows.
You should also see the audited consolidated statements of cash flows
contained within the audited consolidated financial statements appearing in
the Form 10-K.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Year Ended December 31, 1999 Compared With the Year Ended December 31, 1998
Net Sales
---------
Net sales declined by $19.1 million, or 5.1% for the year ended December
31, 1999 compared to the year ended December 31, 1998. The decline 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
Hershey Foods' strategy, which focused on short-term return on investment at the
expense of sales unit growth, was the main reason for the volume shortfall. The
revised marketing strategy, which includes promotional program changes and price
reductions, was implemented primarily in Eastern markets in 1999 and resulted in
volume gains in the markets where it was fully implemented. Volume was also
negatively affected by the loss of a major food service account late in 1998 and
by the increased competitive intensity within the industry. Partially offsetting
the volume and price declines were favorable unsaleables charges, which were
$1.9 million or 14.7% lower than in 1998.
Cost of Sales
-------------
Cost of sales declined by $18.7 million or 9.1% from 1998. In addition to
the reduction resulting from the volume decline, the most significant factor
contributing to the reduced cost of sales was lower durum/semolina prices.
Durum/semolina costs declined 21.6% during 1999 versus 1998. Shipping and
warehousing costs were also 1.1% lower than 1998 due to decreased volume offset
partially by a slight increase in freight rates during this period.
Gross profit declined by $0.4 million or 0.2% from 1998, reflecting the
lower net sales partially offset by lower raw material costs. Gross profit of
$167.0 million was 47.2% of sales for 1999 compared to $167.3 million, or 44.8%
of sales for 1998.
Selling and Marketing Expenses
------------------------------
Selling and marketing expenses increased by $3.5 million or 3.2% as
compared to 1998. Selling costs decreased by $1.6 million or 8.6% from the
previous twelve-month period. The majority of this decrease relates to the
volume decline during the year. Trade promotions increased by $6.3 million or
8.1%, due primarily to restoration of trade promotions not offered in the
previous year. The comparison of 1999 trade promotion spending with prior year
amounts was also negatively impacted by $1.4 million of favorable incremental
marketing accrual adjustments taken in 1998. Advertising costs declined $1.2
million or 19.8% and consumer promotion spending also decreased $0.6 million or
23.3% due to reduced emphasis on these promotional vehicles. Other marketing
costs increased by $0.6 million, or 15.3% from 1998 due to higher marketing
administrative costs partially offset by decreased marketing research.
General and Administrative Expenses
-----------------------------------
General and administrative expenses, including non-recurring transaction
expenses, increased by $5.8 million or 36.8% primarily due to costs incurred as
a result of the transition to an independent operating company. Reduced
building rent, management incentives and trade association dues partially offset
this increase.
9
<PAGE>
Cost of Restructuring
---------------------
The $2.7 million restructuring cost is the estimated cost of closing the
Kansas City, Kansas plant. 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 1999 was $29.6 million, a decline of $12.3
million or 29.4% compared to 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.
Interest Expense
----------------
Interest expense of $26.3 million related to the various debt instruments
used in recapitalizing the Company on January 28, 1999, notably the Notes, the
term loan (the "Term Loan") issued pursuant to our Credit Facility and deferred
debt cost amortization offset partially by interest income on bank deposits.
Income Tax Expense
------------------
The income tax expense for the year ended December 31, 1999 of $2.8 million
differs from the amounts computed by applying the U.S. federal income tax rate
to pretax income primarily due to state income taxes and the tax effect from
non-recurring transaction expenses that may not be deductible.
Net Income
----------
We had net income of $460,000 for 1999 compared to net income of $25.9
million in 1998. This reduction 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 our outstanding debt.
Dividends on Preferred Stock
----------------------------
Dividends on preferred stocks are reflective of the mandatory preferred
stock dividend of 12% recognized on the balance sheet date. The annual dividend
has been prorated from the date of issuance to the balance sheet date.
Year Ended December 31, 1998, compared with Year Ended December 31, 1997
Net Sales
---------
Net sales declined by $13.1 million or 3.4% in 1998 versus 1997. Sales were
negatively impacted by the continuation of Hershey Foods Corporation's strategy
to maximize short-term return on investment as implemented in mid-1996. This
strategy resulted in a sales volume reduction of 3.3%, which equated to an $11.2
million decline in net sales. The decrease was also the result of unfavorable
sales mix in our retail business and price reductions in our industrial
business, both combining for $1.9 million of the decline in net sales. Due to
the decrease in marketing promotional support and the ineffective execution of
marketing programs, sales of our more profitable products declined, generating
the unfavorable sales mix variance.
Cost of Sales
-------------
Cost of sales decreased by $4.2 million or 2.0% during 1998 versus 1997.
This decrease includes $6.9 million attributable to the reduction in sales
volume. Offsetting this decrease was a slight increase in the average purchase
price of semolina. The increased average semolina price is primarily
attributable to purchases in early 1998 at higher market rates. In addition,
labor and overhead costs also increased by $1.5 million and packaging material
costs increased by $1.4 million, despite the volume reduction. These increases
were partially offset by a $1.4 million decrease in freight and distribution
costs resulting from reduced volume and favorable rates. Gross margin decreased
from 45.6% to 44.8%.
10
<PAGE>
Selling and Marketing Expenses
------------------------------
Selling and marketing expenses decreased $11.4 million or 9.4% in 1998
compared to 1997. Selling expenses declined by $1.6 million or 8.5% and related
primarily to the net sales decline. Trade promotions declined by $12.0 million,
which was in line with the marketing strategy to reduce promotional spending on
lower margin products and shift the sales mix toward higher margin items. In
addition, prior year promotion fund reversals increased by $2.6 million in 1998,
which had a favorable effect on trade promotion costs. Advertising costs
increased by $800,000 or 14.5% and consumer promotion increased by $600,000 or
32.5%, with increase emphasis on these promotion vehicles. Other marketing costs
increased by $800,000, primarily due to increased packaging changes.
General and Administrative Expenses
-----------------------------------
General and administrative expenses increased by $2.4 million due to an
increase in the allocated shared service costs from Hershey Foods Corporation.
Income from Operations
----------------------
Income from operations for 1998 increased $148,000 or .4% compared to 1997.
Decreased net sales and higher general and administrative costs were offset
entirely by a reduction in cost of sales and selling and marketing expenses.
Income Tax Expense
------------------
Income tax expense reflected the tax rate applied to the operating income
as a consolidated Hershey Foods Corporation divisional entity, net of any
specific tax credits for Hershey Pasta Group.
Net Income
----------
Net income of $25.9 million reflected a slight increase of $757,000
compared to 1997. Decreased net sales and higher general and administrative
costs were offset entirely by a reduction in cost of sales, selling and
marketing expenses and income tax expense.
Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by operations and
borrowings under our Credit Facility. Cash and cash equivalents totaled $13.1
million at December 31, 1999 and working capital was $21.5 million as of
December 31, 1999 compared to $20.8 million as of December 31, 1998. The
increase in working capital was primarily the result of increased cash, accounts
receivable, and inventory partially offset by increased accrued liabilities. The
current ratio was 1.55 at December 31, 1999 compared to 1.76 at December 31,
1998. See footnote number 8 to the consolidated financial statements for further
information on the Credit Facility and our debt.
Our net cash provided by operating activities was $36.1 million for the
year ended December 31, 1999 compared to $26.4 million for the year ended
December 31, 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.
Net cash used in investing activities totaled $4.0 million for the year
ended December 31, 1999 versus $4.7 million for the year ended December 31,
1998, primarily due to lower capital spending levels.
Net cash used in financing activities of $19.0 million for the year ended
December 31, 1999, reflects the issuance of debt ($470.5 million) and repayments
of debt ($161.5 million), the net proceeds from issuance of the preferred stock
($12.8 million) and the issuance of common stock ($5.3 million), offset
primarily by the repurchase of common stock ($307.7 million). Additionally, we
made advanced principal payments of $16.0 million on the Term Loan issued
pursuant to our Credit Facility and the final settlement payment to Hershey
Foods of $7.0 million during the year ended December 31, 1999.
11
<PAGE>
Management believes that net cash provided by operations, together with
availability under the revolving loan portion of the Credit Facility ($50
million at December 31, 1999), will be sufficient to meet the Company's expected
capital and liquidity needs for the foreseeable future.
Year 2000 Compliance
We completed our Year 2000 remediation in a timely manner and experienced
no significant disruptions as a result of the Year 2000 transition. We spent
approximately $800,000 on remediation efforts during 1999.
New Accounting Standards
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 derivative
instruments at fair value in the balance sheet.
Furthermore, derivative instruments 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, a 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
Date of SFAS No. 133." SFAS No. 137 delays the Standard's 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 our
financial statements.
Inflation
We believe inflation has not had a significant impact on our results of
operations for the periods presented and do not anticipate inflation having a
significant impact on the future results of operations.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risks
We are subject to market risks associated with some commodity prices and,
effective with the Credit Facility we entered into in January 1999, changes in
interest rates. At December 31, 1998, we had open commodity futures contracts
with approximately $2.2 million of deferred losses which were recognized during
1999. We have entered into a procurement agreement with Miller Milling Company,
a related party, pursuant to which Miller Milling Company will purchase or
supply all of our semolina requirements. Accordingly, we do not anticipate
entering into any further commodity futures contracts.
To manage the risk of fluctuations in interest rates, our 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. Our $133.0
million Term Loan bears interest at a floating rate which was 9.375% at December
31, 1999. In May 1999, we entered into an interest rate swap agreement that
converts $50 million of this floating interest rate debt to a fixed rate of
5.645%, plus the credit agreement interest spread. The agreement expires June 2,
2002. The carrying amount of our debt obligations approximates the fair value of
similar debt instruments of comparable maturity, and the interest rate market
risk is currently not considered significant.
ITEM 8. Financial Statements
Financial information required by this item appears in the pages marked F-1
through F-23 at the end of this Report and is incorporated herein by reference
as if fully set forth herein.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
12
<PAGE>
PART III
ITEM 10. Directors and Executive Officers
Set forth below is information concerning our directors, executive officers
and key employees. Our board of directors manages the business and affairs of
our Company and currently has eight members. The board of directors must consist
of not less than one nor more than fifteen members, with the exact number of
members being fixed from time to time by our board of directors. Directors are
elected by a plurality of the votes cast at our annual meeting of stockholders.
Once elected, each director serves until the next annual meeting of stockholders
and until his or her successor is duly elected and qualified, or until his or
her earlier death, resignation or removal. See "ITEM 13. Certain Relationships
and Related Transactions - Stockholders' Agreement" and "ITEM 11. Executive
Compensation - Employment Agreements" for a discussion of certain agreements
relating to the election of certain of our directors and executive officers.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John E. Denton.................................. 56 Chairman, Chief Executive Officer and Director
C. Mickey Skinner............................... 66 Chairman Emeritus and Director
Clifford K. Larsen.............................. 59 Executive Vice President, Marketing and Sales
Cecil A. Archbold............................... 58 Vice President, Human Resources
Vito M. J. Castelgrande......................... 49 Vice President, Sales
Burton R. Freeman............................... 51 Vice President, Manufacturing
Mark E. Kimmel.................................. 40 Vice President, Administration and Development and General Counsel
Glenn A. Zearfoss............................... 45 Vice President, Logistics
Paul S. Levy.................................... 52 Director
Jeffrey C. Lightcap............................. 41 Director
Brett N. Milgrim................................ 31 Director
John C. Miller.................................. 49 Director
Michael L. Snow................................. 49 Director
David Y. Ying................................... 45 Director
</TABLE>
Mr. Denton is Chairman of the Board, Chief Executive Officer and a Director
of New World Pasta. From 1993 until joining New World Pasta on February 28,
2000, Mr. Denton was Chief Executive Officer, President and a Director of
Snyder's of Hanover, a producer of pretzel and snack food products. From 1986 to
1993, Mr. Denton was President of Hanover Foods, a processor of frozen and
canned foods. Mr. Denton currently serves on the board of Snyder's of Hanover.
Mr. Skinner is Chairman Emeritus and a Director of New World Pasta. He has
been a Director of New World Pasta since January 1999. He was Chairman and Chief
Executive Officer of New World Pasta from January 28, 1999 until February 28,
2000, when he became Chairman Emeritus. Mr. Skinner was President of Hershey
Pasta Group from 1984 to 1996. Mr. Skinner then served as Vice Chairman of
Hershey's Pasta and Grocery Group during 1997. He currently serves on the board
of directors of Streck Laboratories and Coleman Natural Products, Inc.
Mr. Larsen is Executive Vice President, Marketing and Sales of New World
Pasta. He has held this position since January 1999. From mid-1996 through 1998,
he was retired. Mr. Larsen was Vice President, Marketing for Hershey Pasta Group
from 1979 until his retirement in mid-1996.
Mr. Archbold is Vice President, Human Resources of New World Pasta. He has
held this position since January 1999. He was previously Vice President, Human
Resources of Hershey's Pasta and Grocery Group from 1997 until January 1999, and
Vice President, Human Resources of Hershey Pasta Group from 1990 to 1997.
Mr. Castelgrande is Vice President, Sales of New World Pasta. He has held
this position since January 1999. He was previously Director of Field Sales of
Hershey's Pasta and Grocery Group, a position he held from 1998 until joining
New World Pasta. He also was Director of Pasta Sales for Hershey Pasta Group
from 1997 until 1998. Within Hershey Pasta Group, Mr. Castelgrande held the
position of Eastern Sales Director from 1989 to 1997.
Mr. Freeman is Vice President, Manufacturing of New World Pasta. He has
held this position since January 1999. He was previously Vice President,
Manufacturing of Hershey Pasta Group from 1991 until joining New World Pasta.
13
<PAGE>
Mr. Kimmel is Vice President, Administration and Development and General
Counsel of New World Pasta. He has held this position since March 1999. He was
previously Senior Counsel of Hershey Foods Corporation from 1994 until joining
New World Pasta.
Mr. Zearfoss is Vice President, Logistics of New World Pasta. He has held
this position since January 1999. He was Manager of Application Consulting at
Hershey Foods Corporation from 1997 to 1999, and was Vice President of Technical
Services and Quality Assurance at Hershey Pasta Group from 1991 to 1997.
Mr. Levy is a Director of New World Pasta. He has been a Director of New
World Pasta since January 1999. He has been a Partner of Joseph Littlejohn &
Levy since its formation in May 1988. Mr. Levy serves on the board of directors
of Hayes Lemmerz International Inc., BSL Holdings, Inc., Jackson Automotive
Group, Inc., Iasis Healthcare Corporation, Motor Coach Industries, International
and Fairfield Manufacturing Company, Inc.
Mr. Lightcap is a Director of New World Pasta and a Partner of Joseph
Littlejohn & Levy, which he joined in 1997. He has been a Director of New World
Pasta since January 1999. From 1993 to 1997, he was a Managing Director and head
of leveraged buyout firm coverage for the mergers and acquisitions group at
Merrill Lynch & Co., Inc. Mr. Lightcap serves on the board of directors of Hayes
Lemmerz International Inc., Iasis Healthcare Corporation, Motor Coach
Industries, International and Jackson Automotive Group, Inc.
Mr. Milgrim is a Director of New World Pasta and a Vice President of Joseph
Littlejohn & Levy, which he joined in 1997. He has been a Director of New World
Pasta since January 1999. From 1996 through 1997, he was an Associate in the
investment banking group at Donaldson, Lufkin & Jenrette, Inc. From 1993 to
1994, Mr. Milgrim was a financial analyst with Vrolyk & Company, an investment
banking boutique specializing in mergers and acquisitions and private
financings. From 1991 to 1993, he was a Financial Analyst at PaineWebber
Incorporated. Mr. Milgrim serves on the board of directors of BSL Holdings, Inc.
Mr. Miller is a Director of New World Pasta. He has been a Director of New
World Pasta since January 1999. Mr. Miller was President of New World Pasta from
January 1999 until February 28, 2000. He also serves, and during the last five
years has served, as Chairman, President and Chief Executive Officer of Miller
Milling Company, which is responsible for procuring New World Pasta's
durum/semolina requirements. Mr. Miller is also a founder, Director and
President of TABLEX-MILLER SA de C.V., a Mexican durum milling company. He
currently serves on the board of directors of the Minneapolis Grain Exchange,
where he is Vice Chairman, and on the executive committee of the North American
Millers' Association, an industry trade organization.
Mr. Snow is a Director of New World Pasta and, during the last five years,
also has served as Executive Vice President, Secretary, Treasurer and a Director
of Miller Milling Company. He has been a Director of New World Pasta since
January 1999. Mr. Snow was Executive Vice President of New World Pasta from
January 1999 until February 28, 2000. He is of counsel to, and was a former
partner of, the commercial law firm of Maslon Edelman Borman & Brand LLP. Mr.
Snow is also a founder, Director and officer of TABLEX-MILLER SA de C.V., a
Mexican durum milling company. He currently acts as counsel to and a director of
Osmonics, Inc. and as a director of Navarre Corporation, Innuity, Inc. and
Artesian Management, Inc.
Mr. Ying is a Director of New World Pasta and a Partner of Joseph
Littlejohn & Levy, which he joined in 1997. He has been a Director of New World
Pasta since January 1999. He was previously a Managing Director at Donaldson,
Lufkin & Jenrette, Inc., which he joined in January 1993, and the head of its
restructuring department. Mr. Ying serves on the board of directors of Hayes
Lemmerz International Inc., Iasis Healthcare Corporation, Motor Coach
Industries, International and BSL Holdings, Inc.
Committees of the Board of Directors
Our board of directors has three standing committees: the Audit Committee,
the Corporate Governance Committee and the Compensation Committee.
The primary purpose of the Audit Committee is to provide objective
oversight of the accounting functions and internal controls of New World Pasta
and our subsidiaries and affiliates and to ensure the quality and objectivity of
our financial statements. The Audit Committee currently consists of Messrs.
Miller, Ying and Milgrim. During 1999, the Audit Committee did not meet.
14
<PAGE>
The Corporate Governance Committee is responsible for providing counsel to
our board of directors with respect to board organization and function,
committee membership and structure and corporate governance matters. The
Corporate Governance Committee currently consists of Messrs. Skinner, Ying and
Milgrim. During 1999, the Corporate Governance Committee did not meet.
The Compensation Committee is authorized to oversee and maintain our
compensation practices, to establish appropriate incentives to motivate and
reward key management employees and to oversee the competency and qualification
of key management personnel. The Compensation Committee also administers our
1999 Stock Option Plan. The Compensation Committee currently consists of Messrs.
Snow, Ying and Milgrim. During 1999, the Compensation Committee did not meet.
