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Filed pursuant to Rule 424(b)(1)
Registration No. 333-49719
PROSPECTUS
5,400,000 Shares
AIPC LOGO
American Italian Pasta Company
CLASS A COMMON STOCK
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OF THE 5,400,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, 1,000,000
SHARES ARE BEING SOLD BY THE COMPANY AND 4,400,000 SHARES ARE BEING SOLD BY THE
SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL
NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES OF CLASS A COMMON STOCK
BY SUCH SELLING STOCKHOLDERS. OF THE 5,400,000 SHARES OF CLASS A COMMON STOCK
BEING OFFERED HEREBY, 4,320,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED
STATES AND CANADA BY THE U.S. UNDERWRITERS AND 1,080,000 SHARES ARE BEING
OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS. SEE "UNDERWRITERS." THE CLASS A COMMON STOCK OF THE COMPANY IS
LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "PLB." ON APRIL 30, 1998,
THE REPORTED LAST SALE PRICE OF THE CLASS A COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE COMPOSITE TRANSACTIONS TAPE WAS $31 PER SHARE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE $30 A SHARE
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
-------- -------------- ----------- -------------------
<S> <C> <C> <C> <C>
Per Share............... $30.00 $1.387 $28.613 $28.613
Total(3)................ $162,000,000 $7,489,800 $28,613,000 $125,897,200
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $710,000. See
"Underwriters" for additional information relating to the payment of
expenses in connection with the Offering.
(3) Certain Selling Stockholders have granted to the U.S. Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 810,000 additional Shares of Class A Common Stock at the price
to public less underwriting discounts and commissions, for the purpose of
covering over-allotments, if any. If the U.S. Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions and proceeds to selling stockholders will be $186,300,000,
$8,613,270 and $149,073,730, respectively. The Company will not receive any
proceeds from the sale of Shares of Class A Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders" and "Underwriters."
------------------------
The Shares of Class A Common Stock are offered, subject to prior sale,
when, as and if accepted by the Underwriters named herein and subject to
approval of certain legal matters by Davis Polk & Wardwell, counsel for the
Underwriters. It is expected that delivery of the Shares of Class A Common Stock
will be made on or about May 6, 1998 at the office of Morgan Stanley & Co.
Incorporated, New York, N.Y., against payment therefor in immediately available
funds.
------------------------
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN
GOLDMAN, SACHS & CO.
GEORGE K. BAUM & COMPANY
April 30, 1998
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Picture
AIPC's Pasta LaBella(R) Branded Pasta
Picture
*Muellers(R) is a registered trademark of Bestfoods
Products Produced by
AIPC for Bestfoods
Picture
AIPC's Private Label
and Branded Pasta
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
BY THE SELLING STOCKHOLDERS OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
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FOR INVESTORS OUTSIDE THE UNITED STATES: NO ACTION HAS BEEN OR WILL BE
TAKEN IN ANY JURISDICTION BY THE COMPANY, BY THE SELLING STOCKHOLDERS OR BY ANY
UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE CLASS A COMMON STOCK OR
POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION
FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO
WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY, THE SELLING
STOCKHOLDERS AND THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY
RESTRICTIONS AS TO THE OFFERING OF THE CLASS A COMMON STOCK AND THE DISTRIBUTION
OF THIS PROSPECTUS.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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Additional Information................. 4
Prospectus Summary..................... 5
Risk Factors........................... 12
Use of Proceeds........................ 18
Price Range of Common Stock and
Dividend Policy...................... 18
Capitalization......................... 19
Selected Financial and Other Data...... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 22
Business............................... 34
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Management............................. 46
Certain Relationships and Related
Transactions......................... 56
Principal and Selling Stockholders..... 58
Description of Capital Stock........... 60
Shares Eligible for Future Sale........ 62
Certain United States Federal Income
Tax Considerations for Non-U.S.
Holders.............................. 64
Underwriters........................... 67
Legal Matters.......................... 70
Experts................................ 70
Index to Financial Statements.......... F-1
</TABLE>
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This Prospectus contains forward-looking statements and information based
upon assumptions by the Company's management, as of the date of this Prospectus,
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 "Risk Factors"
beginning on page 12. 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 undertakes no obligation to update any
forward-looking statements in this Prospectus to reflect future events or
developments.
------------------------
The Company holds a number of federally registered and common law
trademarks, which are used throughout this Prospectus. The Company has
registered the following marks with the U.S. Patent and Trademark Office: AIPC
American Italian Pasta Company(R), Pasta LaBella(R), and Montalcino(R). The
Company also has pending trademark applications with the U.S. Patent and
Trademark Office for the following marks: Calabria(TM) and Heartland(TM).
Additionally, a number of federally registered trademarks are used throughout
this Prospectus that are not owned by the Company. Mueller's(R) is a registered
trademark of Bestfoods, formerly CPC International Inc. ("Bestfoods"). San
Giorgio(R) and Ronzoni(R) are registered trademarks of Hershey Foods Corporation
("Hershey"). Prince(R) and Creamette(R) are registered trademarks of Borden
Foods Holdings Corporation ("Borden").
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS
OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE CLASS A COMMON STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
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ADDITIONAL INFORMATION
The Company has filed a Registration Statement with the Securities and
Exchange Commission (the "Commission") on Form S-1 under the Securities Act with
respect to the shares of Class A Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain items of which
are contained in schedules and exhibits to the Registration Statement as
permitted by rules of the Commission. For further information with respect to
the Company and the Class A Common Stock offered hereby, reference is made to
such Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete. With respect to each such
contract or other document filed as a part of or otherwise incorporated in the
Registration Statement, reference is made to the exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement, including the schedules and exhibits
thereto, as well as such reports, proxy statements and other information filed
by the Company can be inspected, without charge, and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices
maintained by the Commission at Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such materials can also be obtained from the
Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition,
registration statements and certain other filings made with the Commission
through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system
are publicly available through the Commission's site on the Internet's World
Wide Web, located at http://www.sec.gov. The Registration Statement, including
all exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR. The Class A Common Stock is listed on the New York Stock Exchange
and copies of such materials may also be inspected and copied at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10015.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, all references in this Prospectus to (i) the "Company" and
"AIPC" shall mean American Italian Pasta Company, a Delaware corporation, and
its predecessor unless the context otherwise requires; and (ii) "pasta" shall
mean dry pasta, including dry pasta used in shelf-stable, frozen and canned
pasta products. Unless otherwise indicated, all information in this Prospectus
assumes the U.S. Underwriters' over-allotment option is not exercised.
THE COMPANY
OVERVIEW
AIPC is the second 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
were $135.1 million and $20.7 million, respectively, for the twelve-month period
ended December 31, 1997, and grew at compound annual growth rates ("CAGR") of
30% and 33%, respectively, over the five-year period ended December 31, 1997.
The Company has rapidly established a significant market presence in North
America by developing strategic customer relationships with food industry
leaders that have substantial pasta requirements. 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 Company has a
long-term supply agreement with Sysco Corporation ("Sysco"), the nation's
largest marketer and distributor of foodservice products. AIPC is now the
exclusive producer of Mueller's(R) pursuant to a long-term manufacturing and
distribution agreement with Bestfoods, formerly CPC International Inc.
("Bestfoods"). 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 recent months, the Company has added several
new customers including Harris Teeter, Spartan, Meijer and Ahold/Finast. In
addition, AIPC has developed supply relationships with industrial users of
pasta, such as Pillsbury, General Mills and Kraft Foods which use the Company's
pasta as an ingredient in branded food products.
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 workforce. The Company recently completed a significant portion of
its capital expenditure program initiated in 1997 which increased the Company's
annual pasta production capacity to approximately 500 million pounds and added a
highly-automated durum wheat mill to its South Carolina plant. Management
believes the South Carolina plant is now the largest and most efficient pasta
producing facility in North America in terms of productivity and conversion cost
per pound. The Company anticipates that the planned additional capacity
expansion at the Missouri facility, including new high-speed, high-output pasta
production lines and expansion of its distribution facility, will be completed
by June 1998. This expansion will increase the Company's annual production
capacity to more than 600 million pounds.
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PROPOSED HARVEST STATES ALLIANCE
In November 1997, the Company announced a letter of intent with Amber
Milling Company, a division of Harvest States Cooperatives ("Harvest States"),
one of the largest agribusiness cooperatives in the United States. The proposed
business arrangement contemplates AIPC constructing a highly efficient,
state-of-the-art pasta production facility adjacent to Harvest States' recently
constructed wheat mill in Kenosha, Wisconsin. Under the terms of the
contemplated arrangement, Harvest States would transfer to AIPC the land and
infrastructure for the facility and supply semolina and other raw materials to
the proposed plant under a long-term supply agreement. AIPC anticipates the
proposed facility would initially target the growing industrial pasta market.
The Company estimates it would invest approximately $30 million in capital
expenditures to construct the facility, with a targeted annual capacity of
approximately 150 million pounds. The Harvest States alliance is subject to
final negotiations and agreement, several pre-conditions and board of directors'
approval from both parties prior to July 1, 1998. There can be no assurance that
a definitive agreement will be reached or that, if reached, the Company will be
able to implement successfully the Harvest States alliance. See "Risk Factors --
Failure to Implement Harvest States Alliance."
Management believes the Harvest States alliance would create strategic
advantages by: (i) accelerating the time line for constructing a third facility
targeting the growing industrial pasta market; (ii) creating highly efficient
capacity to support future growth; (iii) providing long-term access to the
variety of raw materials needed to support the industrial pasta market (several
of which AIPC cannot produce currently in its durum semolina mills); (iv) making
available rail and highway infrastructure allowing for efficient distribution to
AIPC's customers; and (v) providing access to Harvest States' durum wheat
origination network, which is the largest in the United States, and handles over
50% of U.S. durum wheat. The Harvest States alliance would expand AIPC's
vertical integration strategy to Harvest States' Kenosha mill, one of North
America's newest and most efficient mills. Additionally, Harvest States' Kenosha
mill uses the same high-quality, state-of-the-art milling equipment and
technology as AIPC's existing mills, ensuring product consistency for existing
customers.
OPERATING STRATEGY
The Company's operating strategy is to grow revenues and profitability by
offering customers the highest quality pasta products at competitive prices with
superior customer service. Key elements of the Company's operating strategy are
to:
- Continue to Lead the Industry as a Low Cost Producer of High Quality
Pasta. AIPC has successfully implemented production and capital investment
strategies designed to achieve low-cost production of high-quality
products. AIPC has distinguished itself from most major pasta producers by
vertically integrating the durum wheat milling function with the production
process and strategically locating its distribution centers. Management
believes that its facilities are among the most efficient pasta production
facilities in North America in terms of productivity and conversion cost
per pound, and that its vertically-integrated processes produce pasta of
superior color, texture, flavor and consistency. The Company expects to
realize additional operating efficiencies through the current expansion
programs at its existing facilities, and ongoing improvement programs.
- Expand Customer-Driven Strategy. The Company is committed to
developing and maintaining strategic relationships with customers who (i)
are food industry leaders requiring a significant volume of high-quality
pasta; (ii) have committed marketing and sales resources to growing their
pasta business; and (iii) pursue long-term supplier relationships. The
Company has followed this strategy since commencing operations in 1988,
beginning with an agreement with Sysco, and has developed strategic supply
relationships with Bestfoods, Sam's Club and leading grocery retailers.
Management believes that these strategic relationships increase sales and
operating efficiencies, facilitate AIPC's investment in new technology,
create distribution synergies, and enable closer involvement in its
customers' pasta businesses.
- Provide Superior Customer Service. The Company develops and enhances
customer relationships by providing superior service and technical support
to its customers. The Company has invested heavily in
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the development of a broad range of customer service programs, including
electronic data interchange ("EDI") and efficient consumer response ("ECR")
which streamline the order, invoicing and inventory management functions.
The Company provides marketing, technical and service support to its
customers by assisting customers with supply and category management
decisions, producing pasta to its customers' specifications and making
operational recommendations to its customers using pasta as an ingredient
in their food products.
GROWTH STRATEGY
The Company continues to implement its growth strategy, which builds on the
Company's operating strategy and industry trends. Key elements of the Company's
growth strategy are to:
- Continue Bestfoods Business Expansion. The Company was selected in
1997 to be the exclusive producer of Bestfoods' Mueller's brand pasta, the
largest pasta brand in North America, and has transferred production of
substantially all of Mueller's primarily to its recently expanded South
Carolina facility. Management believes that the Company's experience in
servicing large pasta supply agreements and its current expansion of its
South Carolina and Missouri milling, pasta production and distribution
facilities will enable AIPC to support potential future growth. Management
anticipates Bestfoods' annual volume requirement will represent an
approximately 60% increase over the Company's fiscal 1997 production
volume.
- Obtain Additional Private Label Volume. The Company intends to
continue to grow its existing private label customer volume and secure
additional private label customers by continuing to offer quality products,
competitive pricing, category management and superior customer service.
Management believes that AIPC's prospects for growth in the private label
market have been enhanced since Borden Foods Holdings Corporation
("Borden"), historically the largest private label supplier in North
America, discontinued its private label pasta business in 1997.
- Increase Sales to Industrial Customers. The Company believes that
industrial users of pasta will continue to require increasing quantities of
pasta and that a greater portion of these requirements will be outsourced
to more efficient producers of high-quality pasta, such as AIPC. Management
has identified additional strategic opportunities with industrial users of
pasta which may result in incremental growth, new product development and
cost savings opportunities in the future. See "-- Proposed Harvest States
Alliance."
- Continue Product Innovation. In 1995, the Company introduced Pasta
LaBella flavored pasta, a line of all natural, full-flavored pasta products
utilizing patented flavoring technology and AIPC's proprietary production
process. In addition to pursuing increased sales with institutional
customers, the Company is exploring potential sales and marketing alliances
to expand retail distribution of Pasta LaBella flavored pasta. 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 sales values and margins than traditional pasta
products.
RECENT DEVELOPMENTS
On April 3, 1998, AIPC completed its second fiscal quarter. For the
three-month period ended March 31, 1998, the Company reported net income of $.23
per share assuming dilution. Revenues for the three-month period ended March 31,
1998 increased $13.9 million, or 43.3%, to $46.0 million, from $32.1 for the
three-month period ended March 31, 1997. Gross profit for the three-month period
ended March 31, 1998 also increased $2.7 million, or 32.1%, to $11.1 million,
from $8.4 million for the three-month period ended March 31, 1997, which was
generally related to the growth in revenues. The gross margin percentage for the
three-month period ended March 31, 1998 decreased to 24.1% from 26.2% for the
three-month period ended March 31, 1997. The expected decrease was primarily due
to changes in sales mix, specifically, the lower gross margin on Bestfoods
Mueller's pasta sales, plant expansion costs and higher durum wheat costs.
Operating profit for the three-month period ended March 31, 1998 increased $2.4
million, or 54.5%, to $6.8 million, from $4.4 million for the three-month period
ended March 31, 1997. Second quarter operating profit as a
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percentage of revenues improved to 14.8%, a 1.1% gain over the second quarter of
1997. These improvements reflect the gross profit gains and the absence of
product introduction costs, which were $.6 million in the three-month period
ended March 31, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OWNERSHIP
As of the date of this Prospectus, The Morgan Stanley Leveraged Equity Fund
II, L.P. ("MSLEF"), Morgan Stanley Capital Partners III, L.P. and certain
affiliated funds (the "MSCP Funds" and with MSLEF, the "Morgan Stanley
Stockholders") own approximately 32.5% of the outstanding Common Stock. Upon
consummation of the Offering, the Morgan Stanley Stockholders will own
approximately 7.8% of the outstanding Common Stock (3.4% if the U.S.
