UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: October 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-13403
American Italian Pasta Company
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(Exact name of Registrant as specified in its charter)
Delaware 84-1032638
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1000 Italian Way, Excelsior Springs, Missouri 64024
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(Address of principal executive office and Zip Code)
Registrant's telephone number, including area code: (816) 502-
6000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Class A Convertible New York Stock Exchange
Common Stock: $.001 par
value per share
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
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]
As of December 12, 1997 the aggregate market value of the
Registrant's Class A Convertible Common Stock held by non-
affiliates (using the New York Stock Exchange's closing price)
was approximately $257,916,880.
The number of shares outstanding as of December 12, 1997 of
the Registrant's Class A Convertible Common Stock was 16,776,061
and there were no shares outstanding of the Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for
the 1998 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report. The Definitive Proxy
Statement will be filed no later than 120 days after October 3,
1997.
<PAGE>
Introduction and Certain Cautionary Statements
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American Italian Pasta Company ("AIPC" or the "Company")
changed its fiscal year end from December 31 to the last Friday
of September or the first Friday of October effective beginning
with the nine-month fiscal period ended September 27, 1996 and
for all subsequent periods. This change resulted in a nine-month
fiscal period for 1996, and will result in a 53-week fiscal year
for 1997, and a 52- or 53-week year for all subsequent fiscal
years. The Company's first three fiscal quarters end on the
Friday last preceding December 31, March 31, and June 30 or the
first Friday of the following month of each quarter. For purposes
of this Annual Report on Form 10-K (this "Annual Report"), the
1996 fiscal year is described as the nine-month fiscal period
ended September 30, 1996 and the 1997 fiscal year is described
has having ended on September 30, 1997.
The discussion set forth below, as well as other portions of
this Annual Report, contains statements concerning potential
future events. Such forward-looking statements are based upon
assumptions by the Company's management, as of the date of this
Annual Report, including assumptions about risks and
uncertainties faced by the Company. Readers can identify these
forward-looking statements by their use of such verbs as expects,
anticipates, believes or similar verbs or conjugations of such
verbs. If any of management's assumptions prove incorrect or
should unanticipated 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 combination of factors including, but not
limited to, those factors identified in the Company's Current
Report on Form 8-K dated October 29, 1997, which is hereby
incorporated by reference. This report has been filed with the
Securities and Exchange Commission (the "SEC" or the
"Commission") in Washington, D.C. and can be obtained by
contacting the SEC's public reference operations or obtaining it
through the SEC's web site on the World Wide Web at
http://www.sec.gov. Readers are strongly encouraged to consider
those factors when evaluating any such forward-looking statement.
The Company will not update any forward-looking statements in
this Annual Report to reflect future events or developments.
The Company holds a number of federally registered and
common law trademarks, which are used throughout this Annual
Report. The Company has registered the following marks with the
U.S. Patent and Trademark Office: AIPC American Italian Pasta
Company, Pasta LaBella, and Montalcino. The Company also has
pending trademark applications with the U.S. Patent and Trademark
Office for the following marks: Calabria and Heartland.
Additionally, a number of federally registered trademarks
are used throughout this Annual Report that are not owned by the
Company. Mueller's is a registered trademark of CPC
International, Inc. ("CPC"). San Giorgio and Ronzoni are
registered trademarks of Hershey Foods Corporation ("Hershey").
Prince and Creamette are registered trademarks of Borden Foods
Holdings Corporation ("Borden").
<PAGE>
PART I
ITEM 1. BUSINESS.
General
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American Italian Pasta Company is the third largest and one
of the fastest-growing producers and marketers of pasta in North
America. The Company commenced operations in 1988 with the North
American introduction of new, highly-efficient durum wheat
milling and pasta production technology. Management believes that
the Company's singular focus on pasta, vertically-integrated
facilities, continued technological improvements and development
of a highly-skilled workforce enable AIPC to produce high-quality
pasta at costs below those of many of its competitors. Management
believes that the combination of the Company's cost structure,
the average age of its competitors' North American pasta
production equipment and the growing pasta consumption in North
America creates significant opportunities for continued growth.
The Company's revenue and operating income excluding product
introduction costs were $121.6 million and $16.7 million,
respectively, for the calendar year ended December 31, 1996, and
grew at compounded annual growth rates (CAGRs) of 33% and 33%,
respectively, over the five-year period ended December 31, 1996.
During the fiscal year ended September 30, 1997, the Company had
revenue of $129.1 million and an operating margin excluding
product introduction costs of 16.3%.
The Company produces more than 80 dry pasta shapes in two
vertically-integrated production and distribution facilities,
strategically located in Excelsior Springs, Missouri and
Columbia, South Carolina. The construction of the Missouri plant
in 1988 represented the first use in North America of a
vertically-integrated, high-capacity pasta plant using Italian
pasta production technology. Management believes that this plant
continues to be among the most efficient and highly-automated
pasta facilities in North America. The South Carolina plant,
which commenced operations in 1995, produces only pasta shapes
conducive to high-volume production and employs a highly-skilled,
self-managed work force. Management believes that the South
Carolina plant is the most efficient pasta facility in North
America in terms of productivity and conversion cost per pound.
To meet the significant volume requirements of the CPC Agreement
and support future growth, the Company commenced a capital
expenditure program in 1997 to nearly double the Company's annual
pasta production capacity and add a highly-automated durum wheat
mill to its South Carolina plant, with completion scheduled for
fiscal 1998.
The Company was incorporated under the laws of the State of
Delaware in 1991, and is the successor by merger of a Colorado
corporation incorporated in 1986. The Company's executive
offices are located at 1000 Italian Way, Excelsior Springs,
Missouri 64204, and its telephone number is (816)502-6000. The
Company s home page on the World Wide Web is located at
http://www.pastablabella.com. Information contained in the
Company's home page shall not be deemed to be a part of this
Annual Report.
Recent Developments
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AIPC has commenced an $86.0 million capital expenditure
program to increase its current pasta production capacity by
approximately 90% from over 300 million pounds per year to over
600 million pounds per year in 1998. The additional capacity at
the Missouri facility will combine high-speed, high-output pasta
production lines with the ability to produce a wide range of
products, and will include a distribution center expansion. The
capital expenditures program also includes the construction of a
durum wheat mill in South Carolina which adjoins the existing
plant facility, an over 180% increase in the facility's pasta
production capacity, and a doubling of the capacity of the South
Carolina distribution facility.
The additional capacity will be used to produce Mueller's
brand pasta and take advantage of other market opportunities. By
the second quarter of fiscal 1998, AIPC will assume production of
substantially all of CPC's Mueller's pasta, which management
estimates will require a production capacity of approximately 200
million pounds a year. CPC's guaranteed annual minimum purchases
of 175 million pounds pursuant to the CPC Agreement will utilize
approximately 60% of the Company's newly-added capacity.
On November 18, 1997, the Company announced the signing of a
letter of intent with Harvest States for the possible
construction and operation of a pasta production and distribution
facility adjacent to Harvest State's mill in Kenosha, Wisconsin.
The finalization of the project is subject to a number of
significant conditions, including the execution of a definitive
agreement with Harvest States.
Products and Brands
-------------------
AIPC's product line, comprising over 1,000 stock-keeping
units ("SKUs"), includes long goods such as spaghetti, linguine,
fettuccine, angel hair and lasagna, and short goods such as elbow
macaroni, mostaccioli, rigatoni, rotini, ziti and egg noodles. In
many instances, the Company produces pasta to its customers'
specifications. AIPC makes over 80 different shapes and sizes of
pasta products in over 160 package configurations, including bulk
packages for institutional customers and small
individually-wrapped packages for retail consumers. AIPC
contracts with third parties for the production of certain
specialized pasta shapes, such as retail lasagna and canneloni,
which are necessary to offer customers a full range of pasta
products. Purchased pasta represented less than 2% of AIPC's
total unit volume in fiscal periods 1997, 1996 and 1995.
The Company believes that its state-of-the-art, Italian
pasta production equipment is capable of producing the highest
quality pasta. AIPC's products are produced to satisfy the
specifications of the Company's customers as well as its own
product specifications, which management believes are among the
highest in the industry. The Company's pasta is distinguished by
a rich, natural "wheaty" taste and a consistently smooth and firm
("al dente") texture with a minimum amount of white spots or dark
specks. AIPC evaluates the quality of its products through: (i)
internal laboratory evaluation against competitive products on
physical characteristics, including color, speck count, shape and
consistency, and cooking performance, including starch release,
protein content and texture; and (ii) competitive product
comparisons that AIPC's customers perform on a regular basis.
The Company submits its production facilities to semi-annual
inspections by the American Institute of Baking ("AIB"), the
leading United States baking, food processing and allied
industries evaluation agency for sanitation and food safety. The
Company consistently has achieved the AIB's highest "Superior"
rating. The Company also implemented a comprehensive Hazard
Analysis Critical Control Point ("HAACP") program five years ago
to continuously monitor and improve the safety, quality and
cost-effectiveness of the Company's facilities and products. The
Company believes that having an AIB rating of "Superior" and
meeting HAACP standards have helped the Company attract new
business and strengthen existing customer relationships.
In fiscal 1995, AIPC introduced a product line of all
natural, full-flavored pasta marketed under the Pasta LaBella
brand. Pasta LaBella flavored pasta is principally marketed as a
branded product to grocery retailers and to Sysco. AIPC's
all-natural, full-flavored dry pasta is available in a variety of
flavors including tomato basil, lemon pepper, pesto, roasted
garlic and herb, roasted bell pepper/roasted garlic, and cracked
black pepper. Management believes that AIPC's use of patented
flavoring ingredients under an exclusive license and a
proprietary manufacturing process allows the Company to provide
superior product quality and flavor delivery compared to
competitive flavored pasta products. Pasta LaBella flavored pasta
was recognized as one of the top 10 new products in the United
States in 1996 by Food Processing Magazine. AIPC also intends to
continue assisting its customers with innovative products and
packaging, and the development of additional value-added products
intended to generate higher margins than traditional pasta
products.
Marketing and Distribution
--------------------------
AIPC actively markets its products through approximately 15
internal sales and marketing personnel and approximately 30
independent food brokers and distributors throughout the United
States. AIPC's senior management is directly involved in the
selling process in all customer markets. The Company's sales and
marketing strategy is to provide superior quality, complete
product offering, distinctive packaging specifically tailored to
customers' needs, competitive pricing and superior customer
service to attract new customers and grow existing customers'
pasta sales. The Company has established a significant market
presence in North America by developing strategic customer
relationships with food industry leaders that have substantial
pasta requirements. The Company has a long-term supply agreement
with Sysco Corporation ("Sysco"), the nation's largest marketer
and distributor of food service products. In 1998, AIPC will
become the exclusive producer of Mueller's, the largest pasta
brand in the United States, pursuant to a recent long-term
manufacturing and distribution agreement with CPC. CPC has
announced its intention to close its current pasta production
facility in December 1997. AIPC is also the primary supplier of
pasta to Sam's Wholesale Club ("Sam's Club"), the largest club
store chain in the United States, and supplies private label and
branded pasta to six of the 10 largest grocery retailers in the
United States, including Wal-Mart, A&P, Publix, Albertsons,
American Stores and Winn-Dixie. In addition, AIPC has developed
supply relationships with leading food processors, such as
Pillsbury, General Mills and Kraft Foods, which use the Company's
pasta as an ingredient in branded food products.
One of the Company's core strengths has been the development
of strong customer relationships and the establishment of a
reputation as a technical and service expert in the pasta field.
As part of its overall customer service strategy, AIPC uses its
category management expertise to assist customers in their supply
management decisions regarding pasta and new products. The
Company's category management experts use on-line Nielsen's
supermarket data to recommend pricing, SKU sets and shelf spacing
to both private label and branded customers. AIPC representatives
also assist food processors in incorporating AIPC's pasta as an
ingredient in its customers' food products. The Company sponsors
an annual "Pasta Technology Forum" which is a training and
development program for its customers' production and new product
personnel. AIPC also produces and distributes a quarterly
newsletter, the Pasta Advisor, to its institutional customers
which contains recommendations regarding storage, conveying,
cooking and ingredient combination. In addition to technical
education, the Company provides dedicated technical support to
its institutional customers by making recommendations regarding
the processing of pasta in their facilities. AIPC believes that
these value-added activities provide customers with a better
appreciation and awareness of the Company and its products.
The Company consistently demonstrates its commitment to
customer service through the development of enhanced customer
service programs. Examples of these programs include the creation
by AIPC of an Efficient Customer Response ("ECR") model which
uses Electronic Data Interchange ("EDI") and vendor replenishment
programs to assist its key retail customers, and category
management services for its private label and branded customers.
These programs also enable the Company to more accurately
forecast production and sales demand, enabling higher utilization
of production capacities and lower average unit costs. AIPC has
also created a dedicated sales force for Sysco, its largest
customer, to provide regional sales support.
The Company's three distribution centers are strategically
located in South Carolina, Missouri and Southern California to
serve the national market. The warehousing and distribution
facilities are integrated with the Company's production
facilities which allows cased, finished products to be
automatically conveyed via enclosed case conveying systems from
the production facilities to the distribution centers for
automated palletization and storage until shipping. The
combination of integrated facilities and multiple distribution
centers enables AIPC to realize significant distribution cost
savings and provides lead time, fill rate and inventory
management advantages to its customers. The operation of the
Missouri and South Carolina distribution centers is outsourced
under a long-term agreement with Lanter Company, a firm
specializing in warehouse and logistics management services.
Most of the Company's customers use inventory management
systems which track sales of particular products and rely on
reorders being rapidly filled by suppliers. The Company works
with its customers to forecast consumer demand which allows the
Company to anticipate customer demand.
Pasta Production
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Pasta's primary ingredient is semolina, which is extracted
from durum wheat through a milling process. Durum wheat is used
exclusively for pasta. Durum wheat used in United States pasta
production generally originates from Canada, North Dakota,
Montana, Arizona and California. Each variety of durum wheat has
its own unique set of protein, gluten content, moisture, density,
color and other attributes which affect the quality and other
characteristics of the semolina. The Company blends semolina from
different wheat varieties as needed to meet customer
specifications.
Although durum wheat can be purchased directly from farmers
or grower-owned cooperatives, most milling companies purchase
durum wheat on a commodity exchange. AIPC's ability to produce
high-quality pasta generally begins with its purchasing durum
wheat directly from farmers and grower-owned cooperatives in
North Dakota Pasta Company, a farmer-owned cooperative in North
Dakota ("Dakota Growers"), Montana, Arizona and California,
rather than from grain exchanges. This purchasing method ensures
that the extracted semolina meets AIPC's specifications. The
Company has several sources for durum wheat and is not dependent
on any one supplier or sourcing area. As a result, the Company
believes that it has adequate sources of supply for durum wheat.
The Company occasionally buys and sells semolina to balance its
milling and production requirements. AIPC and Dakota Growers are
the only major producers of pasta in North America that own
vertically integrated milling and production facilities.
Durum wheat is a cash crop whose average monthly market
price has fluctuated from a low of $5.18 per bushel to a high of
$7.49 per bushel in the last four years. Between June 30, 1997
and December 1, 1997, the market price of durum wheat increased
by approximately 15% from $5.60 per bushel to $6.45 per bushel.