Compensation Committee Interlocks and Insider Participation
New World Pasta's Compensation Committee currently consists of Messrs.
Snow, Ying and Milgrim. Mr. Snow is, along with Mr. Miller, a principal in
Miller Milling Company. Under three separate agreements, Miller Milling Company
provided, and continues to provide, certain raw materials and procurement
services to New World Pasta and its subsidiaries. In 1999, New World Pasta paid
Miller Milling Company in excess of $38 million for these raw materials and
services, and New World Pasta expects to pay Miller Milling Company in excess of
$44 million for these raw materials and services in fiscal year 2000. For
further information regarding these agreements, see "ITEM 13. Certain
Relationships and Related Transactions --Procurement Agreement", "Fresno Mill
Agreement" and "Winchester Mill Agreement."
Compensation of Directors
Directors do not receive any compensation for their services. They are,
however, reimbursed for travel expenses and other out-of-pocket costs incurred
in connection with attendance at board of directors and committee meetings.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the directors
and officers of a reporting company to file reports of holdings and transactions
in that company's public equity securities with the Securities and Exchange
Commission and the New York Stock Exchange. Because the Company does not have
public equity securities, the reporting requirements under Section 16(a) do not
apply to the Company.
ITEM 11. Executive Compensation
The following table sets forth certain compensation information for our
chief executive officer and the four other executive officers who, based on
salary and bonus compensation, were the most highly compensated officers for the
year ended December 31, 1999.
15
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation Awards
-------------- ----------------------
Name and Principal Position Other Annual Securities Underlying
Year(1) Salary ($) Bonus ($) Compensation ($) Options
------- -------------- --------- ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
C. Mickey Skinner, (4) 1999 402,564 0 28,280 (3) 170,213 (5)
Chief Executive Officer
John Miller, (6) 1999 201,282 0 0 200,936
President
Glenn Zearfoss, 1999 140,538 0 3,514 (2) 56,442
VP, Logistics
Cliff Larsen, 1999 140,000 0 0 42,553
Executive VP
Sales & Marketing
Burton Freeman, 1999 138,951 0 3,474 (2) 56,442
VP, Manufacturing
</TABLE>
(1) Our current principals acquired control of our Company from Hershey Foods
Corporation in a recapitalization that was completed on January 28, 1999.
Prior to that time, we were a wholly-owned division of Hershey Foods
Corporation, which was operated by a management team comprised of Hershey
Foods Corporation appointees. None of our executive officers received any
compensation directly from us relating to any period prior to January 28,
1999. During the period from January 1, 1999 through January 28, 1999,
however, Messrs. Skinner, Miller and Zearfoss were compensated by Miller
Milling Company in the amounts of $33,333, $16,667, and $15,923,
respectively. We later reimbursed Miller Milling Company for the
compensation paid to these executive officers.
(2) Represents the Company's matching contributions to the individual's 401(k)
account.
(3) Includes car allowance of $13,255; reimbursement for country club fees of
$12,000; and reimbursement of tax preparation fees of $3,025.
(4) Mr. Skinner relinquished his position as Chief Executive Officer on
February 28, 2000. See "Employment Agreements."
(5) In connection with Mr. Skinner's relinquishment of his position as Chief
Executive Officer, the securities underlying his options grants were
reduced to 18,888.
(6) Mr. Miller relinquished his position as President effective February 28,
2000. See "Employment Agreements."
The 1999 Stock Option Plan
Our 1999 Stock Option Plan provides for the grant of equity-based
compensation to our key employees and consultants. Participants in the 1999
Stock Option Plan can receive incentive stock options and nonqualified stock
options, in either case, to acquire shares of our common stock. The 1999 Stock
Option Plan provides for the issuance of options to acquire up to an aggregate
of 910,166 shares of our common stock, or 15.4% of the common stock on a
fully-diluted basis. The 1999 Stock Option Plan is intended to assist us in
attracting and retaining employees of outstanding ability. Options under the
plan were granted to give senior management a financial stake in our future
performance. The Compensation Committee administers the 1999 Stock Option Plan.
The following table sets forth certain information relating to the option
grants under our 1999 Stock Option Plan for the year ended December 31, 1999.
Approximately two-thirds of the options granted to the executives have an
exercise price of $10 per share, which is the per share price paid by New World
Pasta LLC and Miller Pasta LLC in connection with the recapitalization. The
exercise price for the remainder of the options is $73.50 per share.
16
<PAGE>
OPTION/SAR GRANTS IN 1999
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number Of Percent Of Total
Securities Options/SARs
Underlying Granted To
Options/SARs Employees In Exercise or Base Expiration Grant Date Present
Name Granted (#)(1) Fiscal Year(2) Price ($/Sh) Date Value $ (3)
---- -------------- -------------- ------------ ---- ------------------
<S> <C> <C> <C> <C> <C>
C. Mickey Skinner (4) 111,111 20.00 10.00 01/28/09 316,666
59,102 16.67 73.50 01/28/09 --
John C. Miller 92,778 16.70 10.00 01/28/09 264,417
108,158 30.50 73.50 01/28/09 --
Glenn Zearfoss 41,667 7.50 10.00 01/28/09 118,751
14,775 4.17 73.50 01/28/09 --
Cliff Larsen 27,778 5.00 10.00 01/28/09 79,167
14,775 4.17 73.50 01/28/09 --
Burton Freeman 41,667 7.50 10.00 01/28/09 118,751
14,775 4.17 73.50 01/28/09 --
All executive officers 513,889 92.50 10.00 01/28/09 1,464,584
325,059 91.67 73.50 01/28/09 --
</TABLE>
(1) We did not grant any free-standing SARs or options with tandem SARs.
Options vest 20% per year, except for options granted to Mr. Skinner. Mr.
Skinner's options originally had a different vesting schedule, however, see
Footnote 4 below. Options lapse upon an executive's termination of
employment except in the instance of death or disability, in which case the
option may be exercised, to the extent vested, for a period of 90 days.
(2) Percentage indicated is calculated based on the number of options granted
with the same exercise price.
(3) Based on the Black-Scholes option pricing model. The use of this model
should not be construed as an endorsement of its accuracy at valuing
options. The actual value, if any, an executive may realize will depend on
the excess of the stock price over the exercise price on the date the
option is exercised, so there is no assurance the actual value realized
will be at or near the value estimated by the Black-Scholes model. The
estimated values under that model are based on the following assumptions:
Stock price $10.00
Expected option term 7 years
Stock price volatility 0
Dividend yield 0
Risk-free interest rate 4.80%
(4) On February 28, 2000, in connection with the relinquishment of the position
of Chief Executive Officer, Mr. Skinner's option to purchase Company
securities at $10.00 per share vested as to 18,888 common shares and
terminated as to all other shares.
No options were exercised (and no payments were made by us in respect of
any options) during 1999.
Other Incentive Arrangements
In addition to equity-based compensation, bonuses are offered to a select
group of management employees. Annual bonus payments are based on a percentage
of the participating employee's base salary. Bonus percentages are established
by the Compensation Committee or in some instances by the individual's
employment agreement. Bonuses are paid out only if specified performance
criteria are satisfied. The criteria to be used in any particular year are
determined by the Compensation Committee, but may include earnings before
interest, taxes, depreciation and amortization, cash flow, sales, market share
and
17
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other similar company performance-based objectives. In addition to these
objectives, individuals will also have specific objectives related to their job
function. The 1999 objectives were not satisfied and no bonus payments were
made.
New World Pasta LLC and Miller Pasta LLC have also entered into agreements
with members of senior management to make payment to them based on the preferred
dividends paid and the equity value of our Company at the point it is sold or
engages in a public offering of securities.
Employment Agreements
On January 28, 1999, we entered into employment agreements with each of Mr.
Skinner, Mr. Miller and Mr. Snow. The employment agreement with Mr. Skinner
provided for his full-time employment as Chairman of the Board of Directors and
Chief Executive Officer for an initial term of three years, with an option to
renew the term for an additional two years on either a full-time basis, in which
case he will remain Chairman and CEO during the renewal term, or on a part-time
basis, in which case Mr. Skinner will function as Chairman during the renewal
term. On February 2, 2000, we entered into an agreement with Mr. Skinner to
relinquish his position as Chairman of the Board and Chief Executive Officer and
assume the position of Chairman Emeritus. The new agreement terminates Mr.
Skinner's employment agreement dated January 28, 1999. Under the terms of the
new agreement, Mr. Skinner will be employed through January 27, 2004. Mr.
Skinner's compensation will be $400,000 per year through January 27, 2002 and
$250,000 per year through January 27, 2004. The stock options previously granted
to Mr. Skinner to purchase 18,888 shares of our common stock at $10 per share
will immediately vest and all other options previously granted were
relinquished. Mr. Skinner will also be entitled to health, welfare and pension
benefits as well as reimbursement of expenses up to $12,000 per year incurred
for a country club membership, income tax return preparation of up to $2,000 per
year, car allowance of up to $1,200 per month and business expenses, including
first class travel for himself and, where appropriate, travel expenses for his
spouse. Mr. Skinner is subject to specified non-competition and confidentiality
provisions.
The employment agreement with Mr. Miller provides for his part-time
employment as President for an initial term of three years, with an option to
renew the term for an additional two years. Mr. Miller's agreement provides for
a base salary of $200,000 to be paid during the term--increased annually by an
amount equal to the percentage increase in the Consumer Price Index for the
Minneapolis area--and a maximum annual bonus opportunity equal to 50% of his
base salary. In addition, Mr. Miller's agreement provides for a grant of options
to purchase an aggregate of 200,936 shares of our common stock under our 1999
Stock Option Plan. The exercise price of options to purchase 92,778 shares is
equal to $10 per share and the exercise price of options to purchase 108,158
shares is equal to $73.50 per share. Pursuant to Mr. Miller's agreement, Mr.
Miller is also entitled to receive the welfare and pension benefits generally
available to our senior executives.
In the event Mr. Miller's employment is terminated by us without cause, as
defined in Mr. Miller's agreement, or by Mr. Miller with good reason, as defined
in Mr. Miller's agreement, he will be entitled to receive his then-current base
salary and benefits under his agreement for the remainder of the term. Upon the
occurrence of a change in control of our Company, as defined in Mr. Miller's
agreement, his agreement will automatically terminate, unless he does not have
the right to receive cash or marketable securities with respect to his equity
investment in our Company or with respect to the options then held by him, in
which event, his agreement will not automatically terminate, but will become
terminable by him at any time during the 60-day period following the change in
control of our Company. Mr. Miller's agreement provides that he will be subject
to non-competition and non-solicitation provisions following the termination of
his employment during any period that he is receiving payments from us
thereunder. However, upon the termination of his employment following a change
in control of our Company, the non-competition and non-solicitation provisions
will remain in effect for two years following the termination of his employment.
Mr. Miller and the Company have agreed that Mr. Miller will remain an
employee of the Company but will no longer serve as President effective February
28, 2000.
The employment agreement with Mr. Snow provides for his part-time
employment as Executive Vice President for an initial term of three years, with
an option to renew the term for an additional two years. Mr. Snow's agreement
provides for a base salary of $100,000 to be paid during the term--increased
annually by an amount equal to the percentage increase in the Consumer Price
Index for the Minneapolis area--and a maximum annual bonus opportunity equal to
50% of his base salary. In addition, Mr. Snow's agreement provides for a grant
of options to purchase an aggregate of 141,832 shares of our common stock under
our 1999 Stock Option Plan. The exercise price of options to purchase 92,778
shares is equal to $10 per share and the exercise price of options to purchase
49,054 shares is equal to $73.50 per share. Pursuant to Mr. Snow's agreement, he
is also entitled to receive the welfare and pension benefits generally available
to our senior executives.
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<PAGE>
In the event Mr. Snow's employment is terminated by us without cause, as
defined in Mr. Snow's agreement, or by Mr. Snow with good reason, as defined in
Mr. Snow's agreement, he will be entitled to receive his then-current base
salary and benefits under his agreement for the remainder of the term. Upon the
occurrence of a change in control of our Company, as defined in Mr. Snow's
agreement, his agreement will automatically terminate, unless he does not have
the right to receive cash or marketable securities with respect to his equity
investment in us or with respect to the options then held by him, in which
event, his agreement will not automatically terminate, but will become
terminable by him at any time during the 60-day period following the change in
control of our Company. Mr. Snow's agreement provides that he will be subject to
non-competition and non-solicitation provisions following the termination of his
employment during any period that he is receiving payments from us thereunder.
However, upon the termination of his employment following a change in control of
our Company, the non-competition and non-solicitation provisions will remain in
effect for two years following the termination of his employment.
Mr. Snow and the Company have agreed that Mr. Snow will remain an employee
of the Company but will no longer serve as Executive Vice President effective
February 28, 2000.
On February 4, 2000, we entered into an employment agreement with Mr. John
Denton. The employment agreement with Mr. Denton provides for his full-time
employment as Chairman of the Board of Directors and Chief Executive Officer.
The agreement is for a term of two years with automatic one-year extensions
unless either party notifies the other of its desire to terminate the agreement
90 days prior to its scheduled termination date.
Mr. Denton's agreement provides for a base salary of $400,000 to be paid
during the term--which may be increased annually based on performance and merit-
- -and a maximum annual bonus opportunity equal to 100% of his base salary. In
addition, Mr. Denton's agreement provides for a grant of options to purchase an
aggregate of three and one-half percent of the shares of our common stock
outstanding on the grant date at an exercise price equal to $10 per share and
options equal to one and three quarters percent of the common stock outstanding
on the grant date at an exercise price of $73.50 per share. Mr. Denton will also
be issued 29,286 shares of common stock and 792 shares of preferred stock.
11,714 of these shares of common stock and 317 of these shares of preferred
stock will be subject to forfeiture. The forfeiture restriction will lapse as to
one fifth of these shares on each anniversary of the date of this agreement or
upon a change of control. Pursuant to Mr. Denton's agreement, he is also
entitled to receive the health, welfare and pension benefits generally available
to our senior executives and up to an aggregate of $20,000 annually for a
country club membership and car allowance.
In the event Mr. Denton's employment is terminated by us without cause, as
defined in his agreement, or by Mr. Denton with good reason, as defined in Mr.
Denton's agreement, he will be entitled to receive his then-current base salary
and benefits under his agreement for the remainder of the term, provided however
that if Mr. Denton is terminated without cause prior to his second anniversary
with the Company, he will be entitled to receive his salary and benefits until
the end of such two-year period. Mr. Denton's agreement provides that he will be
subject to non-competition restrictions following the termination of his
employment during any period that he is receiving payments from us.
ITEM 12. Security Stock Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding ownership of shares of
our common stock and preferred stock, as of February 1, 2000, by each person
known to be the owner of 5% or more of our common stock, by each person who is a
director or executive officer and by all directors and executive officers as a
group. Unless otherwise indicated, the address of each person listed below is 85
Shannon Road, Harrisburg, Pennsylvania 17112. When reviewing the following
table, you should be aware that:
. The amounts and percentages of common stock and preferred stock
beneficially owned are reported on the basis of regulations of the SEC
governing the determination of beneficial ownership of securities.
Under the rules of the SEC, a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose
of or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person
has a right to acquire beneficial ownership within 60 days. Under
these rules, more than one person may be deemed a beneficial owner of
the same securities and a person may be deemed to be a beneficial
owner of securities as to which that person has no economic interest.
. Through its interest in New World Pasta LLC, Joseph Littlejohn & Levy
Fund III, L.P. is deemed to beneficially own all of the shares of
common stock and preferred stock owned by New World Pasta LLC.
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<PAGE>
. Miller Pasta LLC is owned by a group of investors, including Messrs.
Skinner, Miller and Snow. Through their interests in Miller Pasta LLC,
Messrs. Skinner, Miller and Snow are deemed to beneficially own all of
the shares of common stock and preferred stock owned by Miller Pasta
LLC.
. Messrs. Skinner, Miller and Snow all own membership interests in
Miller Pasta LLC, which owns 10.6% of the common stock and 11.3% of
the preferred stock. Through their interests in Miller Pasta LLC,
Messrs. Skinner, Miller and Snow are deemed to beneficially own all of
the shares of common stock and preferred stock owned by Miller Pasta
LLC.
. Messrs. Levy, Lightcap and Ying are general partners of JLL Associates
III, LLC, the general partner of Joseph Littlejohn & Levy Fund III,
L.P., which owns membership interests in New World Pasta LLC. As a
result, each may be deemed to beneficially own all of the shares of
common stock and preferred stock owned by New World Pasta LLC.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------------- ----------------
Number Percentage Number Percentage
of Shares (1) of Class of Shares of Class
------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
New World Pasta LLC 4,167,869 83.4% 100,636.31 88.7%
Miller Pasta LLC 532,131 10.6% 12,848.69 11.3%
Hershey Foods Corporation 300,000 6.0% -- --
C. Mickey Skinner 551,019 11.0% 12,848.69 11.3%
John C. Miller 583,134 11.5% 12,848.69 11.3%
Michael L. Snow 565,403 11.2% 12,848.69 11.3%
Clifford K. Larsen 9,989 * -- --
Cecil A. Archbold 8,322 * -- --
Vito M. J. Castelgrande 8,322 * -- --
Burton R. Freeman 12,766 * -- --
Mark E. Kimmel 7,236 * -- --
Glenn A. Zearfoss 12,766 * -- --
Paul S. Levy 4,167,869 83.4% 100,636.31 88.7%
Jeffrey C. Lightcap 4,167,869 83.4% 100,636.31 88.7%
Brett N. Milgrim -- -- -- --
David Y. Ying 4,167,869 83.4% 100,636.31 88.7%
All directors and executive 4,862,564 94.2% 113,485.00 100.0%
officers as a group (13 persons)
</TABLE>
* Less than 1%.
(1) The following number of stock options, exercisable as of January 28, 2000,
are included in the total number of shares of common stock listed: C.
Mickey Skinner - 18,888; J. Miller - 51,003; M. Snow - 33,272; C. Larsen -
9,989; B. Freeman - 12,766; C. Archbold - 8,322; V. Castelgrande - 8,322;
G. Zearfoss - 12,766; M. Kimmel - 7,236; and the executive officers as a
group - 162,564.