Underwriters' over-allotment option is exercised). See "Principal and Selling
Stockholders" and "Underwriters." Shares of Class A Common Stock held by the
Morgan Stanley Stockholders and certain related persons are, in certain
circumstances, convertible into an equal number of shares of Class B non-voting
common stock, par value $.001 per share, of the Company ("Class B Common Stock")
and vice versa. See "Description of Capital Stock -- General."
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered by:
The Company................................ 1,000,000 shares
The Selling Stockholders................... 4,400,000 shares(1)
---------------------------------------------
Total................................... 5,400,000 shares
=============================================
Class A Common Stock offered in:
U.S. Offering.............................. 4,320,000 shares
International Offering..................... 1,080,000 shares
---------------------------------------------
Total................................... 5,400,000 shares
=============================================
Common Stock outstanding after the 17,978,680 shares(2)
Offering...................................
Use of proceeds.............................. The net proceeds to the Company from the
Offering will be used to repay a portion of
its indebtedness under its credit facility
(the "Credit Facility") and for general
corporate purposes. The Company will not
receive any proceeds from the sale of Class A
Common Stock by any Selling Stockholder. See
"Use of Proceeds."
New York Stock Exchange Symbol............... PLB
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(1) Of such shares, 4,048,738 shares are being offered by The Morgan Stanley
Stockholders, 150,000 shares are being offered by Thompson Holdings, L.P.
("Thompson Holdings"), a limited partnership of which Richard C. Thompson,
a director of the Company, is the only limited partner, 90,631 shares are
being offered by each of Horst W. Schroeder, Chairman of the Board, and
Timothy S. Webster, President and Chief Executive Officer, and 20,000
shares are being offered by Norman F. Abreo. The shares offered by Messrs.
Schroeder, Webster and Abreo were recently acquired by them pursuant to
exercises of stock options under the Company's 1992 Stock Option Plan. The
Morgan Stanley Stockholders, Thompson Holdings and Messrs. Schroeder,
Webster and Abreo are sometimes referred to herein as the "Selling
Stockholders." Such shares do not include up to 810,000 shares that may
sold by the Selling Stockholders pursuant to the exercise of the U.S.
Underwriters' over-allotment option. See "Principal and Selling
Stockholders."
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(2) Assumes the U.S. Underwriters' over-allotment option will not be exercised.
Does not include 1,976,402 shares of Class A Common Stock issuable upon
exercise of stock options granted under the Company's three stock option
plans, of which options to purchase 1,445,394 shares are currently
outstanding but not exercisable and options to purchase 531,008 shares are
currently outstanding and exercisable. See "Management -- Stock Option
Plans."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Class A Common Stock.
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SUMMARY FINANCIAL AND OPERATING DATA
The summary 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 are derived from, and are qualified by reference
to, the audited Financial Statements of the Company, and Notes thereto, included
elsewhere in this Prospectus. The summary statement of operations data for the
fiscal years ended December 31, 1993 and 1994 have been derived from audited
Financial Statements of the Company not included herein. The summary statement
of operations data for the twelve-month period ended September 30, 1996, and the
three-month periods ended December 31, 1996 and 1997, and the balance sheet data
as of December 31, 1997 have been derived from the Company's unaudited 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 Company's results of operations and financial position for such periods
and as of such dates. The statement of operations data of the Company for the
twelve-month period ended September 30, 1996 are included herein only for
comparison purposes. In 1996, 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 ended September 30, 1996, 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 of each year. For purposes of this
Prospectus, the 1996 fiscal year is described as the nine-month fiscal period
ended September 30, 1996. The following summary financial and operating data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Financial Statements of
the Company, including the Notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE-MONTH
FISCAL YEAR ENDED FISCAL PERIOD TWELVE-MONTH FISCAL YEAR
DECEMBER 31, ENDED PERIOD ENDED ENDED
--------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1996 1996 1997
------- ------- ------- ------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
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STATEMENT OF OPERATIONS DATA:
Revenues......................... $47,872 $69,465 $92,903 $92,074 $121,149 $129,143
Cost of goods sold............... 35,081 54,393 73,851 68,555 91,230 93,467
Plant expansion
costs (1)....................... 1,171 484 2,065 -- -- --
------- ------- ------- ------- -------- --------
Gross profit..................... 11,620 14,588 16,987 23,519 29,919 35,676
Selling and marketing expense,
including product introduction
costs (2)....................... 2,883 3,792 5,303 16,798 18,445 13,664
General and administrative
expense......................... 2,049 1,951 2,930 2,805 3,686 3,766
------- ------- ------- ------- -------- --------
Operating profit................. 6,688 8,845 8,754 3,916 7,788 18,246
Interest expense, net............ 3,210 4,975 8,008 8,023 10,770 10,119
------- ------- ------- ------- -------- --------
Income (loss) before income tax
and extraordinary loss.......... 3,478 3,870 746 (4,107) (2,982) 8,127
Income tax....................... (3,221) 1,484 270 (1,556) (1,139) 3,070
------- ------- ------- ------- -------- --------
Income (loss) before
extraordinary loss.............. 6,699 2,386 476 (2,551) (1,843) 5,057
Extraordinary loss, net of income
tax (3)......................... -- 204 -- 1,647 1,647 --
------- ------- ------- ------- -------- --------
Net income (loss)................ $ 6,699 $ 2,182 $ 476 $(4,198) $ (3,490) $ 5,057
======= ======= ======= ======= ======== ========
Pro forma net income (loss)
before extraordinary loss per
common share -- assuming
dilution (4).................... $ .65 $ .23 $ .05 $ (.25) $ (.18) $ .42
Pro forma net income (loss) per
common share -- assuming
dilution (4).................... .65 .21 .05 (.41) (.34) .42
Pro forma weighted average common
shares outstanding -- assuming
dilution (4).................... 10,377 10,389 10,433 10,223 10,219 12,119
<CAPTION>
THREE-MONTH PERIOD ENDED
DECEMBER 31,
-------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $29,547 $35,536
Cost of goods sold............... 21,149 25,760
Plant expansion
costs (1)....................... -- 266
------- -------
Gross profit..................... 8,398 9,510
Selling and marketing expense,
including product introduction
costs (2)....................... 4,453 2,631
General and administrative
expense......................... 693 1,188
------- -------
Operating profit................. 3,252 5,691
Interest expense, net............ 2,552 264
------- -------
Income (loss) before income tax
and extraordinary loss.......... 700 5,427
Income tax....................... 268 2,062
------- -------
Income (loss) before
extraordinary loss.............. 432 3,365
Extraordinary loss, net of income
tax (3)......................... -- 2,332
------- -------
Net income (loss)................ $ 432 $ 1,033
======= =======
Pro forma net income (loss)
before extraordinary loss per
common share -- assuming
dilution (4).................... $ .04 $ .19
Pro forma net income (loss) per
common share -- assuming
dilution (4).................... .04 .06
Pro forma weighted average common
shares outstanding -- assuming
dilution (4).................... 10,480 17,455
</TABLE>
(footnotes appear on following page)
10
<PAGE> 11
<TABLE>
<CAPTION>
NINE-MONTH
FISCAL YEAR ENDED FISCAL PERIOD TWELVE-MONTH FISCAL YEAR
DECEMBER 31, ENDED PERIOD ENDED ENDED
--------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1996 1996 1997
------- ------- ------- ------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (5)....................... $ 9,495 $12,408 $13,836 $ 8,994 $ 13,936 $ 25,502
EBITDA as a percent of
revenues(5)..................... 19.8% 17.9% 14.9% 9.8% 11.5% 19.7%
Revenue per employee (end of
period)......................... $ 244 $ 288 $ 361 NM $ 445 $ 432
Working capital excluding current
maturities of long-term debt
(average for the period) as a
percent of revenues............. 14.2% 12.0% 4.6% NM 7.0% 8.5%
Cash flows provided by (used in):
Operating activities............ $ 4,787 $ 3,690 $ 5,730 $(7,477) $ (2,960) $ 23,071
Investing activities............ (15,139) (25,431) (38,789) (3,041) (7,125) (28,428)
Financing activities............ 10,382 19,603 33,066 12,318 12,679 6,263
Earnings to fixed
charges......................... 1.87x 1.48x .92x .28x .57x 1.72x
<CAPTION>
THREE-MONTH PERIOD ENDED
DECEMBER 31,
-------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OTHER DATA:
EBITDA (5)....................... $ 4,957 $ 7,559
EBITDA as a percent of
revenues(5)..................... 16.8% 21.3%
Revenue per employee (end of
period)......................... NM NM
Working capital excluding current
maturities of long-term debt
(average for the period) as a
percent of revenues............. NM NM
Cash flows provided by (used in):
Operating activities............ $ 2,464 $ 3,291
Investing activities............ (829) (26,302)
Financing activities............ (1,775) 21,974
Earnings to fixed
charges......................... 12.68x 44.65x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(6)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and temporary investments.............................. $ 1,687 $ 2,212
Working capital............................................. 14,117 16,631
Total assets................................................ 184,933 187,447
Long-term debt, less current maturities..................... 35,638 7,735
Stockholders' equity........................................ 130,731 161,148
</TABLE>
- ---------------
(1) 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.
(2) 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 nine-month fiscal period ended September 30,
1996. Product introduction costs were incurred as follows: $8.1 million for
the nine-month fiscal period ended September 30, 1996, $8.1 million for the
twelve-month period ended September 30, 1996, $2.9 million for the fiscal
year ended September 30, 1997 and $1.5 million for the three-month period
ended December 31, 1996. There were no such costs for the three-month period
ended December 31, 1997.
(3) Represents losses due to early extinguishment of long-term debt, net of
income tax.
(4) Earnings per share is presented on a pro forma basis giving effect to the
consummation of the Recapitalization in connection with the Company's
October 1997 initial public offering. The earnings per share amounts prior
to the three-month period ended December 31, 1997 have been restated as
required to comply with Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share." For further discussion of earnings per share
and the impact of SFAS No. 128, see the Notes to the Financial Statements
beginning on page F-7.
(5) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, thereby removing the effect of certain non-cash charges on
income. Management believes that EBITDA is a meaningful measure of operating
performance, cash generation and ability to service debt. However, EBITDA
should not be considered as an alternative either to: (i) net earnings
(determined in accordance with U.S. generally accepted accounting principles
("GAAP")); (ii) operating cash flow (determined in accordance with GAAP); or
(iii) liquidity. There can be no assurance that the Company's calculation of
EBITDA is comparable to similarly-titled items reported by other companies.
(6) Adjusted to give effect to the issuance and sale by the Company of 1,000,000
shares of Class A Common Stock in the Offering at an offering price per
share of $30, after deducting underwriting discounts and commission and
estimated offering expenses and the application of the net proceeds to the
Company therefrom. See "Use of Proceeds" and "Capitalization."
11
<PAGE> 12
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating an
investment in the shares of Class A Common Stock offered hereby.
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 have commenced facility expansions to increase domestic production
capacity. In addition to AIPC's current capital expansion, management believes
that these capacity additions represent more than 200 million pounds in
aggregate. Dakota Growers increased the capacity of its durum wheat milling
operations in December 1996 and has completed a pasta production capacity
expansion increasing its total annual pasta production capacity to approximately
250 million pounds. Dakota Growers also recently acquired Primo Piatta, a
Minnesota-based pasta producer with annual production capacity of approximately
150 to 200 million pounds. Hershey recently added approximately 25 million
pounds of pasta capacity to its facility in Winchester, Virginia. Barilla is
currently building a pasta production plant near Ames, Iowa with an estimated
annual pasta capacity of between 130 and 150 million pounds scheduled for
completion in late 1998 or early 1999. Two major pasta producers have also
reduced their pasta production capacity. Borden closed or sold five of its ten
North American pasta plants in 1997, and Bestfoods eliminated its capacity of
approximately 180 million pounds. Significant 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.
The Department of Commerce currently 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. On
January 22, 1998, the Department of Commerce indicated that it intends to issue
preliminary findings not later than July 1, 1998, with final results of its
review expected by October 1, 1988. The Company cannot predict the outcome of
the Department of Commerce's review. See "Business -- Pasta Industry -- Pasta
Production Capacity" and "-- Competition."
12
<PAGE> 13
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, the fiscal year ended September 30, 1997
and the three-month period ended December 31, 1997, Sysco accounted for
approximately 33%, 27%, 27% and 26%, respectively, and sales to Sam's Club
accounted for approximately 23%, 19%, 22% and 21%, 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 Bestfoods.
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. In April 1997, the Company entered into a long-term manufacturing and
distribution agreement with Bestfoods (the "Bestfoods Agreement") that requires
Bestfoods 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 Bestfoods Agreement prevent AIPC from
producing and supplying competitors of Sysco and Bestfoods with certain pasta
products. Under the Sysco Agreement, the Company is restricted from supplying
pasta products to foodservice businesses other than Sysco. Without Bestfoods'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. See "Business -- Production and Supply
Agreements."
MANAGEMENT OF GROWTH, EXPANSION AND INTEGRATION OF BESTFOODS 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.
The Company is required to produce substantially all of Bestfoods Mueller's
brand pasta, which has averaged approximately 200 million pounds of pasta
annually over the last five years. The Company has successfully completed its
capital expansion of the South Carolina milling, production and distribution
facilities and expects the expansion of its Missouri facilities to be fully
completed in June 1998. Management believes this increase in capacity of
approximately 100% will allow AIPC to meet its significant volume and other
obligations under the Bestfoods Agreement and provide for future growth. There
can be no assurance, however, that such expanded facilities will be adequate to
meet the Bestfoods volume requirements and any future growth or that future
revenues from products produced at the expanded facilities will be sufficient to
recover the Company's investment in the expansion.
FAILURE TO IMPLEMENT HARVEST STATES ALLIANCE
In November 1997, the Company announced a letter of intent with Amber
Milling Company, a division of Harvest States, for the possible construction and
operation by AIPC of a new pasta production facility targeting the industrial
pasta market. The new facility would be located adjacent to the Harvest States
mill in Kenosha, Wisconsin. Reaching a final agreement is subject to several
pre-conditions, and the specific terms of the alliance have not been finalized.
There can be no assurance that the Company will be able to reach a definitive
agreement with Harvest States, that any construction pursuant to such an
agreement will be
13
<PAGE> 14
completed on schedule and within budget or that future revenues from products
produced at the new facility will be sufficient to recover the Company's
contemplated investment in the new facility. Any significant delay or cost
overrun in finalizing the terms of the Harvest States alliance or the
construction of the new facility could have a material adverse effect on the
Company's future 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,
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. 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. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Raw Materials and Supplies."
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, Darrel E. Bailey,
Senior Vice President of Institutional Sales and Marketing, David B. Potter,
Senior Vice President of Procurement and Jerry H. Dear, Senior Vice President of
Retail Markets. 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. See "Management."
14
<PAGE> 15
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 the Canadian Pacific Rail System. Durum wheat is also shipped to the
Company's mill and production facility in South Carolina from the northern
Midwest and southwest regions of the United States under a 10-year agreement
with the Norfolk Southern Railway Company. Under both agreements, the Company is
obligated to transport specified percentages of the Company's actual wheat
requirements and, in the event such requirements are not met, the Company must
reimburse the carrier for certain of its costs. The Company currently is in
compliance with such volume obligations. An extended interruption in the
Company's ability to ship durum wheat by railroad to its facilities 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. See "Business --
Milling and Production Processes" and "-- Raw Materials and Supplies."
