<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from xxx to xxx
Commission File Number 333-76763
New World Pasta Company
(Exact name of registrant as specified in its charter)
Delaware 52-2006441
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
85 Shannon Road, Harrisburg, PA 17112
(Address of principal executive office) (zip code)
(717) 526-2200
(Registrant's telephone number, including area code)
Not Applicable
(Former Address of principal executive office) (zip code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
As of October 1, 2000, the registrant had 5,011,714 shares of common stock
outstanding, par value $.01, and 114,236 shares of preferred stock outstanding.
<PAGE>
NEW WORLD PASTA COMPANY
INDEX TO FORM 10-Q
PART I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets as of October 1, 2000
(unaudited) and December 31, 1999 1
Consolidated Statements of Operations (unaudited) for
the Three Months and Nine Months Ended October 1,
2000 and October 3, 1999 2
Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended October 1, 2000 and October 3,
1999 3
Consolidated Statement of Stockholders' Equity (Deficit)
(unaudited) for the Nine Months Ended October 1, 2000 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
PART I - Financial Information
ITEM 1 - Financial Statements
NEW WORLD PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
As of October 1, 2000 and December 31, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
(unaudited)
October 1, December 31,
2000 1999
------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,625 13,146
Trade and other receivables, net 19,965 17,651
Inventories, net 18,629 19,868
Prepaid expenses and other current assets 1,967 1,391
Deferred income taxes 9,802 8,786
------------ --------------
Total current assets 54,988 60,842
Property, plant and equipment, net 94,363 99,200
Deferred income taxes 96,754 95,667
Intangible assets, net 62,729 64,571
Deferred debt costs, net 8,306 8,535
------------ --------------
Total assets $ 317,140 328,815
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 1,320 1,340
Loan payable 35 --
Accounts payable:
Trade 8,889 8,133
Related party 2,991 1,666
Accrued other expenses 21,467 28,155
------------ --------------
Total current liabilities 34,702 39,294
Long-term debt, less current maturities 288,700 291,655
Employee benefit liabilities 6,441 7,302
------------ --------------
Total liabilities 329,843 338,251
------------ --------------
Mandatorily redeemable 12% cumulative preferred stock, $.01 par
value; $1,000 liquidation preference value; 115,000 shares
authorized; 114,236 and 113,485 shares issued and outstanding
as of October 1, 2000 and December 31, 1999, respectively 137,115 126,096
Mandatorily redeemable common stock, $.01 par value; $10 liquidation
value; 11,714 and 0 shares issued and outstanding
as of October 1, 2000 and December 31, 1999, respectively 117 --
Unearned compensation (371) --
------------ --------------
136,861 126,096
------------ --------------
Stockholders' equity (deficit):
Common stock, $.01 par value; 7,500,000 and 35,900,000 shares
authorized as of October 1, 2000 and December 31, 1999,
respectively; 5,000,000 shares issued and outstanding as of
October 1, 2000 and December 31, 1999 50 50
Additional paid-in capital 152,633 162,901
Accumulated deficit (302,247) (298,483)
------------ --------------
Total stockholders' equity (deficit) (149,564) (135,532)
------------ --------------
Total liabilities and stockholders' equity (deficit) $ 317,140 328,815
============ ==============
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated financial statements.
1
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended October 1, 2000 and
October 3, 1999 (in thousands)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Three Months Ended Nine Months Ended
Oct. 1, 2000 Oct. 3, 1999 Oct. 1, 2000 Oct. 3, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 75,138 86,956 229,585 267,758
Cost of sales 42,064 45,491 127,928 143,335
---------------- ------------------ ----------------- ----------------
Gross profit 33,074 41,465 101,657 124,423
Selling and marketing expenses 22,574 26,955 74,952 85,147
General and administrative expenses 3,055 4,288 10,613 10,928
Recapitalization transaction expenses -- 217 -- 7,964
Cost of restructuring, net -- -- 582 2,700
Gain on sale of closed facility -- -- (251) --
---------------- ------------------ ----------------- ----------------
Income from operations 7,445 10,005 15,761 17,684
Interest expense, net 7,405 7,052 21,628 19,463
---------------- ------------------ ----------------- ----------------
Income (loss) before income taxes 40 2,953 (5,867) (1,779)
Income tax expense (benefit) 39 1,441 (2,103) 805
---------------- ------------------ ----------------- ----------------
Net income (loss) 1 1,512 (3,764) (2,584)
Dividends on preferred stock 3,427 3,405 10,268 9,237
---------------- ------------------ ----------------- ----------------
Net loss attributable to common stock $ (3,426) (1,893) (14,032) (11,821)
================ ================== ================= ================
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated financial statements.