ITEM 13. Certain Relationships and Related Transactions
New World Pasta LLC, which beneficially owns 83.4% of our common stock, is
controlled by Joseph Littlejohn & Levy Fund III, L.P., which is controlled by
Joseph Littlejohn & Levy. Miller Pasta LLC, which beneficially owns 10.6% of our
common stock, is controlled by a group of investors, including C. Mickey
Skinner, John Miller, Michael Snow and Miller Milling Company. Messrs. Skinner,
Miller and Snow are directors of our Company, and Messrs. Miller and Snow are
principals of Miller Milling Company. Some of these entities and individuals are
parties to material agreements with us, as described below. See also
"Management--Employment Agreements" for a discussion of the employment
agreements between us and Messrs. Skinner, Miller and Snow.
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Stockholders' Agreement
In connection with the recapitalization in which our current principals
acquired control of our Company, Miller Pasta LLC, New World Pasta LLC, Hershey
Foods Corporation, our Company and some of the members of Miller Pasta LLC
entered into a Stockholders' Agreement, dated January 28, 1999, which provides,
among other things, that New World Pasta LLC and Miller Pasta LLC will vote
their shares of our common stock so that our board of directors will be
comprised of eight directors consisting of the Chief Executive Officer, four
designees of New World Pasta LLC and two designees of Miller Milling Company. In
addition, under the Stockholders' Agreement, Mr. Skinner has the right to
continue to serve on our board of directors through January 28, 2004. The
current board of directors designees of New World Pasta LLC are Messrs. Levy,
Lightcap, Milgrim and Ying and the current board of directors designees of
Miller Milling Company are Messrs. Miller and Snow. New World Pasta LLC has, at
all times, the right to elect a majority of our board of directors.
Under the Stockholders' Agreement, Miller Pasta LLC and Hershey Foods
Corporation agreed not to transfer any of our securities, except to permitted
transferees. As defined in the Stockholders' Agreement, permitted transferees
include:
. any descendants of the transferring stockholder;
. New World Pasta;
. in the case of any stockholder that is an entity, the stockholders,
members, beneficiaries or partners of the entity or any successor to
the entity;
. any transferee by testamentary or intestate disposition;
. any transferee by lifetime transfer to the transferring stockholder's
relatives or any trusts, limited partnerships or other entities
established for their benefit;
. any successor nominee or trustee for the beneficial owner for which
the stockholder acts as nominee or trustee;
. the lenders--or any agent acting on their behalf--under our revolving
Credit Facility pursuant to a pledge of the stockholder's shares to
secure our obligations in connection with the revolving Credit
Facility and, in the event of foreclosure by the lenders or their
agent, any transferee or transferees of the lenders or their agent; or
. subject to our consent, which may not be unreasonably withheld or
delayed, any affiliate of the transferring stockholder which the
transferring stockholder controls.
Under the Stockholders' Agreement, the members of Miller Pasta LLC also
agreed not to transfer any of their interests in Miller Pasta LLC, except that:
. the members of Miller Pasta LLC may transfer their membership
interests to permitted transferees, as described above;
. Miller Pasta LLC may issue up to $1.4 million of membership interests
to the employees of Miller Milling Company; and
. Messrs. Miller, Skinner and Snow and Miller Milling Company may
transfer their membership interests with our consent, which may not be
unreasonably withheld or delayed.
The securities of our Company held by Miller Pasta LLC and Hershey Foods
Corporation are subject to "tag-along" and "drag-along" rights upon the transfer
of any of our securities by New World Pasta LLC. The "tag-along" rights allow
Miller Pasta LLC and Hershey Foods Corporation to participate, in proportion to
their respective ownership interests in us, in any sale by New World Pasta LLC
of our securities to a third party. "Drag-along" rights allow New World Pasta
LLC to cause Miller Pasta LLC and Hershey Foods Corporation to participate, in
proportion to their respective ownership interests in us, in any sale by New
World Pasta LLC of our securities to a third party.
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After 180 days following the completion of an initial public offering of
our common stock:
. Hershey Foods Corporation and all of the members of Miller Pasta LLC,
other than Miller Milling Company and Messrs. Skinner, Miller and
Snow, will be able to sell their shares of our common stock without
restriction;
. Miller Milling Company and Messrs. Skinner, Miller and Snow will be
able to sell up to 75% of their shares of our common stock during
specified time periods; and
. each of New World Pasta LLC and Miller Pasta LLC will have the right,
under some circumstances and subject to some conditions, to require us
to register their shares of our common stock under the Securities Act.
The Stockholders' Agreement provides, among other things, that we will pay
all expenses in connection with the first three demand registrations requested
by each of New World Pasta LLC and Miller Pasta LLC and in connection with any
registration commenced by us as a primary offering in which New World Pasta LLC
and Miller Pasta LLC participate through piggyback registration rights granted
under that agreement. We will also be required to pay all expenses in connection
with any registration we commence as a primary offering in which Hershey Foods
Corporation participates through piggyback registration rights granted to
Hershey Foods Corporation under the Stockholders' Agreement. New World Pasta
LLC, Miller Pasta LLC and Hershey Foods Corporation also are granted preemptive
rights under the Stockholders' Agreement to participate in future private equity
offerings. Some of the rights under the Stockholders' Agreement terminate when
either New World Pasta LLC or Miller Pasta LLC ceases to own at least 25% of its
initial investment in us. Unless terminated earlier pursuant to its terms, the
Stockholders' Agreement will terminate on January 28, 2009.
Procurement Agreement
We are a party to a long-term Procurement Agreement, dated January 28,
1999, (the "Procurement Agreement") with Miller Milling Company, pursuant to
which Miller Milling Company has agreed to procure all of our requirements for
semolina and other specified products, and contracts for the milling of durum
and other related services, including quality testing, execution of futures and
hedging contracts, transportation and storage, other than those contract goods
and contract services supplied under the Fresno Mill Agreement and the
Winchester Mill Agreement, each as described below. Miller Milling Company has
agreed to use reasonable commercial efforts to procure the contract goods and
contract services under the Procurement Agreement on terms we believe are
commercially favorable. In return for its services under the Procurement
Agreement, Miller Milling Company is entitled to a minimum fee per year, subject
to adjustment. The Procurement Agreement may be terminated by either party if
the other defaults and the default is not cured within a specified period of its
receiving written notice thereof. We have the right under the Procurement
Agreement to inspect Miller Milling Company's purchase and manufacturing
records. In addition, the Procurement Agreement contains customary
indemnification provisions for both parties.
Fresno Mill Agreement
Pursuant to a multi-year Amended and Restated Mill Agreement, dated March
1, 1998, (the "Fresno Agreement') between Miller Milling Company and our
Company, we have agreed to purchase from Miller Milling Company a substantial
portion of the semolina needs of our Fresno, California plant. We will purchase
semolina milled at Miller Milling Company's Fresno, California mill at a price
which we believe is commercially favorable. The Fresno Mill Agreement may be
terminated by either party if the other party defaults and the default is not
cured within a specified period. In addition, we have the right to inspect
Miller Milling Company's Fresno mill. This agreement was amended as of March 10,
2000, to extend the term through December 31, 2009, to add a consumer price
index based pricing adjustment, and to provide for certain capital additions to
the mill.
Winchester Mill Agreement
Pursuant to a multi-year Mill Agreement, dated January 28, 1999, (the
"Winchester Agreement") among Miller Milling Company, Winchester Pasta LLC, our
wholly-owned subsidiary, and our Company, we have agreed to purchase from Miller
Milling Company substantially all of the semolina needs of our Winchester,
Virginia plant. Under some circumstances, we will purchase from Miller Milling
Company a significant portion of our semolina requirements for our Lebanon,
Pennsylvania plant. We will purchase semolina from Miller Milling Company's
Winchester mill at a price that we believe is commercially favorable. We may
inspect Miller Milling Company's Winchester mill and Miller Milling Company's
books and records on request. The Winchester Mill Agreement may be terminated by
either party if the other party defaults and the default is not
22
<PAGE>
cured within a specified period. This agreement was amended as of March 10,
2000, to extend the term through December 31, 2009, to add a consumer price
index based pricing adjustment, and to provide for certain capital additions to
the mill. We paid in excess of $38 million to Miller Milling Company in 1999
pursuant to the Procurement Agreement, the Fresno Agreement and the Winchester
Agreement, and we expect to pay in excess of $44 million in 2000 pursuant to
these contracts.
Employment Agreements
We are a party to employment agreements with Messrs. Skinner, Miller, Snow
and Denton. For further information regarding the terms of these employment
agreements, see "Employment Agreements" in ITEM 11.
Tax Sharing Agreement
Our Company and our current subsidiaries are included in New World Pasta
LLC's consolidated group for U.S. federal income tax purposes as well as in some
consolidated, combined or unitary groups which include New World Pasta LLC for
state, local and foreign income tax purposes. We entered into a Tax Sharing
Agreement with New World Pasta LLC in connection with the recapitalization in
which our current principals acquired control of New World Pasta. Pursuant to
the Tax Sharing Agreement, we generally will make payments to New World Pasta
LLC such that, with respect to tax returns for any taxable period in which we or
any of our subsidiaries is included in the consolidated group or any combined
group, the amount of taxes to be paid by us will be determined, subject to
specified adjustments, as if we and each of our subsidiaries included in the
consolidated group or combined group filed our own consolidated, combined or
unitary tax return. We and New World Pasta LLC will prepare pro forma tax
returns with respect to any tax return filed with respect to the consolidated
group or any combined group in order to determine the amount of tax sharing
payments under the Tax Sharing Agreement. The Tax Sharing Agreement does not
alter our general responsibility for any taxes with respect to tax returns that
include only us and our subsidiaries. Due to the Section 338(h)(10) election as
described in Note 1 of the consolidated financial statements, the consolidated
group has a loss for federal and state income tax purposes in 1999 and
anticipates a tax loss in 2000. Accordingly, we do not expect to have any
significant payments to New World Pasta LLC in fiscal 2000.
New World Pasta LLC will be responsible for filing any tax return with
respect to the consolidated group or any combined group. Pursuant to the Tax
Sharing Agreement, we will be responsible for preparing these tax returns. The
Tax Sharing Agreement does not alter our general responsibility for preparing
and filing any tax returns that include only us and our subsidiaries.
New World Pasta LLC will be primarily responsible for controlling and
contesting any audit or other tax proceeding with respect to the consolidated
group or any combined group. Pursuant to the Tax Sharing Agreement, we will
conduct the contest of any audit or tax proceeding that relates to any tax
return which we are responsible for preparing. However, the entering into of any
settlement or agreement or any decision in connection with any judicial or
administrative tax proceeding will be subject to the control of New World Pasta
LLC.
Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the federal income tax liability of each other
member of the consolidated group. Accordingly, although the Tax Sharing
Agreement allocates tax liabilities between us and New World Pasta LLC, for any
period in which we were included in the consolidated group, we could be liable
in the event that any federal tax liability was incurred, but not discharged, by
any other member of the consolidated group.
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PART IV
ITEM 14. Financial Statements, Schedules, Exhibits and Report on Form 8-K
Page No.
--------
(a) Documents filed as part of this Form 10-K
1. Financial Statements:
- Independent Auditors' Report ....................................... F1
- Consolidated Balance Sheets as of December 31, 1999 and 1998 ....... F3
- Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 ................................ F4
- Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999, 1998 and 1999 ............ F5
- Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997 .................... F6
- Notes to Consolidated Financial Statements ......................... F7
2. Financial Statement Schedules - Schedules have been omitted because the
information required to be set forth therein is not applicable or is shown
in the financial statements or notes thereto.
3. Exhibits
Exhibit
Number Description
------ -----------
2.1 Recapitalization Agreement, dated as of December 15, 1998, by and
among Hershey Foods Corporation, Hershey CRE, Inc., Homestead, Inc.,
New World Pasta Company, New World Pasta, LLC, Joseph Littlejohn and
Levy Fund III, L.P., filed as Exhibit 2.1 to the Registration
Statement on Form S-4 (Reg. No. 333-76763) declared effective August
3, 1999.
2.2 Amendment No. 1 to Recapitalization Agreement, dated as of January 28,
1999, by and among Hershey Foods Corporation, Hershey Chocolate &
Confectionery Corporation (as successor to Hershey CRE, Inc.),
Homestead, Inc., New World Pasta Company, New World Pasta, L.L.C.,
Joseph Littlejohn and Levy Fund III, L.P., filed as Exhibit 2.2 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
3.1 Amended and Restated Certificate of Incorporation of New World Pasta
Company, as filed with the Secretary of State of the State of Delaware
on January 28,1999, filed as Exhibit 3.1 to the Registration Statement
on Form S-4 (Reg. No. 333-76763) declared effective August 3, 1999.
3.2 Amended and Restated By-Laws of New World Pasta Company, filed as
Exhibit 3.2 to the Registration Statement on Form S-4 (Reg. No.
333-76763) declared effective August 3, 1999.
3.3 Certificate of Formation of Winchester Pasta, L.L.C., as filed with
the Secretary of State of the State of Delaware on December 17, 1998,
filed as Exhibit 3.3 to the Registration Statement on Form S-4 (Reg.
No. 333-76763) declared effective August 3, 1999.
3.4 Limited Liability Company Agreement of Winchester Pasta, L.L.C., dated
as of December 17, 1998, by and between Hershey Foods Corporation, as
the sole member, and Winchester Pasta, L.L.C., filed as Exhibit 3.4 to
the Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
3.5 Amendment No. 1 to Limited Liability Company Agreement of Winchester
Pasta L.L.C., dated as of January 28, 1999, among Hershey Foods
Corporation, as the original member, New World Pasta Company, as the
successor member, and Winchester Pasta, L.L.C., filed as Exhibit 3.5
to the Registration Statement on Form S-4 (Reg. No. 333-76763)
declared effective August 3, 1999.
3.6 Certificate of Formation of Pasta Group, L.L.C., as filed with the
Secretary of State of the State of Delaware on December 17, 1998,
filed as Exhibit 3.6 to the Registration Statement on Form S-4 (Reg.
No. 333-76763) declared effective August 3, 1999.
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3.7 Limited Liability Company Agreement of Pasta Group L.L.C., dated as
December 17, 1998, by and between Hershey Foods Corporation, as the
sole member, and Pasta Group, L.L.C., filed as Exhibit 3.7 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
3.8 Amendment No. 1 to Limited Liability Company Agreement of Pasta Group
L.L.C., dated as of January 28, 1999, among Hershey Foods Corporation,
as the original member, New World Pasta Company, as the successor
member, and Pasta Group, L.L.C., filed as Exhibit 3.8 to the
Registration Statement on Form S-4 (Reg. No. 333- 76763) declared
effective August 3, 1999.
4.1 Indenture, dated as of February 19, 1999, among New World Pasta
Company, as issuer, Winchester Pasta, L.L.C., as guarantor, Pasta
Group, L.L.C., as guarantor, and The Bank of New York, as trustee,
filed as Exhibit 4.1 to the Registration Statement on Form S-4 (Reg.
No. 333-76763) declared effective August 3, 1999.
4.2 Senior Subordinated Guarantee, dated February 19, 1999, by Pasta
Group, L.L.C. in favor of (i) the holders of New World Pasta Company's
outstanding 9-1/4% Senior Subordinated Notes due 2009 and 9-1/4%
Senior Subordinated Exchange Notes due 2009 and (ii) the Bank of New
York, as trustee under the indenture governing the above-referenced
notes, filed as Exhibit 4.2 to the Registration Statement on Form S-4
(Reg. No. 333-76763) declared effective August 3, 1999.
4.3 Senior Subordinated Guarantee, dated February 19, 1999, by Winchester
Pasta, L.L.C. in favor of (i) the holders of New World Pasta Company's
outstanding 9-1/4% Senior Subordinated Notes due 2009 and 9-1/4%
Senior Subordinated Exchange Notes due 2009 and (ii) the Bank of New
York, as trustee under the indenture governing the above-referenced
notes, filed as Exhibit 4.3 to the Registration Statement on Form S-4
(Reg. No. 333-76763) declared effective August 3, 1999.
4.4 Registration Rights Agreement, dated as of February 19, 1999, by and
among New World Pasta Company, Winchester Pasta, L.L.C., Pasta Group,
L.L.C., Morgan Stanley & Co. Incorporated and Scotia Capital Markets
(USA), Inc., filed as Exhibit 4.4 to the Registration Statement on
Form S-4 (Reg. No. 333-76763) declared effective August 3, 1999.
4.5 Form of New World Pasta Company 9-1/4% Senior Subordinated Note due
2009 (included in Exhibit 4.1), filed as Exhibit 4.5 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
4.6 Form of New World Pasta Company 9-1/4% Senior Subordinated Exchange
Note due 2009, filed as Exhibit 4.6 to the Registration Statement on
Form S-4 (Reg. No. 333-76763) declared effective August 3, 1999.
10.1 Stockholders Agreement, dated as of January 28, 1999, among New World
Pasta Company, New World Pasta, L.L.C., Miller Pasta, L.L.C. and
Hershey Foods Corporation, filed as Exhibit 10.1 to the Registration
Statement on Form S-4 (Reg. No. 333-76763) declared effective August
3, 1999.
10.2 Credit Agreement, dated as of January 28, 1999, among New World Pasta
Company, the various financial institutions party thereto (the
"Lenders"), certain financial institutions as the Co-Agents for the
Lenders, Morgan Stanley Senior Funding, Inc., as Syndication Agent,
and The Bank of Nova Scotia, as Lead Arranger and as Administrative
Agent for the Lenders, filed as Exhibit 10.2 to the Registration
Statement on Form S-4 (Reg. No. 333- 76763) declared effective August
3, 1999.
10.3 Borrower Security Agreement, dated as of January 28, 1999, between New
World Pasta Company, as grantor, and The Bank of Nova Scotia, as
Administrative Agent, filed as Exhibit 10.3 to the Registration
Statement on Form S-4 (Reg. No. 333-76763) declared effective August
3, 1999.
10.4 Borrower Pledge Agreement, dated as of January 28, 1999, between New
World Pasta Company, as pledgor, and The Bank of Nova Scotia, as
Administrative Agent, filed as Exhibit 10.4 to the Registration
Statement on Form S-4 (Reg. No. 333-76763) declared effective August
3, 1999.
10.5 Subsidiary Guaranty, dated as of January 28, 1999, made by each of
Pasta Group, L.L.C. and Winchester Pasta, L.L.C., in favor of The Bank
of Nova Scotia, as Administrative Agent, filed as Exhibit 10.5 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
25
<PAGE>
10.6 Subsidiary Security Agreement, dated as of January 28, 1999, among
Pasta Group, L.L.C. and Winchester Pasta, L.L.C. as grantors, and The
Bank of Nova Scotia, as Administrative Agent, filed as Exhibit 10.6 to
the Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
10.7 Transitional Services Agreement, dated as of January 28, 1999, between
Hershey Foods Corporation and New World Pasta Company, filed as
Exhibit 10.7 to the Registration Statement on Form S-4 (Reg. No.