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 AND STOCK PRICE
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 "Risk Factors -- Raw Materials"), plant expansion costs and
interest expenses. In addition, the market price of the Class A Common Stock
could fluctuate widely in response to various factors related to the Company,
its competitors and the financial markets in general, and unrelated to the
longer term operating performance of the Company. Such factors include, but are
not limited to, quarterly operating results, changes in financial analysts'
recommendations or earnings estimates and changes in general or regional
economic conditions. Further, the stock market has experienced price and volume
fluctuations in recent periods, and its volatility, even if unrelated to the
operating performance of the Company, may adversely affect the market price of
the Class A Common Stock.
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.
15
<PAGE> 16
SENSITIVITY TO INTEREST RATE FLUCTUATIONS; COVENANT RESTRICTIONS
As of March 31, 1998, the Company's indebtedness had a weighted average
interest rate of 7.38% and approximately 80%, or $49.0 million, of the Company's
indebtedness bore interest at variable rates. If the Company were to incur
additional amounts of variable-rate indebtedness in the future, 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. In connection with the amendment of the Company's Credit
Facility in October 1997, the Company entered into a $20 million fixed rate
swap.
The limitations contained in the agreements relating to the Company's
Credit Facility 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. See "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
YEAR 2000 COMPLIANCE
Many of the Company's computer software and hardware systems currently are
not, or will or may not be, able to read, calculate or output correctly using
dates after 1999, and such systems will require significant modifications in
order to be "Year 2000 compliant." This issue may adversely affect the
operations and financial performance of the Company because its computer systems
are an integral part of the Company's manufacturing and distribution activities
as well as its accounting and other information systems and because the Company
will have to divert financial resources and personnel to address this issue. The
Company has reviewed its computer hardware and software systems and has begun
upgrading those systems through modification or replacement. The Company
currently anticipates this upgrading to be completed during 1998.
Although the Company is not aware of any material operational impediments
associated with upgrading its computer hardware and software systems to be Year
2000 compliant, there can be no assurance that the upgrade of the Company's
computer systems will be completed on schedule, within budget, or will be free
of defects. If any such risks materialize, the Company could experience material
adverse consequences, material costs or both. Year 2000 compliance may also
adversely affect the operations and financial performance of the Company
indirectly by causing complications of, or otherwise affecting, the operations
of any one or more of the Company's suppliers and customers. The Company intends
to contact its significant suppliers and customers in the first half of calendar
year 1998 in an attempt to identify any potential Year 2000 compliance issues
with them. The Company is currently unable to anticipate the magnitude of the
operational or financial impact on the Company of Year 2000 compliance issues
with its suppliers and customers.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER, BY-LAW AND STATUTORY PROVISIONS
Charter and Bylaws. Certain provisions of the Company's Charter and
By-laws (the "By-laws") could delay or frustrate the removal of incumbent
directors and could make more difficult a merger, tender offer or proxy contest
involving the Company, even if such events could be beneficial, in the short
term, to the interests of the stockholders. For example, the Charter and By-laws
allow the Company to issue preferred stock with rights senior to those of the
Class A Common Stock without stockholder action, require the Board of Directors
to be divided into three classes serving three-year staggered terms, require
stockholder actions to be effected only at annual or special stockholder
meetings (unless the action to be effected by written consent of stockholders
and the taking of such action by written consent have been approved in advance
by the Board of Directors or unless the shareholder action involves the removal
of a director nominated pursuant to the Stockholders Agreement and the person
who nominated such director pursuant to the Stockholders Agreement votes in
favor of the removal of such director pursuant to such written consent), require
the affirmative vote of holders of two-thirds of the outstanding shares entitled
to vote to remove directors (unless the removal of a director has been requested
by a shareholder who designated such director as a nominee for election pursuant
to the Stockholders Agreement, in which case such director can be removed with
or without cause by the affirmative vote of holders of a simple majority of such
shares), require the affirmative vote of holders of at least 80% of the
outstanding shares to amend certain provisions of the Charter or to repeal or
amend the Company's By-laws and impose various other procedural requirements on
the taking of certain actions.
16
<PAGE> 17
Pursuant to the Charter, shares of preferred stock and Class A Common Stock
may be issued in the future without further stockholder approval and, in the
case of such preferred stock, upon such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may determine. The
issuance of preferred stock and Class A Common Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
transactions, could have the effect of making it more difficult for a third
party to acquire, or effectively preventing a third party from acquiring, a
majority of the outstanding Common Stock of the Company. See "Description of
Capital Stock -- Delaware Law and Certain Charter and By-Law Provisions."
Delaware Corporation Law. The Company also is subject to provisions of the
General Corporation Law of the State of Delaware, as amended (the "DGCL"), that
prohibit a publicly-held Delaware corporation from engaging in a broad range of
business combinations with a person who, together with affiliates and
associates, owns 15% of more of the corporation's common stock (an "Interested
Stockholder") for three years after the person became an Interested Stockholder,
unless the business combination is approved in a prescribed manner. Those
provisions could discourage or make more difficult a merger, tender offer or
similar transaction, even if favorable to the Company's stockholders. See
"Description of Capital Stock -- Delaware Law and Certain Charter and By-Law
Provisions."
Stockholders Agreement. In addition, the Stockholders Agreement grants the
Morgan Stanley Stockholders the right to designate one nominee to the Board of
Directors.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon consummation of the Offering, the Company will have outstanding an
aggregate of 17,978,680 shares of Common Stock, assuming no exercise of
outstanding options. Of these shares, all of the 5,400,000 shares sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, unless such shares are purchased by "affiliates" of
the Company as that term is defined in Rule 144 under the Securities Act
("Affiliates"). Of the remaining 12,578,680 shares, 3,493,680 shares of Common
Stock held by certain existing stockholders are "restricted securities" as that
term is defined in Rule 144 under the Securities Act ("Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 or 701 promulgated
under the Securities Act. Beginning 90 days after the date of this Prospectus,
3,492,048 shares will be eligible for sale pursuant to Rule 144, provided the
conditions of Rule 144 are met, upon expiration of the lock-up agreements at
least 90 days after the date of this Prospectus. All officers, directors and
certain stockholders and holders of vested options of the Company have agreed
not to sell or otherwise transfer any shares of Common Stock or any other
securities of the Company for a period of at least 90 days after the date of
this Prospectus. Sales, or the possibility of sales, of Common Stock by certain
of the Company's existing stockholders, whether in connection with the exercise
of registration rights or otherwise, could adversely affect the market price of
the Company's Class A Common Stock. The Company has granted the stockholders who
are parties to the Stockholders Agreement, including the Morgan Stanley
Stockholders, certain "demand" and "piggyback" registration rights with respect
to the Common Stock owned by such stockholders. See "Certain Relationships and
Related Transactions -- Stockholders Agreement" and "Shares Eligible for Future
Sale."
ABSENCE OF DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock
and currently intends to retain all available funds for use in the operation and
expansion of its business. The Company does not anticipate that any cash
dividends on the Common Stock will be declared or paid in the foreseeable
future. See "Dividend Policy."
17
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,000,000 shares of Class
A Common Stock offered by the Company are estimated to be approximately $27.9
million (after deducting underwriting discounts and commissions and estimated
offering expenses), based on an offering price per share of $30. The Company
intends to use approximately $27.9 million of the net proceeds from the Offering
to repay a portion of its outstanding indebtedness under its Credit Facility and
for general corporate purposes. The Company will not receive any of the proceeds
from the sale of Class A Common Stock by the Selling Stockholders. See
"Underwriters."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Class A Common Stock of the Company is listed on the New York Stock
Exchange under the symbol PLB. The Class A Common Stock commenced trading on the
New York Stock Exchange on October 9, 1997. The following table sets forth, for
the periods indicated, the range of high and low reported sales prices per share
of the Class A Common Stock, as reported on the New York Stock Exchange
Composite Transactions Tape:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter............................................. $26 $19 1/4
Second Quarter............................................ 37 1/4 23 1/4
Third Quarter (through April 30, 1998).................... 36 5/8 30
</TABLE>
On April 30, 1998, the reported last sale price for the Class A Common
Stock as reported on the New York Stock Exchange Composite Transactions Tape was
$31 per share. As of April 30, 1998, the Company had 16,777,418 shares of Class
A Common Stock outstanding held by approximately 5,600 stockholders of record as
of the Company's record date of December 29, 1997.
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
Credit Facility contain certain provisions which effectively prohibit 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.
18
<PAGE> 19
CAPITALIZATION
The following table sets forth information regarding the capitalization of
the Company as of December 31, 1997, and as adjusted to give effect to the
issuance and sale of 1,000,000 shares of Class A Common Stock offered by the
Company hereby and the application of the net proceeds therefrom, which are
estimated to be approximately $27.9 million (after deducting underwriting
discounts and commissions and estimated offering expenses), at an offering price
per share of $30. The following table should be read in conjunction with the
Financial Statements, including the Notes thereto, appearing elsewhere in this
Prospectus. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Capital Stock
- -- General."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and capital lease obligations, current
portion................................................... $ 913 $ 913
======== ========
Long-term debt and capital lease obligations, less current
portion:
Long-term debt(2)......................................... $ 29,000 $ 1,097
Capital lease obligations................................. 6,638 6,638
-------- --------
Total long-term debt and capital lease obligations,
less current portion.................................. 35,638 7,735
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding and as
adjusted............................................... -- --
Class A Common Stock, $.001 par value, 75,000,000 shares
authorized and 16,776,056 shares issued and outstanding
and 17,789,680 shares issued and outstanding, as
adjusted(3)............................................ 16 17
Class B Common Stock, $.001 par value, 25,000,000 shares
authorized, no shares issued and outstanding and no
shares issued and outstanding, as adjusted............. -- --
Additional paid-in capital................................ 142,008 172,424
Notes receivable from officers............................ (273) (273)
Accumulated deficit....................................... (11,020) (11,020)
-------- --------
Total stockholders' equity............................. 130,731 161,148
-------- --------
Total capitalization................................. $166,369 $168,883
======== ========
</TABLE>
- ---------------
(1) Adjusted to give effect to the issuance and sale by the Company of 1,000,000
shares of Class A Common Stock in the Offering at an offering price per
share of $30, after deducting underwriting discounts and commissions and
estimated offering expenses and the application of the net proceeds to the
Company therefrom. Also included is the exercise of options to obtain Class
A Common Stock which was subsequently sold by Messrs. Schroeder, Webster and
Abreo as a part of this Offering. See "Use of Proceeds."
(2) The Company intends to apply the net proceeds to repay a portion of its
outstanding indebtedness under its Credit Facility. As of March 31, 1998,
the Company had $49 million outstanding under the Credit Facility.
(3) Does not include 1,976,402 shares of Class A Common Stock issuable upon
exercise of stock options granted under the Company's three stock option
plans, of which options to purchase 1,445,394 shares are currently
outstanding but not exercisable and options to purchase 531,008 shares are
currently outstanding and exercisable. See "Management -- Stock Option
Plans."
19
<PAGE> 20
SELECTED FINANCIAL AND OTHER DATA
The selected statement of operations data presented below for the fiscal
years ended December 31, 1995, the nine-month fiscal period ended September 30,
1996 and the fiscal year ended September 30, 1997 are derived from, and are
qualified by reference to, the Financial Statements of the Company, and Notes
thereto, audited by Ernst & Young LLP, independent auditors, whose report on the
fiscal year ended December 31, 1995, the nine-month fiscal period ended
September 30, 1996 and the fiscal year ended September 30, 1997, appears
elsewhere in this Prospectus. The selected statement of operations data for the
fiscal 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 audited
financial statements of the Company not included herein. The selected statement
of operations data for the twelve-month period ended September 30, 1996, and the
three-month periods ended December 31, 1996 and 1997, and the balance sheet data
as of December 31, 1996 and 1997 have been derived from the Company's unaudited
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 Company's results of operations and financial position of the Company for
such periods and as of such dates. The statement of operations data of the
Company for the twelve-month period ended September 30, 1996 are included herein
only for comparison purposes. In 1996, 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 ended September 30, 1996, 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 of each year. For purposes of this
Prospectus, the 1996 fiscal year is described as the nine-month fiscal period
ended September 30, 1996. The selected financial and other data set forth below
should be read in conjunction with "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 Prospectus.
<TABLE>
<CAPTION>
NINE-MONTH THREE-MONTH PERIOD
FISCAL YEAR ENDED FISCAL PERIOD TWELVE-MONTH FISCAL YEAR ENDED
DECEMBER 31, ENDED PERIOD ENDED ENDED DECEMBER 31,
------------------------------ SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------------
1993 1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- ------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $ 47,872 $ 69,465 $ 92,903 $92,074 $121,149 $129,143 $ 29,547 $ 35,536
Cost of goods sold.... 35,081 54,393 73,851 68,555 91,230 93,467 21,149 25,760
Plant expansion costs
(1)................. 1,171 484 2,065 -- -- -- -- 266
-------- -------- -------- ------- -------- -------- -------- --------
Gross profit.......... 11,620 14,588 16,987 23,519 29,919 35,676 8,398 9,510
Selling and marketing
expense, including
product introduction
costs (2)........... 2,883 3,792 5,303 16,798 18,445 13,664 4,453 2,631
General and
administrative
expense............. 2,049 1,951 2,930 2,805 3,686 3,766 693 1,188
-------- -------- -------- ------- -------- -------- -------- --------
Operating profit...... 6,688 8,845 8,754 3,919 7,788 18,246 3,252 5,691
Interest expense,
net................. 3,210 4,975 8,008 8,023 10,770 10,119 2,552 264
-------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before
income tax and
extraordinary
loss................ 3,478 3,870 746 (4,107) (2,982) 8,127 700 5,427
Income tax............ (3,221) 1,484 270 (1,556) (1,139) 3,070 268 2,062
-------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before
extraordinary
loss................ 6,699 2,386 476 (2,551) (1,843) 5,057 432 3,365
Extraordinary loss,
net of income tax
(3)................. -- 204 -- 1,647 1,647 -- -- 2,332
-------- -------- -------- ------- -------- -------- -------- --------
Net income (loss)..... $ 6,699 $ 2,182 $ 476 $(4,198) $ (3,490) $ 5,057 $ 432 $ 1,033
======== ======== ======== ======= ======== ======== ======== ========
Pro forma net income
(loss) before
extraordinary loss
per common share --
assuming dilution
(4)................. $ .65 $ .23 $ .05 $ (.25) $ (.18) $ .42 $ .04 $ .19
Pro forma net income
(loss) per common
share -- assuming
dilution (4)........ .65 .21 .05 (.41) (.34) .42 .04 .06
Pro forma weighted
average common
shares outstanding
-- assuming dilution
(4)................. 10,377 10,389 10,433 10,223 10,219 12,119 10,480 17,455
(footnotes appear on following page)
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
NINE-MONTH THREE-MONTH PERIOD
FISCAL YEAR ENDED FISCAL PERIOD TWELVE-MONTH FISCAL YEAR ENDED
DECEMBER 31, ENDED PERIOD ENDED ENDED DECEMBER 31,
------------------------------ SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------------
1993 1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- ------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (5)............ $ 9,495 $ 12,408 $ 13,836 $ 8,994 $ 13,936 $ 25,502 $ 4,957 $ 7,559
EBITDA as a percent of
revenues (5)........ 19.8% 17.9% 14.9% 9.8% 11.5% 19.7% 16.8% 21.3%
Revenue per employee
(end of period)..... $ 244 $ 288 $ 361 NM $ 445 $ 432 NM NM
Working capital
excluding current
maturities of
long-term debt
(average for the
period) as a percent
of revenues......... 14.2% 12.0% 4.6% NM 7.0% 8.5% NM NM
Cash flows provided by
(used in):
Operating
activities........ $ 4,787 $ 3,690 $ 5,730 $(7,477) $ (2,960) $ 23,071 $ 2,464 $ 3,291
Investing
activities........ (15,139) (25,431) (38,789) (3,041) (7,125) (28,428) (829) (26,302)
Financing
activities........ 10,382 19,603 33,066 12,318 12,679 6,263 (1,775) 21,974
Earnings to fixed
charges............. 1.87x 1.48x .92x .28x .57x 1.72x 12.68x 44.65x
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and temporary
investments......... $ 2,149 $ 11 $ 18 $ 1,818 $ 1,818 $ 2,724 $ 1,678 $ 1,687
Working capital....... 3,077 4,830 6,632 (1,601) (1,601) 12,188 (1,965) 14,117
Total assets.......... 66,337 93,629 135,424 141,688 141,688 158,175 137,974 184,933
Long-term debt, less
current
maturities.......... 40,024 62,375 97,452 93,284 93,284 100,137 92,143 35,638
Stockholders'
equity.............. 16,973 19,401 20,067 15,969 15,969 42,984 16,402 130,731
</TABLE>
- ---------------
(1) 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.