2
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended October 1, 2000 and October 3, 1999
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
October 1, 2000 October 3, 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,764) $ (2,584)
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 11,194 11,573
(Gain) loss from disposal of property, plant and equipment (205) 42
Deferred income taxes (2,103) 805
Compensation expense from issuance of stock 497 --
Changes in assets and liabilities:
Trade and other receivables (2,314) (5,902)
Inventories 1,194 140
Prepaid expenses and other current assets (576) 2,998
Accounts payable 2,081 2,085
Accrued expenses and other liabilities (7,549) 13,710
------------------ ------------------
Net cash provided by (used in) operating activities (1,545) 22,867
------------------ ------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (4,422) (3,108)
Proceeds from disposal for property, plant and equipment 1,103 --
------------------ ------------------
Net cash used in investing activities (3,319) (3,108)
------------------ ------------------
Cash flows from financing activities:
Proceeds from issuance of debt 355 470,481
Proceeds from issuance of preferred stock -- 113,485
Proceeds from issuance of common stock -- 50,000
Repayment of debt (3,295) (171,035)
Deferred debt costs (717) (9,627)
Advances and withdrawals with former parent prior to
recapitalization, net -- (5,887)
Repurchase of common stock -- (460,000)
------------------ ------------------
Net cash used in financing activities (3,657) (12,583)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (8,521) 7,176
Cash and cash equivalents at beginning of period 13,146 --
------------------ ------------------
Cash and cash equivalents at end of period $ 4,625 $ 7,176
================== ==================
Supplemental disclosures of cash flow information: Cash paid during
the periods for:
Interest, net $ 24,813 $ 13,692
Income taxes -- 65
Noncash investing and financing activities:
Deferred tax assets from recapitalization $ -- $ 106,900
Preferred stock dividend 10,268 9,237
Deferred tax liabilities -- 18,662
Issuance of common stock 117 44,679
Issuance of preferred stock 317 100,636
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated financial statements.
3
<PAGE>
NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
for the Nine Months Ended October 1, 2000
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 2000 5,000,000 $ 50 162,901 (298,483) (135,532)
Net loss -- -- -- (3,764) (3,764)
Preferred stock dividend -- -- (10,268) -- (10,268)
--------------- ---------- ----------- ---------------- -------------
Balance at October 1, 2000 5,000,000 $ 50 $ 152,633 (302,247) (149,564)
========= ======== ========= ========= =========
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated financial statements.
4
<PAGE>
NEW WORLD PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter and nine months ended October 1, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. These financial statements should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations included in Item 2. In addition, for further disclosures, see the
audited financial statements and the footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
New World Pasta Company ("New World Pasta" or "Company") uses a calendar
year annual reporting period, with interim reporting broken down into 4-4-5 (4
week - 4 week - 5 week) monthly periods within each quarterly period. The
Company's quarterly periods in 2000 end on April 2, July 2, and October 1
compared to April 4, July 4, and October 3 during 1999.
2. Description of Business
New World Pasta manufactures and sells quality pasta products in a variety
of shapes, sizes, flavors and packages throughout the United States. New World
Pasta markets its products on a regional basis under several brand names,
including AMERICAN BEAUTY, LIGHT N'FLUFFY, MRS. WEISS', P&R, RONZONI, SAN
GIORGIO and SKINNER. The Company also manufactures certain private label brands
as well as products for industrial and foodservice customers.
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) while 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.
5
<PAGE>
3. Inventories
New World Pasta values much of the raw material components of its
inventories under the last-in, first-out (LIFO) method and the remaining
inventories at the lower of first-in, first-out (FIFO), cost or market.