333-76763) declared effective August 3, 1999.
10.8 Procurement Agreement, dated January 28, 1999, between New World Pasta
Company and Miller Milling Company, filed as Exhibit 10.8 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
10.9 Mill Agreement, dated January 28, 1999, between Winchester Pasta,
L.L.C. and Miller Milling Company, filed as Exhibit 10.9 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
10.10 Amended and Restated Mill Agreement, dated March 1, 1998, between
Hershey Pasta and Grocery Group, the predecessor to New World Pasta
Company, and Miller Milling Company, filed as Exhibit 10.10 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
10.11 First Amendment to Amended and Restated Mill Agreement, dated January
28, 1999, between New World Pasta Company, as successor to Hershey
Pasta and Grocery Group, and Miller Milling Company, filed as Exhibit
10.11 to the Registration Statement on Form S-4 (Reg. No. 333-76763)
declared effective August 3, 1999.
10.12 Tax Sharing Agreement, dated January 28, 1999, between New World
Pasta Company and New World Pasta, L.L.C., filed as Exhibit 10.12 to
the Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
10.13 Employment Agreement, dated as of January 28, 1999, among New World
Pasta Company and C. Mickey Skinner, filed as Exhibit 10.13 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
10.14 Employment Agreement, dated as of January 28, 1999, among New World
Pasta Company and John C. Miller, filed as Exhibit 10.14 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
10.15 Employment Agreement, dated as of January 28, 1999, among New World
Pasta Company and Michael L. Snow, filed as Exhibit 10.15 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
10.16 New World Pasta Company 1999 Stock Option Plan, filed as Exhibit
10.16 to the Registration Statement on Form S-4 (Reg. No. 333- 76763)
declared effective August 3, 1999.
10.17 Form of Qualified Stock Option Agreement for C. Mickey Skinner, John
C. Miller and Michael L. Snow, filed as Exhibit 10.17 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
10.18 Form of Qualified Stock Option Agreement for other personnel, filed
as Exhibit 10.18 to the Registration Statement on Form S-4 (Reg. No.
333-76763) declared effective August 3, 1999.
10.19 Form of Non-Qualified Stock Option Agreement for C. Mickey Skinner,
John C. Miller and Michael L. Snow, filed as Exhibit 10.19 to the
Registration Statement on Form S-4 (Reg. No. 333- 76763) declared
effective August 3, 1999.
10.20 Form of Non-Qualified Stock Option Agreement for other personnel,
filed as Exhibit 10.20 to the Registration Statement on Form S-4 (Reg.
No. 333-76763) declared effective August 3, 1999.
10.21 Agreement dated February 2, 2000, among New World Pasta Company and
C. Mickey Skinner, filed as an exhibit hereto.
10.22 Employment Agreement dated as of February 4, 2000, between John
Denton and New World Pasta Company, filed as an exhibit hereto.
26
<PAGE>
12.1 Computation of Ratio of Earnings to Fixed Charges and Combined Fixed
Charges, filed as an exhibit hereto.
21.1 Subsidiaries of New World Pasta Company, filed as Exhibit 22.1 to the
Registration Statement on Form S-4 (Reg. No. 333-76763) declared
effective August 3, 1999.
27.1 Financial Data Schedule, filed as an exhibit hereto.
(b) Report on Form 8-K.
The Company filed a Form 8-K on November 12, 1999, disclosing a work
stoppage at its Omaha manufacturing facility.
27
<PAGE>
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, hereunto duly authorized.
NEW WORLD PASTA COMPANY
---------------------------------------------
(Registrant)
By:
/s/ Mark E. Kimmel
---------------------------------------------
Mark E. Kimmel, Vice President,
Administration and Development,
and General Counsel and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 28, 2000 by the following persons on behalf of
the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ John E. Denton Chairman of the Board and
----------------------- Chief Executive Officer and Director
(John E. Denton)
/s/ C. Mickey Skinner Chairman Emeritus and Director
-----------------------
(C. Mickey Skinner)
/s/ Thomas Boran Controller and Chief Accounting
----------------------- Officer
(Thomas Boran)
/s/ Paul S. Levy Director
-----------------------
(Paul S. Levy)
/s/ Jeffrey C. Lightcap Director
-----------------------
(Jeffrey C. Lightcap)
/s/ Brett N. Milgrim Director
-----------------------
(Brett N. Milgrim)
/s/ John C. Miller Director
-----------------------
(John C. Miller)
/s/ Michael L. Snow Director
-----------------------
(Michael L. Snow)
/s/ David Y. Ying Director
-----------------------
(David Y. Ying)
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
New World Pasta Company:
We have audited the accompanying consolidated balance sheet of New World Pasta
Company and subsidiaries as of December 31, 1999 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New World Pasta
Company and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Harrisburg, Pennsylvania
February 11, 2000
F1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
New World Pasta Company:
We have audited the accompanying consolidated balance sheets of New World Pasta
Company and subsidiaries (formerly Hershey Pasta Group) as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for the two years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New World Pasta
Company and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
February 12, 1999
F2
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,146 --
Trade and other receivables, net 17,651 17,572
Inventories, net 19,868 22,547
Prepaid expenses and other current assets 1,391 4,793
Deferred income taxes 8,786 3,275
---------- ----------
Total current assets 60,842 48,187
---------- ----------
Property, plant and equipment, net 99,200 108,928
Deferred income taxes 95,667 --
Intangible assets, net 64,571 67,027
Deferred debt costs, net 8,535 --
---------- ----------
Total assets $ 328,815 224,142
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 1,340 --
Accounts payable:
Trade 8,133 9,657
Related parties 1,666 --
Accrued expenses 28,155 17,732
---------- ----------
Total current liabilities 39,294 27,389
Long term-debt, less current maturities 291,655 --
Deferred income taxes -- 21,937
Employee benefit liabilities 7,302 7,872
---------- ----------
Total liabilities 338,251 57,198
---------- ----------
Mandatorily redeemable 12% cumulative preferred stock, $.01 par value,
$1,000 liquidation preference value; 115,000 shares authorized;
113,485 shares issued and outstanding as of December 31, 1999 126,096 --
---------- ----------
Stockholders' equity (deficit):
Common stock, $.01 par value; 35,900,000 shares authorized;
5,000,000 shares issued and outstanding as of December 31, 1999 50 --
Additional paid-in capital 162,901 --
Retained earnings (accumulated deficit) (298,483) 166,944
---------- ----------
Total stockholders' equity (deficit) (135,532) 166,944
---------- ----------
Total liabilities and stockholders' equity (deficit) $ 328,815 224,142
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F3
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 354,019 373,096 386,218
Cost of sales 187,066 205,775 210,003
---------- --------- ---------
Gross profit 166,953 167,321 176,215
Selling and marketing expenses 113,259 109,788 121,200
General and administrative expenses 13,671 15,665 13,295
Transaction expenses 7,764 -- --
Cost of restructuring 2,700 -- --
---------- --------- ---------
Income from operations 29,559 41,868 41,720
Interest expense, net 26,325 -- --
---------- --------- ---------
Income before income taxes 3,234 41,868 41,720
Income tax expense 2,774 15,954 16,563
---------- --------- ---------
Net income 460 25,914 25,157
Dividends on preferred stock (12,611) -- --
---------- --------- ---------
Net income (loss) attributable to common stock $ (12,151) 25,914 25,157
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F4
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1999, 1998, and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
Paid-in (Accumulated
Shares Amount Capital Deficit) Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 -- $ -- -- 183,698 183,698
Net income -- -- -- 25,157 25,157
Advances and withdrawals with former
parent prior to recapitalization, net -- -- -- (46,078) (46,078)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 -- -- -- 162,777 162,777
Net income -- -- -- 25,914 25,914
Advances and withdrawals with former
parent prior to recapitalization, net -- -- -- (21,747) (21,747)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 -- -- -- 166,944 166,944
Advances and withdrawals with former
parent prior to recapitalization, net -- -- -- (5,887) (5,887)
Recapitalization and repurchase of
stockholders' common stock
followed by cancellation of
treasury stock, including related
income tax effects 4,467,869 45 170,196 (460,000) (289,759)
Issuance of common stock 532,131 5 5,316 -- 5,321
Net income -- -- -- 460 460
Preferred stock dividend -- -- (12,611) -- (12,611)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 5,000,000 $ 50 162,901 (298,483) (135,532)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F5
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 460 25,914 25,157
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15,468 14,647 15,437
Loss (gain) from disposal of property, plant and equipment 1,867 (382) 1,413
Deferred income taxes 2,447 2,231 (1,598)
Changes in assets and liabilities:
Trade and other receivables (79) (2,431) 1,042
Inventories 2,580 (386) (271)
Prepaid expenses and other current assets 3,402 (3,146) (837)
Accounts payable 142 (5,205) 3,919
Accrued expenses and other liabilities 9,853 (4,835) 3,666
---------- ---------- ---------
Net cash provided by operating activities 36,140 26,407 47,928
---------- ---------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment (3,960) (4,660) (1,850)
---------- ---------- ---------
Net cash used in investing activities (3,960) (4,660) (1,850)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt 470,481 -- --
Proceeds from issuance of preferred stock 12,849 -- --
Proceeds from issuance of common stock 5,321 -- --
Repayment of debt (177,486) -- --
Deferred debt costs (9,627) -- --
Advances and withdrawals with former parent prior to
recapitalization, net (5,887) (21,747) (46,078)
Repurchase of common stock (314,685) -- --
---------- ---------- ---------
Net cash used in financing activities (19,034) (21,747) (46,078)
---------- ---------- ---------
Net increase in cash and cash equivalents 13,146 -- --
Cash and cash equivalents at beginning of year -- -- --
---------- ---------- ---------
Cash and cash equivalents at end of year $ 13,146 -- --
========== ========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 18,762 -- --
Income taxes 65 -- --
Noncash investing and financing activities:
Deferred tax assets from recapitalization $ 106,900 -- --
Issuance of preferred stock in recapitalization 100,636 -- --
Issuance of common stock in recapitalization 44,679 -- --
Deferred tax liabilities eliminated in recapitalization 18,662 -- --
Preferred stock dividend 12,611 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F6
<PAGE>
NEW WORLD PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Transaction and 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 Company (New World Pasta or the Company). 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. Therefore, the amounts in these financial
statements as of December 31, 1998, and for each of the years in the two-year
period ended December 31, 1998, relate to the company formerly known as Hershey
Pasta Group.
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 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. The total amount paid to HFC for the redemption and
purchase of common stock and preferred stock was $457.0 million. In connection
with the recapitalization, the historical equity was recapitalized into
stockholders' equity and preferred stock.
HCCC's retained interest consists of $3.0 million of common stock of New
World Pasta based on the implied value. The implied equity investments in New
World Pasta following the recapitalization by the constituent stockholders are
as follows (in thousands):
<TABLE>
<CAPTION>
Total
Preferred Common Additional Equity
Stock Stock Paid-In Capital Investment
------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C>
New World Pasta LLC........................... $ 100,636 42 41,637 142,315
Miller Pasta LLC............................... 12,849 5 5,316 18,170
HCCC retained interest (implied value)......... -- 3 2,997 3,000
------------ ------------ ---------------- ------------
$ 113,485 50 49,950 163,485
============ ============ ================ ============
</TABLE>
F7
<PAGE>
The adjustments to reflect these transactions are as follows (in thousands):
Stockholders'
Equity
----------------
Historical book value................................... $ 166,944
----------------
Recapitalization transactions:
Recapitalization of certain historical equity into
preferred stock.................................... (100,636)
Repurchase from HCCC of common stock................. (314,685)
Issuance of common stock to Miller Pasta LLC......... 5,321
Adjustments to establish new deferred tax balances under
Section 338(h)(10):
Elimination of historical deferred tax liability..... 21,937
Elimination of historical deferred tax asset......... (3,275)
Deferred tax asset arising out of Section 338(h)(10)
election........................................... 106,900
---------------
(284,438)
---------------
Adjusted book value..................................... $ (117,494)
===============
For U.S. federal and state income tax purposes, New World Pasta and HCCC
have elected to treat the recapitalization as an asset purchase/sale under
Internal Revenue Code Section 338(h)(10). As a result, there is a step-up in the
tax basis of the assets, which will provide incremental future income tax
deductions of approximately $267.3 million through 2014 to reduce future taxable
income. The deferred tax asset was determined as follows (in thousands):
Recapitalized equity at implied market value............ $ 460,000
Capitalized fees and expenses incurred in connection
with the recapitalization.............................. 1,743
---------------
Total acquisition value................................. 461,743
Less historical stockholders' equity (adjusted for
deferred taxes)........................................ (185,606)
---------------
Excess of recapitalization value over historic book
basis of the net assets acquired....................... 276,137
Estimated corporate tax rate............................ 38.71%
---------------
Deferred tax asset arising out of Section 338(h)(10)
election .......................... $ 106,900
===============
The benefit related to the deferred tax asset has been credited to additional
paid-in capital.
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, IDEAL, LIGHT `N FLUFFY, MRS. WEISS', P&R, RONZONI,
SAN GIORGIO and SKINNER, as well as certain private labels.
The Company's net sales by product were as follows:
For the years ended
---------------------------------
1999 1998 1997
----------- --------- ---------
Retail products.................... $ 318,258 332,737 341,908
Industrial & other................. 35,761 40,359 44,310
----------- --------- ---------
Total.............................. $ 354,019 373,096 386,218
=========== ========= =========
2. Summary of Significant Accounting Policies
Significant accounting policies employed by New World Pasta are discussed
below and in other notes to the consolidated financial statements.
F8
<PAGE>
Principles of Consolidation
The consolidated financial statements include the accounts of New World
Pasta and its two wholly-owned subsidiaries, Pasta Group LLC and Winchester
Pasta LLC. All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents of $13.1 million and $0 at December 31, 1999 and
1998, respectively, consist of savings and checking accounts, overnight
repurchase agreements and certificates of deposit with an initial term of less
than three months. For purposes of the statements of cash flows, the Company
considers all highly liquid instruments with original maturities of three months
or less to be cash equivalents.
Commodities Futures and Options Contracts
In connection with the purchasing of semolina milled from durum wheat for
anticipated manufacturing requirements, New World Pasta utilized commodities
futures contracts in 1998 to reduce the effect of price fluctuations. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 80
"Accounting for Futures Contracts," these futures contracts met the hedge
criteria and were accounted for as hedges. Accordingly, gains and losses were
deferred and recognized in cost of sales as part of the product cost. The
Company recognized losses of $2.2 million during 1999. No commodities futures
contracts were entered into during 1999 and no such contracts were outstanding
as of December 31, 1999.
Interest Rate Swap Agreement
During 1999, the Company entered into an interest rate swap agreement as
part of its interest rate risk management program. Net interest paid or received
related to this agreement is recorded using the accrual method and is recorded
as an adjustment to interest expense. The interest rate swap agreement has a
notional amount of $50 million. The agreement expires in June 2002. The Company
is exposed to credit loss in the event of nonperformance by the parties to the
agreement, however, the Company does not anticipate such nonperformance.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of 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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of
buildings, machinery and equipment is computed using the straight-line method
over the estimated useful lives of the various classes of assets ranging from 3
to 40 years.
Intangibles Resulting from Business Acquisitions
Intangible assets resulting from business acquisitions principally consist
of the excess of the acquisition cost over the fair value of the net assets of
businesses acquired (goodwill). Goodwill, net of accumulated amortization, was
$64.6 million and $67.0 million as of December 31, 1999 and 1998, respectively.
Goodwill is amortized on a straight-line basis over 40 years. Other intangible
assets are amortized on a straight-line basis over their estimated useful lives.
New World Pasta periodically evaluates whether events or circumstances have
occurred indicating that the carrying amount of goodwill may not be recoverable.
When factors indicate that goodwill should be evaluated for possible impairment,
New World Pasta uses an estimate of the acquired businesses' undiscounted future
cash flows compared to the related carrying amount of net assets, including
goodwill, to determine if an impairment loss should be recognized. Accumulated
amortization of intangible assets resulting from business acquisitions was $28.9
million and $26.5 million as of December 31, 1999 and 1998, respectively.
F9
<PAGE>
Revenue Recognition
Revenues are recognized as title transfers, generally as goods are shipped.
Promotional Costs
Promotional costs, which include billbacks and off-invoice allowances, are
expensed as incurred and are included in selling and marketing expenses.
Research and Development and Advertising
Research and development and advertising costs are expensed as incurred.
Research and development costs amounted to $500,000, $400,000 and $300,000 in
1999, 1998 and 1997, respectively. Advertising costs amounted to $3.5 million,
$3.1 million and $2.4 million in 1999, 1998 and 1997, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
For 1998 and 1997, the operations of New World Pasta were included in the
consolidated tax returns of HFC. The provision for income taxes includes the
effect of certain temporary differences between amounts reported in the
financial statements and federal income tax returns of HFC on a separate return
basis.
Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense is recorded only if
the current market price of the underlying stock exceeded the exercise price on
the measurement date. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic value-
based method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
F10
<PAGE>
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
3. Accounts Receivable -- Trade
In the normal course of business, New World Pasta extends credit to
customers that satisfy pre-defined credit criteria. New World Pasta operates in
a single industry and is not dependent upon any single or major group of
customers for its sales. The Company's ten largest customers accounted for
approximately 48.8% of 1999 gross sales. New World Pasta believes that it has
little concentration of credit risk due to the diversity of its customer base.
Receivables, as shown on the balance sheets, were net of allowances and
anticipated discounts of approximately $7.3 million and $7.4 million as of
December 31, 1999 and 1998, respectively.
The following summarizes allowances and anticipated discounts and their
related activity:
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance
Beginning Costs and From At End
of Period Expenses Reserves of Period
--------------- ------------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1999 $7,403 1,995 (2,146) 7,252
Year Ended December 31, 1998 6,267 2,689 (1,553) 7,403
Year Ended December 31, 1997 4,195 3,516 (1,444) 6,267
</TABLE>
F11
<PAGE>
4. 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 $7.2 million and $7.9 million
as of December 31, 1999 and 1998, respectively. All inventories were stated at
amounts that did not exceed realizable values. Total inventories were as
follows:
December 31, December 31,
1999 1998
------------- -------------
(in thousands)
Raw materials........................ $ 4,539 5,901
Work in process...................... 250 320
Finished goods....................... 14,483 17,309
------------- -------------
Inventories at FIFO.................. 19,272 23,530
Adjustment to LIFO................... 596 (983)
------------- -------------
Total inventories.................. $ 19,868 22,547
============= =============
5. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1999 and 1998. The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -----
(in thousands)
Financial Assets:
Cash and cash equivalents $ 13,146 13,146 -- --
Financial liabilities:
Long-term debt 292,995 292,995 -- --
The carrying amounts shown in the table are included in the consolidated
balance sheets under the indicated captions.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents: The carrying amount approximates fair value
-------------------------
because of the short maturity of these instruments.