Durum wheat does not have a related futures market to hedge
against such price fluctuations. The Company manages its durum
wheat cost risk through long-term contracts and other
arrangements with its customers and advance purchase contracts
for durum wheat which are generally less than twelve months'
duration. Long-term supply agreements and other customer
arrangements which allow for the pass-through of durum wheat cost
changes in certain circumstances represented approximately 60% of
AIPC's total revenue for the fiscal year ended September 30,
1997. Management believes that the Company will significantly
increase the percentage of revenues which are generated pursuant
to contracts which include provisions for durum cost related
sales price adjustments as its contract with CPC includes such a
price adjustment provision.
Durum wheat is shipped to the Company's production facility
in Missouri directly from North Dakota, Montana and Canada under
a long-term rail contract with its most significant rail carrier,
the Canadian Pacific Rail System. Under such agreement, the
Company is obligated to transport specified wheat volumes and, in
the event such volumes are not met, the Company must reimburse
the carrier for certain of its costs. The Company currently is in
compliance with such volume obligations. The Company also has
rail contracts to ship semolina, milled and processed at the
Missouri facility, and durum wheat, pending construction of the
Columbia durum mill in 1998 to the South Carolina facility.
The durum wheat delivered to AIPC's mill in Missouri is
first unloaded, blended and pre-cleaned. Next, the moisture
content of the wheat is raised to the optimal level required for
milling (the "tempering process"). The cleaned and tempered wheat
is then conveyed to the mill where grinding, sifting, and
purifying processes extract the purest possible semolina. The
semolina milling is controlled from a central control room
located in the mill where a single AIPC team member monitors and
directs the mill's entire milling, cleaning and storage process.
Semolina is then pneumatically distributed from the mill to
AIPC's pasta production facility in Missouri and, through the use
of a leased fleet of 33 dedicated railcars, transferred to South
Carolina.
After being mixed with water, the semolina is extruded into
the desired shapes and travels through computer-controlled
high-temperature dryers and stabilized at room temperature. The
Company's entire pasta production process is controlled by
programmable logic controllers which enable all of the production
lines to be operated and monitored by minimal staff. The pasta is
then packaged in a wide variety of packaging configurations on
highly-automated film, carton and bulk packaging systems and
forwarded through automated conveyors to the distribution center
to be palletized and stored prior to shipment.
AIPC purchases its packaging supplies, including
poly-cellophane, paperboard cartons, boxes and totes from third
parties. Management believes the Company has adequate sources of
packaging supplies.
The Company buys materials in quantities based on the
anticipated future demands of its customers.
Trademarks and Patents
----------------------
The Company holds a number of federally registered and
common law trademarks which it considers to be of considerable
value and importance to its business including: AIPC American
Italian Pasta Company, American Italian, and Pasta LaBella. The
Company has registered the AIPC American Italian Pasta Company,
Pasta LaBella, Montalcino and other trademarks with the U.S.
Patent and Trademark Office. AIPC has filed a registration
application with the U.S. Patent and Trademark Office for the
Calabria and Heartland trademarks. A patent application is
currently pending with respect to the proprietary flavoring
process for Pasta LaBella flavored pasta.
Dependence on Major Customers
-----------------------------
Historically, a limited number of customers have accounted
for a substantial portion of the Company's revenues. During 1995,
the nine-month fiscal period ended September 30, 1996, and the
fiscal year ended September 30, 1997, Sysco accounted for
approximately 33%, 27% and 27%, respectively, and sales to Sam's
Club accounted for approximately 23%, 19% and 22%, respectively,
of the Company's revenues. The Company expects it will continue
to rely on a limited number of major customers for a substantial
portion of its revenues in the future. Management believes that a
majority of the Company's fiscal 1998 revenues will be derived
from combined sales to Sysco, Sam's Club and CPC. The Company has
an exclusive supply contract with Sysco (the "Sysco Agreement")
through June 2000, subject to renewal by Sysco for two additional
three-year periods. The Company recently entered into a long-term
manufacturing and distribution agreement with CPC (the "CPC
Agreement") that requires CPC to purchase a minimum of 175
million pounds of pasta annually for nine years. The Company does
not have supply contracts with a substantial number of its other
customers, including Sam's Club. Accordingly, the Company is
dependent upon its other customers to sell the Company's products
and to assist the Company in promoting market acceptance of, and
creating demand for, the Company's products. An adverse change
in, or termination or expiration without renewal of, the
Company's relationships with or the financial viability of one or
more of its major customers could have a material adverse effect
on the Company's business, financial condition and results of
operations.
In addition, certain exclusivity provisions of the Sysco
Agreement and CPC Agreement prevent AIPC from producing and
supplying competitors of Sysco and CPC with certain pasta
products. Under the Sysco Agreement, the Company is restricted
from supplying pasta products to certain food service businesses
other than Sysco without Sysco's prior consent. Under the CPC
Agreement, AIPC may not produce branded retail pasta for Borden,
Hershey or Barilla Alimentare S.p.A. ("Barilla") without CPC's
consent, and is limited to the production of an aggregate of 12
million pounds of branded pasta products annually for other
producers.
Under the CPC Agreement, CPC will close its current
facilities dedicated to the production of Mueller's brand pasta
and, beginning in 1998, AIPC will become the exclusive producer
of Mueller's, with the exception of certain specialty items which
are purchased from other suppliers. CPC is a global food company,
and its Mueller's pasta line is the oldest and largest pasta
brand in the United States with an annual sales volume averaging
approximately 200 million pounds over the last five calendar
years. AIPC will be paid on a "cost plus" basis in an amount
equal to total actual cost of production plus a guaranteed profit
per pound of pasta produced. CPC has guaranteed minimum purchase
volumes of 175 million pounds annually for nine years. AIPC may
also benefit from additional cost savings resulting from improved
productivity. The term of the contract is through December 31,
2006 with a three-year renewal term at the option of CPC. The CPC
Agreement may be terminated by CPC upon certain events, including
(i) a failure by AIPC to satisfy certain minimum production
requirements for any reason other than the fault of CPC or events
demonstrably beyond AIPC's control, or (ii) AIPC's merger with,
or sale of substantially all of its assets to, Borden, Hershey or
Barilla.
Pursuant to the Sysco Agreement, AIPC is the primary
supplier of pasta for Sysco and has the exclusive right to supply
pasta to Sysco for sale under Sysco's name. Sysco, which operates
from approximately 65 operations and distribution facilities
nationwide, provides products and services to approximately
230,000 restaurants, hotels, schools, hospitals, and other
institutions, as well as the U.S. government. For the year ended
September 30, 1997, sales attributed to Sysco represented
approximately 27% of the Company's net revenues. Sysco recently
exercised its option to renew its agreement with AIPC for an
additional three years through June 30, 2000, and has options to
renew the agreement for two additional three-year periods through
June 30, 2006. AIPC products are sold to Sysco on a cost-plus
basis, with annual adjustments based on the prior year's costs.
Under the Sysco Agreement, AIPC may not supply pasta products to
any business other than Sysco in the United States, Mexico or
Canada that operates as, or sells to, institutions and businesses
which provide food for consumption away from home (i.e. food
service businesses) without Sysco's prior consent. In 1996 and
1997, Sysco honored the Company as one of its top 10 suppliers
out of its over 1,300 supplier base. The Sysco Agreement may be
terminated by Sysco upon certain events, including a substantial
casualty to or condemnation of AIPC's Missouri plant.
Competition
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The Company operates in a highly competitive environment
against numerous well-established national, regional and foreign
companies, and many smaller companies. The Company's competitors
include both independent pasta producers and pasta divisions and
subsidiaries of large food products companies. The Company
competes in the procurement of raw materials, the development of
new products and product lines, the improvement and expansion of
previously introduced products and product lines and the
production, marketing and distribution of its products. Some of
these companies have longer operating histories, broader product
lines, significantly greater brand recognition and greater
production capacity and financial and other resources than the
Company. AIPC's products compete with a broad range of food
products, both in the retail and institutional customer markets.
Competition in these markets generally is based on product
quality and taste, pricing, packaging and customer service and
logistics capabilities. The Company believes that it currently
competes favorably with respect to these factors.
The Company's direct competitors include large
multi-national companies such as food industry leader Hershey
Foods Corp. with brands such as San Giorgio and Ronzoni; and
Borden Foods Co. with brands such as Prince and Creamette; and
regional U.S. producers of retail and institutional pasta such as
Dakota Growers, Philadelphia Macaroni Co. Inc. and A. Zerega's
Sons, Inc., each an independent producer, and foreign companies
such as Italian pasta producers De Cecco ("De Cecco") and
Barilla. The Company also competes, indirectly, against food
processors such as Kraft Foods, General Mills, Inc., American
Home Food Products Corporation, Campbell Soup Company and
Stouffers Corp., that produce pasta internally as an ingredient
for use in their food products.
The Company's competitive environment depends to a
significant extent on the aggregate industry capacity relative to
aggregate demand for pasta products. Several domestic pasta
producers have recently completed production facility additions
or announced their intention to increase domestic production
capacity. In addition to AIPC's planned capital expansion,
management believes that these capacity additions represent more
than 200 million pounds of additional pasta production capacity
in aggregate. Dakota Growers recently increased the capacity of
its durum wheat mill and has announced plans to complete a pasta
production capacity expansion in excess of 100 million pounds by
the end of 1997. Hershey recently added approximately 50 million
pounds of pasta capacity to its facility in Winchester, Virginia.
In September 1997, Barilla announced plans to build a pasta plant
near Ames, Iowa with an estimated annual pasta capacity of
approximately 150 million pounds. Two major pasta producers have
also recently announced planned reductions in pasta production
capacity. Borden announced that it will close or sell five of
its ten North American pasta plants by the end of 1997, and CPC
intends to eliminate its capacity of approximately 180 million
pounds by the end of 1997.
Several foreign producers, based principally in Italy and
Turkey, have aggressively targeted the U.S. pasta market in
recent years. In 1996, a U.S. Department of Commerce
investigation revealed that several Italian and Turkish producers
were engaging in unfair trade practices by selling pasta at less
than fair value in the U.S. markets and benefiting from subsidies
from their respective governments. Effective July 1996, the U.S.
International Trade Commission ("ITC"), imposed anti-dumping and
countervailing duties on Italian and Turkish imports. While such
duties may enable the Company and its domestic competitors to
compete more favorably against Italian and Turkish producers in
the U.S. pasta market, there can be no assurance that the duties
will be maintained for any length of time, or that these or other
foreign producers will not sell competing products in the United
States at prices less than those of the Company. Bulk imported
pasta, and pasta produced in the U.S. by foreign firms, are
generally not subject to such anti-dumping and countervailing
duties. Foreign pasta producers generally may avoid such duties
by importing bulk pasta into the United States and repackaging it
in U.S. facilities for distribution. A leading branded Italian
producer, Barilla, opened a bulk pasta repackaging and
distribution facility in Syracuse, New York in 1996 and recently
announced plans to build a pasta production plant in Ames, Iowa
for completion in mid-1998. In addition, on August 28, 1997, the
Department of Commerce announced that it is conducting an
administrative review of its anti-dumping and countervailing duty
orders of July 1996 relating to three Turkish and 16 Italian
pasta producers, including Barilla and De Cecco. The Department
of Commerce indicated that it intends to complete its review not
later than July 31, 1998. The Company cannot predict the outcome
of the Department of Commerce's review.
Pasta Industry and Markets
--------------------------
North American pasta consumption exceeded 5.0 billion pounds
in 1996 and is expected to grow based on industry and trade
sources and the Company's own analysis. The pasta industry
consists of two primary customer markets: (i) Retail, which
includes grocery stores, club stores and mass merchants that sell
branded and private label pasta to consumers; and (ii)
Institutional, which includes both food service distributors that
supply restaurants, hotels, schools and hospitals, as well as
food processors that use pasta as a food ingredient. In 1996, the
supermarket portion of the Retail market accounted for
approximately 1.3 billion pounds, of which branded and private
label pasta accounted for 1.0 billion and 0.3 billion pounds,
respectively. Food service distributors, food processors and the
U.S. government in the Institutional market accounted for the
remainder of the volume, approximately 3.7 billion pounds, in
1996.
The expected increase in North American consumption is
primarily attributable to the widespread recognition that pasta
is an inexpensive, convenient and nutritious food. The U.S.
Department of Agriculture places pasta on the foundation level of
its pyramid of recommended food groups. Products such as flavored
pasta, prepared sauces, boxed pasta dinners, and both frozen and
shelf-stable prepared pasta entrees support consumers' lifestyle
demands for convenient at-home meals. Pasta continues to grow in
popularity in restaurants as Americans continue to dine away from
home more frequently.
Pasta Production Capacity. Management believes that pasta
producers have historically rationalized their existing
production facilities. Within the past several years, however,
there has been an increase in some pasta producers' capital
reinvestment. Upon completion of the planned expansion, AIPC will
have increased its production capacity to over 600 million pounds
since commencing operations in 1988. Several domestic pasta
producers have recently completed production facility additions
or announced their intention to increase domestic production
capacity. In addition to AIPC's planned capital expansion,
management believes that these capacity additions represent more
than 200 million pounds in aggregate. Dakota Growers recently
increased the capacity of its durum wheat mill and has announced
plans to complete a pasta production capacity expansion in excess
of 100 million pounds by the end of 1997. Hershey is believed to
have recently added approximately 50 million pounds of pasta
capacity to its facility in Winchester, Virginia. In September
1997, Barilla announced plans to build a pasta plant near Ames,
Iowa with an estimated annual pasta capacity approximately 150
million pounds. Two major pasta producers have also recently
announced planned reductions in pasta production capacity. Borden
announced that it will close or sell five of its ten North
American pasta plants by the end of 1997, and CPC intends to
eliminate its capacity of approximately 180 million pounds by the
end of 1997. AIPC and Dakota Growers are currently the only major
pasta producers that own vertically-integrated milling and pasta
production facilities. Barilla has announced that its new,
vertically-integrated Iowa pasta plant will include milling,
production and warehouse facilities.
Management estimates pasta imported from foreign producers
during 1996 represented approximately 12% of the U.S. dry pasta
market, and that of this amount, approximately two-thirds
originated from producers in Italy and Turkey. The primary
foreign suppliers of pasta with which the Company competes are
Barilla and De Cecco.
Pricing pressures from Turkish and Italian pasta producers
aggressively targeting the U.S. markets have adversely affected
returns and earnings of some U.S. producers in recent years. In
1996, pasta imported from Italy accounted for approximately $140
million in sales, or around 8.0% of the U.S. pasta market. In
1996, a U.S. Department of Commerce investigation revealed that
several Italian and Turkish producers were engaging in unfair
trade practices by selling pasta at less than fair value in the
U.S. markets and benefiting from subsidies from their respective
governments. Effective July 1996, the U.S. International Trade
Commission imposed anti-dumping duties ranging from 2.8% to 46.7%
on Italian imports and from 56.8% to 63.3% on Turkish imports, as
well as countervailing duties ranging from 1.2% to 11.2% on
Italian imports and from 3.9% to 15.8% on Turkish imports.
Although Italian and Turkish importers still participate in the
major U.S. customer markets, management believes that these
duties have significantly reduced the volume of low-priced pasta
from Italy and Turkey.
