<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 July 2, 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 July 2, 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
Page
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of July 2, 2000 1
(unaudited) and December 31, 1999
Consolidated Statements of Operations (unaudited) for 2
the Three Months and Six Months Ended July 2, 2000
and July 4, 1999
Consolidated Statements of Cash Flows (unaudited) 3
for the Six Months Ended July 2, 2000 and July 4, 1999
Consolidated Statement of Stockholders' Equity (Deficit) 4
(unaudited) for the Six Months Ended July 2, 2000
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 17
Market Risk
PART II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE>
PART I - Financial Information
ITEM 1 - Financial Statements
NEW WORLD PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
As of July 2, 2000 and December 31, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
(unaudited)
July 2, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,122 13,146
Trade and other receivables, net 16,101 17,651
Inventories, net 20,628 19,868
Prepaid expenses and other current assets 1,875 1,391
Deferred income taxes 8,846 8,786
------------- ------------
Total current assets 55,572 60,842
Property, plant and equipment, net 96,009 99,200
Deferred income taxes 97,750 95,667
Intangible assets, net 63,343 64,571
Deferred debt costs, net 8,635 8,535
------------- ------------
Total assets $ 321,309 328,815
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $1,340 1,340
Loan payable 155 --
Accounts payable:
Trade 6,409 8,133
Related party 1,593 1,666
Accrued expenses 27,163 28,155
------------- ------------
Total current liabilities 36,660 39,294
Long-term debt, less current maturities 290,985 291,655
Employee benefit liabilities 6,395 7,302
------------- ------------
Total liabilities 334,040 338,251
------------- ------------
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
July 2, 2000 and December 31, 1999,
respectively 133,688 126,096
Mandatorily redeemable common stock, $.01
par value; $10 liquidation value;
11,714 and 0 shares issued and
outstanding as of July 2, 2000
and December 31, 1999, respectively 117 --
Unearned compensation (398) --
------------- ------------
133,407 126,096
------------- ------------
Stockholders' equity (deficit):
Common stock, $.01 par value; 7,500,000
and 35,900,000 shares authorized as of
July 2, 2000 and December 31, 1999;
5,000,000 shares issued and outstanding as
of July 2, 2000 and December 31, 1999 50 50
Additional paid-in capital 156,060 162,901
Accumulated deficit (302,248) (298,483)
------------- ------------
Total stockholders' equity (deficit) (146,138) (135,532)
------------- ------------
Total liabilities and stockholders' equity (deficit) $ 321,309 328,815
============= ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
consolidated financial statements.
1
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NEW WORLD PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended July 2, 2000 and July 4, 1999
(in thousands)
<TABLE>
(unaudited) (unaudited)
Three Months Ended Six Months Ended
July 2, 2000 July 4, 1999 July 2, 2000 July 4, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 72,448 84,531 154,447 180,802
Cost of sales 40,815 46,231 85,864 97,844
------------------ ------------------ --------------- -----------------
Gross profit 31,633 38,300 68,583 82,958
Selling and marketing expenses 24,627 26,432 52,378 58,192
General and administrative expenses 3,596 4,035 7,558 6,639
Recapitalization transaction expenses -- 637 -- 7,747
Cost of restructuring, net 582 2,700 582 2,700
Gain on sale of closed facility (251) -- (251) --
------------------ ------------------ --------------- -----------------
Income from operations 3,079 4,496 8,316 7,680
Interest expense, net 7,291 6,985 14,223 12,411
------------------ ------------------ --------------- -----------------
Loss before income taxes (4,212) (2,489) (5,907) (4,731)
Income tax benefit (1,515) (1,798) (2,142) (636)
------------------ ------------------ --------------- -----------------
Net loss (2,697) (691) (3,765) (4,095)
Dividends on preferred stock 3,427 3,248 6,841 5,832
------------------ ------------------ --------------- -----------------
Net loss attributable to common stock $ (6,124) (3,939) (10,606) (9,927)
================== ================== =============== =================
</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 Six Months Ended July 2, 2000 and July 4, 1999
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,765) (4,095)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,372 7,726
Loss (gain) from disposal of property,
plant and equipment (207) 33
Deferred income taxes (2,143) (635)
Compensation expense from issuance of stock 470 --
Changes in assets and liabilities:
Accounts receivable 1,550 297
Inventories (615) 34
Prepaid expenses and other current assets (484) 2,644
Accounts payable (1,797) (1,886)
Accrued expenses and other liabilities (1,899) 14,754
-------------- --------------
Net cash provided by (used in) operating activities (1,518) 18,872
-------------- --------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (3,377)
(2,589)
Proceeds from disposal for property, plant and equipment 1,103 --
-------------- --------------
Net cash used in investing activities (2,274) (2,589)
-------------- --------------
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 (870) (170,537)
Deferred debt costs (717) (9,627)
Advances and withdrawals with former parent prior to
recapitalization, net -- (5,887)
Repurchase of common stock -- (453,000)
-------------- --------------
Net cash used in financing activities (1,232) (5,085)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (5,024) 11,198