Long-term debt: The fair value of the Company's long-term debt is estimated
--------------
by discounting the future cash flows of each instrument at rates currently
offered to the Company for similar debt instruments of comparable maturities by
the Company's lenders.
F12
*************
<PAGE>
6. Property, Plant and Equipment
Property, plant and equipment balances included construction in progress of
$1.2 million and $1.1 million as of December 31, 1999 and 1998, respectively.
Major classes of property, plant and equipment were as follows:
December 31, December 31,
1999 1998
------------ ------------
(in thousands)
Land............................................ $ 3,666 3,666
Buildings....................................... 33,204 33,486
Machinery and equipment......................... 182,837 188,185
---------- ----------
Property, plant and equipment, gross............ 219,707 225,337
Accumulated depreciation........................ (120,507) (116,409)
---------- ----------
Property, plant and equipment, net............ $ 99,200 108,928
========== ==========
7. Accrued Expenses
Accrued expenses were as follows:
December 31, December 31,
1999 1998
------------ ------------
(in thousands)
Accrued marketing costs......................... $ 11,871 10,932
Accrued interest................................ 6,554 --
Accrued payroll and compensation................ 3,627 4,763
Accrued insurance............................... 2,312 --
Accrued employee benefits....................... 2,066 43
Accrued income taxes............................ 327 --
Accrued cost of restructuring................... 258 --
Other........................................... 1,140 1,994
---------- ----------
$ 28,155 17,732
========== ==========
8. Long-Term Debt
The Company's long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------- -------------
(in thousands)
<S> <C> <C>
9 1/4% Senior Subordinated Notes due 2009 ("Notes")............... $ 160,000 --
Term Loan......................................................... 132,995 --
------------ ------------
Total 292,995 --
Less current portion.............................................. (1,340) --
------------ ------------
$ 291,655 --
============ ============
</TABLE>
The Notes are general unsecured obligations of New World Pasta, ranking
subordinate in right of payment to all senior indebtedness of New World Pasta,
equal in right of payment with all senior subordinated indebtedness of New World
Pasta and senior in right of payment to all junior subordinated indebtedness of
New World Pasta. The Notes are effectively subordinated to all indebtedness of
New World Pasta's subsidiaries. The Notes are guaranteed by each subsidiary of
New World Pasta on the date of original issuance of the old notes.
The Company has entered into a Senior Credit Facility (the "Credit
Facility") that currently provides for a term loan (the "Term Loan") that bears
interest at either an alternate base rate, as defined, plus 2.25% or a
reserve-adjusted LIBOR rate plus 3.25%. On December 31, 1999, the effective
interest rate on the Term Loan was 9.375%. The Term Loan matures in 2006. The
Term Loan is repaid in quarterly payments of $335,000 through March 2005,
$31,490,000 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
F13
<PAGE>
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
also 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 Credit
Facility at December 31, 1999. The Company is required to pay a commitment fee
of 0.5% on the unused portion of the revolving loan.
The Credit Facility is secured by a first-priority perfected lien on a
portion of the capital stock of New World Pasta and substantially all of the
capital stock of each of its subsidiaries and all property and assets, tangible
and intangible, of New World Pasta and each of its subsidiaries. The Credit
Facility is also guaranteed by New World Pasta LLC and all direct and indirect
subsidiaries of New World Pasta other than non-U.S. subsidiaries.
New World Pasta may voluntarily prepay some or all of its obligations under
the Credit Facility. In addition, the loans under the Credit Facility are
subject to mandatory prepayment under some circumstances, including if New World
Pasta generates excess cash flow.
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 as of December 31, 1999.
The aggregate maturities of long-term debt as of December 31, 1999, are as
follows (in thousands):
2000 $ 1,340
2001 1,340
2002 1,340
2003 1,340
2004 1,340
Thereafter 286,295
-------------
$292,995
=============
9. Redeemable Preferred Stock
New World Pasta has one class of preferred stock. A total of 115,000 shares
of preferred stock are authorized and 113,485 shares were outstanding upon
completion of the recapitalization. Holders of the preferred stock are not
entitled to preemptive rights. The preferred stock is mandatorily redeemable by
New World Pasta on January 28, 2010, for $1,000 per share plus all accrued and
unpaid dividends to the redemption date or as soon thereafter as will not be
prohibited by New World Pasta's then-existing debt agreements. The preferred
stock has a liquidation preference over the common stock equal to the redemption
price of $1,000 per share plus all accrued and unpaid dividends.
Dividends on the preferred stock are cumulative and are payable when, as
and if declared by the Company's board of directors, at an annual rate of 12%
per year. No dividends or distributions may be made on the common stock unless
all accrued and unpaid dividends are first paid to the holders of the preferred
stock. Without the consent of the holders of a majority of the outstanding
preferred stock, New World Pasta may not enter into any merger, consolidation or
other business combination, unless and until the preferred stock is repurchased
for an amount equal to $1,000 per share plus all accrued and unpaid dividends
thereon. Except as required by law, the holders of the preferred stock are not
entitled to vote on any matter submitted to a vote of the stockholders. The
redemption of, and payment of cash dividends on, the preferred stock is
generally prohibited by the terms of the Credit Facility and restricted by the
indenture for the Notes.
F14
<PAGE>
10. Rental and Lease Commitments
The Company leases its headquarters, certain warehouses and sales offices,
and various office equipment. The leases expire at various dates through 2006.
Rent expense was approximately $7.1 million, $8.6 million and $8.5 million for
the years ended December 31, 1999, 1998, and 1997, respectively. Future minimum
lease payments under noncancelable operating leases (with initial or remaining
lease terms in excess of one year) as of December 31, 1999, are (in thousands):
2000 $7,800
2001 7,800
2002 7,700
2003 3,600
2004 200
Thereafter 50
11. Income Taxes
Total income taxes (benefit) for the year ended December 31, 1999, 1998 and
1997 were allocated as follows:
<TABLE>
<CAPTION>
For the years ended
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Income tax expense............................... $ 2,774 15,954 16,563
Stockholders' equity for recapitalization........ (106,900) -- --
--------- --------- ---------
$(104,126) 15,954 16,563
========= ========= =========
</TABLE>
Income tax expense (benefit) consists of:
For the years ended
-----------------------------
1999 1998 1997
--------- -------- --------
(in thousands)
Current:
Federal..................................... $ 271 11,459 15,788
State....................................... 56 2,264 2,373
--------- -------- --------
327 13,723 18,161
--------- -------- --------
Deferred:
Federal..................................... 2,031 531 (770)
State....................................... 416 1,700 (828)
--------- -------- --------
2,447 2,231 (1,598)
--------- -------- --------
$2,774 15,954 16,563
========= ======== ========
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to pretax income as a result of the following:
<TABLE>
<CAPTION>
For the years ended
-----------------------
1999 1998 1997
-------- ------ -------
<S> <C> <C> <C>
Expense at statutory rate 35.0% 35.0 35.0
Increase resulting from:
State income taxes, net of federal income tax benefit......... 7.4 1.5 2.1
Non-deductible transaction costs.............................. 41.9 1.5 1.5
Other, net.................................................... 1.5 .1 1.1
-------- ------ -------
Effective income tax rate....................................... 85.8% 38.1 39.7
======== ====== =======
</TABLE>
F15
<PAGE>
The tax effects of the significant temporary differences that give rise to
the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts......................................................... $ 541 1,080
Inventories, principally due to tax cost differences.............. 406 159
Compensated absences, principally due to accrual for financial
reporting purposes............................................... 1,029 1,210
Accrued expenses and other reserves, not currently deductible
for income tax purposes.......................................... 809 911
Post-retirement benefit accruals for financial reporting
purposes......................................................... 1,872 2,447
Net operating loss carryforwards.................................. 4,747 --
Plant and equipment, due to taxable asset acquisition for tax
purposes......................................................... 20,908 --
Amortizable goodwill, due to taxable asset acquisition for tax
purposes......................................................... 73,123 --
Other ............................................................ 1,018 --
--------- --------
Total gross deferred tax assets................................. 104,453 5,807
Less valuation allowance........................................ -- --
--------- --------
Net deferred tax asset.......................................... 104,453 5,807
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation and capitalized interest............................ -- (22,907)
Other............................................................. -- (1,562)
--------- --------
Total gross deferred tax liabilities............................ -- (24,469)
--------- --------
Net deferred tax asset (liability).............................. $ 104,453 (18,662)
========= ========
Reflected on the consolidated balance sheet as:
Current deferred income taxes $ 8,786 3,275
Long-term deferred income taxes 95,667 (21,937)
--------- --------
Net deferred tax asset (liability) $ 104,453 (18,662)
========= ========
</TABLE>
No valuation allowance was recorded for deferred tax assets as of December
31, 1999 or 1998. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. In order to fully realize the deferred tax assets, the Company will
need to generate future taxable income of approximately $271 million prior to
the expiration of the net operating loss carryforward in 2019. Taxable income
(loss) for the years ended December 31, 1999 and 1998 was approximately ($8.8)
million and $34 million, respectively. Based upon the level of historical
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these deductible
temporary differences at December 31, 1999. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
At December 31, 1999, the Company has a net operating loss carryforward for
federal and state income tax purposes of $12.4 million and $10.2 million,
respectively. These net operating loss carryforwards are available to offset
future federal or state taxable income, if any, through 2019 for federal and for
varying periods through 2019 for state purposes.
F16
<PAGE>
12. Related Party Transactions
The Company and Miller Milling Company ("Miller Milling") have entered into
various milling supplier and procurement arrangements which cover all of the
Company's durum and semolina requirements. These supplier arrangements expire
December 31, 2009. John Miller, President and CEO of Miller Milling is a
stockholder through Miller Pasta LLC and Board member of New World Pasta.
Additionally, Michael Snow is a stockholder and a Board member of New World
Pasta. The Company paid in excess of $38 million to Miller Milling Company in
1999 pursuant to these procurement and supplier arranagements. As of
December 31, 1999, the Company had trade and other payables to Miller Milling of
$1.7 million.
For the years ended December 31, 1998 and 1997, certain HFC general and
administrative expenses, which were more specifically allocable to New World
Pasta, have been included in the accompanying consolidated statements of
operations as allocated by HFC. For the years ended December 31, 1998 and 1997,
total expenses of $3.9 million and $3.8 million, respectively, were charged for
building rent, information technology, quality assurance, logistics, packaging
and procurement services. The results of operations for 1998 include incremental
allocated costs relating to accounts receivable accounting and divisional
accounting. These costs were directly charged in 1997. The allocation of these
costs is based on certain methodologies which management believes reasonably
approximate the cost of resources provided or services performed. These
methodologies include a cost per square foot basis for building rent, percentage
of pounds shipped for logistics, and direct costs where identifiable or as a
percentage of cost of sales for all other services.
In 1998 and 1997, HFC charged the Company for its share of group insurance
costs for eligible employees based upon location specific costs, HFC's overall
insurance costs and loss experience incurred during a calendar year. Pension
costs were also charged to the Company based upon eligible employees
participating in the plans. In addition, HFC charged the Company for its share
of retiree medical expenses and for its share of matching contributions to HFC's
401(k) plans.
Various insurance coverages were also provided to the Company through HFC's
consolidated programs. Workers compensation, auto, property, product liability
and other insurance coverages were charged directly based on the loss
experience.
In 1997, the Company's sales organization was combined with the sales force
responsible for selling HFC's grocery products. During 1998 and 1997, certain
sales management and administrative costs were charged directly or allocated by
the Company to the HFC grocery division. The total of such charges was $15.6
million and $14.3 million, respectively, for the years ended December 31, 1998
and 1997. Such allocation was based on sales revenue, and management believes
this methodology approximates the cost of resources provided.
Certain other HFC general and administrative expenses, including certain
department costs for finance, HFC corporate accounting, treasury, legal, tax,
risk management, salaries of corporate officers and staff, human resources and
science and technology costs, have been excluded from the accompanying
consolidated statements of operations as they do not benefit New World Pasta
operating entities. As such, costs are not allocated for purposes of the 1998
and 1997 consolidated financial statements.
F17
<PAGE>
Activity in the intercompany accounts with HFC is as follows:
<TABLE>
<CAPTION>
For the years ended
-----------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Beginning balance due from HFC............. $ 77,350 55,976 3,269
Collections................................ 24,065 316,513 336,445
Bank account disbursement funding.......... (16,524) (238,797) (241,393)
Employee benefits.......................... 12,302 (6,413) (7,964)
Non-employee insurance..................... (81) (2,100) (2,007)
Income taxes............................... (5,342) (21,221) (13,967)
Shared service chargebacks................. (1,446) (7,210) (4,325)
Payroll and payroll taxes.................. (2,676) (28,617) (30,543)
Grocery selling expense.................... 216 15,615 14,312
Flour future losses........................ 73 (3,509) --
Closed to retained earnings................ (83,882) -- --
Other...................................... (4,055) (2,887) 2,149
-------- -------- -------
Ending balance due from HFC................ $ -- 77,350 55,976
======== ======== =======
Average balance during the period.......... $ N/A 68,997 29,477
======== ======== =======
</TABLE>
13. Stock Option Plan
In January 1999, the Company adopted a stock option plan (the "Plan")
pursuant to which the Company's Board of Directors may grant stock options to
officers and key employees. The Plan authorizes grants of options to purchase up
to 910,166 shares of authorized but unissued common stock. Stock options are
granted with an exercise price equal to or greater than the stock's fair market
value at the date of grant. All stock options have 10-year terms and vest and
become fully exercisable on a pro-rata basis over a five-year period from the
date of grant. Mr. Skinner's options, as originally issued, vested on the
following basis:
1/28/00 51,064
1/28/01 51,064
1/28/02 34,042
1/28/03 25,532
1/28/04 8,511
------
170,213
=======
In connection with the relinquishment of his position as Chief Executive
Officer, Mr. Skinner's option to purchase Company securities at $10.00 per
share vested as to 18,888 common shares and terminated as to all other shares.
At December 31, 1999, there were no additional shares available for grant
under the Plan. The per share weighted-average fair value of stock options
granted during 1999 was $1.74 on the date of grant using the Black Scholes
option-pricing (excluding a volatility assumption) with the following weighted-
average assumptions: expected dividend yield 0%, risk-free interest rate of
4.8%, and an expected life of 7 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro-forma amounts indicated
below (in thousands):
1999
--------
Net income As reported $ 460
Pro forma 141
F18
<PAGE>
Stock option activity during the year is as follows:
Weighted-
Number of average
Shares exercise price
------------ ----------------
Granted 910,166 $ 34.74
Exercised -- --
Forfeited -- --
Expired -- --
------------- ----------------
Balance at December 31, 1999 910,166 $ 34.74
============= ================
At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $10.00 - $73.50 and 9.08
years, respectively.
At December 31, 1999, no options were exercisable.
14. Employee Benefits
Prior to the recapitalization, the Company participated in several HFC
defined benefit plans which provide retirement benefits to substantially all
non-union and certain union employees, as well as union administered multi-
employer plans. Upon completion of the recapitalization, the Company's salaried
employees and all Winchester plant employees no longer participated in the HFC
Retirement Plan. Hourly employees at the Omaha and Louisville manufacturing
facilities participate in single employer pension plans administered by New
World Pasta. Hourly employees at the Fresno, Kansas City and Lebanon
manufacturing facilities participate in multi-employer plans.
The Company's policy is to fund pension liabilities in accordance with the
minimum and maximum limits imposed by the Employee Retirement Income Security
Act of 1974 and Federal income tax laws, respectively. Plan assets are invested
in a broadly diversified portfolio consisting primarily of domestic and
international common stocks and fixed income securities. Other post-retirement
benefits are provided to a limited group of employees and include health care
and life insurance. The health care plan is contributory, with participants'
contributions adjusted annually; the life insurance plan is non-contributory.
F19
<PAGE>
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------- ------------------------
December 31,
---------------------------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year.............. $ 19,391 15,868 4,200 4,200
Service cost......................................... 240 1,115 113 200
Interest cost........................................ 436 1,119 98 300
Amendments........................................... -- 24 (2,685) (200)
Actuarial (gain)/loss................................ (785) 1,973 -- (300)
Benefits paid........................................ (12,654) (708) -- --
Change in assumptions................................ -- -- (251) --
-------- -------- -------- --------
Benefit obligation at end of year.................... $ 6,628 19,391 1,475 4,200
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year. $ 18,374 16,449 -- --
Actual return on plan assets......................... 465 1,982 -- --
Employer contribution................................ -- 651 -- --
Benefits paid........................................ (12,654) (708) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year............. $ 6,185 18,374 -- --
======== ======== ======== ========
Funded status........................................ $ (443) (1,017) (1,475) (4,200)
Unrecognized transition obligation................... 23 133 -- --
Unrecognized prior service cost...................... 204 229 (2,605) (500)
Unrecognized net actuarial loss (gain)............... 796 1,436 (1,754) (1,574)
-------- -------- -------- --------
Prepaid (accrued) benefit cost....................... $ 580 781 (5,834) (6,274)
======== ======== ======== ========
Weighted-average assumptions:
Discount rate........................................ 7.25% 6.40 7.25 6.40
Expected long-term rate of return on assets.......... 9.50 9.50 N/A N/A
Rate of increase in compensation levels.............. 3.50 4.90 N/A N/A
</TABLE>
For measurement purposes, a 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000, decreasing 0.5% per
annum until an ultimate rate of 5.0% in 2007.
Accrued other benefit costs of $4.7 million and $5.3 million are included
in long-term liabilities at December 31, 1999 and 1998, respectively. $1.1
million and $974,000 of accrued other benefits are included in accrued expenses
at December 31, 1999 and 1998, respectively. $580,000 and $781,000 of prepaid
pension benefits are included in prepaid expenses and other current assets at
December 31, 1999 and 1998, respectively.