Inventories valued using the LIFO method totaled $6.5 million as of October 1,
2000 and $7.2 million as of December 31, 1999. All inventories were stated at
amounts that did not exceed realizable values. Total inventories were as
follows:
October 1, December 31,
2000 1999
------------- ---------------
(in thousands)
Raw materials..................... $ 4,248 4,539
Work in process................... 218 250
Finished goods.................... 14,537 14,483
------------ --------------
Inventories at FIFO............... 19,003 19,272
Adjustments to LIFO............... (374) 596
------------ --------------
Total inventories........... $ 18,629 19,868
============ ==============
4. Amendment to Credit Facility
The Company entered into an amendment and waiver to its senior credit
facility (as amended, the "Credit Facility") effective as of May 10, 2000,
pursuant to which, among other things: (i) the lenders waived compliance by the
Company with certain financial covenants contained thereunder with respect to
the quarter ended April 2, 2000; (ii) certain financial covenants contained
therein were revised or eliminated for all periods ending on or before December
31, 2002; (iii) the revolving credit portion of the Credit Facility was reduced
to $20 million; and (iv) the interest rates on the Credit Facility were
increased.
5. Cost of Restructuring
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. The building had
a book value of approximately $851,000 and was sold on April 3, 2000 for
approximately $1.1 million resulting in a gain of approximately $251,000.
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:
6
<PAGE>
<TABLE>
<CAPTION>
Original Balance as of
Balance Utilized Reversal October 1, 2000
--------------- -------------- ------------- ----------------------
(in thousands)
<S> <C> <C> <C> <C>
Severance and other
employee related costs $ 600 600 -- --
Other facility exit costs 500 432 68 --
--------------- --------------- ------------- --------------
Total costs $ 1,100 1,032 68 --
=============== =============== ============= ==============
</TABLE>
In the second quarter of 2000, the Company recorded a second restructuring
charge of $650,000 to recognize the reorganization of its workforce. The
reorganization resulted in the termination of 139 employees from various
functional areas across the Company. The reserve was established to record the
severance and outplacement costs for the terminated employees. As of October 1,
2000, $569,000 of the reserve has been utilized. Management expects payments of
separation costs to be completed prior to the end of 2000.
Included in the restructuring charge for the workforce reorganization is
the following:
<TABLE>
<CAPTION>
Original Balance as of
Balance Utilized October 1, 2000
-------- -------- ---------------
(in thousands)
<S> <C> <C> <C>
Severance and other employee
related costs $ 571 528 43
Other reorganization costs 79 41 38
------------- --------------- -------------
$ 650 569 81
============= =============== =============
</TABLE>
6. Stock-Based Compensation
On February 28, 2000, New World Pasta finalized an employment agreement
with John Denton for the position of Chairman of the Board and Chief Executive
Officer. As a provision of that agreement, Mr. Denton received 29,286 shares of
common stock and 792 shares of preferred stock. Of those shares, 11,714 shares
of common stock and 317 shares of preferred stock are restricted. The forfeiture
restrictions on these shares lapse over 4 years, in amounts of 2,929 shares of
common stock and 80 shares of preferred stock annually. In addition, tax
withholding on the value of shares to be received was satisfied through a
reduction in the issuance of unrestricted shares. As a result, 17,572 common
shares and 41 preferred shares were not issued in connection with the agreement.
Compensation expense was recognized upon the date of grant for the
unrestricted shares based on the estimated fair market value of each share and
amounted to approximately $651,000. Unearned compensation was recorded upon the
date of grant for the restricted shares based on the estimated fair market value
of each share and amounted to approximately $434,000. Compensation expense is
charged to earnings on a straight-line basis over the four-year restriction
period. In addition, the employment agreement has a provision which requires the
repurchase of shares by the Company at those values should Mr. Denton's
employment be terminated due to a number of reasons.
7
<PAGE>
7. Subsidiary Financial Information
The Company has two wholly-owned subsidiaries, Pasta Group L.L.C. and
Winchester Pasta, L.L.C. (collectively, the "Subsidiaries"). Set forth below is
summarized financial information attributed to the combined Subsidiaries.
Summarized financial information is presented for the Subsidiaries because the
Company's management does not believe that the information proposed in separate
financial statements would be material to investors.
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Three Months Ended Nine Months Ended
October 1, 2000 October 3, 1999 October 1, 2000 October 3, 1999
--------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Net Sales................. $ 63,990 71,911 192,092 219,083
Gross Profit.............. 32,167 39,505 97,998 118,777
Operating income.......... 7,072 7,971 13,665 23,250
Net income................ 6,827 3,963 15,200 22,502
Current assets............ 55,651 67,932 55,651 67,932
Non-current assets........ 201,920 209,804 201,920 209,804
Current liabilities....... 27,997 30,970 27,997 30,970
Non-current liabilities... 9,550 9,581 9,550 9,581
</TABLE>
These Subsidiaries have, jointly and severally, fully and unconditionally
guaranteed the obligations of the Company with respect to the Company's 9 1/4%
Senior Subordinated Notes due 2009 (the "Notes"). The covenants of the Notes and
the Credit Facility do not restrict the ability of the Subsidiaries to make cash
distributions to the Company.
