SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported): October 29,
1997
American Italian Pasta Company
(Exact name of registrant as specified in its charter)
Delaware 001-13403 84-1032638
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Address of principal executive offices: 1000 Italian Way
Excelsior Springs, MO
64024
Registrant's telephone number, including area code: (816) 502-
6000
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
Not applicable.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Not applicable.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP.
Not applicable.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
Not applicable.
ITEM 5. OTHER EVENTS.
In accordance with provisions included in the Private
Securities Litigation Reform Act of 1995, American Italian Pasta
Company (the "Company") is filing this Current Report on Form 8-
K, which sets forth on Exhibit 99 cautionary statements
identifying significant factors that could cause the Company's
actual operating results or management's plans to materially
differ from those projected in any forward-looking statements,
whether oral or written, made by or on behalf of the Company.
ITEM 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS.
Not applicable.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Exhibit No. Document
99 Certain cautionary statements for purposes of the
"safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 is attached hereto
as Exhibit 99.
ITEM 8. CHANGE IN FISCAL YEAR.
Not applicable.
ITEM 9. SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S.
Not applicable.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
American Italian Pasta Company
Date: October 29, 1997 /s/ David E. Watson
Executive Vice President and
Chief Financial Officer
The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward-looking statements
when such statements are accompanied by meaningful cautionary
statements. The management of American Italian Pasta Company
("Company"; "AIPC") may occasionally make forward-looking
statements and estimates (such as forecasts and projections) of
the Company's future financial performance or statements of
management's plans and objectives. These forward-looking
statements may be contained in, among other things, filings with
the Securities and Exchange Commission and press releases made by
the Company, or may be made orally by the officers of the
Company. THE COMPANY IS, HOWEVER, UNDER NO DUTY TO UPDATE ANY
FORWARD-LOOKING STATEMENT.
Actual results of the Company's operations could materially
differ from those indicated in the forward-looking statements.
Therefore, no assurances can be given that the matters indicated
in such forward-looking statements will be realized. Significant
factors that could cause the Company's actual results to differ
from those indicated in the forward-looking statements include,
but are not limited to, the factors discussed below. PERSONS
EVALUATING SUCH FORWARD-LOOKING COMMENTS SHOULD CAREFULLY
CONSIDER THESE FACTORS, AND ANY AMENDMENTS OR SUPPLEMENTS HERETO,
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THE COMPANY'S
PUBLIC DOCUMENTS.
DEPENDENCE ON MAJOR CUSTOMERS
Historically, a limited number of customers have accounted
for a substantial portion of the Company's revenues. During 1994,
1995, the nine-month fiscal period ended September 27, 1996, and
the year ended October 3, 1997, Sysco Corporation ("Sysco")
accounted for approximately 38%, 33%, 27% and 27%, respectively,
and sales to Sam's Wholesale Club ("Sam's Club") accounted for
approximately 12%, 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 International
Inc. ("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 customers, including
Sam's Club. Accordingly, the Company is dependent upon its
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 food service businesses other
than Sysco. Without CPC's consent, AIPC may not produce branded
retail pasta for Borden, Hershey Foods Corporation ("Hershey") or
Barilla Alimentare S.p.A. ("Barilla"), and is limited to the
production of an aggregate of 12 million pounds of branded pasta
products annually for other producers.
MANAGEMENT OF GROWTH AND IMPLEMENTATION OF CPC BUSINESS
The Company has experienced rapid growth and management
expects significant additional growth in the future. Successful
management of any such future growth will require the Company to
continue to invest in and enhance its operational, financial and
management information resources and systems, attract and retain
management personnel to manage such resources and systems,
accurately forecast sales demand and meet such demand, accurately
forecast retail sales, control its overhead, and attract, train,
motivate and manage its employees effectively. There can be no
assurance that the Company will continue to grow, or that it will
be effective in managing its future growth. Any failure to
effectively manage growth could have a material adverse effect on
the Company's business, financial condition and results of
operations.
During 1998, the Company will be required to produce
substantially all of CPC's Mueller's brand pasta, which has
averaged approximately 200 million pounds of pasta annually over
the last five years. To meet its significant volume and other
obligations under the CPC Agreement and provide for future
growth, the Company must successfully complete its 1997-1998
capital expansion program to increase its overall milling,
production and distribution capacity by approximately 100%.