Customer Markets - Retail. Hershey, Borden and CPC together
represent a majority of the branded Retail market. Hershey, which
primarily competes in the branded Retail market and whose retail
brands include Ronzoni, San Giorgio, Skinner and American Beauty,
is the industry leader and produced 24.0% of the total pounds
sold in the branded Retail market for the 53 weeks ended
September 30, 1997. Borden, which produced 20.4% of the total
pounds sold in the Retail market for the 53 weeks ended September
30, 1997, has announced its intention to shift its strategy to
focus on its branded pasta and sauce products, which include
Creamette, Prince, Catelli, Merlino's and Anthony's, and to exit
private label pasta production and sales. CPC participates in the
Retail market with Mueller's, the oldest and largest pasta brand
in the United States. AIPC directly participates in the branded
Retail market by producing and distributing Pasta LaBella
flavored pasta and will indirectly participate in such market by
processing and distributing Mueller's brand pasta for CPC. During
1998, CPC will transfer substantially all of its Mueller's brand
pasta production to AIPC.
Between the Company's first fiscal quarter of 1994 and the
fourth fiscal quarter of 1997, sales of private label pasta
products increased from 18.6% to 21.0% of the total pounds of
pasta sold in the Retail market based on A.C. Nielsen scanner
data. Management believes that sales of private label pasta
products will continue to grow at a rate in excess of the overall
Retail pasta market. After Borden's departure from the private
label market, AIPC will be one of the leading suppliers in the
remaining fragmented market. Management believes that the private
label category offers significant growth and profit opportunities
to retailers and efficient producers. Retailers often prefer
high-quality private label products to branded products because
private label products typically enable retailers to generate
higher margins and maintain greater control of in-store
merchandising. While consumers traditionally have viewed private
label products as having lower quality than branded products,
management believes that new high-quality private label products
have begun to change this perception. Management attributes some
of this change in the private label market to the increasingly
upscale image, improved packaging, higher product quality and
competitive prices of private label products.
Customer Markets - Institutional. The Institutional market
includes both food service distributors that supply restaurants,
hotels, schools and hospitals, as well as food processors that
use pasta as a food ingredient. Traditional food service
customers include businesses and organizations, such as Sysco and
JP Food service, Inc., that sell products to restaurants,
healthcare facilities, schools, hotels and industrial caterers.
Most food service distributors obtain their supply of pasta from
third party producers such as AIPC. The food service market is
highly-fragmented and is served by numerous regional and local
food distributors, including both "traditional" food service
customers and chain restaurant customers. Sysco, the nation's
largest food service marketer and distributor of food service
products and one of the nation's largest commercial purchasers of
pasta products, serves approximately 10% of the food service
customers in the United States and has more than double the
revenues of the next largest food service distributor.
The Institutional market also includes sales to food
processors who use pasta as an ingredient in their food products
such as frozen dinner entrees and side dishes, dry side dish
mixes, canned soups and single-serve meals. Large food processors
that use pasta as a food ingredient include Kraft Foods, American
Home Food Products Corporation, Stouffers Corp., Campbell Soup
Company, ConAgra, Inc., Pillsbury and General Mills. The
consistency and quality of the color, starch release, texture,
cooking consistency, and gluten and protein content of pasta
produced for food processors is crucial to their products'
success. As a result, food processors have stringent
specifications for these attributes.
The size of the Institutional market is affected by the
number of food processors that elect to produce pasta internally
rather than outsourcing their production. Historically, most
pasta used by food processors was manufactured internally for use
in food processors' own products. Management believes, however,
that an increasing number of food processors may discontinue the
internal production of their own pasta and outsource their
production to efficient producers such as AIPC.
Management Information Systems
------------------------------
The Company's production, distribution, sales and marketing
operations are supported by an IBM AS400-based computer system.
The system utilizes licensed BPCS manufacturing software which
has been tailored to the Company's management processes and
integrates its production, purchasing, order entry, inventory
management, distribution and accounting systems. The Company's
management information systems were recently upgraded in
anticipation of the Company's growth and desire to continue to
offer its customers value-added, efficient services. The Company
has invested substantial amounts in electronic data interchange
and efficient consumer response systems to streamline the order,
invoicing and inventory management functions. The Company
believes that its recent hardware and software upgrades have
adequately addressed the systems operations issues relating to
the year 2000.
Government Regulation; Environmental Matters
--------------------------------------------
The Company is subject to various laws and regulations
relating to the operation of its production facilities, the
production, packaging, labeling and marketing of its products and
pollution control, including air emissions, which are
administered by federal, state, and other governmental agencies.
The Company's production facilities are subject to inspection by
the U.S. Food and Drug Administration and Occupational Safety and
Health Administration, the Missouri Department of Natural
Resources and the South Carolina Department of Health and
Environmental Control.
Employees
---------
As of September 30, 1997, the Company employed 289 full-time
persons, of whom 130 were salaried employees and 159 were hourly
employees. The Company's employees are not represented by any
labor unions. AIPC considers its employee relations to be good.
ITEM 2. PROPERTIES.
Production Facilities. AIPC's pasta production plants are
located near Kansas City in Excelsior Springs, Missouri, and in
Columbia, South Carolina. The Company's facilities are
strategically located to support North American distribution of
AIPC's products and benefit from the rail and interstate highway
infrastructure. At September 30, 1997, the Company's facilities
had combined annual milling and production capacity of
approximately 300 million pounds of durum semolina and 330
million pounds of pasta.
The Company has pursued a capacity expansion strategy over
the past several years. During 1994, the Company completed a
$30.0 million expansion of the Missouri plant, increasing
production capacity more than 70% to 230 million pounds per year
and, at the same time, increased its durum wheat milling capacity
over 100% to support pasta production of approximately 300
million pounds per year. In 1995, the Company added approximately
100 million pounds of pasta capacity by constructing its South
Carolina plant.
AIPC's current capital expenditure program will increase
AIPC s current pasta production capacity by 90% from 330 million
pounds per year to 620 million pounds per year in 1998. At the
Company s Missouri facility, the Company will be adding high-
speed, high-output pasta production lines with the ability to
produce a full range of products and expanding the distribution
center. The capital expenditures program also includes the
construction of a durum wheat mill in South Carolina which
adjoins the existing pasta production plant facility, a 200%
increase in the facility's pasta production capacity, and a
doubling of the capacity of the South Carolina distribution
center.
The additional capacity will be used to produce Mueller's
brand pasta and take advantage of other market opportunities.
CPC's guaranteed annual minimum purchases of 175 million pounds
pursuant to the CPC Agreement will utilize approximately 60% of
the Company's newly-added pasta production capacity.
Distribution Centers. The Company currently owns the
distribution center adjoining its Missouri plant and leases its
distribution center in South Carolina as well as space in a
public warehouse in Southern California. The Company completed
construction of the integrated warehousing and distribution
facilities at its Missouri and South Carolina facilities during
1995.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently is not a party to any litigation, nor
is it aware of any litigation threatened against it which, if
commenced and adversely determined, management expects would
likely have a material adverse effect upon the business or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to its stockholders
during the fourth quarter of the Company's most recent fiscal
year.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K and
instruction 3 to paragraph (b) of Item 401 of Regulation S-K, the
following list is included as an unnumbered Item in Part I of
this Annual Report in lieu of being included in AIPC's Definitive
Proxy Statement which will be filed no later than 120 days after
September 30, 1997. All executive officers are elected annually
and serve at the discretion of the Board of Directors. Certain of
the executive officers have employment agreements with the
Company.
The following table sets forth certain information
concerning each of the executive officers of the Company as of
September 30, 1997.
NAME AGE POSITION
---- --- --------
Horst W. Schroeder....... 56 Chairman of the Board
of Directors
Timothy S. Webster....... 35 President and Chief
Executive Officer;
Director
Norman F. Abreo.......... 47 Executive Vice President
-- Operations
David E. Watson.......... 42 Executive Vice President
and Chief Financial
Officer
David B. Potter.......... 38 Senior Vice President --
Procurement
Darrel E. Bailey......... 45 Senior Vice President -
Institutional Sales and
Marketing
Horst W. Schroeder has served as Chairman of the Board of
Directors of the Company since June 1991, and as a Director of
the Company since August 1990. Since 1990, Mr. Schroeder has been
President of HWS & Associates, Inc., a Hilton Head, South
Carolina management consulting firm owned by Mr. Schroeder. Prior
to founding HWS & Associates, Mr. Schroeder served the Kellogg
Company, a manufacturer and marketer of ready-to-eat and other
convenience food products, in various capacities for more than 20
years, most recently as President and Chief Operating Officer. He
is a manager of PSF Holdings, L.L.C. and has served as Chairman
of the Board of its wholly-owned subsidiary, Premium Standard
Farms, Inc., a vertically-integrated pork producer, since 1996.
Timothy S. Webster has served as President of the Company
since June 1991, as President and Chief Executive Officer of the
Company since May 1992, and as a Director since June 1989. Mr.
Webster joined the Company in April 1989, and served as Chief
Financial Officer from May 1989 to December 1990 and as Chief
Operating Officer from December 1990 to June 1991. In addition,
in August 1997 Mr. Webster assumed responsibility for managing
the Company's sales and marketing functions.
Norman F. Abreo joined the Company in December 1991, serving
initially as the Company's Vice President -- Manufacturing. He
became Senior Vice President-- Operations in June 1995, and
Executive Vice President -- Operations in June 1997. Prior to
joining the Company, he was Plant Manager for the Coca-Cola
Enterprises, Inc. plant in New Orleans, Louisiana, from December
1987 to December 1991; Director of Operations for Borden Pasta
Group from December 1985 to December 1987; and Plant Manager of
the Borden Pasta Group's New Orleans facility from March 1979 to
December 1985.
David E. Watson joined the Company in June 1994 as its
Senior Vice President and Chief Financial Officer. He was
promoted to Executive Vice President and Chief Financial Officer
in June, 1997. Prior to joining AIPC, Mr. Watson spent 18 years
with the accounting firm of Arthur Andersen & Co., most recently
as partner-in-charge of its Kansas City and Omaha Business
Consulting Group practice. Mr. Watson is a certified public
accountant.
David B. Potter joined the Company in 1993 as its Director
of Procurement. He was named Vice President in 1994 and Senior
Vice President -- Procurement in June 1997. Before joining the
Company, Mr. Potter had worked in numerous areas of Hallmark
Cards and its subsidiary, Graphics International Trading Company,
from 1981 to 1993, most recently as Business Logistics Manager.
Darrel E. Bailey joined the Company in 1993 as its Vice
President - Retail Sales and Marketing. He was named Senior
Vice President Institutional Sales and Marketing in 1995.
Before joining the Company, Mr. Bailey had worked at Hallmark
Cards from 1991 to 1993, most recently as Marketing Business
Manager of Party Goods.
There are no arrangements or understandings between the
executive officers and any other person pursuant to which the
executive officer was or is to be selected as an officer, except
with respect to the executive officers who have entered into
employment agreements, which agreements designate the position(s)
to be held by the executive officer.
None of the above officers are related to one another by
family.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Class A Convertible Common Stock, par value
$0.001 per share (the "Class A common stock") is traded on the
New York Stock Exchange under the symbol "PLB". Trading of the
Company's Class A common stock began after the close of the most
recent fiscal year covered by this Annual Report.
As of December 12, 1997, there were 271 holders of the
Company's Class A common stock. No shares of the Company's Class
B Convertible Common Stock, par value $0.001 per share (the
"Class B common stock" and together with the Class A common
stock, the "Common Stock") are outstanding on the date of this
Annual Report.
The Company has not declared or paid any dividends on its
Common Stock to date and does not anticipate paying any such
dividends in the foreseeable future. The Company intends to
retain earnings for the foreseeable future to provide funds for
the operation and expansion of its business and for the repayment
of indebtedness. The borrowing agreements relating to the
Company's current credit facility contain certain provisions
which effectively prohibit the payment of dividends. Future
borrowing agreements of the Company may also contain limitations
on the payment of dividends. Any determination to pay dividends
in the future will be at the discretion of the Company's Board of
Directors and will depend upon the Company's financial condition,
capital requirements, results of operations and other factors,
including any contractual or statutory restrictions on the
Company's ability to pay dividends. The Company has no
restricted retained earnings at September 30, 1997.
Securities Sold in Unregistered Offerings during Fiscal Year 1997
-----------------------------------------------------------------
(a) On April 15, 1997, the Company issued an aggregate of
3,174,528 shares of Class A common stock, par value
$0.01 per share (the "Old Class A common stock"), at a
cash purchase price of $7.02 per share, aggregating
$22,291,947, to all but one of the then-current
stockholders of the Company and several members of the
Company's management team (the "1997 Private Equity
Financing"), all of whom are officers, directors and
senior managers or a spouse thereof. In particular,
the Company issued an aggregate of 2,563,323 shares to
The Morgan Stanley Capital Partners III, L.P. and
certain affiliated funds (the "MSCP Funds") and The
Morgan Stanley Leveraged Equity Fund II, L.P.
("MSLEF"), 427,219 shares to affiliated investment
funds of George K. Baum & Company, an aggregate of
49,056 shares to a trust of which Mr. Schroeder is the
trustee and members of his family are the
beneficiaries, an aggregate of 28,483 shares to Mr.
Schlindwein, his wife and JSS Management Co. Ltd. (an
affiliate of Mr. Schlindwein), an aggregate of 20,242
shares to Mr. Webster and trusts for the benefit of
members of his family, 42,513 shares to David E.
Watson, 5,194 shares to Norman F. Abreo and 13,024
shares to David P. Potter. In this sale of securities,
the purchasers made representations as to their
investment intent, a restrictive legend was included on
the stock certificates, and no underwriters were
involved and no commission or other fees were paid.
All of such sales were made in reliance upon an
exemption from the registration requirements of the
Securities Act set forth in Section 4(2) thereof.
(b) On June 24, 1997, the Company issued 31,200 shares of
Old Class A common stock to the American Italian Pasta
Company Retirement Savings Plan pursuant to an
exemption from registration requirements set forth in
Section 3(a)(2) of the Securities Act.
Use of Proceeds from Initial Public Offering
--------------------------------------------
The Securities and Exchange Commission declared the
Company's registration statement on Form S-1 (Securities and
Exchange Commission file no. 333-32827) (the "Registration
Statement") concerning the initial public offering of the Class A
convertible common stock, par value $0.001 per share, effective
on, and that offering commenced on, October 8, 1997. The
managing underwriters for the offering in the United States were
Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated,
Goldman, Sachs & Co. and George K. Baum & Company, and the
managing underwriters for the International offering were Morgan
Stanley & Co. International Limited, BT Alex. Brown
International, a division of Bankers Trust International PLC,
Goldman Sachs International and George K. Baum & Company.
That offering has terminated and all registered shares
(9,085,000), including the 1,185,000 shares covered by the over-
allotment option granted to the U.S. Underwriters, were sold by
the Company and the selling stockholders (identified below) as
follows.
<TABLE>
<CAPTION>
CLASS A AGGREGATE
SHARES OFFERING
REGISTERED PRICE
SELLING PARTY AND SOLD RECEIVED<F1>
-------------------- ------------- --------------
<S> <C> <C>
The Company 5,310,000 $88,995,600
The Morgan Stanley
Leveraged Equity
Fund II, L.P. 2,207,746<F2> 37,001,823
Morgan Stanley
Capital Partners
III, L.P.<F3> 973,254<F2> 16,311,737
Richard C. Thompson 630,000 10,558,800
<FN>
<F1> Reflects an underwriting discount of $1.24 per share from
the offering price to the public of $18.00 per share. Net
proceeds (prior to expenses other than the underwriting discount)
to the sellers was $16.76 per share. The Company did not receive
any of the proceeds received by the selling stockholders.
<F2> Includes the over-allotment option granted by these
stockholders. No over-allotment option was granted by the
Company.
<F3> Includes certain affiliated funds.