(2) 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 nine-month fiscal period ended September 30,
1996. Product introduction costs were incurred as follows: $8.1 million for
the nine-month fiscal period ended September 30, 1996, $8.1 million for the
twelve-month period ended September 30, 1996, $2.9 million for the fiscal
year ended September 30, 1997 and $1.5 million for the three-month period
ended December 31, 1996. There were no such costs for the three-month period
ended December 31, 1997.
(3) Represents losses due to early extinguishment of long-term debt, net of
income tax.
(4) Earnings per share is presented on a pro forma basis giving effect to the
consummation of the Recapitalization in connection with the Company's
October 1997 initial public offering. The earnings per share amounts prior
to the three-month period ended December 31, 1997 have been restated as
required to comply with Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share." For further discussion of earnings per share
and the impact SFAS No. 128, see the Notes to the Financial Statements
beginning on page F-7.
(5) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, thereby removing the effect of certain non-cash charges on
income. Management believes that EBITDA is a meaningful measure of operating
performance, cash generation and ability to service debt. However, EBITDA
should not be considered as an alternative either to: (i) net earnings
(determined in accordance with U.S. generally accepted accounting principles
("GAAP")); (ii) operating cash flow (determined in accordance with GAAP); or
(iii) liquidity. There can be no assurance that the Company's calculation of
EBITDA is comparable to similarly-titled items reported by other companies.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Financial Statements
of the Company and the Notes thereto included elsewhere in this Prospectus. For
a discussion of important factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors."
In 1996, 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, 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.
For purposes of this Prospectus, the 1996 fiscal year is described as the
nine-month fiscal period ended September 30, 1996. The statement of operations
data of the Company for the nine-month period ended September 30, 1995, the
twelve-month period ended September 30, 1996, the calendar year ended December
31, 1996 and the three-month period ended December 31, 1996 are included herein
only for comparison purposes.
OVERVIEW
AIPC is the second 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 generates its revenues in two customer markets: Retail and
Institutional. The Retail market revenues include the revenues from sales of the
Company's pasta products to customers who resell the Company's pasta in retail
channels. These revenues include sales to club stores and grocery retailers,
encompass sales of the Company's private label and branded products, and include
sales to Bestfoods. The Institutional market revenues include the revenues from
product sales to customers who use the Company's pasta as an ingredient in food
products or customers who resell the Company's pasta in the foodservice market
such as Sysco. The Institutional market also includes revenues from
opportunistic sales to government agencies and other customers which the Company
pursues periodically when capacity is available ("Contract Sales") to increase
production volumes and thereby lower average unit costs. Average sales prices in
the Retail and Institutional markets differ depending on customer-specific
packaging and raw material requirements, product manufacturing complexity and
other service requirements. Generally, average retail sales prices are higher
than institutional sales prices. Average retail and institutional prices vary
due to changes in the relative share of customer revenues and item specific
sales volumes (i.e., product sales mix). Revenues are reported net of cash
discounts, pricing allowances and product returns.
The Company seeks to develop strategic customer relationships with food
industry leaders that have substantial pasta requirements. The Company has
long-term supply agreements with Sysco and Bestfoods and other arrangements with
food industry leaders, such as Sam's Club, that provide for the "pass-through"
of direct material cost changes as pricing adjustments. The pass-throughs are
generally limited to actual changes in cost and, as a result, impact marginal
profitability in periods of changing costs and prices. The pass-throughs are
generally effective 30 to 90 days following such costs changes and thereby
significantly reduce the long-term exposure of the Company's operating results
to the volatility of raw material costs. Management estimates that over 70% of
the Company's revenues in fiscal 1998 will be pursuant to long-term supply
agreements and other non-contractual customer arrangements which provide for the
pass-through of changes in durum wheat costs. Management believes that this
percentage will increase as the Company generates revenue from Bestfoods. See
"Risk Factors -- Raw Materials."
The Company's Pasta LaBella flavored pasta products are sold at prices
which are significantly higher than the Company's non-flavored products as a
result of higher product and distribution costs and its premium brand position.
In the second quarter of calendar 1996, the Company began distribution of Pasta
LaBella flavored pasta into the U.S. Retail grocery market. This initiative was
supported by a comprehensive trade and consumer
22
<PAGE> 23
product introduction program, including the payment of product placement or
"slotting" fees to retailers, and an on-going selling and marketing program
required to support branded retail sales. The Company achieved distribution in
approximately 40% of the U.S. Retail grocery market and ceased to incur
additional product introduction costs in the first quarter of fiscal 1997. The
Company did not incur such product introduction costs prior to the calendar year
ended December 31, 1996. Product introduction costs included in selling and
marketing expense were incurred as follows: $9.6 million for the calendar year
ended December 31, 1996, $8.1 million for the nine-month fiscal period ended
September 30, 1996, $8.1 million for the twelve-month period ended September 30,
1996, $2.9 million for the fiscal year ended September 30, 1997 and $1.5 million
for the three-month period ended December 31, 1996. The Company did not incur
product introduction costs during the three-month period ended December 31,
1997.
The Company's cost of goods sold consists primarily of raw materials,
packaging, manufacturing (including depreciation) and distribution costs. A
significant portion of the Company's cost of goods sold is durum wheat. The
Company purchases durum wheat on the open market and, consequently, is subject
to fluctuations in cost. The Company manages its durum cost risk through durum
cost "pass-through" agreements in long-term contracts and other noncontractual
arrangements with its customers and advance purchase contracts for durum wheat
which are generally less than six months' duration. The following chart
illustrates the fluctuation in the price of durum wheat during the years
1977-1997:
<TABLE>
<S> <C>
3.37 i
3.66 i
4.73 i
6.81 i
4.61 i
4.25 i
4.83 i
4.45 i
4.07 i
3.57 i
4.13 i
5.53 i
4.25 i
3.48 ii
3.61 i
3.88 i
5.84 i
6.28 i
7.21 i
5.65 i
6.3 i
i
</TABLE>
The durum cost volatility and the timing and amount of sales price
adjustments impacted profit and margins over the 1994-1997 periods and led to
increases in the Company's costs beginning in the first quarter of its 1998
fiscal year.
The Company's capital asset strategy is to achieve low-cost production
through vertical integration and investment in the most current pasta-making
assets and technologies. The manufacturing- and distribution-
23
<PAGE> 24
related capital assets which have been or will be acquired to support this
strategy are depreciated over their respective economic lives. Because of the
capital intensive nature of the Company's business and its current and future
facilities expansion plans, management believes its depreciation expense for
production and distribution assets may be higher than that of many of its
competitors. Depreciation expense is a component of inventory cost and cost of
goods sold. 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.
Selling and marketing expense incurred to support retail sales are higher
than those for institutional sales, as the Company incurs external broker
commissions, and promotional and other marketing expenses in addition to the
costs incurred by its internal retail sales force. The Company is not
responsible for selling and marketing expense related to the Bestfoods
Agreement. Consequently, the Company expects prospective selling and marketing
expense as a percentage of revenues to decrease relative to historical levels as
the Company generates additional Bestfoods revenues in 1998.
At September 30, 1997, the Company had a net operating loss carryforward of
approximately $26.8 million for federal income tax purposes. The net operating
loss carryforward resulted principally from the Company's significant tax
depreciation deductions related to its capital assets. Subject to certain
limitations, the Company expects this net operating loss carryforward will be
available to offset future taxable income.
RECENT DEVELOPMENTS
On April 3, 1998, AIPC completed its second fiscal quarter. For the
three-month period ended March 31, 1998, the Company reported net income of $.23
per share assuming dilution.
Revenues for the three-month period ended March 31, 1998 increased $13.9
million, or 43.3% to $46.0 million, from $32.1 million for the three-month
period ended March 31, 1997. The increase was primarily due to volume growth
from existing and new customers, including Bestfoods, favorable changes in sales
mix, and increases in average sales prices related to the pass through of higher
durum wheat costs.
Gross profit for the three-month period ended March 31, 1998 increased $2.7
million, or 32.1%, to $11.1 million, from $8.4 million for the three-month
period ended March 31, 1997, which was generally related to the growth in
revenues. The gross margin percentage for the three-month period ended March 31,
1998 decreased to 24.1% from 26.2% for the three-month period ended March 31,
1997. The expected decrease was primarily due to changes in sales mix,
specifically, the lower gross margin on Bestfoods Mueller's pasta sales, plant
expansion costs and higher durum wheat costs.
Operating profit for the three-month period ended March 31, 1998 increased
$2.4 million, or 54.5%, to $6.8 million, from $4.4 million for the three-month
period ended March 31, 1997. Second quarter operating profit as a percentage of
revenues improved to 14.8%, a 1.1% gain over 1997. These improvements reflect
the gross profit gains and the absence of product introduction costs, which were
$.6 million in the three-month period ended March 31, 1997.
24
<PAGE> 25
The following table sets forth certain statement of operations data of the
Company for the three-month period ended March 31, 1998, compared to the
three-month period ended March 31, 1997:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
ENDED
MARCH 31,
--------------------------
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Retail.................................................... $17,700 $32,057
Institutional............................................. 14,417 13,977
------- -------
Total revenues............................................ 32,117 46,034
Cost of goods sold.......................................... 23,729 34,506
Plant expansion costs....................................... -- 421
Gross profit................................................ 8,388 11,107
Selling and marketing expenses(1)........................... 2,996 3,118
General and administrative expenses......................... 1,016 1,185
------- -------
Operating profit............................................ 4,376 6,804
Interest expense, net....................................... 2,740 225
------- -------
Income before income tax expense............................ 1,636 6,579
Income tax provision........................................ 615 2,500
------- -------
Net income.................................................. $ 1,021 $ 4,079
======= =======
Earnings per common share:
Net income per common share............................... $ .10 $ .24
======= =======
Weighted average common shares outstanding.................. 10,230 16,777
======= =======
Earnings per common share -- assuming dilution:
Net income per common share............................... $ .10 $ .23
======= =======
Weighted average common shares outstanding.................. 10,335 17,572
======= =======
</TABLE>
- ---------------
(1) Includes product introduction costs related to the 1996 retail introduction
of Pasta LaBella Flavored Pasta of $.6 million for the period ended March
31, 1997. There were no such costs in the current period.
25
<PAGE> 26
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. This table should be read in conjunction with the Financial
Statements and related Notes thereto appearing elsewhere in this Prospectus:
<TABLE>
<CAPTION>
NINE-MONTH THREE-MONTH
FISCAL YEAR TWELVE-MONTH NINE-MONTH FISCAL PERIOD TWELVE-MONTH FISCAL YEAR PERIODS ENDED
ENDED PERIOD ENDED PERIOD ENDED ENDED PERIOD ENDED ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------
1995 1996 1995 1996 1996 1997 1996 1997
------------ ------------ ------------- ------------- ------------- ------------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Retail............. 53.1% 59.6% 51.4% 60.7% 59.5% 56.7% 56.3% 63.4%
Institutional...... 46.9 40.4 48.6 39.3 40.5 43.3 43.7 36.6
----- ----- ----- ----- ----- ----- ----- -----
Total revenues....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- ----- -----
Cost of goods sold... 79.5 73.8 80.8 74.5 75.3 72.4 71.6 72.5
Gross profit before
plant expansion
costs.............. 20.5 26.2 19.2 25.5 24.7 27.6 28.4 27.5
Plant expansion
costs.............. 2.2 -- 2.6 -- -- -- -- .7
----- ----- ----- ----- ----- ----- ----- -----
Gross profit......... 18.3 26.2 16.6 25.5 24.7 27.6 28.4 26.8
Selling and marketing
expense, including
product
introduction
costs.............. 5.7 17.5 5.7 18.2 15.2 10.6 15.1 7.4
General and
administrative
expense............ 3.2 2.9 3.2 3.0 3.0 2.9 2.3 3.4
----- ----- ----- ----- ----- ----- ----- -----
Operating profit..... 9.4 5.8 7.7 4.3 6.5 14.1 11.0 16.0
Interest expense,
net................ 8.6 8.7 8.2 8.7 8.9 7.8 8.6 .7
Income tax........... .3 (1.1) (.2) (1.7) (.9) 2.4 .9 5.8
Extraordinary loss,
net of income
tax................ -- 1.4 -- 1.8 1.4 -- -- 6.6
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).... .5% (3.2)% (.3)% (4.5)% (2.9)% 3.9% 1.5% 2.9%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
THREE-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED TO THE THREE-MONTH
PERIOD ENDED
DECEMBER 31, 1996
Revenues. Revenues increased $6.0 million, or 20.3%, to $35.5 million for
the three-month period ended December 31, 1997, from $29.5 million for the
three-month period ended December 31, 1996. The increase for the three-month
period ended December 31, 1997 was primarily due to increases in unit volume,
favorable changes in sales mix, and increases in average sales prices related to
the pass through of higher durum wheat costs. Approximately $2.8 million in
revenues related to initial shipments of Mueller's brand pasta to Bestfoods.
Management expects continued increases in revenues as a result of the Company's
long-term supply agreement with Bestfoods.
Revenues for the Retail market increased $5.9 million, or 35.5%, to $22.5
million for the three-month period ended December 31, 1997, from $16.6 million
for the three-month period ended December 31, 1996. The increase primarily
reflects gains in private label volumes and Bestfoods volumes and average sales
price increases related to the pass through of higher durum wheat costs offset
by lower sales volumes of Pasta LaBella flavored pasta as the prior period
included heavy introductory "pipeline" shipments.
Revenues for the Institutional market increased $.1 million, or .8%, to
$13.0 million for the three-month period ended December 31, 1997, from $12.9
million for the three-month period ended December 31, 1996.