Implementation of the CPC Agreement may also adversely affect the
Company's financial, operational and human resources. There can
be no assurance that the Company's planned expansion of its
production facilities will be completed in a timely and
cost-effective manner or at all, or that such expanded facilities
will be adequate to meet the CPC volume requirements and any
future growth. Failure to complete the Company's planned capital
expansion in a timely and cost-effective manner and implement the
CPC Agreement could have a material adverse effect on the
Company's business, financial condition and results of
operations.
SUBSTANTIAL PLANNED INVESTMENTS IN MILLING AND PRODUCTION
FACILITIES
The Company has begun a major expansion of its durum wheat
milling and pasta production and distribution facilities,
budgeted to cost approximately $86 million during the 1997 and
1998 fiscal years, which is planned to increase AIPC's overall
milling, production and distribution capacity by approximately
100%. There can be no assurance that the Company will be able to
complete this expansion on schedule, within budget or at all,
that the expanded facilities will result in the anticipated
increase in production capacity or that future revenues from
products produced at the expanded facilities will be sufficient
to recover the Company's investment in the expansion. In
addition, there can be no assurance that the Company will be able
to calibrate its production capacity to future changes in demand
for its products or that any future additions to, or expansions
of, its facilities will be completed on schedule and within
budget. Any significant delay or cost overrun in the construction
or acquisition of new or expanded facilities could have a
material adverse effect on the Company's business, financial
condition and results of operations.
RAW MATERIALS
The principal raw material in the Company's products is
durum wheat. Durum wheat is used almost exclusively in pasta
production and is a narrowly traded, cash only commodity crop.
The Company attempts to minimize the effects 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 Company's
ability to benefit from possible durum wheat cost decreases. The
supply and price of durum wheat is subject to market conditions
and is influenced by numerous factors beyond the control of the
Company, including general economic conditions, natural disasters
and weather conditions, competition, and governmental programs
and regulations. The supply and cost of durum wheat may also be
adversely affected by insects, plant diseases and funguses,
including the karnal bunt fungus, which infected a portion of the
durum wheat produced in the southwestern United States in 1996
and in central Texas in 1997. The Company also relies on the
supply of plastic, corrugated and other packaging materials. The
costs of durum wheat and packaging materials have varied widely
in recent years and future changes in such costs may cause the
Company's results of operations and margins to fluctuate
significantly. A large, rapid increase in the cost of raw
materials could have a material adverse effect on the Company's
operating profit and margins unless and until the increased cost
can be passed along to customers. Following a period of
relatively stable prices during the nine months ended June 30,
1997, the market price of durum wheat increased by approximately
23% from $5.60 per bushel to $6.90 per bushel between June 30,
1997 and October 29, 1997. Historically, changes in prices of the
Company's pasta products have lagged changes in the Company's
materials costs. Competitive pressures may also limit the ability
of the Company to raise prices in response to increased raw
material costs in the future. Accordingly, there can be no
assurance as to whether, or the extent to which, the Company will
be able to offset raw material cost increases with increased
product prices.
COMPETITION
The Company operates in a highly-competitive environment
against numerous well-established national, regional and foreign
companies, and many smaller companies in the procurement of raw
materials, the development of new pasta products and product
lines, the improvement and expansion of previously introduced
pasta products and product lines and the production, marketing
and distribution of pasta products. Several 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. The
Company's direct competitors include large multi-national
companies such as food industry leader Hershey with brands such
as San Giorgio(R) and Ronzoni(R), and Borden with brands such as
Prince(R) and Creamette(R), regional U.S. producers of retail and
institutional pasta such as Dakota Growers Pasta Company ("Dakota
Growers"), a farmer-owned cooperative in North Dakota,
Philadelphia Macaroni Co. Inc. ("Philadelphia Macaroni") and A.
Zerega's Sons, Inc. ("Zerega's"), each an independent producer,
and foreign companies such as Italian pasta producers De Cecco
("De Cecco") and Barilla.
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 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 over 200 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. Increases in industry
capacity levels above demand for pasta products could have a
material adverse effect on the Company's business, financial
condition and results of operations.
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 benefitting 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. Such practices, if continued or increased, could
have a material adverse effect on the Company's business,
financial condition and results of operations. 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.
RELIANCE ON PASTA; PRODUCT LINE CONCENTRATION
Since commencing operations in 1988, the Company has focused
exclusively on the dry pasta industry. For the foreseeable
future, AIPC expects to continue to receive substantially all of
its revenues from the sale of pasta and pasta-related products.