Cash and cash equivalents at beginning of period 13,146 --
-------------- --------------
Cash and cash equivalents at end of period $ 8,122 11,198
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 12,800 5,576
Income taxes -- 65
Noncash investing and financing activities:
Deferred tax assets from recapitalization -- 112,906
Preferred stock dividend 6,841 5,832
Deferred tax liabilities eliminated in recapitalization -- 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 Six Months Ended July 2, 2000
(in thousands, except share data)
(unaudited)
<TABLE>
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 -- -- -- (3,765) (3,765)
Preferred stock dividend -- -- (6,841) -- (6,841)
--------- -------- ------- ------- ---------
Balance at July 2, 2000 5,000,000 $ 50 156,060 (302,248) (146,138)
========= ======== ======== ======== =========
</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 six months ended July 2, 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 $7.2 million as of July 2, 2000
and December 31, 1999. All inventories were stated at amounts that did not
exceed realizable values. Total inventories were as follows:
July 2, December 31,
2000 1999
------------ -----------
(in thousands)
Raw materials................ $ 4,016 4,539
Work in process.............. 208 250
Finished goods............... 16,829 14,483
------------ -----------
Inventories at FIFO......... 21,053 19,272
Adjustments to LIFO......... (425) 596
------------ -----------
Total inventories........ $ 20,628 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 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 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>
Original Balance as of
Balance Utilized Reversal July 2, 2000
--------------- -------------- ------------- --------------------
(in thousands)
<S> <C> <C> <C> <C>
Severance and other employee
related costs $ 600 600 -- 0
Other facility exit costs 500 432 68 0
--------------- --------------- ------------- ------------------
Total costs $ 1,100 1,032 68 0
=============== =============== ============= ==================
</TABLE>
In the second quarter of 2000, the Company recorded a 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. None of the established reserve
has been utilized as of July 2, 2000. Management expects payments of separation
costs prior to the end of 2000.
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. 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.
7
<PAGE>
<TABLE>
(unaudited) (unaudited)
Three Months Ended Six Months Ended
July 2, 2000 July 4, 1999 July 2, 2000 July 4, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales................. $ 59,982 $ 69,348 $ 128,102 $ 147,171
Gross Profit.............. 30,397 36,974 65,832 79,272
Operating income.......... 2,368 7,011 6,593 15,280
Net income................ 3,909 7,243 8,373 15,512
Current assets............ 55,460 56,576 55,460 56,576
Non-current assets........ 204,629 224,103 204,629 224,103
Current liabilities....... 25,847 27,492 25,847 27,492
Non-current liabilities... 8,165 9,581 8,165 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
9
<PAGE>
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 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 July 2, 2000 Compared With Three Months Ended July 4, 1999
-----------------------------------------------------------------------------
Net Sales
---------
Net sales decreased by $12.1 million, or 14.3% for the second quarter ended
July 2, 2000 compared to the second quarter ended July 4, 1999. The decrease was
the result of both price and volume factors which were similar to those
experienced in the first quarter of 2000. The major price factor impacting sales
was a net price decline affecting the Company's branded products taken during
1999 as a component of the Company's new marketing strategy. Unit volume was
impacted by several factors. These included a decline in consumers' consumption
of dry pasta during the quarter, 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 decreased by $5.4 million or 11.7% from the second quarter of
1999, primarily due to net sales reduction in the quarter. Other factors
contributing to the reduction in cost of sales include certain flexible
packaging prices that were more favorable than those in 1999 and a reduction in
depreciation expense due to the closure of the Kansas City plant. Factors
impacting cost of sales negatively included an increase in warehousing costs due
to the implementation of a new pallet management program 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 $6.7 million, with the decrease in net sales
being only partially offset by cost of sales reductions. Gross margin of $31.6
million was 43.7% of net sales for the second quarter of 2000 compared to $38.3
million, or 45.3% of net sales for the second quarter of 1999.
10
<PAGE>
Selling and Marketing Expenses
------------------------------
Selling and marketing expenses for the second quarter of 2000 decreased by
$1.8 million or 6.8% from the second quarter of 1999. This reduction was the
result of reductions in volume-sensitive broker and sales incentives, decreased
trade promotion expenses, lower advertising expenditures and decreased consumer
promotion expenditures.
General and Administrative Expenses
-----------------------------------
General and administrative expenses for the second quarter were slightly
lower in 2000 than for the same period in 1999. Increased executive compensation
costs due to the management transition were more than offset by the absence of
start-up costs during the period.
Recapitalization Transaction Expenses
-------------------------------------
The prior year amounts reflect the costs incurred to transition to an
independent operating company.