26
<PAGE> 27
This increase was primarily a result of increases in average sales prices
related to the pass through of higher durum wheat costs offset by decreases in
spot contract business volumes due to capacity constraints in the current
quarter. Non-contract unit volumes in the Institutional market generally
remained consistent between periods.
Gross Profit. Gross profit increased $1.1 million, or 13.1%, to $9.5
million for the three-month period ended December 31, 1997, from $8.4 million
for the three-month period ended December 31, 1996. This increase is generally
related to revenue growth. Gross profit as a percentage of revenues decreased to
26.8% for the three-month period ended December 31, 1997 from 28.4% for the
three-month period ended December 31, 1996. The decrease in gross profit as a
percentage of revenues relates to generally lower gross margin Bestfoods
volumes, lower sales volumes of higher margin flavored pasta products, plant
expansion costs, and higher durum wheat costs. Management expects continued
increases in gross profit as a result of continued revenue increases. However,
management expects gross profit as a percentage of revenues to continue to
decrease based on the anticipated higher Bestfoods volumes and related revenue
share and further plant expansion costs.
Selling and Marketing Expense. Selling and marketing expense decreased
$1.9 million, or 42.2%, to $2.6 million for the three-month period ended
December 31, 1997, from $4.5 million for the three-month period ended December
31, 1996. Selling and marketing expense as a percentage of revenues decreased to
7.4% for the three-month period ended December 31, 1997, from 15.1% for the
three-month period ended December 31, 1996. The decrease was primarily due to
the absence of product introduction costs incurred in the Company's fiscal 1997
retail introduction of Pasta LaBella flavored pasta. The Company did not incur
product introduction costs for the three-month period ended December 31, 1997,
compared to $1.4 million of such costs for the three-month period ended December
31, 1996. The decrease in product introduction costs was due to the completion
of the flavored pasta 1997 launch program.
General and Administrative Expense. General and administrative expense
increased $.5 million, or 71.4%, to $1.2 million for the three-month period
ended December 31, 1997, from $.7 million for the three-month period ended
December 31, 1996, and increased as a percentage of revenues to 3.4% for the
three-month period ended December 31, 1997 from 2.4% for the three-month period
ended December 31, 1996. The majority of the increase in general and
administrative expense relates to the one-time realization of a $.3 million
property tax abatement in South Carolina during the three-month period ended
December 31, 1996. The benefit was realized in 1996 as a result of the Company's
reaching certain capital expansion levels in Columbia, S.C. which qualified the
Company for incremental property tax abatements.
Operating Profit. Operating profit increased $2.4 million, or 72.7%, to
$5.7 million for the three-month period ended December 31, 1997, from $3.3
million for the three-month period ended December 31, 1996, and increased as a
percentage of revenues to 16.1% for the three-month period ended December 31,
1997, from 11.2% for the three-month period ended December 31, 1996 as a result
of the factors discussed above.
Interest Expense. Interest expense decreased $2.3 million, or 88.5% to $.3
million, for the three-month period ended December 31, 1997, from $2.6 million
for the three-month period ended December 31, 1996. The decrease was primarily
the result of reduced borrowings under the Company's Credit Facility as a result
of the $86.7 million in net proceeds realized from the Company's October 1997
initial public offering of Class A Common Stock.
Income Tax. Income tax expense increased $1.8 million, or 600.0%, to $2.1
million for the three-month period ended December 31, 1997, from $0.3 million
for the three-month period ended December 31, 1996, and reflects an effective
income tax rate of approximately 38%.
Extraordinary Item. During the three-month period ended December 31, 1997,
the Company incurred a $2.3 million (net of tax) extraordinary loss due to the
write-off of deferred debt issuance costs in conjunction with the extinguishment
and restructuring of the Company's principal bank credit agreement. There was no
such item for the three-month period ended December 31, 1996.
Net Income. Net income increased $.6 million, or 150.0%, to $1.0 million
for the three-month period ended December 31, 1997, from $0.4 million for the
three-month period ended December 31, 1996. Diluted
27
<PAGE> 28
earnings per common share before the extraordinary item was $.19 per share for
the three-month period ended December 31, 1997 compared to $.04 per share for
the three-month period ended December 31, 1996. Diluted earnings per share after
the extraordinary item was $0.06 per share for the three-month period ended
December 31, 1997 compared to $.04 per share in the comparable prior year
period.
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 Bestfoods.
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
$4.7 million, or 25.5%, 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 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 2.7%, to $3.8 million for the fiscal year ended
September 30, 1997, from $3.7 million for the twelve-month period ended
September 30, 1996. General and administrative expense as a percentage of
revenues decreased to 2.9% for the fiscal year ended September 30, 1997 from 3%
for the twelve-month period ended September 30, 1996.
Operating Profit. Operating profit increased $10.4 million, or 133.3% to
$18.2 million for the fiscal year ended September 30, 1997, from $7.8 million
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 for the
twelve-month period ended September 30, 1996, 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.
Interest Expense. Interest expense for the fiscal year ended 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
28
<PAGE> 29
decrease was primarily the result of reduced borrowings under the Company's
prior 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 increased $4.2 million, or 381.8%, to $3.1 million
for the fiscal year ended September 30, 1997, from $(1.1) million for the
twelve-month period ended September 30, 1996, and reflects an effective income
tax rate of approximately 38%.
Extraordinary Item. During the twelve-month 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 year ended September 30, 1997.
Net Income. Net income increased $8.6 million, or 245.7%, to $5.1 million
for the fiscal year ended September 30, 1997, from $(3.5) million for the
twelve-month period ended September 30, 1996. Diluted earnings per common share
before the extraordinary item was $.42 per share for the fiscal year ended
September 30, 1997 compared to $(.18) per share for the twelve-month period
ended September 30, 1996. Diluted earnings per share after the extraordinary
item was $.42 per share for the fiscal year ended September 30, 1997 compared to
$(.34) per share in the comparable prior year period.
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 foodservice 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
29
<PAGE> 30
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 $.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. General and administrative expense as a percentage of
revenues decreased to 3.0% for the nine-month fiscal period ended September 30,
1996 from 3.2% for the nine-month period ended September 30, 1995. 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 foodservice
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
30
<PAGE> 31
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 $.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 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 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 1996 from $.3 million for the fiscal year ended 1995, and reflects an
effective income tax rate of approximately 38% in both periods.
Extraordinary Item. During 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 $.5 million for the fiscal year
ended 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash provided by operations,
sales of equity and borrowings under its Credit Facility. Historically, the
Company has generated liquidity through the sale of equity, which proceeds have
generally been used to reduce debt and finance capital expansions. The Company
received approximately $86.7 million in net proceeds from the October 1997
initial public offering of its Class A Common Stock, which was used to reduce
indebtedness. Cash and temporary investments totaled $1.7 million, and working
capital totaled $14.1 million on December 31, 1997.
The Company's net cash provided by operating activities totaled $3.3
million for the three-month period ended December 31, 1997 compared to $2.5
million for the three-month period ended December 31, 1996. This increase of $.8
million was primarily due to higher net income and the non-cash extraordinary
loss due to early extinguishment of debt, offset by an increase in working
capital.
31
<PAGE> 32
Cash used in investing activities principally relates to the Company's
investments in manufacturing, distribution and milling assets. Capital
expenditures were $26.3 million for the three-month period ended December 31,
1997 compared to $.8 million in the comparable prior year period. 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 June
1998. The increased spending in 1995 was primarily the result of the
construction of the Company's South Carolina manufacturing and distribution
facilities and Missouri distribution center. The increase in spending for the
three-month period ended December 31, 1997 was a result of the Company's
expenditures toward its $86.0 million South Carolina and Missouri capital
expansion programs, which the Company expects to complete during fiscal year
1998. Total spending to date related to the aforementioned capital expansion
programs is approximately $71 million. The Company has current commitments for
$35 million in raw material purchases for fiscal year 1998 and has approximately
$15 million in expenditures remaining under the previously referenced $86.0
million capital expansion program. The Company anticipates the capital expansion
programs will be fully funded by the end of fiscal year 1998. The Company
expects to fund these commitments from operations and borrowings under the
Credit Facility. The Credit Facility currently has a credit commitment of $150.0
million and has scheduled commitment reductions which begin at the end of fiscal
year 1999. At this time, the current and projected borrowings under the Credit
Facility do not exceed the facility's available 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.
Net cash provided by financing activities was $22.0 million for the
three-month period ended December 31, 1997 compared to net cash used of $1.8
million for the three-month period ended December 31, 1996. The $22.0 million is
primarily a result of: (i) $86.7 million in net proceeds from the October 1997
initial public offering; (ii) $21.8 million proceeds from issuance of debt (net
of $.3 million deferred debt issuance costs) offset by (iii) $86.2 million debt
repayment.
The Company plans to use the net proceeds from the Offering to pay a
portion of the outstanding indebtedness under the Company's Credit Facility. 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 entered into an amended and restated credit agreement (the
"Credit Agreement") on October 17, 1997, which 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. Interest is to be charged at
either the base rate (higher of prime or 1/2 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
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.
Management believes that net cash provided by operating activities, net
cash provided by financing activities and the net proceeds of the Offering will
be sufficient to meet the Company's expected capital and liquidity needs for the
foreseeable future.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components. Comprehensive income
includes all changes in equity during a period except those due to owner
investments and distributions. It includes items such as foreign currency
translation adjustments, and unrealized gains and losses on available-for-sale
securities. This standard does not change the display or components of
present-day net income. SFAS 130 is not expected to have a material impact on
the Company.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This new standard requires
companies to disclose segment data based on how management makes decisions about
allocating resources to segments and how it measures segment performance. SFAS
131 requires companies to disclose a measure of segment profit or loss
(operating income, for example), segment assets, and reconciliations to
consolidated totals. It also requires entity-wide disclosures abut a company's
products and services, its major customers and the material countries in which
it holds assets and reports revenues. This statement is not expected to have a
significant effect on the Company.
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.
YEAR 2000 COMPLIANCE
The Company has reviewed its computer hardware and software systems and has
recently begun upgrading those systems through modification or replacement. The
Company currently anticipates this upgrading to be completed during 1998.
The Company expects to incur approximately $100,000 in each fiscal quarter
beginning with the second quarter of 1998 through the first quarter of 1999 to
resolve the Company's Year 2000 compliance issues. All expenses incurred in
connection with Year 2000 compliance will be expensed as incurred, other than
acquisitions of new software or hardware, which will be capitalized. See "Risk
Factors -- Year 2000 Compliance."
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BUSINESS
OVERVIEW
AIPC is the second 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 is on target to nearly double
its capacity in June 1998 with the completion of the expansion of its Missouri
facility. The Company's revenue and operating income were $135.1 million and
$20.7 million, respectively, for the twelve-month period ended December 31,
1997, and grew at CAGRs of 30% and 33%, respectively, over the five-year period
ended December 31, 1997.
The Company has rapidly established a significant market presence in North
America by developing strategic customer relationships with food industry
leaders that have substantial pasta requirements. North American pasta
consumption exceeded 5.0 billion pounds in 1995 and is expected to grow based on
industry trade sources and the Company's own analysis. The Company has a
long-term supply agreement with Sysco, the nation's largest marketer and
distributor of foodservice products. AIPC is now the exclusive producer of
Mueller's, the largest pasta brand in the United States, pursuant to a long-term
manufacturing and distribution agreement with Bestfoods. AIPC is also the
primary supplier of pasta to 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 recent months the Company has
added several new customers including Harris Teeter, Spartan, Meijer and
Ahold/Finast. In addition, AIPC has developed supply relationships with
industrial users of pasta, such as Pillsbury, General Mills and Kraft Foods,
which use the Company's pasta as an ingredient in branded food products.
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 workforce. The Company recently completed a significant portion of
its capital expenditure program initiated in 1997 which increased the Company's
annual pasta production capacity to approximately 500 million pounds and added a
highly-automated durum wheat mill to its South Carolina plant. Management
believes the South Carolina plant is now the largest and most efficient pasta
producing facility in North America in terms of productivity and conversion cost
per pound. The Company anticipates that the planned additional capacity
expansion at the Missouri facility, including new high-speed, high-output pasta
production lines and expansion of its distribution facility, will be completed
by June 1998. This expansion will increase the Company's annual production
capacity to more than 600 million pounds.
PROPOSED HARVEST STATES ALLIANCE
In November 1997, the Company announced a letter of intent with Amber
Milling Company, a division of Harvest States Cooperatives, one of the largest
agribusiness cooperatives in the United States. The proposed business
arrangement contemplates AIPC constructing a highly efficient, state-of-the-art
pasta production facility adjacent to Harvest States' recently constructed wheat
mill in Kenosha, Wisconsin. Under the terms of the contemplated arrangement,
Harvest States would transfer to AIPC the land and infrastructure for the
facility and supply semolina and other raw materials to the proposed plant under
a long-term
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supply agreement. AIPC anticipates the proposed facility would initially target
the growing industrial pasta market. The Company estimates it would invest
approximately $30 million in capital expenditures to construct the facility,
with a targeted annual capacity of approximately 150 million pounds. The Harvest
States alliance is subject to final negotiations and agreement, several
pre-conditions and board of directors' approval from both parties prior to July
1, 1998. There can be no assurance that a definitive agreement will be reached
or that, if reached, the Company will be able to implement successfully the
Harvest States alliance. See "Risk Factors -- Failure to Implement Harvest
States Alliance."
Management believes the Harvest States alliance would create strategic
advantages by: (i) accelerating the time line for constructing a third facility
targeting the growing industrial pasta market; (ii) creating highly efficient
capacity to support future growth; (iii) providing long-term access to the
variety of raw materials needed to support the industrial pasta market (several
of which AIPC cannot produce currently in its durum semolina mills); (iv) making
available rail and highway infrastructure for efficient distribution to AIPC's
customers; and (v) providing access to Harvest States' durum wheat origination
network, which is the largest in the United States, and handles over 50% of U.S.
durum wheat. The Harvest States alliance would expand AIPC's vertical
integration strategy to Harvest States' Kenosha mill, one of North America's
newest and most efficient mills. Additionally, Harvest States' Kenosha mill uses
the same high-quality, state-of-the-art milling equipment and technology as
AIPC's existing mills, ensuring product consistency for existing customers.
OPERATING STRATEGY
The Company's operating strategy is to grow revenues and profitability by
offering customers the highest quality pasta products at competitive prices with
superior customer service. Key elements of the Company's operating strategy are
to:
- Continue to Lead the Industry as a Low Cost Producer of High Quality
Pasta. AIPC has successfully implemented production and capital investment
strategies designed to achieve low-cost production of high-quality
products. AIPC has distinguished itself from most major pasta producers by
vertically integrating the durum wheat milling function with the production
process, thereby allowing the Company to manage the grain procurement
process and better control the consistency, quality and cost of its raw
materials. The Company has invested in new pasta making technology, process
controls and the development of a largely self-managed work force.
Management believes that its facilities are among the most efficient pasta
production facilities in North America in terms of productivity and
conversion cost per pound. AIPC actively manages plant capacity utilization
to optimize its fixed asset base and profitability through Contract Sales
to government agencies and other customers. The Company believes that its
vertically-integrated processes and pasta production equipment produces
pasta of superior color, texture, flavor and consistency. AIPC's logistics
strategy enables the Company to realize significant distribution cost
savings through its strategically-located distribution centers. The Company
expects to realize additional operating efficiencies through the current
expansion programs at its existing facilities, and ongoing improvement
programs. See "-- Proposed Harvest States Alliance" and "-- Facilities and
Expansion."