The summarized financial information for the Subsidiaries has been prepared
from the books and records of the Company. The summarized financial information
may not necessarily be indicative of the results of operations or financial
position had the Subsidiaries operated as independent entities.
8
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
The discussion set forth below, as well as other portions of this quarterly
report, and other reports and statements filed by the Company from time-to-time
with the Securities and Exchange Commission contain, or may contain, statements
concerning potential future events. Such forward-looking statements are based
upon the beliefs of, and the information currently available to, the Company's
management, as well as estimates and assumptions made by the Company's
management, including assumptions about uncertainties and risks. Readers can
identify these forward-looking statements by the use of such verbs as "expects",
"anticipates", "believes", "estimates", "intends", "plans" or similar verbs or
conjugations of such verbs. If circumstances arise, the Company's actual results
could materially differ from those anticipated by such forward-looking
statements. The differences could be caused by a number of factors or a
combination of these factors. The Company currently believes that the most
important of these factors are the Company's high degree of leverage, a
potential increase in the costs of durum/semolina, the intense levels of
competition in the pasta industry and the risks associated with the Company's
revised sales and marketing initiatives. Other important factors include the
following:
. possible conflicts of interest;
. our reliance on a single vendor for our raw material procurement;
. transportation risks;
. declines in retail pasta sales;
. our ability to successfully integrate any future acquisitions;
. labor relations;
. environmental liability;
. product liability;
. dependence on key personnel; and
. changes in laws, government relations or trade policies and
regulations.
Readers are strongly encouraged to consider these factors and others
mentioned in the Company's Registration Statement on Form S-4 (Reg. No.
333-76763) declared effective August 3, 1999, when evaluating any such
forward-looking statements in this quarterly report. The Company undertakes no
responsibility to update any forward-looking statements contained in this
report.
General
New World Pasta's primary business is the production of dry pasta, which 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 own several other brands including: P&R,
IDEAL and MRS. WEISS.
On a combined basis, these brands give us a market share of approximately
26%, which is about 45% greater than our closest competitor. Our noodle products
have the largest market share in the
9
<PAGE>
United States with a 19% share of the retail egg noodle market. These noodle
products 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.
Results of Operations
Three Months Ended October 1, 2000 Compared With Three Months
--------------------------------------------------------------
Ended October 3, 1999
---------------------
Net Sales
---------
Net sales decreased by $11.8 million or 13.6% for the third quarter ended
October 1, 2000 compared to the third quarter ended October 3, 1999. The
decrease was primarily the result of volume declines which were similar to those
experienced in the first six months of 2000. The volume decline was attributable
to several factors, including a decline in consumers' consumption of dry pasta
during the quarter and the loss of the General Mills co-pack business in the
third quarter of 1999. Price reductions taken in late 1999 and early 2000 on
certain branded items also had a slightly unfavorable impact on net sales.
Cost of Sales
-------------
Cost of sales decreased by $3.4 million or 7.5% from the third quarter of
1999, primarily due to net sales reduction in the quarter described above. Other
factors contributing to the reduction in cost of sales include certain flexible
packaging prices that were more favorable than those in 1999, decreased
manufacturing costs related to the operational restructuring implemented on June
29, 2000 and the closure of the Kansas City facility in August 1999. Factors
impacting cost of sales negatively included an increase in shipping and
warehousing costs as well as an increase in durum/semolina costs. Management
expects durum/semolina costs to decline over the balance of the year.
Gross profit decreased by $8.4 million, with the decrease in net sales
being only partially offset by cost of sales reductions. Gross margin of $33.1
million was 44.0% of net sales for the third quarter of 2000 compared to $41.5
million, or 47.7% of net sales for the third quarter of 1999.
Selling and Marketing Expenses
------------------------------
Selling and marketing expenses for the third quarter of 2000 decreased by
$4.4 million or 16.3% from the third quarter of 1999. This was the result of
reductions in volume-sensitive broker and sales incentives, as well as reduced
selling expenses resulting from the restructuring implemented on June 29, 2000.