F20
<PAGE>
Net periodic benefit costs include the following components:
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------------
Pension Benefits Postretirement Benefits
1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost
Service cost.................................. $ 240 1,115 1,001 $ 113 200 200
Interest cost................................. 436 1,119 964 98 300 300
Expected return on plan assets................ (465) (1,532) (1,172) -- -- --
Amortization of prior service cost ........... 25 24 23 (260) (100) --
Recognized net actuarial loss (gain).......... (23) 33 13 (71) -- --
------- ------- ------- ------- ------- -------
Corporate sponsored plans..................... 213 759 829 (120) 400 500
Multi-employer plans.......................... 377 413 448 -- -- --
------- ------- ------- ------- ------- -------
$ 590 1,172 1,277 $(120) 400 500
======= ======= ======= ======= ======= =======
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1 Percentage Point 1 Percentage Point
Increase Decrease
-------- --------
(in thousands)
<S> <C> <C>
Effect on total service and interest
cost components........................................... $ 73 (110)
Effect on post retirement benefit
obligation................................................. 266 (413)
</TABLE>
The Company sponsors a defined contribution plan. For all eligible
employees, the Company will match 75% of the first 2% and 50% on the next 2% of
the employees' contribution. In addition, for all eligible salaried and certain
eligible non-salaried employees, the Company is required to make an annual
contribution into the plan equal to 5% of the employees' regular compensation.
The Company's total contribution for 1999 was approximately $1.4 million.
15. Restructuring Charge
In the second quarter of 1999, the Company recorded a restructuring charge
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. At December 31,
1999, the building has a book value of $840,000 and is being held for sale.
Included in the restructuring charge is a non-cash charge of approximately
$1.6 million for impairment of equipment and accruals for cash charges for
approximately $1.1 million as follows:
<TABLE>
<CAPTION>
Original Balance at
Balance Utilized December 31, 1999
----------- ----------- --------------------
(in thousands)
<S> <C> <C> <C>
Severance & other employee
related costs $ 600 527 73
Other facility exit costs 500 315 185
---------- ---------- ----------
Total costs $1,100 842 258
========== ========== ==========
</TABLE>
F21
<PAGE>
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 might be necessary if replacement of the industrial
business was not obtained in the intervening period.
16. Commitments and Contingencies
In the ordinary course of business, the Company is involved in various
pending or threatened litigation claims. Although the outcome of any legal
proceeding cannot be predicted with certainty, management believes that any
ultimate liability arising from such matters in the aggregate will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
The Company and Miller Milling have entered into various milling supplier
and procurement arrangements which cover all of the Company's durum and semolina
requirements. These supplier arrangements have various expiration dates through
December 31, 2009. John C. Miller, President and CEO of Miller Milling, is a
stockholder, through Miller Pasta LLC, and board member of New World Pasta.
Michael Snow, Executive Vice President and Director of Miller Milling, is also a
stockholder, through Miller Pasta LLC, and a board member of New World Pasta.
New World Pasta is a party to employment agreements with certain executive
officers and directors of New World Pasta. The total amount due under these
agreements is $1.9 million at December 31, 1999.
17. Subsidiary Financial Information
The Company has two wholly-owned subsidiaries, Pasta Group LLC and
Winchester Pasta LLC (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 management does not believe that the information proposed in separate
financial statements would be material to investors.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C>
Net sales............................. $ 294,361 303,697 315,653
Gross profit.......................... 160,391 152,459 160,289
Income from operations................ 34,244 32,973 32,996
Net income............................ 18,831 18,136 18,191
Current assets........................ 60,683 46,719 42,572
Non-current assets.................... 204,142 142,402 150,521
Current liabilities................... 26,913 18,966 29,650
Non-current liabilities............... 9,071 22,937 23,603
</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.
F22
<PAGE>
18. Quarterly Financial Data - Unaudited
Summary quarterly results were as follows (in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- -------
Year ended December 31, 1999:
<S> <C> <C> <C> <C> <C>
Net sales $ 96,271 84,531 86,956 86,261 354,109
Gross profit 44,658 38,300 41,465 42,530 166,953
Income from operations 3,184 4,496 10,005 11,874 29,559
Net income (loss) (3,404) (691) 1,512 3,043 460
Year ended December 31, 1998:
Net sales 108,647 84,263 89,242 90,944 373,096
Gross profit 49,155 38,645 39,720 39,801 167,321
Income from operations 12,157 8,833 11,924 8,954 41,868
Net income 7,525 5,468 7,381 5,540 25,914
</TABLE>
F23
<PAGE>
EXHIBIT 10.21
AGREEMENT
---------
AGREEMENT (this "Agreement"), dated as of February 2, 2000, by and among C.
Mickey Skinner (the "Executive"), and New World Pasta Company, a Delaware
corporation (the "Company") and, for purposes of Sections 4(d) and 5(a) only,
Joseph Littlejohn & Levy Inc. ("JLL").
WHEREAS, the Executive has been employed by the Company pursuant to an
employment agreement, dated as of January 28, 1999 (the "Employment Agreement");
WHEREAS, the employment of the Executive as Chairman of the Board and
Chief Executive Officer of the Company ("Chairman and CEO") shall terminate
effective as of 12:01 a.m. local time in Naples, Florida on February 28, 2000
(the "Termination Date");
WHEREAS, the Executive is entitled under the Employment Agreement to
the continuation of his salary and benefits after a termination under certain
conditions;
WHEREAS, the Executive will continue as an employee of the Company
solely on the terms set forth in this Agreement; and
WHEREAS, the Executive and the Company now desire fully and finally to
settle all matters arising out of the Employment Agreement and the termination
of Executive's employment as Chairman and CEO, including without limitation, any
rights or obligations under the Employment Agreement and under any employee
benefit plans or programs of the Company, that have arisen or might arise
between them and to specify the terms and conditions under which the Executive
will continue employment with the Company.
NOW, THEREFORE, in consideration of the promises and of the release,
representations, covenants and obligations herein contained, the parties hereto
agree as follows:
1. Termination of Employment Agreement. The Executive and the Company
-----------------------------------
hereby agree that the Employment Agreement shall terminate effective as of the
later of the Effective Date (defined below) or the Termination Date and shall
have no
<PAGE>
further force and effect. As of the later of the Effective Date or the
Termination Date, the Executive shall cease to be the Chairman and Chief
Executive Officer of the Company. Notwithstanding the foregoing, following the
later of the Effective Date or the Termination Date, to the fullest extent
permitted by law and the terms of any applicable benefit plans or arrangements,
the Executive shall continue as any employee of the Company and shall serve as
Chairman Emeritus of the Company and shall perform the duties set forth in
Section 2 below solely for the compensation and benefits provided for in this
Agreement. The Effective Date is the eighth business day following the execution
of this Agreement by all parties, provided the Revocation Period referred to in
Section 5(c) has expired and the Executive has not revoked his agreement hereto.
2. Duties. During the first twelve months beginning on the later of the
------
Effective Date or the Termination Date (the "Interim Period") (and thereafter
only as and to the extent agreed to by the Company and the Executive), the
Executive will use reasonable efforts to assist his immediate successor as
Chairman and Chief Executive Officer of the Company, upon his immediate
successor's reasonable written or oral request, in his successor's transition
into such positions and will, at his immediate successor's written or oral
request, cooperate to the fullest extent reasonably practicable in providing a
smooth transition for the Company to a new Chairman and Chief Executive Officer
and will, at his immediate successor's written or oral request, use reasonable
efforts to introduce his immediate successor into the Restricted Business (as
defined below).
The Executive also agrees that during the Interim Period, he will
provide upon written or oral request, reasonable assistance to the Company in
retaining key employees and maintaining customer and industry contacts and
relationships as may be requested by the Board and during the Interim Period, he
will, upon written or oral request, engage in such other reasonable transition
activities as the Board may reasonably request consistent with such position.
Executive shall devote such time and attention to his duties under
this Agreement as are commensurate with his position and his duties. Executive
may, to the extent feasible and consistent with the terms of this Agreement,
perform his duties to the Company in Florida. Nothing contained herein shall
require the Executive to devote any specified number of hours to the performance
of such duties. The parties understand that the time which the Executive will
devote to his duties should decline dramatically over the course of the year.
2
<PAGE>
3. Salary; Fringe Benefits; Equity Compensation.
--------------------------------------------
(a) Whether or not the Executive is considered to be an employee of
the Company, on and after the later of the Effective Date or the Termination
Date and subject to Section 3(a)(iii) hereof, the Company shall pay or shall
cause to be paid to the Executive and shall provide benefits to the Executive as
follows:
(i) The Company shall pay to the Executive (or his estate,
heirs and personal representative should the Executive die or become
Disabled (as defined below) the following amounts during the indicated
periods ("Salary"), which amounts shall be payable in accordance with the
Company's regular payroll practice (but not less often than semi-monthly):
(A) from the later of the Effective Date or the Termination Date through
January 27, 2002 at a rate of $400,000 per annum; and (B) from January 28,
2002 through January 27, 2004 at a rate of $250,000 per annum.
(ii) The Company shall provide or arrange to provide to the
Executive the following benefits (collectively the "Benefits"):
(1) Vacation, Holidays and Sick Leave. During the Interim
---------------------------------
Period, to the extent the Executive is required to
perform services under this Agreement, Executive shall be
entitled to paid vacation, paid holidays and sick leave
in accordance with the Company's standard policies for
its senior executive officers in effect as of the date
hereof. The benefits to be provided under this Section
3(a)(ii)(1) shall terminate on the Executive's death
unless earlier terminated as provided under Section
3(a)(iii).
(2) Business Expenses. Executive shall be reimbursed for all
-----------------
reasonable and necessary business expenses incurred
during the Interim Period, by (i) him in connection with
his employment (including, without limitation, expenses
for first-class air travel on all Company business) and
(ii) his spouse in connection with her accompaniment of
Executive on business trips where it is customary for
Executive's spouse to attend, in each case, upon timely
submission by Executive of receipts and other
documentation as required by the Internal Revenue
3
<PAGE>
Code of 1986, as amended (the "Code") and in accordance
with the Company's normal expense reimbursement policies.
The benefits to be provided under this Section
3(a)(ii)(2) shall terminate on the Executive's death or
Disability unless earlier terminated as provided under
Section 3(a)(iii).
(3) Health, Welfare and Pension Benefits. Executive and
------------------------------------
eligible members of his family shall be eligible to
participate fully in all: (a) health and dental benefits
and insurance programs; (b) life and short and long term
disability benefits and insurance and (c) pension and
retirement benefits all as available to senior executive
officers of the Company generally, which benefits
(excluding all retirement plans other than Section 401(k)
savings plans) shall not be materially less favorable in
the aggregate than those similar benefits available to
senior executives of the Company as of the date hereof.
The benefits to be provided under this Section
3(a)(ii)(3) shall terminate on the Executive's death
unless earlier terminated as provided under Section
3(a)(iii). Notwithstanding the foregoing, the benefits to
be provided pursuant to clause (a) above shall be
provided to the Executive's spouse until the earlier of
her death or termination pursuant to Section 3(a)(iii).
(4) Membership Dues; Tax Returns; etc. The Company shall
----------------------------------
reimburse Executive for (i) annual membership dues and
assessments at one (1) country club of Executive's choice
not to exceed $12,000 per year (increased annually by the
increase in the Consumer Price Index for the preceding
year), (ii) reimburse the Executive for the cost of
annual personal income tax return preparation in an
amount not to exceed $2,000 per year, and (iii) an annual
physical. The benefits to be provided under clauses (i)
and (ii) above shall terminate on the date which is one
year after the Executive's death, unless earlier
terminated as provided under Section 3(a)(iii) and the
benefits to be provided under clause (iii) shall
terminate on the date of the
4
<PAGE>
Executive's death, unless earlier terminated as provided
under Section 3(a)(iii).
(5) Car Allowance. The Executive shall be paid an allowance
-------------
of $1,200.00 per month for an automobile to be used by
Executive. The benefits to be provided under this Section
3(a)(ii)(5) shall terminate on the date which is one year
after the Executive's death unless earlier terminated as
provided under Section 3(a)(iii).
(6) D&O Coverage. The Company shall maintain director and
------------
officer liability insurance for its officers and
directors, in such amount as the Company Board believes
is reasonably necessary.
(7) Accommodations. During the Interim Period, and to the
--------------
extent the Executive is required to be at the Company's
headquarters, the Company shall provide Executive with
reasonable accommodations at the Company's headquarters
commensurate with his position to enable the Executive to
perform his duties hereunder.
(iii) The Company's obligations to pay Salary pursuant to
Section 3(a)(i) or to provide Benefits under Section 3(a)(ii) of this
Agreement shall terminate on the earlier of (i) 11:59 p.m. local time in
Naples, Florida, on January 27, 2004, or (ii) if the Executive materially
breaches his obligations under Sections 2, 4 or 5 of this Agreement and, to
the extent curable, the Executive fails to cure such breach within twenty
(20) business days after his receipt of written notice from the Company of
such breach (which notice shall specify the details of such breach with
particularity), 11:59 p.m. local time in Naples, Florida, on the twentieth
(20th) business day after his receipt of the written notice from the
Company referred to above; provided, however, that the termination of the
Company's obligations pursuant to this subparagraph (iii) shall not be
construed to relieve the Company of its obligations to make Salary and
provide the Benefits to which the Executive was entitled through the date
of termination provided for in this paragraph (iii).
(iv) Disability means that either (A) the Executive has become
unable to perform his normal duties by reason of physical or mental illness
or accident for any twelve (12) consecutive month period, or (B) the
Company receives written opinions from both a physician for the Company and
a physician for Executive that Executive will be so disabled.
5
<PAGE>
(v) The Parties agree that the Company is obligated to
provide the Executive with the Benefits set forth in Section 3(a),
notwithstanding the eligibility requirements of any benefit plan or
arrangement and if the Executive is not eligible to receive any of the
Benefits under any such plan or arrangement, the Company shall nevertheless
continue to provide the Executive with the Benefit in question either
directly or through a plan which is permitted to provide the Executive with
the Benefit in question.
(b) The Company agrees that the options held by the Executive to
acquire 18,888 shares of Common Stock of the Company at $10.00 per share (the
"Options") pursuant to the New World Pasta 1999 Stock Option Plan and the Stock
Option Agreement entered into pursuant thereto (collectively, the "Plan") are,
notwithstanding the terms of the Plan, (i) fully vested, (ii) exercisable at any
time or from time to time on or after the later of the Effective Date or the
Termination Date and prior to January 28, 2009 and (iii) are not subject to
Section 5(c), 6(c)(iv) or 6(d) of the Plan. The Executive acknowledges and
agrees that all other options or rights to acquire any equity interest in the
Company or any payment with respect thereto shall expire as of the later of the
Effective Date or the Termination Date and Executive is not entitled to any
additional consideration in respect thereof. Notwithstanding the foregoing, in
the event that the Company's obligations to pay Salary and Benefits terminate
prior to January 27, 2004, pursuant to clause (ii) of Section 3(a)(iii), all
options outstanding on the date of such termination shall automatically expire.
(c) The Executive hereby acknowledges that, except as set forth in
subparagraphs (a) or (b) above, his participation in all other of the Company's
employee benefit plans and programs (including any and all option and equity
incentive plans), and all perquisites previously provided to the Executive
ceased as of the Termination Date.
(d) All of the foregoing Salary payments and Benefits shall be
subject to any applicable federal, state and local tax withholding.
4. Noncompetition; Confidentiality, etc.
-------------------------------------
(a) Non-Competition Covenants.
-------------------------
6
<PAGE>
(i) Executive will not for any period during which Executive is
receiving payments from the Company pursuant to this Agreement, engage in
Competition (as defined herein) with the Company.
(ii) Without limiting the generality of the foregoing, during any
period during which Executive is receiving payments from the Company
pursuant to this Agreement, Executive will not, directly or indirectly, for
his benefit or for the benefit of any other person or entity, do any of the
following: (a) solicit from any customer doing business with the Company
during the twelve (12) months immediately preceding the later of the
Effective Date or the Termination Date, Restricted Business; (b) solicit
from any potential customer of the business of the Company, Restricted
Business which has been the subject of a written or oral bid, offer or
proposal by the Company, or of substantial preparation by the Company with
a view to making such a bid, proposal or offer during the three (3) months
immediately preceding the Date of Termination; (c) solicit the employment
or services of, any person who is employed by or is a consultant to the
Company; or (d) otherwise wrongfully interfere with the business or
accounts of the Company, including through the making of any false
statements or comments of a defamatory or disparaging nature to third
parties regarding the Company or any of its officers, directors, personnel,
stockholders, products or services.
(iii) Executive further acknowledges and agrees that due to the
uniqueness of his services and the confidential nature of the information
he possesses, the covenants set forth in this Section 4(a) are reasonable
and necessary for the protection of the business and goodwill of the
Company; and it is the intention of the parties hereto that this Section
4(a) shall be enforceable to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which such enforcement
is sought. Accordingly, it is the intention of the parties hereto that if,
in the opinion of any court of competent jurisdiction, any provision or
clause set forth in this Section 4(a) is not reasonable in any respect,
including, without limitation, with respect to the scope of the time, place
or manner restrictions set forth herein, such court shall have the right,
power and authority to modify any and all such provisions and clauses as to
such court shall appear not unreasonable and to enforce the remainder of
this Section 4(a) as so modified.
7
<PAGE>
(iv) "Competition" means engaging in, or otherwise directly or
indirectly being employed by or acting as a consultant or lender to, or
being a director, officer, employee, principal, licensor, trustee, broker,
agent, stockholder, member, owner, joint venturer or partner of, or
permitting a name to be used in connection with the activities of any other
business or organization which engages, directly or through Affiliates it
controls, in the Restricted Business, provided that, it will not be a
violation for Executive to (a) become the registered or beneficial owner of
up to one percent (1%) of any class or series of the capital stock of a
publicly traded corporation that is engaged in Competition or (b) acquire
up to one percent (1%) of any issue of publicly traded debt securities of a
corporation that is engaged in Competition, it being understood that
Executive may not actively participate in the business of any such
corporation, by reason of such ownership or acquisition or otherwise, until
such time as this covenant expires.
(v) "Restricted Business" means the manufacturing, distribution,
marketing or sale of pasta or egg noodle products or any other business
which constitutes more than 10% of the consolidated revenues of the company
during the fiscal year ending immediately prior to any such determination
or the Termination Date, as the case may be.
(b) Confidentiality Covenant.
(i) Until January 27, 2011, Executive will not, directly or
indirectly, whether individually, as a director, stockholder, owner,
partner, member, officer, employee, principal or agent of any business, or
in any other capacity, make known, disclose, furnish, make available or
utilize any of the Company's confidential information, other than in the
proper performance of the duties contemplated by this Agreement, or as
required by law; provided that, prior to disclosing any of the confidential
information required by law, Executive will promptly notify the Company so
that the Company may seek a protective order or other appropriate remedy.