</FN>
</TABLE>
The Company incurred the following expenses in connection
with the initial public offering:
Underwriting Discounts and Commissions $6,584,400
Finder's Fees 0
Expenses Paid to or for the Underwriters 0
Other Expenses 2,000,000*
----------
Total Offering Expenses $8,584,000
==========
* These expenses are estimated for the purpose of this Annual
Report.
These expenses are payable to or have been paid, directly or
indirectly, to persons other than any: (i) director or officer of
the Company or their associates; (ii) 10 percent or greater
beneficial owner of the Company's Class A common stock; or (iii)
affiliate of the Company other than a portion of the underwriting
discount paid to associates of The Morgan Stanley Leveraged
Equity Fund II, L.P. and Morgan Stanley Capital Partners III,
L.P. and Jonathan E. Baum, who controls George K. Baum & Company.
The net proceeds to the Company after deducting the total
offering expenses were $87 million. The Company used the full
amount of the net proceeds from the offering to repay bank
indebtedness. This application of the proceeds is consistent with
the use of proceeds described in the Registration Statement. This
amount has been paid, directly or indirectly, to persons other
than any: (i) director or officer of the Company or their
associates; (ii) 10 percent or greater beneficial owner of the
Company's Class A common stock; or (iii) affiliate of the
Company.
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of operations data for the fiscal
year ended December 31, 1995, the nine-month fiscal period ended
September 30, 1996, and the fiscal year ended September 30, 1997
and the selected balance sheet data as of September 30, 1996 and
September 30, 1997 are derived from the Financial Statements
including the Notes thereto of the Company audited by Ernst &
Young LLP, independent auditors, and its opinion thereon
appearing elsewhere in this Annual Report. The selected statement
of operations data for the years ended December 31, 1993 and 1994
and the selected balance sheet data as of December 31, 1993, 1994
and 1995 have been derived from financial statements of the
Company not included herein, which have been audited by Ernst &
Young LLP. The selected statement of operations data for the
calendar year ended December 31, 1996 and the twelve-month period
ended September 30, 1996 and the balance sheet data as of
December 31, 1996 have been derived from the Company's unaudited
internal financial statements, which in the opinion of
management, have been prepared on the same basis as the audited
financial statements and reflect all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation
of the results of operations and financial position of the
Company. The statement of operations data of the Company for the
calendar year ended December 31, 1996 and the twelve-month period
ended September 30, 1996 and the balance sheet data as of
December 31, 1996 are included herein only for comparison
purposes. The selected other data has been derived from the
accounting records of the Company and has not been audited. The
selected financial and other data set forth below should be read
in conjunction with, and is qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Financial Statements,
including the Notes thereto, appearing elsewhere in this Annual
Report. The Company has not paid any dividends on its Class A
common stock during the periods indicated below.
<TABLE>
<CAPTION>
NINE
MONTH TWELVE-
FISCAL MONTH FISCAL
CALENDAR PERIOD PERIOD YEAR
YEAR ENDED ENDED ENDED
ENDED SEPT- SEPT- SEPT-
FISCAL YEAR ENDED DECEMBER 31, DEC- EMBER EMBER EMBER
----------------------------- EMBER 31 30, 30, 30,
1993 1994 1995 1996<F1> 1996<F1> 1996 1997
---- ---- ---- -------- --------- ------- -----
-
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $47,872 $69,465 $ 92,903 $121,621 $ 92,074 $121,149 $129,143
Cost of goods sold 35,081 54,393 73,851 89,704 68,555 91,230 93,467
Plant expansion
costs <F2> 1,171 484 2,065 -- -- -- --
------- ------- -------- -------- --------- --------- --------
Gross profit 11,620 14,588 16,987 31,917 23,519 29,919 35,676
Selling and marketing expense,
including product introduction
costs <F3> 2,883 3,792 5,303 21,250 16,798 18,445 13,664
General and administrative
expense 2,049 1,951 2,930 3,498 2,805 3,686 3,766
------- ------- -------- ------- --------- --------- --------
Operating profit 6,688 8,845 8,754 7,169 3,916 7,788 18,246
Interest expense, net 3,210 4,975 8,008 10,575 8,023 10,770 10,119
------- ------- -------- -------- --------- --------- --------
Income (loss) before income tax
and extraordinary loss 3,478 3,870 746 (3,406) (4,107) (2,982) 8,127
Income tax (3,221) 1,484 270 (1,288) (1,556) (1,139) 3,070
Extraordinary loss, net of
income tax <F4> -- 204 -- 1,647 1,647 1,647 --
------- ------- -------- -------- --------- --------- --------
Net income (loss) $ 6,699 $ 2,182 $ 476 $(3,765) $ (4,198) $ (3,490) $ 5,057
======= ======= ======== ======= ========= ========= ========
---Net income (loss) per
common share <F5> $ .64 $ .21 $ .05 $ (.36) $ (.40) $ (.33) $ .42
Weighted average
common shares
outstanding <F5> 10,390 10,401 10,445 10,475 10,473 10,470 12,161
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and temporary
investments $ 2,149 $ 11 $ 18 $ 1,678 $ 1,818 $ 1,818 $ 2,724
Working capital 3,077 4,830 6,632 (1,965) (1,601) (1,601) 12,188
Total assets 66,337 93,629 135,424 137,974 141,688 141,688 158,175
Long-term debt, less
current maturities 40,024 62,375 97,452 92,143 93,284 93,284 100,137
Stockholders' equity 16,973 19,401 20,067 16,402 15,969 15,969 42,984
<FN>
<F1> The Company adopted a fiscal year ending on the last Friday
of September or the first Friday of October, effective beginning
with the nine-month fiscal period ended September 27, 1996 and
for all subsequent fiscal periods. For purposes of this Form 10-
K, the 1996 nine-month fiscal period and the 1997 fiscal year are
shown as having ended on September 30.
<F2> Plant expansion costs include incremental direct and
indirect manufacturing and distribution costs which are incurred
as a result of construction, commissioning and start-up of new
capital assets. These costs are expensed as incurred but are
unrelated to current production and, therefore, are reported as a
separate line item in the statement of operations.
<F3> Selling and marketing expense includes incremental product
introduction costs, including payment of product placement or
"slotting" fees, related to the Company's launch of its Pasta
LaBella flavored pasta products into the U.S. retail grocery
market. The Company did not incur such product introduction costs
prior to the calendar year ended December 31, 1996. Product
introduction costs were incurred as follows: $9.6 million in
calendar year ended December 31, 1996, $8.1 million for the
nine-month and twelve-month periods ended September 30, 1996, and
$2.9 million for the fiscal year ended September 30, 1997.
<F4> Represents losses due to early extinguishment of long-term
debt, net of income tax.
<F5> Earnings per share is presented on a pro forma basis giving
effect to the consummation of the Recapitalization in connection
with the Offering.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
Introduction and Certain Cautionary Statements
----------------------------------------------
Management's discussion and analysis of the Company's
financial condition and results of its operations focuses on and
is intended to clarify the Company's results of operations,
certain changes in its financial position, liquidity, capital
structure and business developments for the periods covered by
the consolidated financial statements included in this Annual
Report. This discussion should be read in conjunction with, and
is qualified by reference to, the other related information
including, but not limited to, the audited financial statements
(including the notes thereto and the independent auditor's
opinion thereon), the description of the Company's business, all
as set forth in this Annual Report, as well as the risk factors
discussed in the Company's Current Report on 8-K dated October
29, 1997 (the "Risk Factors"), which has been incorporated by
reference into this Annual Report as if it is fully set forth
herein.
As previously noted, the discussion set forth below, as well
as other portions of this Annual Report, contains statements
concerning potential future events. Readers can identify these
forward-looking statements by their use of such verbs as expects,
anticipates, believes or similar verbs or conjugations of such
verbs. If any of management's assumptions on which the
statements are based prove incorrect or should unanticipated
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 combination of factors including, but not limited to,
the Risk Factors. Readers are strongly encouraged to consider
those factors when evaluating any such forward-looking statement.
The Company will not update any forward-looking statements in
this Annual Report to reflect future events or developments.
The Company changed its fiscal year end from December 31 to
the last Friday of September or the first Friday of October. This
change resulted in a nine-month fiscal year for 1996 and a
53-week year for fiscal 1997, and a 52- or 53-week year for all
subsequent fiscal years. The Company's first three fiscal
quarters end on the Friday last preceding December 31, March 31,
and June 30 or the first Friday of the following month of each
quarter. For purposes of this Form 10-K, the 1996 fiscal year is
described as the nine-month fiscal period ended September 30,
1996. The unaudited statement of operations data of the Company
for the nine-month period ended September 30, 1995 and the
unaudited twelve-month period ended September 30, 1996 and the
calendar year ended December 31, 1996 are included herein only
for comparison purposes.
For purposes of management's discussion and analysis of
fiscal year 1997 is compared to the unaudited twelve month period
ended September 30, 1996 and the fiscal year 1996 is compared to
the unaudited nine month period ended September 1995. Although
the comparative periods are unaudited, the financial statements
on which the discussion is based contain all adjustments
necessary to fairly present the financial position of the Company
and the results of its operations for those undaunted periods.
Recent Events
-------------
Restructuring of Revolving Credit Facility and Write Off of
Deferred Debt Issuance Costs.
On October 17, 1997, the Company completed a restructuring
of its primary bank credit facility. The restructured facility
initially provides the Company with $150 million in credit on an
unsecured, revolving basis at interest rates which are 250 basis
points lower than the previous agreement. As a result of the
restructuring the Company anticipates a first quarter
extraordinary charge of approximately $2.3 million, net of tax,
related to the write off of current and deferred debt issuance
costs.
The current and noncurrent portions of long-term debt
outstanding at September 30, 1997 have been reclassified in the
Company's balance sheet to reflect the scheduled maturities of
the new debt. The terms of the new debt are described more fully
in Note 2 of the financial statements included in this Annual
Report.
Completion of Initial Public Offering.
-------------------------------------
The Company completed the initial public offering of its
Class A common stock October 8, 1997 (the "Offering"). All
registered shares, including the 1,185,000 shares covered by the
over-allotment option, were sold by the Company and selling
stockholders. The Company has outstanding 16,776,061 shares of
Class A common stock (not including 3,284,663 shares reserved for
issuance in connection with equity incentive plans) outstanding
upon completion of the Offering.
The Company received net proceeds after deducting the total
offering expenses of $87 million, which funding was closed on
October 15, 1997. The Company used all of the net proceeds from
the offering to repay bank indebtedness on October 16, 1997.
Following this reduction, the Company had outstanding
indebtedness of $11 million. The Company will incur up to
approximately $62 million in new indebtedness through the middle
of fiscal 1998 to fund its capital expenditure program to
increase its current pasta production capacity, as discussed
under Item 1 above.
Adoption of 1997 Equity Incentive Plan.
In October 1997, the Board of Directors adopted the 1997
Equity Incentive Plan (the "1997 Plan") for all employees. Under
the 1997 Plan, the Board or a committee designated by the Board
is authorized to grant nonqualified stock options, incentive
stock options, reload options, stock appreciation rights, shares
of restricted Class A common stock, performance shares,
performance units and shares of Class A common stock awarded as a
bonus. There are 2,000,000 shares of Class A common stock
reserved for issuance under the 1997 Plan. On October 9, 1997,
the Board of Directors granted options to purchase an aggregate
of 993,391 shares of Class A common stock at an exercise price of
$18 per share. The stock options expire 10 years from the date of
grant, unless terminated earlier in accordance with the terms of
the 1997 Plan, and become exercisable over the next five years in
varying amounts depending on the terms of the individual option
agreements.
AIPC, Harvest States Working Toward Alliance.
On November 18, 1997, the Company announced the signing of a
letter of intent with Harvest States for the possible
construction and operation of a pasta production and distribution
facility adjacent to Harvest State s mill in Kenosha, Wisconsin.
The finalization of the project is subject to a number of
significant conditions, including the execution of a definitive
agreement with Harvest States.
Results of Operations
---------------------
The following table sets forth certain statement of
operations data of the Company, expressed as a percentage of
revenues, for each of the periods presented.
<TABLE>
<CAPTION>
NINE
MONTH TWELVE
FISCAL CALENDAR FISCAL MONTH
FISCAL
YEAR YEAR PERIOD PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED
DEC- DEC- SEPT- SEPT- SEPT-
EMBER EMBER EMBER EMBER EMBER
31, 31, 30, 30, 30,
1995 1996 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Retail 53.1% 59.6% 60.7% 59.5% 56.7%
Institutional 46.9 40.4 39.3 40.5 43.3
----- ----- ----- ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Costs of goods sold 79.5 73.7 74.6 75.3 72.4
Gross profit before
plant expansion
costs 20.5 26.3 25.4 24.7 27.6
Plan expansion costs 2.2 -- -- -- --
----- ----- ----- ----- -----
Gross profits 18.3 26.3 25.4 24.7 27.6
Selling and marketing
expense, including
product introduction
costs 5.7 17.5 18.2 15.2 10.6
General and
administrative
expense 3.2 2.9 3.0 3.0 2.9
----- ----- ----- ----- -----
Operating profit 9.4 5.9 4.2 6.5 14.1
Interest expense, net 8.6 8.7 8.7 8.9 7.8
Income tax 0.3 (1.1) (1.7) (0.9) 2.4
Extraordinary loss,
net of income tax -- 1.4 1.8 1.4 --
----- ----- ----- ----- -----
Net income (loss) 0.5% (3.1)% (4.6)% (2.9)% 3.9%
===== ===== ===== ===== =====
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO TWELVE-MONTH
PERIOD ENDED SEPTEMBER 30, 1996
Revenues. Revenues increased $8.0 million, or 6.6%, to
$129.1 million for the fiscal year ended September 30, 1997, from
$121.1 million for the twelve-month period ended September 30,
1996. The increase for the fiscal year ended September 30, 1997
was primarily due to increases in unit volume. The revenues
increase was lower than historical periods as the Company planned
for and achieved higher than historical capacity utilization
levels which precluded more significant unit and revenue growth.
Management expects increased revenue as a result of the long-term
supply agreement with CPC.
Revenues for the Retail market increased $1.2 million, or
1.7%, to $73.3 million for the fiscal year ended September 30,
1997, from $72.1 million for the twelve-month period ended
September 30, 1996. The increase reflects gains in private label
volumes and lower retail sales volumes of Pasta LaBella flavored
pasta as the prior period included introductory pipeline full
shipments.
Revenues for the Institutional market increased $6.8
million, or 13.9%, to $55.9 million for the fiscal year ended
September 30, 1997, from $49.1 million for the twelve-month
period ended September 30, 1996. This was primarily the result of
volume gains in ingredient, foodservice, and Contract Sales which
were partially offset by durum wheat related price reductions and
changes in sales mix.
Gross Profit. Gross Profit increased $5.8 million, or
19.4%, to $35.7 million for the fiscal year ended September 30,
1997, from $29.9 million for the twelve-month period ended
September 30, 1996. Gross profit as a percentage of revenues
increased to 27.6% for the fiscal year ended September 30, 1997
from 24.7% for the twelve-month period ended September 30, 1996.
These increases were the result of increases in revenues and
lower product costs due to improved plant efficiencies and
capacity utilization.