Additionally, trade promotion expenses decreased during the quarter. This shift
from trade to consumer spending is the result of a revised marketing strategy
implemented by the Company during the third quarter of 2000 and will result in a
larger percentage of the Company's marketing and promotion dollars being spent
on programs to build consumer interest and brand loyalty as opposed to programs
focused at the retail and trade level. The Company will continue to adjust its
promotion spending levels during future quarters to further reduce its trade
spending levels and increase the level of its consumer promotion spending.
10
<PAGE>
General and Administrative Expenses
-----------------------------------
General and administrative expenses for the third quarter were $1.2 million
lower in 2000 than for the same period in 1999. Organizational start-up costs
were $831,000 lower than the previous year. In addition, decreased salaries and
benefits related to the restructuring implemented June 29, 2000 accounted for a
portion of the remaining positive variance in the third quarter of 2000.
Recapitalization Transaction Expenses
-------------------------------------
The prior year amounts reflect the costs incurred to transition to an
independent operating company.
Income from Operations
----------------------
Income from operations for the third quarter ended October 1, 2000 was $7.4
million, a decrease of $2.6 million or 25.6% compared to the third quarter ended
October 3, 1999. The decrease was due to decreases in net sales offset partially
by decreases in cost of sales, selling and marketing expenses, general and
administrative expenses and the absence of recapitalization transaction
expenses.
Interest Expense
----------------
Interest expense of $7.4 million represents interest on the Notes and the
term loan portion of the Credit Facility (the "Term Loan") and deferred debt
cost amortization. Interest expense was offset partially by interest income on
bank deposits. The increase in interest expense from the third quarter of 1999
of $353,000 or 5.0% is the result of the interest rate increase related to the
amendment of the Credit Facility in the second quarter of 2000.
Income Taxes
------------
The income tax expense of $39,000 for the third quarter ended October 1,
2000 reflects the anticipated tax expense that results from applying the
estimated annual effective tax rate for the year to income before income taxes,
as adjusted for income tax expense (benefit) recognized in prior quarters. The
prior year third quarter tax expense of $1.4 million reflected the effective tax
rate applied to the Company's quarterly net income before taxes of $3.0 million,
as adjusted for the tax effect from transaction expenses incurred as part of the
recapitalization effected in January 1999 and income tax expense (benefit)
recognized in prior quarters.
Net Income
----------
The Company reported net income of $1,000 for the third quarter of 2000
compared to $1.5 million for the third quarter of 1999. The decrease in the
reported net income was due to the decrease in net sales and an increase in net
interest expense offset partially by decreases in the cost of sales, selling and
marketing expenses, general and administrative expenses, income tax expenses and
the absence of recapitalization transaction expenses during the quarter.
Dividends on Preferred Stock
----------------------------
Dividends on preferred stock are reflective of the dividends on the
mandatorily redeemable cumulative preferred stock of 12% recognized on the
balance sheet date.
11
<PAGE>
Results of Operations
Nine Months Ended October 1, 2000 Compared With Nine Months
------------------------------------------------------------
Ended October 3, 1999
---------------------
Net Sales
---------
Net sales decreased by $38.2 million, or 14.3% for the nine months ended
October 1, 2000 compared to the nine months ended October 3, 1999. The decrease
was the result of both price and volume factors. The pricing impact was the
result of a net price decline on certain of the Company's branded products taken
during 1999 and early 2000. Unit volume was impacted by the continuing decline
in consumers' consumption of dry pasta that has been experienced over the past
several periods, the loss of the General Mills co-pack business in the third
quarter of 1999, significant competitive pressures within the dry pasta category
and lower effectiveness of promotional activities.
Cost of Sales
-------------
Cost of sales for the nine months ended October 1, 2000 decreased by $15.4
million or 10.8% from the nine months ended October 3, 1999, primarily due to
the net sales decline experienced during the period. Raw material prices,
particularly durum/semolina costs, had an unfavorable impact on cost of sales.
We expect durum/semolina costs to decline over the balance of the year.
Packaging material prices were more favorable for the period than those in the
first nine months of 1999 due to flexible packaging savings, which was partially
offset by increases in the cost of cartons and cases. Freight and warehousing
costs increased by 1.3% due to higher freight rates and the implementation of a
new pallet management program, both of which were partially offset by the
decrease in volume. Depreciation expense decreased for the current period as
compared to the same period in 1999, due to the asset base reductions associated
with the Kansas City plant closing.