- Expand Customer-Driven Strategy. The Company is committed to
developing and maintaining strategic relationships with customers who (i)
are food industry leaders requiring a significant volume of high-quality
pasta; (ii) have committed marketing and sales resources to growing their
pasta business; and (iii) pursue long-term supplier relationships. The
Company has followed this strategy since commencing operations in 1988,
beginning with an agreement with Sysco. For almost a decade, the Company
has been Sysco's primary pasta supplier. In addition, since 1994, the
Company has been the primary pasta supplier to Sam's Club. AIPC currently
supplies private-label and branded products to over 20 retail grocery
customers, including many of the largest U.S. grocery retailers. AIPC also
supplies pasta to leading food processors such as Pillsbury, General Mills
and Kraft for use as a food ingredient. The Company is also the sole
producer of Mueller's, the largest pasta brand in the United States, under
the Bestfoods Agreement. Management believes that these strategic
relationships increase sales and operating efficiencies, facilitate AIPC's
investment in new technology, create distribution synergies, and enable
closer involvement in its customers' pasta businesses.
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- Provide Superior Customer Service. The Company develops and
enhances customer relationships by providing superior service and technical
support to its customers. The Company has invested heavily in the
development of a broad range of customer service programs, including
electronic data interchange (EDI) and efficient consumer response (ECR)
programs which streamline the order, invoicing and inventory management
functions. AIPC uses its customer response services and category management
expertise, based in part on data supplied by A.C. Nielsen Co. ("Nielsen"),
to assist customers in their supply management and merchandising decisions.
AIPC's inventory management system is designed to optimize customer lead
time, order fill rate and inventory turnover. To provide its customers with
benefits in both transportation cost and delivery time, the Company has
strategically located its distribution centers in Missouri, South Carolina
and California. The Company provides marketing, technical and service
support to its customers by assisting customers with supply and category
management decisions, producing pasta to its customers' specifications and
making operational recommendations to its customers using pasta as an
ingredient in their food products. AIPC is the only pasta producer to
sponsor an annual durum milling and pasta production technology forum, at
which industry experts conduct a training and development program for the
manufacturing and research and development personnel of food companies.
GROWTH STRATEGY
The Company continues to implement its growth strategy, which builds on the
Company's operating strategy and industry trends. Key elements of the Company's
growth strategy are to:
- Continue Bestfoods Business Expansion. The Company was selected in
1997 to be the exclusive producer of Bestfoods' Mueller's brand pasta, the
largest pasta brand in North America and has transferred production of
substantially all of Mueller's primarily to its recently expanded South
Carolina facility. Management believes that the Company's experience in
servicing large pasta supply agreements and its current expansion of its
South Carolina and Missouri milling pasta production and distribution
facilities will enable AIPC to support potential future growth. Management
anticipates Bestfoods's annual volume requirements will represent an
approximately 70% increase over the Company's fiscal 1997 production
volume.
- Obtain Additional Private Label Customers. The Company intends to
continue to grow its existing private label customer base and secure
additional private label customers by continuing to offer quality products,
competitive pricing, category management and superior customer service.
Management believes that AIPC's prospects for growth in the private label
market have been enhanced since Borden, historically the largest private
label supplier in North America, discontinued its private label pasta
business in 1997.
- Increase Sales to Industrial Customers. The Company believes that
industrial users of pasta will continue to require increasing quantities of
pasta and that a greater portion of these requirements will be outsourced
to more efficient producers of high-quality pasta, such as AIPC. Management
has identified additional strategic opportunities with industrial users of
pasta which may result in incremental growth, new product development and
cost savings opportunities in the future. See "-- Proposed Harvest States
Alliance"
- Continue Product Innovation. In 1995, the Company introduced Pasta
LaBella flavored pasta, a line of all natural, full-flavored pasta products
utilizing patented flavoring technology and AIPC's proprietary production
process. In addition to pursuing increased sales with institutional
customers, the Company is exploring potential sales and marketing alliances
to expand retail distribution of Pasta LaBella flavored pasta. 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.
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 64024, and its telephone number is (816) 502-6000. The
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Company's home page on the World Wide Web is located at
http://www.pastalabella.com. Information contained in the Company's home page
shall not be deemed to be a part of this Prospectus.
PASTA INDUSTRY
North American pasta consumption exceeded 5.0 billion pounds in 1995 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 foodservice 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 .3 billion pounds, respectively. Foodservice
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.
Customer Markets
Retail. Hershey, Borden and Bestfoods 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 June 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. Bestfoods 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 Bestfoods. Bestfoods has
transferred substantially all of its Mueller's brand pasta production to AIPC.
See "-- Production and Supply Agreements."
Between the first quarter of 1994 and the first quarter of fiscal 1998,
sales of private label pasta products increased from 18.7% to 22.0% of the total
pounds of pasta sold in the Retail market based on Information Resources, Inc.
InfoScan Review 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. Following Borden's departure from the private label market, AIPC has
become 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.
Institutional. The Institutional market includes both foodservice
distributors that supply restaurants, hotels, schools and hospitals, as well as
food processors that use pasta as a food ingredient. Traditional foodservice
customers include businesses and organizations, such as Sysco and JP
Foodservice, Inc., that sell products to restaurants, healthcare facilities,
schools, hotels and industrial caterers. Most foodservice
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distributors obtain their supply of pasta from third party producers such as
AIPC. The foodservice market is highly-fragmented and is served by numerous
regional and local food distributors, including both "traditional" foodservice
customers and chain restaurant customers. Sysco, the nation's largest
foodservice marketer and distributor of foodservice products and one of the
nation's largest commercial purchasers of pasta products, serves approximately
10% of the foodservice business in the United States and has more than double
the revenues of the next largest foodservice 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,
International Home Foods, Inc., 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 more
efficient producers such as AIPC.
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 expansion of the Company's Missouri facility, 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 substantially completed capital
expansion, management believes that these capacity additions represent more than
200 million pounds in aggregate. Dakota Growers increased the capacity of its
durum wheat milling operations in December 1996 and has completed a pasta
production capacity expansion increasing its total annual pasta production
capacity to 240 million pounds. In late 1997 Hershey added approximately 25
million pounds of pasta capacity to its facility in Winchester, Virginia.
Barilla is currently building an integrated milling and pasta production
facility near Ames, Iowa with an estimated annual pasta capacity between 130 and
155 million pounds scheduled for completion in late 1998 or early 1999. Two
major pasta producers have also reduced pasta production capacity. Borden closed
or sold five of its ten North American pasta plants in 1997, and Bestfoods
eliminated its capacity of approximately 180 million pounds. In addition, on
February 23, 1998, Dakota Growers acquired all of the outstanding stock of Primo
Piatta, Inc. ("Primo"), a Minnesota-based pasta producer. Primo's assets include
two production facilities with total annual capacity of approximately 175
million pounds and a distribution center located in Minneapolis. AIPC and Dakota
Growers are currently the only major pasta producers in the United States that
own vertically-integrated milling and pasta production facilities. Barilla's
planned facility in Ames, Iowa will also be vertically integrated.
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. 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. 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
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.
The Department of Commerce currently is conducting an
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administrative review of its anti-dumping and countervailing duty orders of July
1996 relating to three Turkish and 16 Italian pasta producer, including Barilla
and De Cecco. On January 22, 1998, the Department of Commerce indicated that it
intends to issue preliminary findings not later than July 1, 1998, with the
final results of its review expected by October 1, 1998. 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. See "Risk Factors -- Competition."
Raw Materials
Pasta's primary ingredient is semolina, which is extracted from durum wheat
through a milling process. Almost all domestic pasta producers purchase semolina
from third party milling companies. Durum wheat is used exclusively for pasta.
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.
Durum wheat used in United States pasta production generally originates
from Canada, North Dakota, Montana, Arizona and California. Although durum wheat
can be purchased directly from farmers or grower-owned cooperatives, most
milling companies purchase durum wheat on a commodity exchange. AIPC and Dakota
Growers are the only major producers of pasta in North America that have
vertically integrated milling and production facilities. See "Raw Materials and
Supplies."
PRODUCTS
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 sale
to individual consumers. AIPC contracts with third parties for the production of
certain pasta shapes, such as retail lasagna and canneloni, which are
specialized products, but 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.
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 to assist its customers with innovative
products and packaging, and the development of additional value-added products
intended to generate higher margins than traditional pasta products.
QUALITY
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 of AIPC products against competitive
products on physical characteristics, including color, speck count, shape and
consistency, and cooking performance, including starch release, protein content
and bite; and (ii) competitive product comparisons that AIPC's customers perform
on a regular basis.
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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 ("HACCP") 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 HACCP standards have helped the Company attract new business and
strengthen existing customer relationships.
PRODUCTION AND SUPPLY AGREEMENTS
The Company has established itself as one of the largest producers of dry
pasta in North America by establishing strategic production, supply and
distribution arrangements with several food industry leaders, including
Bestfoods and Sysco.
Under the Bestfoods Agreement, Bestfoods closed its pasta production
facility formerly dedicated to the production of Mueller's brand pasta in
December 1997 and AIPC became the exclusive producer of Mueller's, with the
exception of two specialty items which Bestfoods currently purchases from
another supplier. Bestfoods 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
years. AIPC is 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.
Bestfoods 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 Bestfoods. Without
Bestfoods' consent, AIPC may not produce branded retail pasta for Borden,
Hershey or Barilla, and is limited to the production of an aggregate of 12
million pounds of branded pasta products annually for other producers. The
Bestfoods Agreement may be terminated by Bestfoods upon certain events,
including (i) a failure by AIPC to satisfy certain minimum production
requirements for any reason other than the fault of Bestfoods 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 brand names. 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 twelve-month period ended
December 31, 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 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. foodservice businesses)
without Sysco's prior consent. In 1996 and 1997, Sysco honored the Company as
one of the 10 best of its 1,300 suppliers. The Sysco Agreement may be terminated
by Sysco upon certain events, including a substantial casualty to or
condemnation of AIPC's Missouri plant.
RAW MATERIALS AND SUPPLIES
AIPC's ability to produce high-quality pasta generally begins with its
purchasing durum wheat directly from farmers and grower-owned cooperatives in
Canada, North Dakota, Montana, Arizona and California, rather than from grain
exchanges. This direct purchasing method ensures that the extracted semolina
meets AIPC's specifications since each variety of durum wheat has its own unique
set of milling and pasta making characteristics. The Company has several sources
for durum wheat and is not dependent on any one supplier. 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.
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Durum wheat is a commodity 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. The February 1998 average price per bushel of durum wheat was
$5.95. The Company manages its durum wheat cost risk through durum "pass-
through" long-term contracts and other arrangements with its customers and
advance purchase contracts for durum wheat which are generally less than six
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 65% of AIPC's total revenue for the
twelve-month period ended December 31, 1997. Management believes that the
Company will significantly increase the percentage of revenues pursuant to
contracts which include provisions for sales price adjustments as it generates
Bestfoods revenues in 1998. See "Risk Factors -- Raw Materials" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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.
FACILITIES AND EXPANSION
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 March 31, 1998, the Company's facilities had combined annual
milling and production capacity of approximately 600 million pounds of durum
semolina and 500 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 has completed a significant portion of its $86.0 million capital
expenditure program which, when completed, will nearly double its current pasta
production capacity from 330 million pounds per year to approximately 600
million pounds per year in 1998. The Company recently completed the construction
of a durum wheat mill in South Carolina which adjoins the existing plant
facility, representing a 200% increase in the facility's pasta production
capacity, and a doubling of the capacity of the South Carolina distribution
facility. The additional capacity at the Missouri facility, scheduled for
completion in June 1998, will combine high-speed, high-output pasta production
lines with the ability to produce a full range of products, and will include a
distribution center expansion. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Risk Factors -- Substantial
Planned Investment in Milling and Production Facilities."
To date, each of the Company's major capacity expansion programs has been
completed on schedule and within budget, and has delivered the targeted levels
of output and efficiency. The current expansion of the Missouri facility is
progressing on-time and on-budget. See "Risk Factors -- Substantial Planned
Investments in Milling and Production Facilities" and "Management of Growth and
Implementation of Bestfoods Business."
Proposed Harvest States Alliance. In November 1997, the Company announced a
letter of intent with Amber Milling Company, a division of Harvest States
Cooperatives, one of the largest agribusiness cooperatives in the United States.
The proposed business arrangement contemplates AIPC constructing a highly
efficient, state-of-the-art pasta production facility adjacent to Harvest
States' recently constructed wheat mill in Kenosha, Wisconsin. Under the terms
of the contemplated arrangement, Harvest States would transfer to AIPC the land
and infrastructure for the facility and supply semolina and other raw materials
to the proposed plant under a long-term supply agreement. AIPC anticipates the
proposed facility would initially target the growing industrial pasta market.
The Company estimates it would invest approximately $30 million in capital
expenditures to construct the facility, with a targeted annual capacity of
approximately 150 million pounds. The Harvest States alliance is subject to
final negotiations and agreement, several pre-conditions and
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<PAGE> 42
board of directors' approval from both parties prior to July 1, 1998. There can
be no assurance that a definitive agreement will be reached or that, if reached,
the Company will be able to implement successfully the Harvest States alliance.
See "Risk Factors -- Failure to Implement Harvest States Alliance."
Management believes the Harvest States alliance would create strategic
advantages by: (i) accelerating the time line for constructing a third facility
targeting the growing industrial pasta market; (ii) creating highly efficient
capacity to support future growth; (iii) providing long-term access to the
variety of raw materials needed to support the industrial pasta market (several
of which AIPC cannot produce currently in its durum semolina mills); (iv) making
available rail and highway infrastructure for efficient distribution to AIPC's
customers; and (v) providing access to Harvest States' durum wheat origination
network, which is the largest in the United States, and handles over 50% of U.S.
durum wheat. The Harvest States alliance would expand AIPC's vertical
integration strategy to Harvest States' Kenosha mill, one of North America's
newest and most efficient mills. Additionally, Harvest States' Kenosha mill uses
the same high-quality, state-of-the-art milling equipment and technology as
AIPC's existing mills, ensuring product consistency for existing customers.
Milling and Pasta Production Processes. Durum wheat is currently delivered
to AIPC's mills in Missouri and South Carolina by railcar directly from the
durum wheat elevators in the northern United States and Canada under a long-term
rail contract with the Canadian Pacific Rail System and the Norfolk Southern
Railway Company. The wheat is then 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 mills where a single AIPC team member monitors and
directs the mill's entire milling, cleaning and storage process.
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.
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<PAGE> 43
The Company's vertically-integrated milling and pasta production process is
depicted in the following chart:
AIPC'S MILLING AND PASTA PRODUCTION PROCESS
MILLING AND PASTA PRODUCTION PROCESS GRAPH
Distribution. The Company's three distribution centers are strategically
located in South Carolina, Missouri and Southern California to serve a national
market. 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 Pomona, California. The Company completed
construction of the integrated warehousing and distribution facilities at its
Missouri and South Carolina facilities during 1995 and recently completed the
expansion of its South Carolina distribution facility. 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
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<PAGE> 44
Company works with its customers to forecast consumer demand which allows the
Company to anticipate customer demand.
SALES AND MARKETING
AIPC actively markets its products through approximately 19 internal sales
and marketing staff 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.
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
drive pasta category growth by recommending 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 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 ECR model which uses 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.