Selling and Marketing Expense. Selling and marketing
expense decreased $4.8 million, or 26%, to $13.7 million for the
fiscal year ended September 30, 1997, from $18.4 million reported
for the twelve-month period ended September 30, 1996. Selling and
marketing expense as a percentage of revenues decreased to 10.6%
for the fiscal year ended September 30, 1997, from 15.2% for the
comparable prior period. The decrease was primarily due to lower
product introduction costs incurred in the Company's retail
introduction of Pasta LaBella flavored pasta. The Company s
incurred $2.9 million of product introduction costs for the
fiscal year ended September 30, 1997, as compared to $8.1 million
for the twelve-month period ended September 30, 1996. The
decrease in product introduction costs was due to a reduction in
introduction activities as the Company completed its retail
launch. The decrease in product introduction costs was partially
offset by increases in other selling and marketing expenses which
supported incremental private label and branded revenues.
General and Administrative Expense. General and
administrative expense increased $.1 million, or 2%, to $3.8
million for the fiscal year ended September 30, 1997, from $3.7
million reported for the comparable period last year, but
decreased as a percentage of revenues from 3% to 2.9%.
Operating Profit. Operating profit for the fiscal year
ended September 30, 1997, was $18.2 million, an increase of 133 %
over the $7.8 million reported for the twelve-month period ended
September 30, 1996. Excluding product introduction costs,
operating profit increased $5.2 million, or 32.9%, to $21.1
million for the fiscal year ended September 30, 1997, from $15.9
million reported for the comparable period last year, and
increased as a percentage of revenues to 16.3% for the fiscal
year ended September 30, 1997, from 13.1% for the twelve-month
period ended September 30, 1996.
September 30, 1997, was $10.1 million, decreasing 6.5% from the
$10.8 million reported for the twelve-month period ended
September 30, 1996. The decrease was primarily the result of
reduced borrowings under the Company s term and revolving credit
facilities resulting from the $22.3 million in proceeds realized
from the April 1997 private equity financing.
Income Tax. Income tax for the fiscal year ended September
30, 1997, was $3.1 million, increasing $4.2 million from the
$(1.1) million reported for the twelve-month period ended
September 30, 1996, and reflects an effective income tax rate of
approximately 38%.
Net Income. Net income for the fiscal year ended September
30, 1997, was $5.1 million, increasing from the $(3.5) million
reported for the twelve-month period ended September 30, 1996.
Net income per share was $0.42 in fiscal 1997 compared to a loss
of $0.33 per share for the twelve-month period ended September
30, 1996.
Supplementary net income per share for the year ended
September 30, 1997 is $0.57 calculated to give effect to the
reduction of interest expense, net of tax and the increase in the
weighted average number of common and common equivalent shares
outstanding sufficient to retire certain indebtedness as if the
retirement had occurred at the beginning of the period affected.
NINE-MONTH FISCAL PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO THE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
Revenues. Revenues increased $28.3 million, or 44.4%, to
$92.1 million for the nine-month fiscal period ended September
30, 1996, from $63.8 million for the nine-month period ended
September 30, 1995. This increase was primarily due to higher
unit volume, favorable changes in product sales mix and higher
average prices resulting from the introduction of the Company's
new, higher-priced Pasta LaBella flavored pasta.
Revenues for the Retail market increased $23.1 million, or
70.4%, to $55.9 million for the nine-month fiscal period ended
September 30, 1996, from $32.8 million for the nine-month period
ended September 30, 1995. This increase was due to (i) higher
sales volume, with the largest increases coming from private
label and club stores customers; (ii) higher average unit prices
due to the introduction of the Company's new, higher-priced Pasta
LaBella flavored pasta into the U.S. retail grocery market; (iii)
improved product sales mix in the club store category; and (iv)
the pass-through of higher durum wheat costs.
Revenues for the Institutional market increased $5.2
million, or 16.8%, to $36.2 million for the nine-month fiscal
period ended September 30, 1996, from $31.0 million for the
nine-month period ended September 30, 1995. The volume gains in
ingredient and food service categories were partially offset by
lower Contract Sales volumes as available production capacity was
utilized by retail sales growth. The average 1996 institutional
unit price also increased due to the pass-through of higher durum
wheat costs.
Gross Profit. Gross profit increased $12.9 million, or
121.7%, to $23.5 million for the nine-month fiscal period ended
September 30, 1996, from $10.6 million for the nine-month period
ended September 30, 1995. Gross profit as a percentage of
revenues increased to 25.5% for the nine-month fiscal period
ended September 30, 1996, from 16.6% for the nine-month period
ended September 30, 1995. These increases were primarily the
result of (i) higher sales volumes; (ii) higher average unit
prices, primarily as a result of Pasta LaBella flavored pasta
sales; (iii) the absence of plant expansion costs; (iv) lower per
unit warehousing and distribution costs resulting from
outsourcing logistics functions through a new strategic alliance
with Lanter Company; and (v) improved plant efficiencies and
capacity utilization, including the impact of the new South
Carolina production and distribution facilities.
Selling and Marketing Expense. Selling and marketing expense
increased $13.1 million, or 354.1%, to $16.8 million for the
nine-month fiscal period ended September 30, 1996, from $3.7
million for the nine-month period ended September 30, 1995.
Selling and marketing expense as a percentage of revenues
increased to 18.2% for the nine-month fiscal period ended
September 30, 1996 from 5.7% for the nine-month period ended
September 30, 1995. These increases in selling and marketing
expense were primarily due to the Company's incurrence of $8.1
million of product introduction costs during the nine-month
fiscal period ended September 30, 1996 related to the retail
introduction of the Company's Pasta LaBella flavored pasta
products. These costs included payment of product placement fees
or "slotting," introductory consumer sampling, couponing,
advertising and trade promotions. There were no comparable 1995
expenditures. Selling and marketing expenses also increased due
to Pasta LaBella flavored pasta sales and increases in club store
and private label revenues.
General and Administrative Expense. General and
administrative expense increased $0.8 million, or 40.0%, to $2.8
million for the nine-month fiscal period ended September 30,
1996, from $2.0 million for the nine-month period ended September
30, 1995, but decreased as a percentage of revenues from 3.2% for
the nine-month period ended September 30, 1995 to 3.0% for the
nine-month fiscal period ended September 30, 1996. The increase
in general and administrative expense was primarily due to
increases in MIS expenses and communication costs incurred to
support sales growth and the commencement of operations in South
Carolina.
Operating Profit. Operating profit decreased $1.0 million,
or 20.4% to $3.9 million for the nine-month fiscal period ended
September 30, 1996 from $4.9 million for the nine-month period
ended September 30, 1995. Excluding product introduction costs,
operating profit increased to $12.0 million, or 144.9%, from $4.9
million and increased as a percentage of revenue to 13.0% for the
nine-month fiscal period ended September 30, 1996 from 7.7% for
the nine-month period ended September 30, 1995.
Interest Expense. Interest expense increased $2.7 million,
or 50.9%, to $8.0 million for the nine-month fiscal period ended
September 30, 1996 from $5.3 million for the nine-month period
ended September 30, 1995, due to higher borrowing levels to
finance the Company's South Carolina and Missouri capital assets
expansion and increases in working capital.
Income Tax. Income tax decreased to $(1.6) million for the
nine-month fiscal period ended September 30, 1996, from $(0.1)
million for the nine-month period ended September 30, 1995 and
reflected an effective income tax rate of approximately 38% in
both periods.
Extraordinary Item. During the nine-month fiscal period
ended September 30, 1996, the Company incurred a $1.6 million
(net of tax) extraordinary loss due to the write-off of deferred
debt issuance costs in conjunction with a partial extinguishment
and restructuring of the Company's principal bank credit
agreement. There was no such item for the nine-month period ended
September 30, 1995.
Net Income. Net income decreased $4.0 million to $(4.2)
million for the nine-month fiscal period ended September 30,
1996, from $(0.2) million for the nine-month period ended
September 30, 1995.
CALENDAR YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE FISCAL YEAR
ENDED DECEMBER 31, 1995
The calendar year ended December 31, 1996 does not conform
to the Company's fiscal year and is discussed below only for
purposes of comparison with the Company's fiscal year ended
December 31, 1995.
Revenues. Revenues increased $28.7 million, or 30.9%, to
$121.6 million for the calendar year ended December 31, 1996,
from $92.9 million for the fiscal year ended December 31, 1995.
This increase was due to higher unit volume, higher average unit
price from the mid-1996 introduction of the Company's new
higher-priced Pasta LaBella flavored pasta into the U.S. Retail
grocery market and improvements in product sales mix.
Revenues for the Retail market increased $23.1 million, or
46.9%, to $72.4 million for the calendar year ended December 31,
1996, from $49.3 million for the fiscal year ended December 31,
1995. This increase was due to (i) higher average unit prices
associated with the introduction of the Company's new,
higher-priced Pasta LaBella flavored pasta into the U.S. retail
grocery market in mid-1996; (ii) higher unit volume, with the
largest increases coming from the private label and club store
customers; (iii) improved product sales mix; and (iv) the
pass-through of higher durum wheat costs.
Revenues for the Institutional market increased $5.6
million, or 12.8% to $49.2 million for the calendar year ended
December 31, 1996 from $43.6 million for the fiscal year ended
December 31, 1995. The ingredient and food service volume gains
were partially offset by lower Contract Sales volumes as
available capacities were utilized by retail unit growth. The
average 1996 institutional unit price increased due to the
pass-through of higher durum wheat costs.
Gross Profit. Gross profit increased $14.9 million, or
87.6%, to $31.9 million for the calendar year ended December 31,
1996, from $17.0 million for the fiscal year ended December 31,
1995. Gross profit as a percentage of revenues increased to 26.2%
for the calendar year ended December 31, 1996, from 18.3% for the
fiscal year ended December 31, 1995. These increases were
primarily the result of (i) higher unit volumes; (ii) higher
average unit prices, primarily due to Pasta LaBella flavored
pasta sales; (iii) lower durum wheat costs; (iv) the absence of
plant expansion costs; and (v) lower per unit warehousing and
distribution costs resulting from outsourcing logistics functions
through a new strategic alliance with Lanter Company.
Selling and Marketing Expense. Selling and marketing
expense increased $16.0 million, or 301.9%, to $21.3 million for
the calendar year ended December 31, 1996, from $5.3 million for
the fiscal year ended December 31, 1995. Selling and marketing
expense grew as a percentage of revenue to 17.5% for the calendar
year ended December 31, 1996, from 5.7% for the fiscal year ended
December 31, 1995. This increase was due to the Company's
incurrence of $9.6 million of product introduction costs during
the calendar year ended December 31, 1996 related to the retail
introduction of the Company's Pasta LaBella flavored pasta
products. These costs included payment of fees for product
placement or "slotting," introductory consumer sampling,
couponing, advertising and trade promotions. There were no
comparable 1995 expenditures. In addition to product introduction
costs, selling and marketing expenses also increased due to the
larger retail revenues associated with Pasta LaBella flavored
pasta and increases in club store and private label sales.
General and Administrative Expense. General and
administrative expense increased $0.6 million, or 20.7%, to $3.5
million for the calendar year ended December 31, 1996 from $2.9
million for the fiscal year ended December 31, 1995, but
decreased as a percentage of revenues from 3.2% to 2.9% over the
same period. The increase in general and administrative expense
was primarily due to increases in MIS expenses and communication
costs incurred to support sales growth and the operations in
South Carolina.
Operating Profit. Operating profit decreased $1.6 million,
or 18.2%, to $7.2 million for the calendar year ended December
31, 1996, from $8.8 million for the fiscal year ended December
31, 1995 and decreased as a percentage of revenue to 5.9% for the
calendar year ended December 31, 1996, from 9.4% for the fiscal
year ended December 31, 1995. Excluding product introduction
costs, operating profit increased by $8.0 million, or 90.9%, to
$16.8 million for the calendar year ended December 31, 1996, from
$8.8 million for the fiscal year ended December 31, 1995 and
increased as a percentage of revenue to 13.8% for the calendar
year ended December 31, 1996 from 9.4% for the fiscal year ended
December 31, 1995.
Interest Expense. Interest expense increased $2.6 million,
or 32.5% to $10.6 million for the calendar year ended December
31, 1996 from $8.0 million for the fiscal year ended December 31,
1995, due to higher debt levels resulting from the incremental
borrowings required to finance the Company's South Carolina and
Missouri capital asset expansion and increases in working
capital.
Income Tax. Income tax decreased to $(1.3) million for the
calendar year ended December 31, 1996 from $0.3 million for the
fiscal year ended December 31, 1995, and reflects an effective
income tax rate of approximately 38% in both periods.
Extraordinary Item. During the calendar year ended December
31, 1996, the Company incurred a $1.6 million (net of tax)
extraordinary loss due to the write-off of deferred debt issuance
costs in conjunction with a partial extinguishment and
restructuring of the Company's principal bank credit agreement.
Net Income. Net income decreased $4.3 million to $(3.8)
million for the calendar year ended December 31, 1996, from $0.5
million for the fiscal year ended December 31, 1995.
Liquidity and Capital Resources
-------------------------------
The Company's primary sources of liquidity are cash provided
by operations and borrowings under its existing credit
facilities. The Company has generated liquidity through the sale
of equity, which proceeds have historically been used to finance
capital expansions. Cash and temporary investments totaled $2.7
million and working capital totaled $12.2 million at September
30, 1997. At September 30, 1996, cash and temporary investments
totaled $1.8 million and working capital totaled $(1.6) million.
The $13.8 million increase in working capital resulted primarily
from the 1997 Private Equity Financing and improvements in the
Company s operating results.
The Company's net cash provided by operating activities
totaled $23 million for the fiscal year ended September 30, 1997
compared to a reduction of net cash of $(7.5) million for the
nine-month fiscal period ended September 30, 1996. This increase
of $30.5 million was primarily due to higher net income,
reductions in net working capital investment and reduced product
introduction costs. Net cash provided by operating activities was
$5.7 million and $3.7 million for the fiscal years ending
December 31, 1995 and 1994, respectively. The $2.0 million
increase in net cash provided by operating activities in the
fiscal year ending December 31, 1995 was primarily due to lower
investment in net working capital.
Net cash provided by financing activities was $6.3 million
for the fiscal year ended September 30, 1997 compared to $12.3
million for the nine-month fiscal period ended September 30,
1996. The $6.3 million is primarily a result of (1) $22.0 million
in net proceeds from the 1997 Private Equity Financing, (2) $11.7
proceeds from issuance of debt, (net of $2.1 deferred debt
issuance costs) partially offset by the $25.3 million repayment
of short-term and long-term borrowings. Net cash provided by
financing activities was $33.1 million for the fiscal year ending
December 31, 1995, as a result of net borrowings required to fund
the Company's capital asset expansion programs and working
capital.
In April 1997, the Company entered into an amended and
restated credit agreement with Bankers Trust Company, Morgan
Stanley Senior Funding, Inc. and various banks named therein (the
"Credit Agreement"). The Credit Agreement provided for (i) an
$18.0 million term loan to mature on February 26, 2000; (ii) a
$19.9 million term loan to mature on February 26, 2002; (iii) a
$54.7 million term loan to mature on February 27, 2004; (iv) a
$45.0 million term loan to mature on February 27, 2004 to finance
a portion of the Company's 1997-1998 capital assets expansion;
and (v) a $25.0 million revolving loan to mature on February 29,
2000. At September 30, 1997, $93.9 million was outstanding under
the Credit Agreement, and the Company had $45.0 million available
to borrow under the $45.0 million term credit facility and $17.0
million available to borrow under the $25.0 million revolving
credit facility (subject to borrowing base limitations). Interest
on borrowings was based on the London Interbank Offer Rate
(LIBOR), plus a credit margin of 300 to 375 basis points. At
September 30, 1997, the three-month LIBOR rate was 5.7%, and the
Company's aggregate, weighted average bank debt borrowing rate
was 9.1%. The Credit Agreement contained restrictive covenants
that, among other things, limited the Company's ability to incur
debt, sell assets, make capital expenditures and pay dividends.