Because of this product concentration, any decline in the demand
or pricing for dry pasta, any shift in consumer preferences away
from dry pasta, or any other factor that adversely affects the
pasta market, could have a more significant adverse effect on the
Company's business, financial condition and results of operations
than on pasta producers which also produce other products. In
addition, the Company's pasta production equipment is highly
specialized and is not adaptable to the production of non-pasta
food products.
RELIANCE ON KEY PERSONNEL
The Company's operations and prospects depend in large part
on the performance of its senior management team, including Horst
W. Schroeder, Chairman of the Board, Timothy S. Webster,
President and Chief Executive Officer, David E. Watson, Executive
Vice President and Chief Financial Officer, Norman F. Abreo,
Executive Vice President of Operations and David B. Potter,
Senior Vice President of Procurement. No assurance can be given
that the Company would be able to find qualified replacements for
any of these individuals if their services were no longer
available. The loss of the services of one or more members of the
Company's senior management team could have a material adverse
effect on the Company's business, financial condition and results
of operations. The Company does not maintain key person life
insurance on any of its key employees. The Company has employment
agreements with Messrs. Schroeder, Webster, Watson, Abreo and
Potter.
TRANSPORTATION
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 a
rail contract to ship semolina, milled and processed at the
Missouri facility, to the South Carolina facility. An extended
interruption in the Company's ability to ship durum wheat by
railroad to the Missouri plant, or semolina to the Company's
South Carolina facility, could have a material adverse affect on
the Company's business, financial condition and results of
operations. The Company experienced a significant interruption in
railroad shipments in 1994 due to a railroad strike. While the
Company would attempt to transport such materials by alternative
means if it were to experience another interruption due to
strike, natural disasters or otherwise, there can be no assurance
that the Company would be able to do so or be successful in doing
so in a timely and cost-effective manner.
PRODUCTION AND INVENTORY MANAGEMENT
Most of the Company's customers use, to some extent,
inventory management systems which track sales of particular
products and rely on reorders being rapidly filled by suppliers
to meet consumer demand rather than on large inventories being
maintained by retailers. Although these systems reduce a
retailer's investment in inventory, they increase pressure on
suppliers like the Company to fill orders promptly and thereby
shift a portion of the retailer's inventory management cost to
the supplier. The Company's production of excess inventory to
meet anticipated retailer demand could result in markdowns and
increased inventory carrying costs for the Company. In addition,
if the Company underestimates the demand for its products, it may
be unable to provide adequate supplies of pasta products to
retailers in a timely fashion, and may consequently lose sales.
POTENTIAL VOLATILITY OF FUTURE QUARTERLY OPERATING RESULTS
The Company's results of operations may fluctuate on a
quarterly basis as a result of a number of factors, including
total sales volumes, the timing and scope of new customer
volumes, the timing and amounts of price adjustments due to durum
wheat and other cost changes, the cost of raw materials,
including durum wheat (see the discussion under "Raw Materials"
above), plant expansion costs and interest expenses.
RISK OF PRODUCT LIABILITY
Although the Company has never been involved in a product
liability lawsuit, the sale of food products for human
consumption involves the risk of injury to consumers as a result
of tampering by unauthorized third parties, product contamination
or spoilage, including the presence of foreign objects,
substances, chemicals, aflatoxin and other agents, or residues
introduced during the growing, storage, handling or
transportation phases. While the Company is subject to U.S. Food
& Drug Administration inspection and regulations and believes its
facilities comply in all material respects with all applicable
laws and regulations, there can be no assurance that consumption
of the Company's products will not cause a health-related illness
in the future or that the Company will not be subject to claims
or lawsuits relating to such matters. The Company maintains
product liability insurance in an amount which the Company
believes to be adequate. However, there can be no assurance that
the Company will not incur claims or liabilities for which it is
not insured or that exceed the amount of its insurance coverage.
SUBSTANTIAL INFLUENCE OF CURRENT PRINCIPAL STOCKHOLDER
The Morgan Stanley Leveraged Equity Fund II, L.P. (the
"MSLEF") and Morgan Stanley Capital Partners III, L.P. and
certain affiliated funds (the "MSCP Funds" and with MSLEF the
"Morgan Stanley Stockholders") currently own approximately 32.5%
of the Company's outstanding Class A common stock, par value
$0.001 per share (the "Common Stock"). The Company's Charter
provides that, if at any time after consummation of the Offering,
the Morgan Stanley Stockholders own in excess of 49% of the
outstanding Class A Common Stock, such excess shares will be
automatically converted into an equal number of shares of Class B
Common Stock. The Morgan Stanley Stockholders are affiliates of
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), an
affiliate of Morgan Stanley & Co. Incorporated, a representative
of the U.S. Underwriters, and Morgan Stanley & Co. International
Limited, a representative of the International Underwriters. Upon
consummation of the Offering, three of nine directors of the
Company will be employees of a wholly-owned subsidiary of MSDWD.