Gross profit decreased by $22.8 million, with the decrease in net sales
being only partially offset by the reduction in cost of sales. Gross margin of
$101.7 million was 44.3% of net sales for the first nine months of 2000 compared
to $124.4 million, or 46.5% of net sales for the first nine months of 1999.
Selling and Marketing Expenses
------------------------------
Selling and marketing expenses for the first nine months of 2000 decreased
by $10.2 million or 12.0% from the first nine months of 1999. This decrease was
due primarily to reductions in volume-sensitive broker and sales incentives and
reduced trade promotions, consumer promotions and advertising expenses.
General and Administrative Expenses
-----------------------------------
General and administrative expenses for the current period decreased by
$315,000 or 2.9% from the first nine months of 1999, primarily as a result of
salary and benefit cost reductions related to the June 29, 2000 restructuring
and reduced organizational start-up costs. These decreases were partially offset
by incremental executive compensation costs incurred in the first quarter
management transition.
Recapitalization Transaction Expenses
-------------------------------------
The prior year amounts reflect the costs incurred to transition to an
independent operating company.
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Cost of Restructuring
---------------------
The $582,000 restructuring cost includes the current year restructuring
costs of $650,000 offset by the reversal of the unused portion ($68,000) of the
$2.7 million restructuring reserve established in the second quarter of 1999 for
the Kansas City plant closure. The current year charge was established to cover
the cost of the reorganization plan executed on June 29, 2000. This
reorganization was undertaken to align the sales, marketing, administrative and
manufacturing functions of the Company with the revised strategic direction
implemented by the executive management and resulted in the termination of 139
employees from various functional areas across the Company. This reorganization
should reduce the overall cost structure of the Company in future periods.
Gain on Sale of Closed Facility
-------------------------------
A $251,000 gain was recognized on the sale of the Kansas City plant that
included the land, building and building improvements associated with this
property.
Income from Operations
----------------------
Income from operations for the nine months ended October 1, 2000 was $15.8
million, a decrease of $1.9 million or 10.9% compared to the nine months ended
October 3, 1999. The decrease was due to deceased net sales offset only
partially by the absence of recapitalization transaction expenses incurred in
the first nine months of 1999, as well as decreases in cost of sales, selling
and marketing expenses, costs of restructuring, and general and administrative
expenses.
Interest Expense
----------------
Interest expense of $21.6 million included interest on the Notes and the
Term Loan as well as deferred debt cost amortization. These interest costs were
offset partially by interest income on bank deposits. The increase in interest
expense from the first nine months of 1999 of $2.2 million or 11.1% is the
result of the interest rate increase related to the recent amendment to the
Credit Facility and nine months of expense included in 2000 versus only eight
months in 1999.
Income Taxes
------------
The income tax benefit of $2.1 million for the nine-month period ended
October 1, 2000 reflects the anticipated tax benefit that results from applying
the estimated annual effective tax rate for the year to the loss before income
taxes. The prior year first nine months expense of $805,000 reflected the
estimated effective tax rate applied to the loss before taxes, adjusted for the
tax effect from non-recurring transaction expenses incurred as part of the
recapitalization effected January 1999.
Net Loss
--------
The Company reported a net loss of $3.8 million for the first nine months
of 2000 compared to a net loss of $2.6 million in the first nine months of 1999.
The increase in the reported loss was due to the impact of reduced net sales and
increased interest expense, offset only partially by the absence of
recapitalization transaction expenses incurred in the first nine months of 1999,
as well as decreases in the cost of sales, selling and marketing expenses, costs
of restructuring, general and administrative expenses, and an increase in the
income tax benefit for the period.
13
<PAGE>
Dividends on Preferred Stock
----------------------------
Dividends on preferred stock are reflective of the dividends on the
mandatorily redeemable cumulative preferred stock of 12% recognized on the
balance sheet date. The additional month of accrual in 2000 is the primary
reason for the increase from the comparable period in 1999.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash provided by operations
and borrowings under its Credit Facility. Cash and cash equivalents totaled $4.6
million at October 1, 2000 and $13.1 million as of December 31, 1999; working
capital was $20.3 million as of October 1, 2000 compared to $21.5 million as of
December 31, 1999. The current ratio was 1.58 at October 1, 2000 compared to
1.55 at December 31, 1999.