After the close of the fiscal year end, the Company used the
net proceeds from the Offering to repay outstanding indebtedness,
a portion of which related to the capital expansion, incurred
under the Company's Credit Facility. The Company intends to
finance the remainder of its capital expansion program and fund
future working capital needs with borrowings under the new Credit
Agreement (the "New Credit Agreement") which was completed on
October 17, 1997. The Company s restructured credit facility
provides the Company with $150 million in credit on an unsecured,
revolving basis at interest rates which are expected to be 250
basis points lower than the previous agreement.
Interest is to be charged at either the base rate (higher of
prime of of 1% in excess of the federal funds effective rate)
or LIBOR plus an applicable margin based on a sliding scale of
the ratio of the Company s total indebtedness divided by earnings
before interest, taxes, depreciation and amortization (EBITDA).
In addition, a commitment fee is to be charged on the unused
facility balance based on the sliding scale of the Company's
total indebtedness divided by EBITDA. The stated interest plus
the commitment fee will be classified as interest expense.
The Company anticipates a first quarter 1998 extraordinary
charge of approximately $2.3 million (net of tax), related to the
write off of current and deferred debt issuance costs.
The New Credit Agreement contains restrictive covenants
which include, among other things, financial covenants requiring
minimum and cumulative earnings levels and limitations on the
payment of dividends, stock purchases and the Company's ability
to enter into certain contractual arrangements. Management does
not expect these limitations to have a material effect on the
Company's business or results of operations. The Company is in
compliance with all financial covenants contained in the new
Credit Agreement.
Cash flow used in investing activities principally relates
to the Company's investments in manufacturing, distribution,
milling and Management Information Systems(MIS) assets. Capital
expenditures were $28.4 million for the fiscal year ended
September 30, 1997 and 3.0 million for the nine-month period
ended September 30, 1996 and were $38.8 million for the fiscal
year ended December 31, 1995, respectively. The increase in
spending for the fiscal year ending September 30, 1997 was a
result of the Company's initial expenditures of $23.7 million of
the $86.0 million capital expansion program discussed above,
which the Company expects to complete by April 1998. The
increased spending in 1994 and 1995 was primarily the result of
the construction of the Company's South Carolina manufacturing
and distribution facilities and Missouri distribution center.
The Company currently uses cash to fund capital
expenditures, repayments of debt and working capital
requirements. The Company expects that future cash requirements
will principally be for capital expenditures, repayments of
indebtedness under the Credit Agreement and working capital
requirements.
The Company has committed to spend $15 million for raw
material purchases for fiscal year 1998 and has approximately $63
million remaining of the $86 million capital expenditure program,
which the Company anticipates will be funded by the middle of
fiscal year 1998. The Company expects to fund these commitments
from operations and borrowings under the current revolving credit
facility. The current credit facility has scheduled reductions in
the amount of the commitment beginning at the end of fiscal year
1999. At this time, the borrowings outstanding under the current
credit facility (assuming the full $63 million is funded under
the facility) do not exceed the facility's minimum commitment.
The facility matures at the end of fiscal year 2002. The Company
anticipates that any borrowing outstanding at that time will be
satisfied with funds from operations or will be refinanced. The
Company currently has no other material commitments.
Management believes that net cash provided by operating
activities, net cash provided by financing activities and the net
proceeds from the Offering will be sufficient to meet the
Company's expected capital and liquidity needs for the
foreseeable future.
Other Matters
-------------
Recently Issued Accounting Standards. In February 1997, the
Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," which is required to be adopted by the
Company in its first quarterly period ended on December 31, 1997.
At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all
prior periods. SFAS No. 128 replaced primary and fully diluted
earnings per share with basic and diluted earnings per share.
Under the new requirements for calculating earnings per share,
the dilutive effect of stock options will be excluded from basic
earnings per share but included in the computation of diluted
earnings per share. If SFAS No. 128 had been implemented by the
Company at September 30, 1997, the impact on the calculation of
earnings per share would not have been material.
Effect of Inflation
-------------------
During the last three fiscal periods, inflation has not had
a material effect on the Company, other than to increase its cost
of borrowing and raw materials. In general, however, the Company
has been able to increase the majority of customer sales prices
to recover significant raw material cost increases. However,
changes in prices of the Company's pasta products and the
pass-through of higher durum wheat costs to certain customers
historically have lagged price increases in the Company's raw
material costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not applicable.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN ITALIAN PASTA COMPANY
Index to Audited Financial Statements
PAGE
----
Report of Independent Auditors 35
Balance Sheets at September 30, 1996 and 1997 36
Statements of Operations for the year ended December
31, 1995, the fiscal nine-months ended September 30,
1996, and the year ended September 30, 1997 37
Statements of Stockholders' Equity for the year ended
December 31, 1995, the fiscal nine-months ended
September 30, 1996 and the year ended September 30, 1997 38
Statements of Cash Flows for the year ended December 31,
1995, the fiscal nine-months ended September 30, 1996
and the year ended September 30, 1997 39
Notes to Financial Statements 40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Italian Pasta Company
We have audited the accompanying balance sheets of American
Italian Pasta Company (the Company) as of September 30, 1996 and
1997, and the related statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1995, the
nine-month fiscal period ended September 30, 1996 and the year
ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
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 financial statements referred to above
present fairly, in all material respects, the financial position
of American Italian Pasta Company at September 30, 1996 and 1997,
and the results of its operations and its cash flows for the year
ended December 31, 1995, the nine-month fiscal period ended
September 30, 1996 and the year ended September 30, 1997 in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Kansas City, Missouri
October 27, 1997
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ITALIAN PASTA COMPANY
BALANCE SHEETS
SEPTEMBER SEPTEMBER
30, 1996 30, 1997
--------- ---------
(In thousands)
<S> <C> <C>
ASSETS (Note 2)
Current assets:
Cash and temporary investments $ 1,818 $ 2,724
Trade and other receivables 12,494 9,180
Prepaid expenses and deposits 1,879 1,028
Inventory 14,374 13,675
Deferred income taxes (Note 3) 269 635
-------- --------
Total current assets 30,834 27,242
Property, plant and equipment:
Land and improvements 4,413 4,540
Buildings 37,491 37,491
Plant and mill equipment 81,461 84,233
Furniture, fixtures and equipment 3,635 4,581
-------- --------
127,000 130,845
Accumulated depreciation (23,247) (29,332)
-------- --------
103,753 101,513
Construction in progress -- 23,721
-------- --------
Total property, plant and equipment 103,753 125,234
Deferred income taxes (Note 3) 4,479 1,124
Other assets 2,622 4,575
-------- --------
Total assets $141,688 $158,175
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,193 $ 8,644
Accrued expenses 3,664 5,581
Current maturities of long-term
debt (Notes 2 & 12) 8,078 829
Revolving line of credit facility
(Notes 2 & 12) 13,500 --
-------- --------
Total current liabilities 32,435 15,054
Long-term debt (Notes 2 & 12) 93,284 100,137
Commitments and contingencies (Note 4)
Stockholders' equity: (Notes 6, 11 & 12)
Preferred stock, $.001 par value:
Authorized shares 10,000,000 -- --
Class A common stock, $.001 par value:
Authorized shares 75,000,000 8 11
Class B common stock, $.001 par value:
Authorized shares 25,000,000 -- --
Additional paid-in capital 33,071 55,324
Notes receivable from officers -- (298)
Accumulated deficit (17,110) (12,053)
-------- --------
Total stockholders' equity 15,969 42,984
Total liabilities and stockholders'
equity $141,688 $158,175
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ITALIAN PASTA COMPANY
STATEMENT OF OPERATIONS
NINE TWELVE
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER SEPTEMBER SEPTEMBER SEPTEMBER
31, 1995 30, 1996 30, 1996 30, 1997
-------- --------- --------- ---------
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues (Note 5) $92,903 $92,074 $121,149 $129,143
Cost of goods sold 73,851 68,555 91,230 93,467
Plant expansion costs (Note 8) 2,065 -- -- --
------- ------- ------- -------
Gross profit 16,987 23,519 29,919 35,676
Selling and marketing expense,
including product introduction
costs (Note 10) 5,303 16,798 18,445 13,664
General and administrative expense 2,930 2,805 3,686 3,766
------- ------- ------- -------
Operating profit 8,754 3,916 7,788 18,246
Interest expense, net 8,008 8,023 10,770 10,119
------- ------- ------- -------
Income (loss) before income tax expense
(benefit) and extraordinary item 746 (4,107) (2,982) 8,127
Income tax expense (benefit) (Note 3) 270 (1,556) (1,139) 3,070
------- ------- ------- -------
Income (loss) before extraordinary item 476 (2,551) (1,843) 5,057
Extraordinary item:
Loss due to early extinguishment of
long-term debt, net of income taxes
(Note 2) -- (1,647) (1,647) --
------- ------- ------- -------
Net income (loss) $ 476 $(4,198) $(3,490) $ 5,057
======= ======= ======= =======
Net income (loss) per common share:
Before extraordinary item $ 0.05 $ (0.24) $ (0.17) $ 0.42
Extraordinary item -- (0.16) (0.16) $ --
------- ------- ------- -------
Total $ 0.05 $ (0.40) $ (0.33) $ 0.42
======= ======= =======
Weighted-average common shares outstanding 10,445 10,473 10,470 12,161
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ITALIAN PASTA COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES
RECEIV- TOTAL
CLASS A CLASS A ADDITIONAL ABLE STOCK-
COMMON COMMON PAID-IN FROM ACCUMULATED HOLDERS'
SHARES STOCK CAPITAL OFFICERS DEFICIT EQUITY
------- ------- ---------- -------- ----------- -------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 8,201,233 $ 8 $32,781 $ -- $(13,388) $19,401
Issuance of 38,767 shares
of Class A Common stock 38,767 -- 190 -- -- 190
Net income -- -- -- -- 476 476
---------- ---- ------- ----- -------- -------
Balance at December 31, 1995 8,240,000 8 32,971 -- (12,912) 20,067
Issuance of 20,328 shares of
Class A Common stock 20,328 -- 100 -- -- 100
Net loss -- -- -- -- (4,198) (4,198)
---------- ---- ------- ----- -------- -------
Balance at September 30, 1996 8,260,328 8 33,071 -- (17,110) 15,969
Issuance of 3,174,526 shares
of Class A Common Stock, net
of issuance costs 3,174,528 3 22,039 -- -- 22,042
Notes received from officers
in exchange for stock -- -- -- (298) -- (298)
Issuance of 31, 200 shares of
Class A Common Stock to
employee benefit plan 31,200 -- 214 -- -- 214
Net income -- -- -- -- 5,057 5,057
---------- ---- ------- ----- -------- -------
Balance at September 30, 1997 11,466,056 $ 11 $55,324 $ (298) $ (12,053) $42,984
========== ====== ======= ====== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ITALIAN PASTA COMPANY
STATEMENTS OF CASH FLOWS
NINE
YEAR MONTHS YEAR
ENDED ENDED ENDED
DEC- SEPT- SEPT-
EMBER 31, EMBER 30, EMBER 30,
1995 1996 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 476 $(4,198) $ 5,057
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operations:
Depreciation and amortization 6,279 5,434 7,828
Deferred income tax expense
(benefit) 264 (1,556) 2,989
Extraordinary loss due to early
extinguishment of long-term debt -- 1,647 --
Loss on disposal of property, plant and
equipment 439 -- --
Changes in operating assets and
liabilities
Trade and other receivables (4,586) (1,785) 3,347
Prepaid expenses and deposits (364) (952) 464
Inventory (2,814) (1,830) 1,086
Accounts payable and accrued expenses 6,610 (3,961) 2,792
Other (574) (276) (492)
-------- -------- -------
-- Net cash provided by (used in) operating
activities 5,730 (7,477) 23,071
Investing activities:
Additions to property, plant and equipment
(38,789) (3,041) (28,428)
-------- -------- -------
-- Net cash used in investing activities (38,789) (3,041) (28,428)
Financing activities:
Additions to deferred debt issuance costs (71) (2,083) (2,115)
Proceeds from issuance of debt 40,795 86,470 11,730
Net borrowings under revolving line of
credit facility -- 13,500 (5,500)
Principal payments on debt and
capital lease obligations (7,848) (85,669) (19,810)
Proceeds from issuance of common
stock, net of issuance costs 190 100 21,958
-------- --------- -------
Net cash provided by financing activities 33,066 12,318 6,263
-------- --------- -------
Net increase in cash and temporary
investments 7 1,800 906
Cash and temporary investments at
beginning of period 11 18 1,818
-------- --------- -------
Cash and temporary investments at
end of period $ 18 $ 1,818 $ 2,724
======== ======== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
American Italian Pasta Company (the Company) is a Delaware
Corporation which began operations in 1988. The Company is the
third largest producer and marketer of pasta products in the
United States with manufacturing and distribution facilities
located in Excelsior Springs, Missouri and Columbia, South
Carolina.
CHANGE IN FISCAL YEAR
Effective for its 1996 fiscal year, the Company changed its
fiscal year end from December 31 to the last Friday of September
or the first Friday of October. This change resulted in a
nine-month fiscal period for 1996, a 53-week year for fiscal
1997, and a 52- or 53-week year for all subsequent fiscal years.
The Company's other fiscal quarters end on the Friday last
preceding December 31, March 31 and June 30 or the first Friday
of the following month of each quarter. For purposes of the
financial statements and notes thereto, the 1997 fiscal year is
described as having ended on September 30, 1997.
UNAUDITED FINANCIAL INFORMATION
The Company has included information for the twelve months
ended September 30, 1996 in the statements of operations for
comparative purposes. This information is unaudited.
REVENUE RECOGNITION
Sales of the Company's products, including pricing terms,
are final upon shipment of the goods. Accordingly, revenue is
recognized at such time.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
RISKS AND UNCERTAINTIES
The Company grants credit to certain customers who meet the
Company's pre-established credit requirements. Generally, the
Company does not require collateral security when trade credit is
granted to customers. Credit losses are provided for in the
financial statements and consistently have been within
management's expectations. The allowance for doubtful accounts
at September 30, 1996 and 1997 was $60,000 and $196,000,
respectively. At September 30, 1996 and 1997, approximately 34%
and 37%, respectively, of accounts receivable were due from two
customers.
Pasta is made from semolina milled from durum wheat, a class
of hard amber wheat grown in certain parts of the world and
purchased by the Company from United States and Canadian sources.
The Company mills the wheat into semolina at its Excelsior
Springs plant. Durum wheat is a narrowly traded, cash only
commodity crop. The Company attempts to minimize the effect of
durum wheat cost fluctuations through forward purchase contracts
and raw material cost-based pricing agreements with many of its
customers. The Company's commodity procurement and pricing
practices are intended to reduce the risk of durum wheat cost
increases on profitability, but also may temporarily affect the
timing of the Company's ability to benefit from possible durum
wheat cost decreases for such contracted quantities.
FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments,
including cash and temporary investments, accounts receivable,
accounts payable and long-term debt, as reported in the
accompanying balance sheet at September 30, 1997, approximates
fair value.