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 MIS 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 EDI and ECR to streamline the order, invoicing and
inventory management functions. The Company believes that its current and
planned hardware and software upgrades will adequately address any systems
operations issues relating to the year 2000. See "Risk Factors -- Year 2000
Compliance."
COMPETITION
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. AIPC's products compete with a broad range of food
products, both
44
<PAGE> 45
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. See "Risk
Factors -- Competition" and "Business -- Pasta Industry."
AIPC's direct competitors include large multi-national companies such as
Hershey and Borden and other competitors such as Dakota Growers, Philadelphia
Macaroni and Zerega's. The Company also competes against foreign companies such
as Italian pasta producers De Cecco and Barilla and competes, indirectly,
against food processors such as Kraft Foods, General Mills, Inc., International
Home Food Products Inc., Campbell Soup Company and Stouffers Corp., that produce
pasta internally as an ingredient for use in their food products. See
"-- Industry."
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(R), Pasta LaBella(R), Montalcino(R) 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(TM) and Heartland(TM)
trademarks. A patent application is currently pending with respect to the
proprietary flavoring process for Pasta LaBella flavored pasta.
REGULATION
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 March 31, 1998, the Company employed 380 full-time persons, of whom
200 were salaried employees and 180 were hourly employees. The Company's
employees are not represented by any labor unions. AIPC considers its employee
relations to be good.
LEGAL PROCEEDINGS
The Company currently is not a party to any material litigation nor is it
aware of any litigation threatened against it which, if commenced and adversely
determined, would likely have a material adverse effect upon the business or
financial condition of the Company.
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<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
directors and executive officers of the Company as of the date of this
Prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Horst W. Schroeder........................ 56 Chairman of the Board of Directors
Timothy S. Webster........................ 36 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
Darrel E. Bailey.......................... 45 Senior Vice President -- Institutional
Sales
David B. Potter........................... 39 Senior Vice President -- Procurement
Jerry H. Dear............................. 50 Senior Vice President -- Retail Markets
Jonathan E. Baum.......................... 37 Director
David Y. Howe............................. 33 Director
Robert H. Niehaus......................... 42 Director
John P. O'Brien........................... 56 Director
William R. Patterson...................... 56 Director
Lawrence B. Sorrel........................ 39 Director
Richard C. Thompson....................... 46 Director
</TABLE>
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 October 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. Prior to joining the Company,
Mr. Webster was a manager with the Entrepreneurial Services Group of Arthur
Young and Company (a predecessor firm to Ernst & Young LLP) from April 1987 to
April 1989.
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 LLP, most
recently as partner-in-charge of its Kansas City and Omaha Business Consulting
Group practice. Mr. Watson is a certified public accountant.
Darrel E. Bailey has served as Senior Vice President -- Institutional Sales
since 1996. Mr. Bailey joined the Company in May 1993 as Vice President of Sales
and Marketing. He was named Senior Vice President in
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<PAGE> 47
1995. Prior to joining the Company, Mr. Bailey was employed by Hallmark Cards,
Inc. as Marketing Business Manager.
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.
Jerry H. Dear was named Senior Vice President -- Retail Markets in February
1998. Mr. Dear joined the Company in 1994 and served as Business Development
Manager and Senior Business Development Manager until 1995, when he was named
Vice President of Retail Sales. Prior to joining the Company, Mr. Dear worked
for Pillsbury as Director of Corporate Sales and Development from 1984 to 1994.
Jonathan E. Baum has served as a Director of the Company since 1994. He has
been the Chairman and Chief Executive Officer of George K. Baum & Company, an
investment banking firm, since 1994. Previously, he had been a Vice President
with Salomon Brothers Inc.
David Y. Howe has served as a Director of the Company since 1995. He is a
Vice President of Citicorp Venture Capital, Ltd., a venture capital firm, where
he has been employed since 1993. From 1990 to 1993, he had been employed by
Butler Capital, a private investment company. He is also a director of Aetna
Industries, Inc., Brake-Pro, Inc., Cable Systems International, Inc.,
Copes-Vulcan, Inc., Pen-Tab Industries, Inc., Milk Specialties Company and
Furnishings International, Inc.
Robert H. Niehaus has served as a Director of the Company since 1992. He
has been a Managing Director of Morgan Stanley & Co. Incorporated since 1990
where he has been employed since 1982. He is also Managing Director and a
Director of The Morgan Stanley Leveraged Equity Fund II, Inc., the general
partner of MSLEF, and Morgan Stanley Capital Partners III, Inc., the general
partner of the general partner of the MSCP Funds. He is also a director of
Allegiance Telecom, Inc., Silgan Holdings Inc., Fort James Corporation,
Waterford Wedgewood UK, plc, of which he is the Chairman, and Waterford Crystal
Ltd.
John P. O'Brien has been Managing Director of Inglewood Associates, Inc., a
private investment and consulting firm specializing in turnarounds of
financially under-performing companies since April 1993. Mr. O'Brien has also
been Chairman of the Board of two Inglewood Associates, Inc. portfolio
companies-Jeffery Mining Products, L.P. (a manufacturer and distributor of
underground mining products) since October 1995 and Allied Construction
Products, Inc. (a manufacturer and distributor of hydraulic and pneumatic
demolition, compaction, boring and trench shoring devices) since 1993. Prior to
joining Inglewood, he was the Southeast Regional Managing Partner for Price
Waterhouse and a member of the firm's Policy Board and Management Committee from
July 1984 to April 1990. Mr. O'Brien is also a director of Premix, Inc.
William R. Patterson is currently Vice President of PSF Holdings, L.L.C.,
and the Executive Vice President, Chief Financial Officer and Treasurer of its
wholly-owned subsidiary, Premium Standard Farms, Inc. ("PSF, Inc."), a
fully-integrated pork producer and processor. From January to October 1996, Mr.
Patterson was a principal of Patterson Consulting LLC and served as the Acting
Chief Financial Officer of the predecessor company of PSF, Inc. Prior to joining
the predecessor to PSF, Inc. in 1996, Mr. Patterson was a partner in Arthur
Andersen LLP from 1976 through 1995. He is also a director of the Paul Mueller
Company.
Lawrence B. Sorrel has served as a Director of the Company since 1992. He
is a Managing Director of Morgan Stanley & Co. Incorporated where he has been
employed since 1986. He is also Managing Director and a Director of Morgan
Stanley Capital Partners III, Inc., the general partner of the general partner
of the MSCP Funds, and The Morgan Stanley Leveraged Equity Fund II, Inc., the
general partner of MSLEF. He is also a director of Renaissance Media Group,
Emmis Broadcasting Corporation, Vanguard Health Systems, Inc., LifeTrust
America, Inc., and The Compucare Company.
Richard C. Thompson has served as a Director of the Company since 1986. Mr.
Thompson is an experienced entrepreneur and, since 1993, has been President and
Chief Executive Officer of Thompson's Pet
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<PAGE> 48
Pasta Products, Inc., a pet food producer. He is the founder of the Company and
served as its President from May 1986 to June 1991.
COMPOSITION OF BOARD OF DIRECTORS
The Company's Board of Directors consists of nine directors, divided into
three classes, with the members of each class serving staggered three-year
terms. The current term of the first class expires at the annual meeting of
stockholders to be held in 2001, the current term of the second class expires in
1999 and the current term of the third class expires in 2000. Messrs. Howe,
O'Brien and Patterson are included in the first class, Messrs. Baum, Niehaus and
Thompson are included in the second class and Messrs. Webster, Schroeder and
Sorrel are included in the third class. Directors hold office for a term of
three years and serve until their successors are elected and qualified. Officers
are elected annually by the Board of Directors and serve until their successors
are duly elected and qualified.
COMPENSATION OF DIRECTORS
Effective January 1, 1998, all directors who are not employees of AIPC or
employees of significant stockholders ("Outside Directors") will be paid an
annual retainer of $15,000, payable in shares of the Company's Class A Common
Stock immediately following AIPC's annual meeting of stockholders, and paid
$1,500 in cash for each meeting of the Board of Directors attended.
Additionally, Outside Directors who are members of a committee of the Board of
Directors will be paid $500 in cash for each committee meeting attended. An
Outside Director who is a chairman of such a committee will also be paid an
annual cash retainer of $2,500. None of the other directors of the Company is
paid directors' fees for serving on the Board of Directors or its committees.
All directors are reimbursed for out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors and meeting of Board
committees. On February 25, 1998, the Company issued 544 shares of Class A
Common Stock to each of Messrs. O'Brien, Patterson and Thompson.
COMMITTEES OF THE BOARD
Under the Company's By-laws, the Board of Directors may establish one or
more committees, appoint one or more members of the Board of Directors to serve
on each committee, fix the exact number of committee members, fill vacancies,
change the composition of the committee, impose or change the duties of the
committee and terminate the committee. The Board of Directors has established an
Audit Committee and a Compensation Committee. Each such committee has two or
more members who serve at the pleasure of the Board of Directors.
The Compensation Committee is responsible for reviewing and making
recommendations to the Board of Directors with respect to the salaries, bonuses,
and other compensation paid to key employees and officers of the Company,
including the terms and conditions of their employment, and administers all
stock option and other benefit plans (except with respect to participation by
executive officers in stock option and other equity incentive plans of the
Company which will be made by the Board of Directors or a committee comprised
solely of outside directors, unless otherwise specified in the applicable plan
documents) affecting key employees' and officers' direct and indirect
remuneration. Currently, Messrs. Niehaus, O'Brien, Schroeder and Sorrel serve on
the Compensation Committee.
The Audit Committee is responsible for reviewing the Company's financial
statements, audit reports, internal financial controls and the services
performed by the Company's independent public accountants, and for making
recommendations with respect to those matters to the Board of Directors. Messrs.
Baum, Patterson and Thompson serve on the Audit Committee.
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<PAGE> 49
EXECUTIVE COMPENSATION
The following table summarizes compensation information with respect to the
President and Chief Executive Officer ("CEO") of the Company and each of the
Company's most highly-compensated executive officers for services rendered
during the fiscal year ended September 30, 1997 (collectively, with the CEO, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
FISCAL PERIOD COMPENSATION
COMPENSATION AWARDS
-------------------- ---------------------
FISCAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION PERIOD(1) SALARY($) BONUS($) UNDERLYING OPTIONS(#) COMPENSATION
--------------------------- --------- --------- -------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Timothy S. Webster................. 1997 $282,596 $250,000 84,622 $ 7,151(2)
President and
Chief Executive Officer
Horst W. Schroeder................. 1997 183,700 180,000 84,622 --
Chairman of the Board
David E. Watson.................... 1997 159,931 90,000 -- 5,244(3)
Executive Vice President and
Chief Financial Officer
Norman F. Abreo.................... 1997 137,423 80,000 -- 3,223(3)
Executive Vice
President--Operations
Darrel E. Bailey................... 1997 147,249 30,000 15,330 4,208(3)
Senior Vice President--
Institutional Sales and Marketing
</TABLE>
- ---------------
(1) For purposes of the foregoing table, the Company's 1997 fiscal year extended
from October 1, 1996 to September 30, 1997.
(2) Includes payments under the American Italian Pasta Company Retirement
Savings Plan and premiums in the amount of $518 paid by the Company on a
split-dollar life insurance policy.
(3) Represents payments under the American Italian Pasta Company Retirement
Savings Plan.
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<PAGE> 50
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during the fiscal year
ended September 30, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------- POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES
OPTIONS OF STOCK PRICE
SHARES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------
NAME GRANTED 1997 PER SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Timothy S. Webster............... 84,622 32.9% $ 7.02 4/15/07 $373,593 $946,757
Horst W. Schroeder............... 84,622 32.9 7.02 4/15/07 373,593 946,757
David E. Watson.................. -- -- -- -- -- --
Norman F. Abreo.................. -- -- -- -- -- --
Darrel E. Bailey................. -- -- -- -- -- --
</TABLE>
- ---------------
(1) The amounts shown as potential realizable values are based on assumed
annualized rates of appreciation in the price of the Common Stock of five
percent and ten percent over the term of the options, as set forth in the
rules of the Securities and Exchange Commission. Actual gains, if any, on
stock option exercises are dependent upon the future performance of the
Common Stock. There can be no assurance that the potential realizable values
reflected in this table will be achieved.
The following table sets forth certain information with respect to the
aggregate exercises during fiscal 1997 by the Named Executive Officers and the
number and value of options held by such officers as of September 30, 1997:
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME UPON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy S. Webster...... -- -- 263,169 136,953 $3,352,903 $1,282,729
Horst W. Schroeder...... -- -- 263,169 136,953 3,352,903 1,282,729
David E. Watson......... -- -- 44,899 44,752 457,267 390,339
Norman F. Abreo......... -- -- 53,937 35,713 575,492 272,114
Darrel E. Bailey........ -- -- 27,116 18,077 133,411 88,939
</TABLE>
- ---------------
(1) Based on the initial public offering price of the Class A Common Stock of
$18 per share on October 9, 1997.
EMPLOYMENT AGREEMENTS
Mr. Webster. Mr. Webster entered into an employment agreement with the
Company effective October 15, 1997 and terminating September 30, 2002. Under the
agreement, Mr. Webster is entitled to an annual base salary of $330,000, subject
to annual adjustment by the Board. Mr. Webster is also eligible to receive
annual bonuses at the discretion of the Board under the Company's 1996 Salaried
Bonus Plan (the "Bonus Plan"). In connection with the Company's initial public
offering, Mr. Webster was granted options to purchase 398,583 shares of Class A
Common Stock at the initial public offering price of $18 per share. If Mr.
Webster's employment is terminated without cause, due to his disability or if he
resigns for good reason, he is to receive payments equal to two times his
then-current base salary and bonus. Mr. Webster has agreed not to compete with
the Company for two years after termination of employment, subject to the
receipt by Mr. Webster of certain severance payments, in some cases at the
election of the Company. All stock options awarded to Mr. Webster will vest (i)
immediately upon a termination of his employment without cause or his
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<PAGE> 51
resignation for good reason; (ii) if the employment agreement expires and the
Company does not offer Mr. Webster a new agreement on terms no less favorable
than those in the current agreement; or (iii) upon a change of control (as
defined in the agreement). The Company has agreed to nominate Mr. Webster for
election to its Board of Directors in accordance with the terms of the
Stockholders Agreement.
Mr. Schroeder. In connection with the Company's initial public offering
effective October 15, 1997, Mr. Schroeder entered into an employment agreement
with the Company terminating October 15, 2000. Under the agreement, Mr.
Schroeder serves as Chairman of the Board and is entitled to receive base
compensation of $4,000 per day of service to the Company, subject to a minimum
payment of $120,000 per year. Pursuant to a prior agreement, the Company paid to
Mr. Schroeder a signing bonus of $330,000 on January 1, 1996. In the event Mr.
Schroeder does not render services to the Company through December 31, 1998
because he voluntarily terminates, refuses to provide services under his current
agreement, or is terminated for cause, Mr. Schroeder is required to repay the
portion of the signing bonus which relates to the period of the original term
for which he does not render services. Mr. Schroeder is also eligible to
participate in the Company's Bonus Plan. If Mr. Schroeder terminates his
agreement for good reason, including a "change of control" as defined in the
Shareholders Agreement, dated October 30, 1992 by and among the Company and its
shareholders, he is entitled to receive payment of all unpaid amounts due for
service rendered, as well as an additional amount equal to the unpaid balance
due for the remainder of the term of the agreement and an additional payment
equal to $2,000 multiplied by the number of days of service remaining under the
term, which in no event shall be more than 30 days during any calendar year. In
addition, upon termination by Mr. Schroeder of his employment for good reason,
the unvested portion of Mr. Schroeder's options under the Company's stock option
plans will become immediately vested. Mr. Schroeder was also granted options to
purchase 275,942 shares of the Company's Class A Common Stock, at the initial
public offering price. Mr. Schroeder has agreed not to compete with the Company
for a period of two years after termination of his employment.