Pursuant to the Stockholders Agreement (as amended and restated
effective upon the consummation of the Offering) among the Morgan
Stanley Stockholders, the Company, and certain other stockholders
of the Company, one of the Morgan Stanley Stockholders, The
Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"), has
the right to designate two director nominees so long as the
Morgan Stanley Stockholders own at least 25% of the outstanding
Common Stock or one director nominee so long as the Morgan
Stanley Stockholders own at least 10% but less than 25% of the
outstanding Common Stock. In addition, another Morgan Stanley
Stockholder, Morgan Stanley Capital Partners III, L.P. ("MSCP"),
has the right to designate two director nominees so long as the
Morgan Stanley Stockholders own at least 35% of the outstanding
Common Stock or one director nominee so long as the Morgan
Stanley Stockholders own at least 10% but less than 35% of the
outstanding Common Stock. Whenever the Morgan Stanley
Stockholders collectively own at least 5% but less than 10% of
the outstanding Common Stock, they shall jointly be entitled to
designate one director nominee. The number of directors
designated by the Morgan Stanley Stockholders will increase
proportionately if the size of the Board of Directors is
increased in the future. In addition, so long as the Morgan
Stanley Stockholders own at least 25% of the outstanding shares
of Common Stock, certain significant corporate actions are
subject to the approval of the Board of Directors and the Morgan
Stanley Stockholders. As a result of their ownership interest in
the Company and their rights under the Stockholders Agreement,
the Morgan Stanley Stockholders will continue to have a
substantial influence over the affairs of the Company following
the consummation of the Offering, including with respect to
mergers or other business combinations involving the Company and
the acquisition or disposition of assets by the Company.
Similarly, the Morgan Stanley Stockholders will have the power to
prevent or, by selling their Common Stock, cause a change of
control of the Company and could take other actions that might be
favorable to the Morgan Stanley Stockholders. In such instances
or otherwise, various conflicts of interest between the Company
and the Morgan Stanley Stockholders could arise. Stockholders may
be prevented from receiving a premium for their shares if the
Morgan Stanley Stockholders were to act in concert to oppose any
takeover attempt.
FINANCIAL LEVERAGE; SENSITIVITY TO INTEREST RATE FLUCTUATIONS;
COVENANT RESTRICTIONS
The Company has reduced its outstanding bank indebtedness
from approximately $86 million on June 30, 1997 to $11 million
representing approximately 7% of the Company's total
capitalization as of the date of this current report. However,
the Company intends to substantially increase such indebtedness
in the future to finance its capital expenditure plan. The degree
to which the Company is financially leveraged following such
borrowings and the terms of the Company's indebtedness could have
important consequences to stockholders, including: (i) the
Company's ability to obtain additional financing in the future
for working capital, capital expenditures, and general corporate
purposes may be impaired; (ii) a substantial portion of the
Company's cash flow from operations may have to be dedicated to
the payment of the principal of and interest on its indebtedness;
(iii) the terms of such indebtedness may restrict the Company's
ability to pay dividends; and (iv) the Company may be more highly
leveraged than many of its competitors, which may place the
Company at a competitive disadvantage.
As of the date of this current report, the Company's
indebtedness had a weighted average interest rate of 7.9% and
approximately 61%, or $11 million, of the Company's indebtedness
bore interest at variable rates. Although the Company used the
net proceeds of the Offering to substantially reduce the amount
of such indebtedness, the Company may incur additional amounts of
variable-rate indebtedness in the future. If this were to occur,
and if interest rates were to significantly increase thereafter,
the Company's operating results and its ability to satisfy its
debt service obligations may be materially and adversely
affected. The Company has obtained an interest rate protection
agreement covering $20 million of variable rate indebtedness to
effectively limit the Company's exposure to variable rates by
fixing the Company's base interest rate at 6.03%. There can be no
assurance, however, that in the future the Company will be able
to enter into such agreements.
The limitations contained in the agreements relating to the
Company's credit facility, together with the leveraged position
of the Company, restrict the Company from paying dividends and
could limit the ability of the Company to effect future debt or
equity financings and may otherwise restrict corporate
activities, including the ability to avoid defaults and to
respond to competitive market conditions, to provide for capital
expenditures beyond those permitted or to take advantage of
business opportunities.