Cost of Restructuring
---------------------
The $582,000 restructuring cost includes the current period 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.
The current period charge was established to cover the cost of a reorganization
plan executed on June 29, 2000. The reorganization was undertaken to align the
sales, marketing, administrative and manufacturing functions of the Company with
revised sales and marketing strategies implemented by the new 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 which
included the land, building and building improvements associated with this
property.
Income from Operations
----------------------
Income from operations for the second quarter ended July 2, 2000 was $3.1
million, a decrease of $1.4 million or 31.5% compared to the second quarter
ended July 4, 1999. The decrease was due to decreased net sales offset partially
by decreased cost of sales, and decreased selling and marketing expenses, a
decrease in costs of restructuring, a decrease in general and administrative
expenses and the absence of recapitalization transaction expenses.
11
<PAGE>
Interest Expense
----------------
Interest expense of $7.3 million represents interest on the Notes and 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 second quarter of 1999 of $306,000 or 4.4% is the result of the
interest rate increase related to the recent amendment of the Credit Facility.
Income Taxes
------------
The income tax benefit of $1.5 million for the second quarter ended July 2,
2000 reflects the anticipated tax benefit of applying the estimated annual
effective tax rate for the year to the loss before income taxes. The prior year
second quarter tax benefit of $1.8 million reflected the tax benefit expected
from the Company's estimated loss, adjusted for the tax effect from transaction
expenses incurred as part of the recapitalization effected in January 1999 that
may not be deductible.
Net Loss
--------
The Company reported a net loss of $2.7 million for the second quarter of
2000 compared to a $691,000 net loss in the second quarter of 1999. The increase
in the reported loss was due to the decrease in net sales, an increase in net
interest expense and a decrease in income tax benefit, offset partially by a
decrease in the cost of sales, a decrease in the costs of restructuring, a
decrease in selling and marketing expenses, a decrease in general and
administrative expense and the absence of recapitalization transaction expenses.
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.
Results of Operations
Six Months Ended July 2, 2000 Compared With Six Months Ended July 4, 1999
-------------------------------------------------------------------------
Net Sales
---------
Net sales decreased by $26.4 million, or 14.6% for the six months ended
July 2, 2000 compared to the six months ended July 4, 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
as a component of the Company's new marketing strategy. Unit volume was impacted
by a decline in consumers' consumption of dry pasta during the period, 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.
12
<PAGE>
Cost of Sales
-------------
Cost of sales for the six months ended July 2, 2000 decreased by $12.0
million or 12.2% from the six months ended July 4, 1999, primarily due to the
volume 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 six months of
1999 due to flexible packaging savings, which was partially offset by increases
in the cost of cartons and cases. Freight costs decreased by 2.6% due to
decreased volume partially offset by higher rates, while warehousing costs
increased principally because of the implementation of a new pallet management
program. 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 $14.4 million, with the decrease in net sales
being only partially offset by the reduction in cost of sales. Gross margin of
$68.6 million was 44.4% of net sales for the first six months of 2000 compared
to $83.0 million, or 45.9% of net sales for the first six months of 1999.
Selling and Marketing Expenses
------------------------------
Selling and marketing expenses for the first six months of 2000 decreased
by $5.8 million or 10.0% from the first six months of 1999. This decrease was
due primarily to reductions in volume-sensitive broker and sales incentives and
reduced trade promotions and advertising expenses. Offsetting this decrease
slightly were higher consumer promotion costs, and other marketing costs,
primarily marketing research and packaging changes.
General and Administrative Expenses
-----------------------------------
General and administrative expenses for the current period increased by
$1.0 million or 15.2% from the first six months of 1999, primarily due to
incremental executive compensation costs incurred in the first quarter
management transition. Information technology costs and costs for continuing
professional services were also greater during the first six months of 2000
compared to the same period in 1999.
Recapitalization Transaction Expenses
-------------------------------------
The prior year amounts reflect the costs incurred to transition to an
independent operating company.
Cost of Restructuring
---------------------
The $582,000 restructuring cost includes the current period 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.
The current period charge was established to cover the cost of a reorganization
plan executed on June 29, 2000. The reorganization was undertaken to align the
sales, marketing, administrative and manufacturing functions of the Company with
revised sales and marketing strategies implemented by the new 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.
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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 six months ended July 2, 2000 was $8.3
million, an increase of $636,000 or 8.9% compared to the six months ended July
4, 1999. The increase was due to the absence of recapitalization transaction
expenses incurred in the first six months of 1999, as well as decreased cost of
sales, decreased selling and marketing expenses, and decreased costs of
restructuring offset partially by decreased net sales and increased general and
administrative expenses.