ADVERTISING COSTS
The Company amortizes direct response advertising costs over
the period in which the future benefits are expected (generally
six months or less). Other costs of advertising and promotions
are expensed as incurred.
CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments include cash on hand, amounts
due from banks and highly liquid marketable securities with
maturities of three months or less at the date of purchase.
INVENTORIES
Inventories are stated using product specific standard costs
which approximate the lower of cost or market determined on a
first-in, first-out (FIFO) basis. Inventories consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- ------------
(In thousands)
<S> <C> <C>
Finished goods $10,809 $ 9,310
Raw materials, packaging
materials and work-in process 3,565 4,365
------- -------
$14,374 $13,675
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Capital additions, improvements and major renewals are
classified as property, plant and equipment and are recorded at
cost. Depreciation is calculated for financial statement
purposes using the straight-line method over the estimated useful
life of the related asset for each year as follows:
NUMBER OF
YEARS
---------
Land improvements 40
Buildings 30
Plant and mill equipment 20
Packaging equipment 10
Furniture, fixtures and equipment 5
The Company capitalizes interest costs associated with the
construction and installation of plant and equipment. During the
fiscal year ended December 31, 1995, approximately $1,559,000 of
interest cost was capitalized. There was no interest cost
capitalized in fiscal 1996. During the year ended September 30,
1997, approximately $488,000 of interest cost was capitalized.
<PAGE>
OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------ ------------
(In thousands)
<S> <C> <C>
Debt issuance costs (Note 2) $ 2,143 $ 4,258
Package design costs 1,456 1,598
Other 1,150 1,702
-------- --------
4,749 7,558
Accumulated amortization (2,127) (2,983)
-------- --------
$ 2,622 $ 4,575
======== ========
</TABLE>
Debt issuance costs relate to expenditures incurred in
connection with obtaining long-term debt. These costs are being
amortized over the life of the related debt using the effective
interest rate method. Debt issuance costs, net of accumulated
amortization, were $3,436,000 at September 30, 1997.
Package design costs relate to certain incremental third
party costs to design artwork and produce die plates and
negatives necessary to manufacture and print packaging materials
according to the Company's and customer's specification. These
costs are amortized ratably over a two-year period. In the event
that product packaging is discontinued prior to the end of the
amortization period, the respective package design costs are
written off. Package design costs, net of accumulated
amortization, were $378,000 at September 30, 1997.
INCOME TAXES
The Company accounts for income taxes in accordance with the
method prescribed by Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse.
STOCK OPTIONS
The Company has elected to follow Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its
employee stock options and have adopted the pro forma disclosure
requirements under SFAS No. 123 "Accounting for Stock-Based
Compensation." Under APB No. 25, because the exercise price of
the Company's employee stock options is equal to or greater than
the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is calculated using the
weighted-average number of common shares and common equivalent
shares, to the extent dilutive, outstanding during the periods.
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, stock issued and common stock options granted by
the Company during the 12 months preceding the October 1997
filing date for its initial public offering have been included in
the calculation of weighted-average common and common equivalent
shares outstanding, using the treasury stock method based on the
initial public offering price of $18 per share, as if the stock
and options were outstanding for all periods presented.
Supplementary net income per share for the year ended
September 30, 1997 is $0.57 calculated to give effect to the
reduction of interest expense, net of tax and the increase in the
weighted average number of common and common equivalent shares
outstanding sufficient to retire certain indebtedness as if the
retirement had occurred at the beginning of the period affected.
2. LONG-TERM DEBT
The Company refinanced certain of its credit facilities
subsequent to September 30, 1997 as more fully described in Note
12.
The principal maturity terms of the new $150 million
unsecured, revolving credit facility are as follows:
<TABLE>
<CAPTION>
SCHEDULED COMMITMENT
FACILITY AMOUNT REDUCTION
-------- ------ --------------------
(In thousands)
<S> <C> <C>
Scheduled Commitment Reduction $ 10,000 September 30, 1999
Scheduled Commitment Reduction 15,000 September 30, 2000
Scheduled Commitment Reduction 25,000 September 30, 2001
Final Maturity 100,000 September 30, 2002
--------
$150,000
========
</TABLE>
Interest is to be charged at either the base rate (higher of
prime or of 1% in excess of the federal funds effective rate)
or LIBOR plus an applicable margin based on a sliding scale of
the ratio of the Company's total indebtedness divided by earnings
before interest, taxes, depreciation and amortization (EBITDA).
In addition, a commitment fee is to be charged on the unused
facility balance based on the sliding scale of the Company's
total indebtedness divided by EBITDA. The stated interest plus
the commitment fee will be classified as interest expense.
Long-term debt, as reclassified to reflect the refinancing
events described above, consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------ -------------
(In thousands)
<S> <C> <C>
Term loans $ 94,813 $ 93,938
Capital lease, 15-year term
with three, five-year renewal
options, at an imputed interest
rate of 12.5% 3,586 3,482
Capital lease, eight-year term at
an imputed interest rate of 8.5% 2,260 2,054
Other 703 1,492
-------- --------
101,362 100,966
Less current portion 8,078 829
------- -------
$ 93,284 $100,137
======== ========
</TABLE>
In February 1996, the Company refinanced certain of its
credit facilities. The unamortized balance of debt issuance
costs of $2.6 million which related to the previous debt were
written off, net of related tax benefits of $1 million, as an
extraordinary loss on debt extinguishment as required by
generally accepted accounting principles.
The following information related to the old revolving
credit facility is presented for the year ended December 31,
1995, the nine-month fiscal period ended September 30, 1996 and
the year ended September 30, 1997.
1995 1996 1997
---- ---- ----
Weighted-average interest rate 9.0% 8.4% 8.5%
Annual maturities of long-term debt and capital lease
obligations for each of the next five years ended September 30,
including the principal amortization provisions of the refinanced
credit agreement, are as follows:
<TABLE>
<CAPTION>
LONG TERM CAPITAL LEASES
YEAR DEBT AND OTHER TOTAL
---- -------- -------------- -----
(In thousands)
<S> <C> <C> <C>
1998 $ -- $ 1,520
1999 -- 1,496
2000 -- 1,220
2001 -- 994
2002 93,938 990
Thereafter -- 5,235
------ -------
93,938 11,455 $105,393
Less imputed interest -- 4,427 4,427
------ ------- -------
Present value of net
minimum payments 93,938 7,028 100,966
Less current portion -- 829 829
------- ------- -------
Long-term obligations $93,938 $ 6,199 $100,137
======= ======= ========
</TABLE>
The new revolving credit agreement contain various
restrictive covenants which include, among other things,
financial covenants requiring minimum and cumulative earnings
levels and limitations on the payment of dividends, stock
purchases, and the Company's ability to enter into certain
contractual arrangements. The facility is unsecured.
The Company leases certain assets under capital lease
agreements. At September 30, 1996 and 1997, the cost of these
assets was $7,128,000 and $7,949,000, respectively, and related
accumulated amortization was $642,000 and $687,000, respectively.
3. INCOME TAXES
At September 30, 1997, the Company has net operating loss
carryforwards for federal income tax purposes that expire as
follows:
2003 $ 958
2004 5,253
2005 76
2006 5
2007 1,299
2008 195
2009 1,248
2010 5,121
2011 12,584
2012 58
------
$26,797
=======
The Company also has state income enterprise zone credits of
approximately $1 million that expire in 1997.
The Company has established a valuation allowance of
approximately $1 million for state enterprise zone credits that
are available but are not expected to be realized. Management
believes it is more likely than not that remaining deferred tax
assets will be realized through the generation of future taxable
income and available tax planning strategies.
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------ -------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 9,730 $ 10,183
State enterprise zone credits 1,031 1,031
AMT credit carryforward 561 676
Other 1,888 732
-------- --------
Total deferred tax assets 13,210 12,622
Deferred tax liabilities:
Book basis of tangible assets
greater than tax 6,721 9,404
Other 710 428
-------- --------
Total deferred tax liabilities 7,431 9,832
-------- --------
Net deferred tax assets before
allowance 5,779 2,790
Valuation allowance for deferred
tax assets (1,031) (1,031)
-------- --------
Net deferred tax assets $ 4,748 $ 1,759
======== ========
</TABLE>
Significant components of the provision for income taxes are
as follows:
<TABLE>
<CAPTION>
NINE
YEAR MONTHS YEAR
ENDED ENDED ENDED
DEC- SEPT- SEPT-
EMBER EMBER EMBER
31, 1995 30,1996 30, 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current income tax expense $ 6 $ -- $ 81
Deferred tax expense (benefit) 264 (1,556) 2,989
------ ------- -------
Net income tax expense (benefit) $ 270 $(1,556) $ 3,070
====== ======= =======
</TABLE>
The reconciliation of income tax computed at the
U.S. statutory tax rate to income tax expense is as follows:
<TABLE>
<CAPTION>
NINE
YEAR MONTHS YEAR
ENDED ENDED ENDED
DEC- SEPT- SEPT-
EMBER EMBER EMBER
31, 1995 30, 1996 30, 1997
-------- -------- ------
(In thousands)
<S> <C> <C> <C>
Income (loss) before income
taxes $ 746 $(4,107) $8,127
U.S. statutory tax rate x34% x34% x34%
-------- -------- ------
Federal income tax expense
(benefit) at U.S. statutory
rate 254 (1,396) 2,763
State income tax expense
(benefit), net of federal
tax effect 30 (165) 325
Other, net (14) 5 (18)
------- ------- ------
Net income tax expense
(benefit) $ 270 $(1,556) $3,070
======= ======= ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
In April 1997, the Company entered into a long-term supply
arrangement in which the Company is obligated to produce and the
customer is obligated to purchase certain minimum annual volumes
of pasta products beginning in fiscal 1998. In order to fulfill
its obligations under the contract, the Company will be required
to expand significantly its available production capacity.
The Company has committed approximately $86 million to
expand significantly its existing manufacturing, milling and
distribution facilities. The expansion assets are anticipated to
be placed in service during fiscal 1998. As of September 30,
1997, cumulative expansion expenditures are $23,721,000,
including capitalized interest of $488,000. The remaining
expansion costs will be funded from a portion of the proceeds
from the Company's common stock sale (see Note 12), available
bank credit facilities and cash provided by operations.
The Company had durum wheat purchase commitments totaling
approximately $8.0 million and $15.1 million at September 30,
1996 and 1997, respectively.
Under an agreement with its predominant rail carrier, the
Company is obligated to transport specified wheat volumes. In
the event the specified transportation volumes are not met, the
Company is required to reimburse certain rail carrier costs. The
Company is in compliance with the volume obligations at
September 30, 1997.
5. MAJOR CUSTOMERS
Sales to a certain customer during the year ended
December 31, 1995, the fiscal nine-months ended September 30,
1996 and the year ended September 30, 1997 represented 33%, 27%
and 27% of revenues, respectively. Sales to a second customer
during the year ended December 31, 1995, the fiscal nine-months
ended September 30, 1996 and the year ended September 30, 1997
represented 23%, 19% and 22% of revenues, respectively.
6. STOCK OPTION PLAN
In October 1992, a stock option plan was established that
authorizes the granting of options to purchase up to 1,201,880
shares of the Company's common stock by certain officers and key
employees. In October 1993, an additional plan was established
that authorizes the granting of options to purchase up to 82,783
shares of the Company's common stock. The stock options expire
10 years from the date of grant and become exercisable over the
next five years in varying amounts depending on the terms of the
individual option agreements.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE EXERCISABLE
--------- ------------- -------- -----------
<S> <C> <C> <C> <C>
Outstanding at
December 31, 1994 673,433 $2.33-$4.92 $ 4.06 374,447
Exercised --
Granted 339,562 $12.23 $12.23
Canceled/Expired --
----------
Outstanding at
December 31, 1995 1,012,995 $2.33-$12.23 $ 6.79 455,942
Exercised --
Granted 1,226 $12.23 $12.23
Canceled/Expired (613) $12.23 $12.23
---------
Outstanding at
September 30, 1996 1,013,608 $2.33-$12.23 $ 6.80 541,471
Exercised --
Granted 262,052 $7.02-$12.23 $ 8.87
Canceled/Expired (96,334) $4.92-$12.23 $12.09
---------
Outstanding at
September 30, 1997 1,179,326 $2.33-$12.23 $ 6.83 734,877
=========
</TABLE>
The following table summarizes outstanding and exercisable
options at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING PRICE EXERCISABLE PRICE
--------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
$2.33-$2.38 226,456 $ 2.36 226,456 $ 2.36
$4.92 445,137 4.92 338,563 4.92
$7.02 169,244 7.02 57,028 7.02
$12.23 338,489 12.23 112,830 12.23
</TABLE>
SFAS No. 123 requires the disclosure of pro forma net income
and earnings per share for stock-based awards as if the Company
had used the fair value method of accounting for such awards.
Under SFAS No. 123, the fair value is calculated through the use
of option pricing models. These models require subjective
assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values.
The Company's calculations were made using the minimum value
method with the following weighted-average assumptions: expected
life, 18 months following vesting; no stock volatility; risk free
interest rate of 6% and no dividends during the expected term.
Based on these calculations and assumptions, the effect of
applying SFAS No. 123's fair value method to the Company's
stock-based awards granted subsequent to December 15, 1994
results in pro forma net income which is not materially different
from amounts reported in the accompanying statements of
operations.
7. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan organized under
Section 401(k) of the Internal Revenue Code covering
substantially all employees. The plan allows all qualifying
employees to contribute up to the tax deferred contribution limit
allowable by the Internal Revenue Service. The Company will
match 50% of the employee contributions up to a maximum employee
contribution of 6% of the employee's salary and may contribute
additional amounts to the plan as determined annually by the
Board of Directors. Employer contributions related to the plan
totaled $139,000, $124,000 and $200,000 for the year ended
December 31, 1995, the fiscal nine-months ended September 30,
1996 and the year ended September 30, 1997, respectively.
8. PLANT EXPANSION COSTS
Plant expansion costs include incremental direct and
indirect manufacturing and distribution costs which are incurred
as a result of construction, commissioning and start-up of new
capital assets. These costs are expensed as incurred but are
unrelated to current production and, therefore, reported as a
separate line item in the statement of operations. Plant
expansion costs amounted to $2,065,000 for the year ended
December 31, 1995.
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE
YEAR MONTHS YEAR
ENDED ENDED ENDED
DEC- SEPT- SEPT-
EMBER EMBER EMBER
31, 1995 30, 1996 30, 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Cash paid for interest $9,675 $8,101 $9,899
====== ====== ======
Cash paid for income tax $ 100 50 --
====== ====== ======
</TABLE>
10. PRODUCT INTRODUCTION COSTS
During 1996, the Company began distribution of its Pasta
LaBella flavored pasta products into the United States' retail
grocery trade. Introduction of these products was supported by
significant advertising, promotions and other initiatives. The
Company's selling and marketing expense includes the following
product introduction costs:
<TABLE>
<CAPTION>
NINE
MONTHS YEAR
ENDED ENDED
SEPT- SEPT-
EMBER EMBER
30, 1996 30, 1997
-------- --------
(In thousands)
<S> <C> <C>
Introductory advertising $3,587 $ 137
In-store product demonstrations 692 307
Direct response advertising amortization 166 200
Product placement fees paid 3,113 1,633
Introductory trade incentives 268 --
Other 296 588
------ ------
Total product introduction costs $8,122 $2,865
====== ======
There were no such costs in 1995.