The Company's net cash used in operating activities was $1.5 million for
the nine months ended October 1, 2000 compared to net cash provided by
operations of $22.9 million for the nine months ended October 3, 1999. This
shift to net cash used was due to a decrease in accrued expenses and other
liabilities, an increase in prepaid expenses and other current assets, an
increase in deferred taxes and an increase in trade and other receivables,
offset partially by a reduction in inventory and an increase in accounts
payable.
Net cash used in investing activities totaled $3.3 million for the nine
months ended October 1, 2000, versus $3.1 million for the nine months ended
October 3, 1999, as a result of higher capital expenses during the quarter.
Net cash used in financing activities for 2000 reflects the repayment of a
portion of the financing of the Company's insurance premiums for 2000, the
mandatory debt repayments as well as a voluntary debt repayment of $2.0 million
in the period and capitalization of certain costs associated with amending the
Credit Facility. Net cash used in financing activities for the nine months ended
October 3, 1999 reflects primarily the payment of debt proceeds received in
conjunction with the recapitalization, the issuance of debt ($470.4 million),
the net proceeds from issuance of the preferred stock ($113.5 million) and the
issuance of common stock ($50.0 million), offset primarily by the repurchase of
common stock ($460.0 million) and the repayment of debt ($171.0 million).
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 Company entered into an amendment and waiver to its Credit Facility
effective as of May 10, 2000, pursuant to which, among other things: (i) the
lenders thereunder waived compliance by the Company with certain financial
covenants contained thereunder with respect to the quarter ended April 2, 2000;
(ii) certain financial covenants contained therein were amended for all periods
ending on or before December 31, 2002; and (iii) the interest rates on the
Credit Facility were increased. The Company believes that cash generated from
operations, together with availability under the amended Credit Facility, which
includes a $20 million revolving loan commitment, will be sufficient to meet its
liquidity needs for the foreseeable future. As of November 13, 2000, the Company
had $20 million of availability under the revolving credit portion of the Credit
Facility.
14
<PAGE>
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 the
derivative instrument at fair value in the balance sheet.
Furthermore, the derivative instrument must meet specific criteria or the
change in its fair value must be recognized in earnings in the period of
change. To achieve hedge accounting treatment the derivative instrument needs
to be part of a well-documented hedging strategy that describes the exposure to
be hedged, the objective of the hedge and a measurable definition of its
effectiveness in hedging the exposure. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective 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. In June 2000, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." This statement further
clarified elements of SFAS No. 133. Adoption of these standards is not expected
to have a material effect on the Company's financial statements.
Additional pronouncements which may have future impact on the Company's
financial statements are Emerging Issues Task Force (EITF) 00-14 and SEC Staff
Accounting Bulletin Nos. 101 and 101A. SEC Staff Accounting Bulletins 101 and
101A address "Revenue Recognition in Financial Statements" and the Company is
currently in compliance with these bulletins. EITF No. 00-14 gives guidance on
"Accounting for Certain Sales Incentives" and we are currently reviewing the
impact this pronouncement will have on future financial statement presentation.
15
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
New World Pasta is subject to market risk associated with some commodity
prices and changes in interest rates. To manage the risk of fluctuations in
interest rates, New World Pasta's borrowings are a mix of fixed and floating
rate obligations. This includes the $160.0 million of Notes that bear interest
at a 9.25% fixed rate and are due 2009. New World Pasta's $130.0 million Term
Loan bears interest at a floating rate. In May 1999, New World Pasta entered
into an interest rate swap agreement that converts $50 million of this floating
interest rate debt to a fixed rate. The interest rate under the interest rate
swap agreement is approximately 8.9%, and expires June 2, 2002. The carrying
amount of New World Pasta's debt obligations approximates the fair value of
similar debt instruments of comparable maturity, and the interest rate market
risk is currently not considered significant.
Since the majority of the commodity purchasing for the Company is now done
by Miller Milling Company pursuant to a procurement agreement entered into in
January 1999, the Company does not currently have, and does not expect to enter
into, any derivative instruments to manage commodity price risks.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
16
<PAGE>
10.29 Employment Agreement dated September 14, 2000 between New World
Pasta and Stephen H. Vesce.
27 Financial Data Schedule
b) Form 8-Ks:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signatures:
NEW WORLD PASTA COMPANY
Date: November 14, 2000 /s/ Wayne Robison
-----------------------------------
Wayne Robison
Vice President, Finance and
Chief Financial Officer
Date: November 14, 2000 /s/ Mark E. Kimmel
-----------------------------------
Mark E. Kimmel
Vice President and General Counsel
17