Immediately after the Interim Period, Executive will return all
confidential information, including all photocopies, extracts and summaries
thereof, and any such information stored electronically on tapes, computer
disks or in any other manner to the Company at any time upon request by the
Company; provided, however, that Executive may retain one copy of such
information and may use such information in connection with (a) any dispute
with the Company
8
<PAGE>
or (b) any action brought against Executive where such information is
relevant. Confidential Information does not include any information
available to or already in the hands of the public, any information
known to Executive prior to January 28, 1999, any information
disclosed to Executive by a third party who is not under a duty of
confidentiality with respect to such information or any information
independently developed by Executive without the use of Confidential
Information of the Company.
(ii) Company will not disclose any information concerning the
Executive to any person including but not limited to the reason for
any termination of employment of the Executive, provided however, that
the Company may disclose such information to its insurers as and to
the extent they have a need to know such information and provided
further that the Company may disclose such information as and to the
extent necessary and relevant to any dispute between the Company and
the Executive and as and to the extent such disclosure is required by
law.
(c) The Executive agrees that he shall not, at any time, make any
comment or statement that is defamatory, disparaging or otherwise critical
of the Company, or any of their subsidiaries, or any of their respective
products, operations, management, employees or stockholders.
(d) The Company and JLL shall not, and each shall use reasonable
efforts to cause its executive officers and directors, employees and attorneys
not to, make any comment or statement that is defamatory, disparaging or
otherwise critical of the Executive.
5. Mutual Release.
--------------
(a) Except as set forth in paragraph (b) of this Section 5, the
Executive, on behalf of himself, any and all family members, heirs, executors,
administrators, legal representatives and assignees of his rights under this
Agreement, on the one hand, and the Company and JLL, for and on behalf of their
respective partners, shareholders, members, directors and managers, on the other
hand, hereby voluntarily, knowingly, willingly, irrevocably and unconditionally
mutually release and forever discharge each other, including each of the other's
respective associates, stockholders, subsidiaries, successors, heirs, assigns,
agents, directors, officers, employees, representatives, lawyers and all persons
acting by, through, under or in concert with them, or any of them, of and from
any and all charges, complaints, claims, liabilities, obligations, promises,
9
<PAGE>
agreements, causes of action, rights, costs, losses, debts and expenses of any
nature whatsoever, known or unknown (the "Claims"), which against them the other
party or his or its successors or assigns ever had, now have or hereafter can,
shall or may have (either directly, indirectly, derivatively or in any other
representative capacity), based upon the Employment Agreement, the Executive's
employment by the Company, and the termination of such employment and the
Employment Agreement, including any rights or claims the other party may have
based on any facts or events relating thereto, whether known or unknown, that
occurred on or before the Effective Date, and including, without limitation, a
release of any rights or claims the Executive may have based on the Civil Rights
Act of 1866, as amended; the Civil Rights Act of 1991, as amended; the Age
Discrimination in Employment Act of 1967, as amended (the "ADEA"); Title VII of
the Civil Rights Act of 1964, as amended; the Americans with Disabilities Act of
1990; the Equal Pay Act of 1963; any and all laws of any state concerning wages,
employment and discharge; any state, local, or municipal fair employment
statutes or laws; and any other law, rule, regulation or ordinance pertaining to
employment, terms and conditions of employment, or termination of employment.
This release by the Executive also includes, without limitation, all Claims
arising under the Company's employee benefit plans and programs now in effect or
hereafter adopted.
(b) Nothing herein shall be deemed to affect (i) the Executive's or
the Company's rights under this Agreement or (ii) the Executive's rights to
indemnification under the Company's charter, by-laws or the laws of the State of
Delaware or (iii) the Executive's rights to Base Salary or benefits under the
Employment Agreement up to the later of the Effective Date or the Termination
Date except as provided in Section 2(b) with respect to options.
(c) The Executive acknowledges that the Company has advised the
Executive to discuss all aspects of this Agreement with legal counsel prior to
entering thereunto and that the Executive has availed himself of this right to
the extent he desires, and that he has carefully read and fully understands all
of the provisions of this Agreement. The Executive acknowledges that he is
entering into this Agreement, including the release and waiver set forth above,
knowingly and voluntarily, in exchange for good and valuable consideration.
Further, the Executive acknowledges that he has been given at least twenty-one
(21) days to consider the terms of this Agreement and in particular the waiver
of his rights under the ADEA as contained in Section 5 but may execute and
return this Agreement prior thereto. Once the Executive has executed this
Agreement, he shall have seven (7) additional days from such execution to revoke
his consent to the waiver of his rights under the ADEA (the "Revocation
Period"). If no such revocation occurs, the Executive's waiver of rights under
the ADEA shall become effective upon the expiration of the Revocation Period. In
the event that the Executive revokes his
10
<PAGE>
waiver of rights under the ADEA within the Revocation Period, this Agreement
shall not be effective in whole or in part.
(d) The Executive represents that, in executing this Agreement, he
has not relied and does not rely upon any representation or statement of the
Company not set forth herein with regard to the subject matter, basis or effect
of this Agreement or otherwise.
6. No Mitigation. The Company agrees that the Executive is not required
-------------
to seek other employment or to attempt in any way to reduce any amounts payable
to the Executive by the Company pursuant to Section 3 hereof. Further, the
amount of any payment or benefit provided for in this Agreement shall not be
reduced by any compensation earned by the Executive as the result of employment
by another employer or by retirement benefits.
7. Remedies; Notices.
-----------------
(a) In the event of a claimed breach by the Company of this
Agreement, the Executive shall be entitled to institute legal proceedings to
obtain damages for any such breach; provided, however, that if such claimed
breach involves failure to pay money, the Company shall be entitled to have ten
(10) business days to cure such breach after receiving written notice from the
Executive of such claimed breach. In the event of a claimed breach by the
Executive of the terms of this Agreement, the Executive shall have the right,
during the twenty (20) business day period commencing on the date on which the
Company delivers notice to him of such claimed breach, to cure any such breach
(if curable) and if the claimed breach is not cured during such period or is not
curable, the Company shall be entitled to institute legal proceedings to obtain
damages for any such breach, or, in case of a claimed breach of Sections 4 or 5,
to enforce the specific performance of such section and to enjoin any further
violation thereof.
(b) For the purposes of this Agreement, notices, demands and all
other communications required or permitted in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified mail, return receipt requested,
postage prepaid, addressed, if to the Executive, to:
C. Mickey Skinner
685 Woodthrush Way
Hummelstown, PA 17036-8500
11
<PAGE>
and
C. Mickey Skinner
6975 Green Tree Drive
Naples, FL 34108
with a copy to:
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
Minneapolis, Minnesota 55402
Attn: Larry A. Koch
and, if to the Company, as follows:
New World Pasta Company
85 Shannon Road
Harrisburg, Pennsylvania 17112
Attn: General Counsel
with a copy to:
Joseph Littlejohn & Levy
450 Lexington Avenue
Suite 3350
New York, New York 10017
Attn: Mr. David Y. Ying
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
(c) Arbitration. Notwithstanding any other provision of this
-----------
Agreement, in the event a dispute arises out of or pertaining to this
Agreement, the Executive may, by written notice to the Company, require
that such dispute be submitted to binding arbitration pursuant to the rules
of the American Arbitration Association in Philadelphia, Pennsylvania
(including reasonable discovery as determined by the arbitrator) and the
order of such arbitrator shall be conclusive, final and binding on all
parties hereto and may be entered as a judgment in any court having
jurisdiction over the parties. In the event that Executive requires the
Company to submit such dispute to arbitration and
12
<PAGE>
diligently pursues such arbitration, the Company shall continue to pay
Executive his Salary and provide the Benefits to be paid or provided to
Executive under this Agreement until the earlier of (i) a determination by
the arbitrator and (ii) the period provided for payment pursuant Sections
3(a) without regard to clause (ii) of Section 3(a)(iii); provided, however,
that Executive shall promptly repay to the Company all amounts paid to him
pursuant to this sentence (including the cost of all benefits provided) in
the event that the Executive does not prevail in such arbitration.
Executive acknowledges and agrees that in the event that he does not comply
with his obligations pursuant to the immediately preceding sentence, the
Company may set off such amount against any obligations owed to Executive.
8. Modification; Waiver or Discharge. This Agreement is entered into
---------------------------------
between the Company and the Executive for the benefit of each of them. No
provisions of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing signed by the
Executive and the Company. No waiver by any party hereto at any time of any
breach by any other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time.
9. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect; provided, however, that if any one or more of the terms incorporated in
Section 4 by reference to the Employment Agreement shall for any reason be held
to be excessively broad with regard to time, duration, geographic scope or
activity, that term shall not be deleted but shall be reformed and construed in
a manner to enable it to be enforced to the maximum extent allowable under
applicable law.
10. Entire Agreement. This Agreement sets forth the entire agreement of
----------------
the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto (including the
Employment Agreement). The Stockholders Agreement between New World Pasta, LLC
and Miller Pasta, LLC dated January 28, 1999 shall not be effected by this
Agreement.
11. Binding Effect. This Agreement shall be binding upon the parties
--------------
and their respective heirs, representatives, successors, transferees and
permitted assigns. Any successor to the Company (whether direct or indirect and
whether by purchase, lease, merger, consolidation, liquidation or otherwise) to
all or substantially all of the
13
<PAGE>
Company's business and/or assets shall be bound by, and shall assume in writing
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. For purposes of this Agreement, the term "Company" shall include any
successor to their business and/or assets which executes and delivers the
assumption agreement described in this Section 11 or which becomes bound by the
terms of this Agreement by operation of law.
12. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
13. Headings. The headings contained herein are for reference purposes
--------
only and shall not in any way affect the meaning or interpretation of this
Agreement.
14. Governing Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
Delaware without regard to principles of conflicts of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.
NEW WORLD PASTA COMPANY
By: /s/ David Y. Ying
---------------------------
Name:
Title:
C. MICKEY SKINNER
/s/ C. Mickey Skinner
------------------------------
JOSEPH LITTLEJOHN & LEVY INC.
For purposes of Section 4(d) and 5(a) only
By: /s/ David Y. Ying
---------------------------
Name: David Y. Ying
Title: Senior Managing Director
14
<PAGE>
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of February 4, 2000, by and between New World Pasta
Company, a Delaware corporation (the "Company"), and John Denton (the
"Executive").
WHEREAS, the Company desires that Executive serve as the Chairman of
the Board of Directors ("Chairman") and Chief Executive Officer ("CEO") of the
Company, and Executive desires to hold such positions under the terms and
conditions of this Agreement; and
WHEREAS, the Board of Directors of the Company (the "Company Board")
has approved and authorized the Company to enter into this Agreement with
Executive.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, and intending to be legally bound hereby, the
parties agree as follows:
1. Employment. The Company hereby employs Executive, and Executive
----------
hereby accepts employment with the Company, upon the terms and subject to the
conditions set forth herein.
2. Term.
----
(a) Subject to Section 14 hereof, the term of the employment by
the Company of Executive pursuant to this Agreement (as the same may be
extended, the "Term") shall commence on February 28, 2000 (the "Effective
Date"), and terminate on the second anniversary thereof.
(b) Commencing on the first anniversary of the Effective Date
and on each subsequent anniversary thereof, the Term shall automatically be
extended for one (1) additional year unless, not later than ninety days (90)
prior to any such anniversary date, either party hereto shall have notified the
other party hereto in writing that such extension shall not take effect.
<PAGE>
3. Position. During the Term, Executive shall serve as the Chairman
--------
and CEO of the Company, supervising the conduct of the business and affairs of
the Company and performing such other duties as the Company Board shall
determine.
4. Duties. During the Term, Executive shall devote his full time and
------
attention during normal business hours to the business and affairs of the
Company, except vacations in accordance with the Company's policies and for
illness or incapacity, in accordance with Section 8 hereof.
5. Salary and Bonus.
----------------
(a) During the Term, the Company shall pay to Executive a base
salary at the rate of $400,000 per year (the "Base Salary"), subject to
adjustments pursuant to the terms of Section 5(b) hereof.
(b) Commencing on the first anniversary hereof and on or prior to
each anniversary hereof during the Term, the Company Board or the Compensation
Committee of the Company Board (the "Compensation Committee") shall review the
Base Salary and may increase the Base Salary based upon performance and merit.
The Base Salary shall be payable to Executive in substantially equal
installments in accordance with the Company's normal payroll practices, but in
no event less often than semi-monthly.
(c) For the Company's fiscal year ending December 31, 2000, and
for each fiscal year during the Term thereafter, Executive shall be eligible to
receive an annual cash bonus equal to up to one hundred percent (100%) of his
Base Salary subject to the terms of a Bonus Compensation Plan to be approved by
the Company Board or the Compensation Committee.
6. Stock Option. Pursuant to the New World Pasta Company 1999 Stock
------------
Option Plan (the "Plan") and subject to the terms of the stock option agreement
to be entered into between Executive and the Company, attached hereto as Exhibit
A, within 90 days following the date hereof (the "Grant Date"), the Company
shall grant Executive (i) options, with an exercise price of $10 per share, to
purchase an aggregate of three and one-half percent (3.5%) of the outstanding
shares of common stock of the Company on the Grant Date (assuming for such
purposes that all options with an exercise price of $10 per share are deemed to
be outstanding on such date) and (ii) options with an exercise price of $73.50
per share to purchase an
2
<PAGE>
aggregate of 1.75% of the outstanding shares of common stock of the Company on
the Grant Date (assuming for such purposes that all options are deemed to be
outstanding on such date).
7. Stock Grant.
-----------
(a) On or promptly following the date hereof, the Company shall
issue to Executive 29,286 shares of common stock (the "Common Grant Shares") and
792 shares of preferred stock of the Company (the "Preferred Grant Shares," and
together with the Common Grant Shares, the "Grant Shares"), subject to (i) the
terms of Articles IV and V of the Stockholders' Agreement, dated as of January
28, 1999 and (ii) the provisions of Section 7(b) hereof.
(b) 11, 714 of the Common Grant Shares and 317 of the Preferred
Grant Shares shall be subject to forfeiture in accordance with the following
sentence. Commencing on the first anniversary hereof and on each subsequent
anniversary hereof during the Term, so long as Executive remains employed by the
Company on such anniversary, the forfeiture restrictions on 2,929 Common Grant
Shares and 80 Preferred Grant Shares shall lapse; provided, however, that in the
-------- -------
event of a Change of Control (as defined herein) of the Company, the forfeiture
restrictions on any of the Grant Shares which are then in existence shall
automatically lapse.
(c) Executive shall possess all incidents of ownership of the
Grant Shares issued hereunder, including the right to receive dividends with
respect to such Grant Shares and the right to vote such Grant Shares; provided,
--------
however, common stock distributed in connection with a stock split or stock
- -------
dividend, and other property distributed as a dividend, shall be subject to
restrictions and risk of forfeiture to the same extent as the Grant Shares with
respect to which such capital stock or other property has been distributed.
(d) In the event that the employment of the Executive pursuant to
this Agreement is terminated pursuant to Section 14(b), (c), (e) or (f) hereof,
for one hundred and twenty days following the applicable Date of Termination,
Executive or his heirs may require the Company to repurchase any Grant Shares
which are no longer subject to forfeiture for $10 per Common Grant Share and
$1000 per Preferred Grant Share.
3
<PAGE>
(e) In the event that the employment of the Executive pursuant to
this Agreement is terminated pursuant to Section 14(d) or 14(g) hereof, for one
hundred and twenty days following the applicable Date of Termination, Executive
may require the Company to repurchase up to 17,572 Common Grant Shares and 475
Preferred Grant Shares for $10 per Common Grant Share and $1000 per Preferred
Grant Share.
8. Vacation, Holidays and Sick Leave. During the Term, Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior executive officers, which
policies shall provide Executive with benefits no less favorable than those
provided to any other senior executive officer of the Company.
9. Business Expenses. Executive shall be reimbursed for all
-----------------
reasonable and necessary business expenses incurred by him in connection with
his employment, including, without limitation, expenses for travel and
entertainment incurred in conducting or promoting business for the Company upon
timely submission by Executive of receipts and other documentation as required
by the Internal Revenue Code of 1986, as amended (the "Code"), and in accordance
with the Company's normal expense reimbursement policies.
10. Health, Welfare and Pension Benefits.
------------------------------------
(a) During the Term, Executive and eligible members of his family
shall be eligible to participate fully in all (i) health and dental benefits and
insurance programs; (ii) life and short- and long-term disability benefits and
insurance programs and (iii) pension and retirement benefits, all as available
to senior executive officers of the Company generally. In addition to life
insurance provided to the Company's senior executive officers, Executive shall
be provided with supplemental (i) term life insurance coverage to the extent
necessary to provide Executive with aggregate death benefits equal to twice his
Base Salary and (ii) disability insurance coverage to the extent necessary to
provide Executive with aggregate disability benefits equal to his Base Salary.
(b) During the Term, the Company shall reimburse Executive for
all reasonable expenses incurred by him in connection with an annual physical
examination by a licensed physician at a medical center of Executive's choice.
4
<PAGE>
11. Membership Dues and Car Allowance. During the Term, the Company
---------------------------------
shall reimburse Executive up to an aggregate of $20,000 per year for (i) annual
membership dues and assessments at one country club of Executive's choice and
(ii) an automobile to be used by Executive in conducting or promoting business
for the Company.
12. D&O Coverage. During the Term, the Company shall maintain
------------
directors and officers liability insurance for its directors and officers, in
such amounts as the Company Board believes is reasonably necessary.
13. Relocation Expenses. Executive shall be reimbursed for all
-------------------
reasonable and necessary expenses incurred by him in connection with his commute
from Executive's residence to the Company, including reasonable costs for meals,
lodging and transportation during such trips. If Executive relocates his
personal residence to the Harrisburg, Pennsylvania area, the Company shall pay
the Executive $50,000 to cover all reasonable costs and expenses incurred by
Executive in connection therewith.
14. Termination of Agreement. The employment by the Company of
------------------------
Executive pursuant to this Agreement shall not be terminated prior to the end of
the Term, except as set forth in this Section 14.
(a) By Mutual Consent. The employment by the Company of Executive
-----------------
pursuant to this Agreement may be terminated at any time by the mutual written
agreement of the Company and Executive.
(b) Death. The employment by the Company of Executive pursuant to
-----
this Agreement shall be terminated upon the death of Executive, in which event
Executive's spouse or heirs shall receive the (i) Executive's Base Salary and
benefits to be paid or provided to Executive under this Agreement through the
Date of Termination and, (ii) the Base Salary and health and welfare benefits
pursuant to Section 10(a)(i) hereof to be paid or provided to Executive under
this Agreement for one (1) year after the Date of Termination.