</TABLE>
11. NOTES RECEIVABLE FROM OFFICERS
In April 1997, certain officers of the Company acquired
42,366 shares of common stock. At the same time, the Company
loaned these officers $298,000, all of which remains outstanding
at September 30, 1997. The loans which were evidenced by
promissory notes are payable in equal installments over three
years commencing upon termination of certain transfer
restrictions applicable to such shares under the Stockholders
Agreement, not later than December 31, 1998. The notes are
collateralized by the pledge of shares of common stock of the
Company, may be prepaid in part or in full without notice or
penalty and bear interest at the applicable federal rate in
effect on the first day of each quarter. These loans, evidenced
by promissory notes, are classified as a reduction to
stockholders equity in the accompanying balance sheet at
September 30, 1997.
12. SUBSEQUENT EVENTS
PUBLIC OFFERING OF COMMON STOCK AND RECAPITALIZATION
On October 8, 1997, the Company completed an initial public
offering (the "Offering") of 7,900,000 shares of Class A Common
Stock, par value of $.001 per share (the "New Class A Common
Stock"), of which 5,310,000 shares were offered by the Company
and 2,590,000 shares were sold by certain selling stockholders.
The offering of 5,310,000 primary shares at $18 per share,
generated $95.6 million of gross proceeds. Net proceeds of the
offering were $87 million, after deducting the expenses of the
offering. The Company used the proceeds of the offering to pay
down the Company s outstanding debt. Prior to consummation of
the Offering, the Company amended and restated its Charter and
By-Laws and effected a recapitalization such that (i) the common
equity of the Company consists of New Class A Common Stock and
Class B Convertible Common Stock, par value $.001 per share (the
"New Class B Common Stock") and (ii) each previously-outstanding
share of common stock of the Company was converted into 6.132043
shares of New Class A Common Stock. All share and per share data
included in the financial statements and accompanying footnotes
have been restated to reflect the recapitalization of New Class A
Common Stock. Shares of New Class A Common Stock held by persons
other than private equity funds sponsored by Morgan Stanley Dean
Witter (the "Morgan Stanley Stockholders") and certain related
persons are not convertible into New Class B Common Stock.
Holders of New Class B Common Stock will have no right to vote on
matters submitted to a vote of stockholders, except in certain
circumstances. Shares of the New Class B Common Stock have no
preemptive or other subscription rights and are convertible into
an equal number of shares of New Class A Common Stock (1) at the
option of the holder thereof to the extent that, following such
conversion, the Morgan Stanley Stockholders will not, in the
aggregate, own more than 49% of the outstanding shares of New
Class A Common Stock, and (2) automatically upon the transfer of
such shares by any Morgan Stanley Stockholder to any person that
is not a Morgan Stanley Stockholder.
In connection with the recapitalization, the Company's
Charter was amended to provide that the Board of Directors is
authorized, subject to certain limitations prescribed by law,
without further stockholder approval, to issue from time to time
up to an aggregate of 10,000,000 shares of Preferred Stock in one
or more series and to fix or alter the designations, preferences,
rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms
of redemption (including sinking fund provisions) redemption
price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The
issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company. The
rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. The Company has
no present plans to issue any shares of Preferred Stock.
1997 EQUITY INCENTIVE PLAN
In October 1997, the Board of Directors adopted the 1997
Equity Incentive Plan for all employees. Under the Plan, the
Board or a committee designated by the Board is authorized to
grant nonqualified stock options, incentive stock options, reload
options, stock appreciation rights, shares of restricted Common
Stock, performance shares, performance units and shares of Common
Stock awarded as a bonus. There are 2,000,000 shares of Common
Stock reserved for issuance under the Plan. On October 9, 1997,
the Board of Directors granted options to purchase 993,391 shares
of common stock at $18 per share. The stock options expire 10
years from the date of grant and become exercisable over the next
five years in varying amounts depending on the terms of the
individual option agreements.
REVOLVING CREDIT FACILITY
On October 17, 1997, the Company completed a restructuring
of its primary bank credit facility. The restructured facility
initially provides the Company with $150 million in credit on an
unsecured, revolving basis at interest rates which are 250 basis
points lower than the previous agreement. As a result of the
restructuring the Company anticipates a first quarter
extraordinary charge of approximately $2.3 million, net of tax,
related to the write off of current and deferred debt issuance
costs.
The current and noncurrent portions of long-term debt
outstanding at September 30, 1997 have been reclassified in the
Company s balance sheet to reflect the scheduled maturities of
the new debt. The terms of the new debt are described more fully
in Note 2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
AIPC has incorporated by reference certain responses to the
Items of this Part III pursuant to Rule 12b-23 under the Exchange
Act and General Instruction G(3) to Form 10-K. AIPC's definitive
proxy statement for the 1998 annual meeting of stockholders (the
"Definitive Proxy Statement") will be filed no later than 120
days after October 3, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors of the Company
The information set forth in response to Item 401 of
Regulation S-K under the heading "Proposal 1 - Election of Three
Directors" and "The Board of Directors" in AIPC's Definitive
Proxy Statement is incorporated herein by reference in partial
response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of
Regulation S-K under "Executive Officers of the Registrant" an
unnumbered Item in Part 1 (immediately following Item 4
Submission of Matters to a Vote of Security Holders) of this Form
10-K is incorporated herein by reference in partial response to
this Item 10.
The information set forth in response to Item 405 of
Regulation S-K under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in AIPC's Definitive Proxy
Statement is incorporated herein by reference in partial response
to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth in response to Item 402 of
Regulation S-K under "Management Compensation" in AIPC's
Definitive Proxy Statement, (other than The Compensation
Committee Report on Executive Compensation) is incorporated by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information set forth in response to Item 403 of
Regulation S-K under the heading "Principal Stockholders and
Stock Owned Beneficially by Directors and Certain Executive
Officers" in AIPC's Definitive Proxy Statement is hereby
incorporated by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in response to Item 404 of
Regulation S-K under the heading "Certain Relationships and
Related Transactions" in AIPC's Definitive Proxy Statement is
incorporated herein by reference in response to this Item 13.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) The following items are filed as a part of the report:
1. The Company's financial statements prepared in
accordance with Regulation S-X, including the
statements of operations, cash flow and
stockholder's equity for the three fiscal periods
ended December 31, 1995, September 30, 1996 and
September 30, 1997 and the balance sheets as of
September 30, 1996 and 1997, and related notes and
the independent auditor's opinion thereon are
included under Item 8 of this Annual Report.
2. No financial statement schedules are required to
be included in this Annual Report by the
Securities and Exchange Commission's regulations.
3. The list of exhibits following the signature page
of this Annual Report is incorporated by reference
herein in partial response to this Item.
(b) Reports on Form 8-K.
The Company did not file any current reports on Form 8-K
during the last fiscal quarter covered by this Annual Report.
<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,
thereunto duly authorized.
AMERICAN ITALIAN PASTA COMPANY
By: /s/ Timothy S. Webster
-------------------------
Timothy S. Webster
President and Chief
Executive Officer
Date December 23, 1997
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
POWER OF ATTORNEY AND SIGNATURES
Each of the undersigned hereby severally constitute and
appoint Timothy S. Webster and David E. Watson, and each of them
singly, with power of substitution and resubstitution, as his or
her true and lawful attorneys, with full power to them and each
of them singly, to sign for us in our names in the capacities
indicted below, all amendments to this Annual Report on Form 10-K
and generally to do all things in our names and on our behalf in
such capacities to enable American Italian Pasta Company to
comply with the provisions of the Securities Exchange Act of
1934, and all requirements of the Securities and Exchange
Commission with respect to this Annual Report on Form 10-K.
<S> <C> <C>
/S/ Horst W. Schroeder Chairman of the December 23, 1997
------------------------- Board of Directors
/S/ Timothy S. Webster President, Chief December 23, 1997
------------------------- Executive Officer
and Director
(Principal Executive
Officer)
/S/ David E. Watson Executive Vice December 23, 1997
------------------------- President and Chief
Financial Officer,
Treasurer and
Secretary (Principal
Financial and
Accounting Officer)
S/ Robert H. Niehaus Director December 23, 1997
-------------------------
/S/ Richard S. Thompson Director December 23, 1997
-------------------------
/S/ Jonathan E. Baum Director December 23, 1997
-------------------------
/S/ David Y. Howe Director December 23, 1997
-------------------------
/S/ Lawrence B. Sorrel Director December 23, 1997
-------------------------
/S/ Amy S. Rosen Director December 23, 1997
-------------------------
/S/ James A. Schlindwein Director December 23, 1997
-------------------------
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
Not applicable.
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
Not applicable.
(3) Articles and By-Laws
3.1 The Company's amended and restated Certificate of
Incorporation dated October 7, 1997, which is
attached as Exhibit 3.1 to the Company's
registration statement on Form S-1, as amended
(Commission file no. 333-32827) (the "Registration
Statement"), is incorporated by reference herein
as Exhibit 3.1.
3.2 The Company's amended and restated By-Laws dated
October 7, 1997, which is attached as Exhibit 3.2
to the Registration Statement, are incorporated by
reference herein as Exhibit 3.2.
(4) Instruments Defining the Rights of Security Holders,
Including Indentures
4.1 The specimen certificate representing the
Company's Class A Convertible Common Stock, par
value $0.001 per share, which is attached as
Exhibit 4.1 to the Registration Statement, are
incorporated by reference herein as Exhibit 4.1.
4.2 The specimen certificate representing the
Company's Class B Convertible Common Stock, par
value $0.001 per share, which is attached as
Exhibit 4.2 to the Registration Statement, are
incorporated by reference herein as Exhibit 4.2.
4.3 Section 7.1 of the Company's amended and restated
Certificate of Incorporation, which is
incorporated herein as Exhibit 3.1, is
incorporated by reference herein as Exhibit 4.3.
4.4 Article II of the Company's amended and restated
Bylaws, which is incorporated herein as Exhibit
3.2, is incorporated by reference herein as
Exhibit 4.4.
4.5 Sections 1, 2, 3, 4 of Article III of the
Company's amended and restated Bylaws, which is
incorporated herein as Exhibit 3.2, is
incorporated by reference herein as Exhibit
4.5.
4.6 Article VII of the Company's amended and restated
Bylaws, which is incorporated herein as Exhibit
3.2, is incorporated by reference herein as
Exhibit 4.6.
4.7 Article IX of the Company's amended and restated
Bylaws, which is incorporated herein as Exhibit
3.2, is incorporated by reference herein as
Exhibit 4.7.
(9) Voting Trust Agreements
Not applicable.
(10) Material Contracts
10.1 Credit Agreement among the Company, various banks
named therein, Bankers Trust Company and Morgan
Stanley Senior Fund, Inc. dated as of October 30,
1992, as amended and restated as of April 11,
1997, which is attached as Exhibit 10.1 to the
Registration Statement, is incorporated by
reference herein as Exhibit 10.1.
10.2 Manufacturing and Distribution Agreement dated as
of April 15, 1997 between CPC International Inc.
and the Company, which is attached as Exhibit 10.2
to the Registration Statement, is incorporated by
reference herein as Exhibit 10.2.
10.3 Amended and Restated Supply Agreement dated
October 29, 1992, as amended July 1, 1997, between
the Company and Sysco Corporation, which is
attached as Exhibit 10.3 to the Registration
Statement, is incorporated by reference herein as
Exhibit 10.3.
10.4 Warehouse Lease dated May 23, 1995 between the
Company and Lanter Company, which is attached as
Exhibit 10.4 to the Registration Statement, is
incorporated by reference herein as Exhibit 10.4.
10.5 Employment Agreement between the Company and
Timothy S. Webster effective October 8, 1997,
which is attached as Exhibit 10.5 to the
Registration Statement, is incorporated by
reference herein as Exhibit 10.5.
10.6 Employment Agreement dated September 30, 1997
between the Company and Horst W. Schroeder, which
is attached as Exhibit 10.6 to the Registration
Statement, is incorporated by reference herein as
Exhibit 10.6.
10.7 Employment Agreement dated September 30, 1997
between the Company and David E. Watson, which is
attached as Exhibit 10.7 to the Registration
Statement, is incorporated by reference herein as
Exhibit 10.7.
10.8 Employment Agreement dated September 30, 1997
between the Company and Norman F. Abreo, which is
attached as Exhibit 10.8 to the Registration
Statement, is incorporated by reference herein as
Exhibit 10.8.
10.9 Employment Agreement dated September 30, 1997
between the Company and David B. Potter, which is
attached as Exhibit 10.9 to the Registration
Statement, is incorporated by reference herein as
Exhibit 10.9.
10.10 Amended and Restated Shareholders' Agreement dated
October 6, 1997 by and between the parties named
therein, which is attached as Exhibit 10.10 to the
Registration Statement, is incorporated by
reference herein as Exhibit 10.10.
10.11 American Italian Pasta Company 1992 Stock Option
Plan, which is attached as Exhibit 10.11 to the
Registration Statement, is incorporated by
reference herein as Exhibit 10.11.
10.12 American Italian Pasta Company 1993 Non-Qualified
Stock Option Plan, which is attached as Exhibit
10.12 to the Registration Statement, is
incorporated by reference herein as Exhibit 10.12.
10.13 1996 Salaried Bonus Plan, which is attached as
Exhibit 10.13 to the Registration Statement, is
incorporated by reference herein as Exhibit 10.13.
10.14 1997 Equity Incentive Plan, which is attached as
Exhibit 10.14 to the Registration Statement, is
incorporated by reference herein as Exhibit 10.14.
(11) Statement re computation of per share earnings
Not applicable.
(12) Statements re computation of ratios
Not applicable.
(13) Annual report to security holders, Form 10-Q or
quarterly report to security holders
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(21) Subsidiaries of the registrant
Not applicable.
(22) Published report regarding matters submitted to vote of
security holders
Not applicable.
(23) Consents of experts and counsel
Not applicable.
(24) Power of Attorney
The power of attorney is set forth on the signature
page of this Annual Report.
(27) Financial Data Schedule
The Company's Financial Data Schedule is attached
hereto as Exhibit 27.
(99) Additional Exhibits
Not applicable.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED
FROM Balance Sheets at
September 30, 1996 and 1997;
Statements of Operations for the
year ended December 31, 1995, the
fiscal nine-months ended
September 30, 1996, and the year
ended September 30, 1997;
Statements of Stockholders' Equity
for the year ended December 31,
1995, the fiscal nine-months ended
September 30, 1996 and the year
ended September 30, 1997; the
Statements of Cash Flows for the
year ended December 31, 1995, the
fiscal nine-months ended
September 30, 1996 and the year
ended September 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL
STATEMENTS AND THE NOTES THERETO
<MULTIPLIER> 1000
<PERIOD-START> OCT-01-1996
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-03-1997
<PERIOD-END> OCT-03-1997
<CASH> 2724
<SECURITIES> 0
<RECEIVABLES> 9376
<ALLOWANCES> 196
<INVENTORY> 13675
<CURRENT-ASSETS> 27242
<PP&E> 130845
<DEPRECIATION> 29332
<TOTAL-ASSETS> 158175
<CURRENT-LIABILITIES> 15054
<BONDS> 100137
0
0
<COMMON> 11
<OTHER-SE> 42973
<TOTAL-LIABILITY-AND-EQUITY> 158175
<SALES> 129143
<TOTAL-REVENUES> 129143
<CGS> 93467
<TOTAL-COSTS> 113897
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10119
<INCOME-PRETAX> 8127
<INCOME-TAX> 3070
<INCOME-CONTINUING> 5057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5057
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</TABLE>