Interest Expense
----------------
Interest expense of $14.2 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 six months of 1999 of $1.8 million or 14.6% is the result
of the interest rate increase related to the recent amendment to the Credit
Facility and six months of expense included in 2000 versus only five months in
1999.
Income Taxes
------------
The income tax benefit of $2.1 million for the six-month period ended July
2, 2000 reflects the anticipated tax benefit of applying the estimated annual
effective tax rate for the year to the loss before income taxes. The prior year
first six months benefit of $636,000 reflected the tax benefit expected from the
Company's expected loss, adjusted for the tax effect from non-recurring
transaction expenses incurred as part of the recapitalization effected January
1999 that may not be deductible.
Net Loss
--------
The Company reported a net loss of $3.8 million for the first six months of
2000 compared to a net loss of $4.1 million in the first six months of 1999. The
decrease in the reported loss was due to the absence of recapitalization
transaction expenses incurred in the first six months of 1999, a decrease in the
cost of sales, a decrease in selling and marketing expenses and a decrease in
costs of restructuring offset by the impact of the decreased net sales, and an
increase in general and administrative expenses.
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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 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 $8.1
million at July 2, 2000 and $13.1 million as of December 31, 1999; working
capital was $18.9 million as of July 2, 2000 compared to $21.5 million as of
December 31, 1999. The current ratio was 1.52 at July 2, 2000 compared to 1.55
at December 31, 1999.
The Company's net cash used in operating activities was $1.5 million for
the six months ended July 2, 2000 compared to net cash provided by operations of
$18.9 million for the six months ended July 4, 1999. This decrease was due to a
decrease in accrued expenses and other liabilities, a decrease in accounts
payable, an increase in inventories, an increase in prepaid expenses and other
current assets, and an increase in deferred taxes offset partially by a decrease
in accounts receivable.
Net cash used in investing activities totaled $2.3 million for the six
months ended July 2, 2000, versus $2.6 million for the six months ended July 4,
1999.
Net cash used in financing activities for 2000 reflects the financing of a
portion of the Company's insurance premiums for 2000, the mandatory debt
repayments in the period and capitalization of certain costs associated with
amending the Credit Facility. Net cash used in financing activities for the six
months ended July 4, 1999 reflects 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 ($453.0 million) and the repayment of debt ($170.5 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
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liquidity needs for the foreseeable future. As of August 15, 2000, the Company
had $20 million of availability under the revolving credit portion of the Credit
Facility.
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. EITF No. 00-14 gives guidance on
"Accounting for Certain Sales Incentives" while SEC Staff Accounting Bulletins
101 and 101A address "Revenue Recognition in Financial Statements." We are
currently reviewing the impact these pronouncements will have on future
financial statement presentation.
Also, FASB Interpretation No. 44, which addresses "Accounting for Certain
Transactions Involving Stock Compensation", is effective July 1, 2000, with the
effects of the interpretation applied on a prospective basis from July 1, 2000.
The effects of this interpretation are immaterial to the financial statement
presentation.
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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 $132.3 million Term
Loan bears interest at a floating rate. In May 1999, New World Pasta entered
into an interest rate swap agreement that converts $50 million of this floating
interest rate debt to a fixed rate. The interest rate under the interest rate
swap agreement is approximately 8.9%, and expires June 2, 2002. The carrying
amount of New World Pasta's debt obligations approximates the fair value of
similar debt instruments of comparable maturity, and the interest rate market
risk is currently not considered significant.
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
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Pursuant to Section 228(d) of the Delaware General Corporation Law, New
World Pasta LLC, the recordholder of 4,167,869 shares (or approximately 83.4%)
of the Company's issued and outstanding common stock, approved the following by
written consents on April 17, 2000 and June 21, 2000, respectively: (1) an
increase in the number of stock options available for issuance under the
Company's 1999 Stock Option Plan from 910,166 to 1,057,232; and (2) an
amendment to the Company's amended and
17
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restated Certificate of Incorporation to reduce the number of shares of common
stock authorized to be issued from 35,900,000 to 7,500,000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
3.9 Amendment to the Amended and Restated Certificate of
Incorporation of New World Pasta Company, as filed with
the Secretary of State of the State of Delaware on June
28, 2000.
10.26 Amendment No. 1 to Credit Agreement, dated as of
January 28, 1999, among New World Pasta Company, the
various 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.
10.27 Employment Agreement dated April 24, 2000, between New
World Pasta and Angelo Fraggos.
10.28 Employment Agreement dated May 8, 2000, between New
World Pasta and Wayne Robison.
27 Financial Data Schedule
b) Form 8-Ks:
Not Applicable
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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: August 14, 2000 /s/ Wayne Robison
----------------------------
Wayne Robison
Vice President, Finance and
Chief Financial Officer
Date: August 14, 2000 /s/ Thomas P. Boran
----------------------------
Thomas P. Boran
Chief Accounting Officer
19