(c) Disability. The employment by the Company of Executive
----------
pursuant to this Agreement may be terminated by written notice to Executive at
the option of the Company in the event that (i) Executive becomes unable to
perform his normal duties by reason of physical or mental illness or accident
for any six (6) consecutive month period, or (ii) the Company receives written
opinions from both a
5
<PAGE>
physician for the Company and a physician for Executive that Executive will be
so disabled. In the event the employment by the Company of Executive is
terminated pursuant to this Section 14(c), Executive shall be entitled to
receive (i) all Base Salary and benefits to be paid or provided to Executive
under this Agreement through the Date of Termination and (ii) the Base Salary
and health and welfare benefits pursuant to Section 10(a) hereof to be paid or
provided to Executive for one (1) year after the Date of Termination; provided,
--------
however, that amounts payable to Executive under this Section 14(c) shall be
- -------
reduced by the proceeds of any short- and/or long-term disability payments under
the Company plans referred to in Section 10(a) hereof to which Executive may be
entitled during such period.
(d) By the Company for Cause. The employment of Executive
------------------------
pursuant to this Agreement may be terminated by the Company by written notice to
Executive ("Notice of Termination") for Cause. In the event the employment by
the Company of Executive is terminated pursuant to this Section 14(d), Executive
shall be entitled to receive all Base Salary and benefits to be paid or provided
to Executive under this Agreement through the Date of Termination.
(e) By the Company Without Cause. The employment by the Company
----------------------------
of Executive pursuant to this Agreement may be terminated by the Company at any
time without Cause by delivery of a Notice of Termination to Executive. In the
event the employment by the Company of Executive is terminated pursuant to this
Section 14(e), Executive shall be entitled to receive (i) all Base Salary and
benefits to be paid or provided to Executive under this Agreement through the
Date of Termination, and (ii) the Base Salary and health and welfare benefits
pursuant to Section 10(a) and (b) hereof to be paid or provided to Executive
under this Agreement for the remainder of the Term; notwithstanding the
foregoing, in the event of the termination by the Executive pursuant to this
Section 14(e) prior to the second anniversary hereof, Executive shall be
entitled to receive Base Salary and health and welfare benefits pursuant to
Section 10(a) hereof to be paid or provided to Executive until two years from of
such Date of Termination.
(f) By Executive for Good Reason. The employment by Executive
----------------------------
pursuant to this Agreement may be terminated by Executive by written notice to
the Company of his resignation ("Notice of Resignation") for Good Reason (as
defined herein). In the event the employment by the Company of Executive is
terminated pursuant to this Section 14(f), Executive shall be entitled to
receive (i) all Base Salary and benefits to be paid or provided to Executive
under this Agreement through the Date of Termination, (ii) the Base Salary and
health and welfare benefits
6
<PAGE>
pursuant to Section 10(a) and (b) hereof to be paid or provided to Executive
under this Agreement for the remainder of the Term.
(g) By Executive Without Good Reason. The employment of Executive
--------------------------------
by the Company pursuant to this Agreement may be terminated by Executive by
delivery of a Notice of Resignation at any time without Good Reason. In the
event the employment by the Company of Executive is terminated pursuant to this
Section 14(g), Executive shall be entitled to receive all Base Salary and
benefits to be paid or provided to Executive under this Agreement through the
Date of Termination.
(h) Date of Termination. Executive's Date of Termination shall
-------------------
be: (i) if the parties hereto mutually agree to terminate this Agreement
pursuant to Section 14(a) hereof, the date designated by the parties in such
agreement; (ii) if Executive's employment by the Company is terminated pursuant
to Section 14(b), the date of Executive's death; (iii) if Executive's employment
by the Company is terminated pursuant to Section 14(c), the last day of the
applicable period referred to in Section 14(c)(i) hereof or the date upon which
the Company receives written opinions from both a physician for the Company and
a physician for Executive referred to in Section 14(c)(ii) hereof; (iv) if
Executive's employment by the Company is terminated pursuant to Section 14(d),
the date on which a Notice of Termination is given; (v) if Executive's
employment by the Company is terminated pursuant to Section 14(e) or 14(g), the
date the Notice of Termination or Notice of Resignation, as the case may be, is
given (provided, that the Company, in its sole discretion may waive all or any
part of such 60-day period); and (vi) if Executive's employment by the Company
is terminated pursuant to Section 14(f), the date on which a Notice of
Resignation is given. If, within thirty (30) days after any Notice of
Termination is given pursuant to Section 14(c), Executive notifies the Company
that a dispute exists concerning Executive's termination, the Date of
Termination shall be the date on which the dispute is finally determined in
favor of termination of Executive's employment by the Company hereunder, either
by mutual written agreement of the parties or by a binding and final arbitration
award; provided, however, that Executive's Date of Termination shall be extended
-------- -------
by a notice of dispute only if such notice is given in good faith and Executive
pursues the resolution of such dispute with reasonable diligence.
15 Representations.
---------------
7
<PAGE>
(a) The Company represents and warrants that this Agreement has
been authorized by all necessary corporate action of the Company and is a valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms.
(b) Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement and that this Agreement is
a valid and binding agreement of Executive enforceable against Executive in
accordance with its terms.
16 Successors. This Agreement is a personal contract and the rights
----------
and interests of Executive hereunder may not be sold, transferred, assigned,
pledged, encumbered, or hypothecated by him, except as otherwise expressly
permitted by the provisions of this Agreement. This Agreement shall inure to the
benefit of and be enforceable by Executive and his personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Executive should die while any amount would still be
payable to him hereunder had Executive continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to his devisee, legatee or other designee or, if there is no such
designee, to his estate.
17 Non-Competition Covenants.
-------------------------
(a) Executive will not, during the Term and for any period during
which Executive is receiving payments from the Company pursuant to this
Agreement, engage in Competition (as defined herein) with the Company.
(b) Without limiting the generality of foregoing, during the Term
and for any period during which Executive is receiving payments from the Company
pursuant to this Agreement, Executive will not, directly or indirectly, for his
benefit or for the benefit of any other person or entity, do any of the
following: (i) solicit Restricted Business from any customer doing business with
the Company, provided that, after the expiration of the Term, the restriction
--------
set forth in this clause (i) shall be limited to such customers with which the
Company has done business during the twelve months immediately preceding the
expiration of the Term; (ii) solicit Restricted Business from any potential
customer of the business of the Company, which has been the subject of a written
or oral bid, offer or proposal by the Company, or of preparation by the Company
with a view to making such a bid,
8
<PAGE>
proposal or offer, provided that, after the Termination Date, the restriction
--------
set forth in this clause (ii) shall be limited to such bids, offers and
proposals by the Company, in any case, during the twelve months immediately
preceding the Date of Termination; (iii) solicit the employment or services of
any person who is employed by or is a consultant to the Company; or (iv)
otherwise wrongfully interfere with the business or accounts of the Company,
including through the making of any false statements or comments of a defamatory
or disparaging nature to third parties regarding the Company or any of its
officers, directors, personnel, stockholders, products or services.
(c) Notwithstanding the provisions of Sections 17(a) and 17(b),
in the event that this Agreement is terminated pursuant to Section 14(d) or (g)
(whether automatically or by Executive), then the provisions of Sections 17(a)
and 17(b) shall remain in effect for a period of two (2) years thereafter.
(d) Executive further acknowledges and agrees that due to the
uniqueness of his services and the confidential nature of the information he
will possess, the covenants set forth in this Section 17 are reasonable and
necessary for the protection of the business and goodwill of the Company; and it
is the intention of the parties hereto that this Section 17 shall be enforceable
to the fullest extent permissible under the laws and public policies applied in
each jurisdiction in which such enforcement is sought. Accordingly, without
limiting the generality of Section 22 hereof, it is the intention of the parties
hereto that if, in the opinion of any court of competent jurisdiction, any
provision or clause set forth in this Section 17 is not reasonable in any
respect, including, without limitation, with respect to the scope of the time,
place or manner restrictions set forth herein, such court shall have the right,
power and authority to modify any and all such provisions and clauses as to such
court shall appear not unreasonable and to enforce the remainder of this Section
17 as so modified.
18 Confidentiality Covenant.
------------------------
(a) Executive will not, directly or indirectly, whether
individually, as a director, stockholder, owner, partner, member, officer,
employee, principal or agent of any business, or in any other capacity, make
known, disclose, furnish, make available or utilize any of the Company's
confidential information, other than in the proper performance of the duties
contemplated by the Agreement, or as required by law; provided that, prior to
--------
disclosing any of the confidential information required by law, Executive will
promptly notify the Company so that the Company
9
<PAGE>
may seek a protective order or other appropriate remedy. Executive will return
all confidential information, including all photocopies, extracts and summaries
thereof, and any such information stored electronically on tapes, computer disks
or in any other manner to the Company at any time upon request by the Company
and, in any event, promptly after the termination of his employment for any
reason; provided, however, that Executive may retain one copy of such
-------- -------
information and may use such information in connection with (i) any dispute with
the Company or (ii) any action brought against Executive where such information
is relevant. Confidential information does not include any information available
to or already in the hands of the public, any information known to Executive
prior to the date hereof, any information disclosed to Executive by a third
party who is not under a duty of confidentiality with respect to such
information, any information independently developed by Executive without the
use of confidential information of the Company.
(b) Company will not disclose any information concerning
Executive to any person including, but not limited to, the reason for any
termination of employment of Executive, provided however, that the Company may
-------- -------
disclose such information to its insurers as and to the extent they have a need
to know such information, and provided further that the Company may disclose
-------- -------
such information as and to the extent necessary and relevant to any dispute
between the Company and Executive and as and to the extent such disclosure or
any other disclosure is required by law.
19 Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and
supersedes any other undertakings and agreements, whether oral or in writing,
previously entered into by them with respect thereto. Executive represents that,
in executing this Agreement, he does not rely and has not relied upon any
representation or statement made by the Company not set forth herein with regard
to the subject matter or effect of this Agreement or otherwise.
20 Amendment or Modification; Waiver. No provision of this Agreement
---------------------------------
may be amended or waived unless such amendment or waiver is agreed to in
writing, signed by Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
10
<PAGE>
21 Notices. All notices and other communications required or
-------
permitted to be given hereunder shall be in writing and shall be (i) delivered
by hand, (ii) delivered by a nationally recognized commercial overnight delivery
service, (iii) mailed postage prepaid by first class mail or (iv) transmitted by
facsimile transmitted to the party concerned at the address or telecopier number
set forth below:
To Executive at:
Mr. John Denton
850 Grantley Court
York, Pennsylvania 17403
with copies to:
Bernard Frechtman, Esq.
8041 Knue Road
Indianapolis, Indiana 46235
To the Company at:
New World Pasta Company
85 Shannon Road
Harrisburg, Pennsylvania 17112
Attention: General Counsel
with copies to:
Joseph Littlejohn & Levy
450 Lexington Avenue
New York, New York 10017
Facsimile (212) 286-8626
Attention: David Y. Ying
and
Skadden, Arps, Slate, Meagher & Flom LLP
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899
Facsimile (302) 651-3001
11
<PAGE>
Attention: Robert B. Pincus
Such notices shall be effective: (i) in the case of hand deliveries
when received; (ii) in the case of an overnight delivery service, on the next
business day after being placed in the possession of such delivery service, with
delivery charges prepaid; (iii) in the case of mail, seven (7) days after
deposit in the postal system, first class mail, postage prepaid; and (iv) in the
case of facsimile notices, when electronic confirmation of receipt is received
by the sender. Any party may change its address and telecopy number by written
notice to the other given in accordance with this Section 21; provided, however,
-------- -------
that such change shall be effective when received.
22 Severability. If any provision or clause of this Agreement or the
------------
application of any such provision or clause to any party or circumstances shall
be determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision or clause to such person or circumstances other than those to
which it is so determined to be invalid and unenforceable, shall not be affected
thereby, and each provision or clause hereof shall be validated and shall be
enforced to the fullest extent permitted by law.
23 Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
24 Governing Law; Arbitration.
--------------------------
(a) This Agreement will be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without regard to
it conflicts of law principles.
(b) In the event a dispute arises out of or pertaining to this
Agreement, either party may, by written notice to the other party, require that
such dispute be submitted to binding arbitration pursuant to the rules of the
American Arbitration Association in Harrisburg, Pennsylvania (including
reasonable discovery as determined by the arbitrator) and the order of such
arbitrator shall be conclusive, final and binding on all parties hereto and may
be entered as a judgment in any court having jurisdiction over the parties.
12
<PAGE>
25 Headings. All descriptive headings of sections and paragraphs in
--------
this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
26 Withholding. All payments to Executive under this Agreement shall
-----------
be reduced by all applicable withholding required by federal, state or local
law.
27 Specific Performance. Each party hereto acknowledges that money
--------------------
damages would be both incalculable and an insufficient remedy for any breach of
this Agreement by such party and that any such breach would cause the other
parties, irreparable harm. Accordingly, each party hereto also agrees that, in
the event of any breach or threatened breach of the provisions of this Agreement
by such party, the other parties shall be entitled to equitable relief without
the requirement of posting a bond or other security, including in the form of
injunctions and orders for specific performance, in addition to all other
remedies available to such other parties at law or in equity.
28 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
29 Definitions.
-----------
(a) "Cause" means the determination, in good faith, by the
Company Board, after notice to Executive and a reasonable opportunity to cure of
no less than 30 days, that one or more of the following events has occurred: (i)
any act of gross negligence, fraud or willful misconduct by Executive materially
injuring the interest, business or reputation of the Company, or any of its
parents, subsidiaries or affiliates; (ii) Executive's commission of any felony;
(iii) any misappropriation or embezzlement of the property of the Company, or
any of its parents, subsidiaries or affiliates; or (iv) any material breach by
Executive of this Agreement, including, without limitation, a material breach of
Sections 17 and 18 hereof, which breach remains uncorrected for a period of
thirty (30) days after receipt by Executive of written notice from the Company
setting forth such breach.
(b) "Change of Control" includes the occurrence of any of the
following events: (i) any "Person" (within the meaning of Section 12(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than New World Pasta, LLC, a Delaware limited liability company,
or its
13
<PAGE>
affiliates, becomes a Beneficial Owner (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of more than fifty percent (50%) of the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors; (ii) there is
consummated a merger or consolidation of the Company or any direct or indirect
subsidiary of the Company with any other Company, other than a merger or
consolidation that would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof) at least fifty percent
(50%) of the combined voting power of the securities of the Company or such
surviving entity or any parent thereof outstanding immediately after such merger
or consolidation; (iii) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets; or (iv) the following individuals cease for any reason
to constitute a majority of the number of directors then serving: individuals
who, as of February 1, 2000, constitute the Company Board and any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Company Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least a
majority of the directors then still in office who either were directors on
February 1, 2000 or whose appointment, election or nomination for election was
previously so approved or recommended.
(c) "Competition" means engaging in, or otherwise directly or
indirectly being employed by or acting as a consultant or lender to, or being a
director, officer, employee, principal, licensor, trustee, broker, agent,
stockholder, member, owner, joint venturer or partner of, or permitting a name
to be used in connection with the activities of any other business or
organization which engages, directly or through affiliates it controls, in the
Restricted Business, provided that, it will not be a violation for Executive to
--------
(i) become the registered or beneficial owner of up to one percent (1%) of any
class or series of the capital stock of a publicly traded corporation that is
engaged in Competition or (ii) acquire up to one percent (1%) of any issue of
publicly traded debt securities of a corporation that is engaged in Competition,
it being understood that Executive may not actively participate in the business
of any such corporation, by reason of such ownership or acquisition or
otherwise, until such time as this covenant expires.
14
<PAGE>
(d) "Good Reason" for termination includes the occurrence of any
of following events without the prior consent of Executive: (i) removal of
Executive from Executive's then current position; (ii) material reduction by the
Company of Executive's then current duties, responsibilities or authority or the
assignment to Executive of duties materially inconsistent with his then current
position; (iii) relocation of the Company's headquarters to a location more than
25 miles from the greater Harrisburg, Pennsylvania metropolitan area; (iv)
material breach by the Company of this Agreement, which breach remains uncured
for a period of thirty days after receipt by the Company of written notice from
Executive; or (v) failure to extend the Term pursuant to Section 2(b) hereof.
(e) "Restricted Business" means the manufacturing, distribution,
marketing or sale of pasta or egg noodle products or any other business which
constitutes more than 10% of the consolidated revenues of the Company during the
fifty-two week period ending immediately prior to any such determination or the
Date of Termination, as the case may be.
[SIGNATURE PAGE FOLLOWS]
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Employment Agreement as of the date first above written.
NEW WORLD PASTA COMPANY
By: /s/ David Y. Ying
-------------------------------
Name:
Title:
EXECUTIVE
/s/ John Denton
----------------------------------
John Denton
16
<PAGE>
Exhibit 12.1
NEW WORLD PASTA
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings before income taxes............... 31,625 31,144 41,720 41,868 3,234
Interest expense........................... -- -- -- -- 26,325
---------- ----------- ----------- ----------- ----------
31,625 31,144 41,720 41,868 29,559
========== =========== =========== =========== ==========
Interest expense........................... -- -- -- -- 26,325
Dividends on preferred stock............... -- -- -- -- 12,611
---------- ----------- ----------- ----------- ----------
-- -- -- -- 38,936
========== =========== =========== =========== ==========
Ratio of Earnings to Combined
Fixed Charges.......................... N/A* N/A* N/A* N/A* .76 (1)
</TABLE>
* Historically, New World Pasta has not incurred indebtedness or related
interest expense as a division of Hershey Foods Corporation.
(1) Combined fixed changes exceed earnings before income taxes for the year
ended December 31, 1999 by $9,377,000.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,146
<SECURITIES> 0
<RECEIVABLES> 17,651
<ALLOWANCES> 0
<INVENTORY> 19,868
<CURRENT-ASSETS> 60,842
<PP&E> 219,707
<DEPRECIATION> 120,507
<TOTAL-ASSETS> 328,815
<CURRENT-LIABILITIES> 39,294
<BONDS> 292,995
126,096
0
<COMMON> 50
<OTHER-SE> (135,582)
<TOTAL-LIABILITY-AND-EQUITY> 328,815
<SALES> 354,019
<TOTAL-REVENUES> 354,019
<CGS> 187,066
<TOTAL-COSTS> 187,066
<OTHER-EXPENSES> 137,394
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,325
<INCOME-PRETAX> 3,234
<INCOME-TAX> 2,774
<INCOME-CONTINUING> 460
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 460
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