Messrs. Watson and Abreo. Messrs. Watson and Abreo have entered into
employment agreements with the Company effective October 15, 1997 and
terminating October 15, 2000. Such agreements are renewable automatically for
successive one-year terms, unless the Company gives the employee at least six
months' prior written notice of non-renewal. The agreements entitle Messrs.
Watson and Abreo to annual base salaries of $180,000 and $160,000, respectively
(subject to annual merit increase reviews by the Board of Directors), and annual
bonuses at the discretion of the Board of Directors in accordance with the terms
of the Bonus Plan. Effective October 8, 1997, Messrs. Watson and Abreo each
received options to purchase 61,320 shares, respectively, of Class A Common
Stock at $18 per share. In the event of termination of employment without cause
or resignation for good reason, or in the event their employment is terminated
by the Company without cause within six months after a change in control,
Messrs. Watson and Abreo are each entitled to the greater of (i) one-year's
annual base salary and bonus or (ii) annual base salary and bonus for the
remainder of the initial employment term under their respective employment
agreements. The employment agreements also contain one-year covenants not to
compete after any termination of employment. All stock options awarded to each
of Messrs. Watson and Abreo will vest immediately upon (i) resignation for good
reason or (ii) a change in control of the Company.
1996 SALARIED BONUS PLAN
The Company maintains the Bonus Plan for certain salaried employees of the
Company, including the Named Executive Officers. The Bonus Plan permits these
employees to earn cash performance bonus awards of up to a percentage of their
respective salaries as determined by the Board of Directors, or by management on
the Board's behalf. The amount of any bonus is based upon the Company's
performance and the individual performance of such participant. See
"Management -- Executive Compensation."
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<PAGE> 52
STOCK OPTION PLANS
1992 Non-Statutory Stock Option Plan
On October 29, 1992, the Company's Board of Directors and stockholders
adopted the American Italian Pasta Company Non-Statutory Stock Option Plan (the
"1992 Plan"). The purpose of the 1992 Plan is to secure for the Company and its
stockholders the benefits of the incentive inherent in stock ownership by
officers and other key employees of the Company.
The 1992 Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has the power and sole discretion to
determine the persons to whom options are granted and the number of shares
covered by those options, subject in each case to the limitations set forth in
the 1992 Plan. Options may be granted under the 1992 Plan only to officers and
key employees of the Company. The period during which an option may be exercised
(not to exceed 13 years), and the time at which it becomes exercisable, is fixed
by the Compensation Committee at the time the option is granted. Options granted
under the 1992 Plan are not transferable by the holder other than by will or the
laws of descent and distribution.
The number of shares which may be issued and sold pursuant to options
granted under the 1992 Plan may not exceed 1,201,880 shares (subject to
adjustment for stock dividends, stock splits, combinations or reclassifications
of shares, or similar transactions). No consideration is paid to the Company by
any optionee in exchange for the grant of an option. The per share exercise
price for an option granted under the 1992 Plan is determined by the
Compensation Committee.
Certain provisions of the 1992 Plan may have the effect of discouraging or
delaying possible takeover bids. In the event of a "Change of Control," all of
the outstanding options automatically become immediately exercisable in full. A
"Change of Control" is generally defined to take place when disclosure of such a
change would be required by the proxy rules promulgated by the Securities and
Exchange Commission or when (i) certain persons acquire beneficial ownership of
25% or more of the combined voting power of the Company's voting securities,
(ii) less than a majority of the directors are persons who were either nominated
or selected by the Board of Directors, (iii) a merger involving the Company in
which the Company's stockholders own less than 80% of the voting stock of the
surviving corporation; or (iv) a liquidation of the Company or sale of
substantially all the assets of the Company occurs. In the event that the
Company is not the surviving corporation of any merger, consolidation,
reorganization or acquisition by another corporation, outstanding options under
the 1992 Plan may be assumed, or replaced with new options of comparable value,
by the surviving corporation. If the surviving corporation does not assume or
replace outstanding options, or in the event the Company is liquidated or
dissolved, then subject to certain limitations, each holder of outstanding
options may exercise all or part of such options (even if the options would not
otherwise have been exercisable in full) during the period beginning 30 days
before the event triggering the acceleration, and ending on the day before such
event.
Generally, the exercise price of an option is at least equal to the fair
market value of the Common Stock on the date of grant. As of the date of this
Prospectus, options to purchase 932,013 shares of Common Stock at exercise
prices ranging from $2.33 to $12.23 per share (with a weighted average exercise
price of $7.57 per share) were issued and outstanding under the 1992 Plan. The
outstanding options under the 1992 Plan expire at dates ranging from October
2002 to April 2007. None of the executive officers of the Company have exercised
any options prior to the date of this Prospectus.
1993 Non-Qualified Stock Option Plan
The American Italian Pasta Company 1993 Non-Qualified Stock Option Plan
(the "1993 Plan") was adopted by the Board of Directors and approved by the
stockholders of the Company effective December 8, 1993. The 1993 Plan was
adopted to compensate and provide incentives for mid-level managers of the
Company.
The 1993 Plan is also administered by the Compensation Committee. The
Compensation Committee has full and final authority in its discretion, subject
to the provisions of the 1993 Plan and applicable law, to
52
<PAGE> 53
determine the individuals to whom and the time or times at which options shall
be granted and the number of shares of Common Stock covered by each option.
Options may be granted under the 1993 Plan to mid-level management. The period
during which an option may be exercised (not to exceed ten years), and the time
at which it becomes exercisable is fixed by the Compensation Committee at the
time the option is granted. Options granted under the 1993 Plan are not
transferrable by the holder other than by will or the laws of dissent and
distribution.
The number of shares which may be issued and sold pursuant to options
granted under the 1993 Plan may not exceed 82,783 shares (subject to adjustment
for stock dividends, stock splits, combinations or reclassifications of shares
or similar transactions). No consideration is paid to the Company by any
optionee in exchange for the grant of an option. The per share exercise price
for an option granted under the 1993 Plan is determined by the Compensation
Committee.
In the event of any merger, recapitalization, consolidation, split-up,
spin-off, repurchase, distribution or similar transaction effecting the Common
Stock, the Compensation Committee may take such action in its sole discretion
that it deems appropriate. The Compensation Committee may authorize the issuance
or assumption of options or similar rights in connection with any such
transaction whether or not the Company is a surviving or continuing corporation,
and upon such terms and conditions as it may deem appropriate.
The exercise price of an option is generally at least equal to the fair
market value of the Common Stock on the date of grant. As of the date of this
Prospectus, options to purchase 40,012 shares of Common Stock at exercise prices
ranging from $4.92 to $12.23 per share (with a weighted average exercise price
of $10.68 per share) were issued and outstanding under the 1993 Plan. The
outstanding options under the 1993 Plan expire at dates ranging from December
2003 to December 2006.
1997 Equity Incentive Plan
The Company has adopted the American Italian Pasta Company 1997 Equity
Incentive Plan (the "Equity Incentive Plan" or "1997 Plan") effective October 7,
1997. Under the 1997 Plan, the Board or a committee designated by the Board (the
Board or committee, as the case may be, the "Committee") is authorized to grant
nonqualified stock options, incentive stock options, reload options, stock
appreciation rights ("SARs"), shares of restricted Common Stock ("restricted
shares"), performance shares, performance units and shares of Common Stock
awarded as a bonus ("bonus shares") (all of the foregoing collectively,
"Awards"). There are 2,000,000 shares of Common Stock reserved for issuance
under the Equity Incentive Plan. In connection with the Company's initial public
offering, 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. As of the date of this Prospectus, options to
purchase 1,004,377 shares of Common Stock at exercise prices ranging from $18.00
to $27.56 per share (with a weighted average exercise price of $18.32 per share)
were issued and outstanding under the 1997 Plan.
Eligibility and Conditions of Grants. All employees (including officers),
directors and consultants of the Company or any subsidiary are eligible to
receive Awards at the discretion of the Committee. The Committee is authorized,
subject to certain limits specified in the Equity Incentive Plan, to determine
to whom and on what terms and conditions Awards shall be made including, but not
limited to, the vesting and term of options.
Stock Options. The option exercise price must be determined by the
Committee at the time of grant and set forth in the award agreement, but such
exercise price must be at least 100% of the fair market value of a share of
Common Stock on the date of grant. (In the case of options to be granted in
connection with the Offering, such fair market value will equal the price at
which the Class A Common Stock is offered to the public.) The option exercise
price may be paid by any one or more of the following in the discretion of the
Committee: (i) cash, (ii) check, (iii) wire transfer, (iv) shares of Common
Stock that have been held for at least 6 months or that were purchased on the
open market, or (v) a "cashless" exercise pursuant to a sale through a broker of
all or a portion of the shares. The Committee also has discretion to have the
Company
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<PAGE> 54
make or guarantee loans to the grantees for the exercise price. The Committee
will determine the term and vesting schedule for options at the time of grant.
Options can be granted as either nonstatutory options (pursuant to which
grantees would receive taxable income, and the Company would receive a
compensation expense deduction, when options are exercised) or as incentive
stock options (ISOs) (which, subject to certain conditions, would offer more
favorable tax consequences to grantees, but not the Company).
Stock Appreciation Rights. Upon exercise of a stock appreciation right,
the grantee shall receive a payment equal to the appreciation in value of the
Common Stock between the grant date and the exercise date. The benefit will be
payable in cash or Common Stock.
Restricted Shares. Restricted shares will be forfeited unless the
conditions set by the Committee at the time of grant are satisfied or are
waived. The Committee will determine whether or not a grantee shall be required
to pay for such restricted shares and, if so, what such price shall be.
Performance Shares/Performance Units. To the extent that the performance
goals specified by the Committee in a grant of performance shares or performance
units have been achieved, then a benefit shall be paid after the end of the
performance-measuring period specified by the Committee. The amount of the
benefit of performance shares is based on the percentage attainment of the
performance goals multiplied by the value of a share of Common Stock at the end
of the performance period. The value of performance units is based on the
achievement of performance goals multiplied by the unit value stabilized by the
Committee at the time of grant. No benefit is payable on either performance
shares or performance units if the minimum performance goals have not been met.
The benefit will be payable in cash or Common Stock.
Bonus Shares. Bonus shares can be granted without cost and without
restriction in amounts and subject to such terms and conditions as the Committee
may in its discretion determine.
Other. Options and stock appreciation rights may have a maximum term of 10
years. The effect of a change of control, the termination of a grantee's
employment or the death or permanent disability of a grantee will be determined
by the Committee at the time of grant and be set forth in the award agreement.
Both Awards and Shares acquired pursuant to the exercise or vesting of Awards
are subject to transfer restrictions as set forth in the 1997 Plan. The Plan may
be amended by the Board without: (i) stockholder approval except in the event of
an increase in the number of shares available for Awards; (ii) the consent of
the Award holder unless such amendment would adversely affect such holder; or
(iii) as otherwise may be required under stock exchange listing requirements or
any other regulatory or legal requirement. The Equity Incentive Plan will
terminate when shares available for grant under the plan have been exhausted,
except in no event will incentive stock options be granted on or after the 10th
anniversary of the earlier of (i) the date the Equity Incentive Plan was
adopted; and (ii) the date the Equity Incentive Plan was approved by the
Stockholders of the Company. Shares acquired pursuant to the 1997 Plan by
persons who are parties to the Stockholders Agreement will be subject to certain
restrictions under the Stockholders Agreement. In addition, the Compensation
Committee may, in its discretion, condition the grant of any Award under the
1997 Plan on the consent of the recipient of such Award to become bound by the
Stockholders Agreement.
401(K) PROFIT SHARING PLAN
The Company adopted the American Italian Pasta Company Retirement Savings
Plan (the "401(k) Plan") effective January 1, 1992. In general, employees of the
Company who have completed one year of service (as defined in the 401(k) Plan)
are eligible to participate in the 401(k) Plan. Participants may make
contributions to the 401(k) Plan by voluntarily reducing their salary from the
Company up to a maximum of 12% of total compensation or $9,500 (or such higher
amount as is prescribed by the Secretary of the Treasury for cost of living
adjustments), whichever is less, and the Company matches such contributions to
the extent of 50% of the first 6% of a participant's salary reduction. The
Company's matching contributions vest 25% per year and are 100% vested after 4
years of service. In addition to matching contributions, the Company may
contribute additional amounts determined by it in its sole discretion which are
allocated to a participant's account in the proportion that such participant's
compensation bears to the total compensation of all participants for the plan
year. These additional contributions vest in the same manner as the matching
54
<PAGE> 55
contributions. Subject to certain conditions and limitations, participants of
the 401(k) Plan may elect to invest up to 50% of their matching contribution
accounts into shares of Common Stock of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All compensation decisions during the fiscal period ended September 30,
1997 for each of the Named Executive Officers were made by the Compensation
Committee of the Board of Directors. Mr. Schroeder, Chairman of the Board, is a
member of the Compensation Committee. See "Certain Relationships and Related
Transactions." Decisions with respect to the base salary and cash bonuses paid
to executive officers are made by the Compensation Committee and decisions with
respect to the participation of executive officers in stock option and other
equity incentive plans of the Company are made by the Board of Directors or a
committee comprised solely of outside directors.
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<PAGE> 56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
Effective upon completion of this Offering, the Company, the Morgan Stanley
Stockholders, Citicorp Venture Capital, Ltd. and CCT Partners III, L.P.
(collectively "Citicorp"), affiliated entities of George K. Baum & Company
("GKB"), and Messrs. Schroeder, Thompson, Webster, Watson, Abreo and Bailey and
certain other existing stockholders of the Company (collectively, the "Existing
Stockholders") amended their existing Stockholders Agreement, which sets forth
certain rights and obligations of such Existing Stockholders. The amended
Stockholders Agreement grants the Morgan Stanley Stockholders and Citicorp
certain demand registration rights and contains customary terms and provisions
with respect to, among other things, registration procedures and certain rights
to indemnification granted by the parties thereunder in connection with any such
registration. Pursuant to the Stockholders Agreement, the Morgan Stanley
Stockholders have the right to designate one director nominee so long as the
Morgan Stanley Stockholders own any shares of the outstanding Common Stock of
the Company. The Existing Stockholders will agree to vote all of their shares of
Class A Common Stock in favor of the director nominee designated pursuant to the
Stockholders Agreement. At least two members of the Board of Directors will be
independent directors. Additionally, certain members of the Company's senior
management, including Messrs. Schroeder, Webster, Watson, Abreo, Potter, Dear
and Bailey have agreed to certain restrictions and limitations on the ability to
sell or transfer shares of Common Stock as provided in the Stockholder
Agreement.
1997 PRIVATE EQUITY FINANCING
In April 1997, the Company sold an aggregate of 3,174,528 shares of Class A
Common Stock to current stockholders of the Company for an aggregate purchase
price of $22,291,947, or $7.02 per share, determined by an independent valuation
firm to be fair value for the shares. The MSCP Funds purchased a total of
2,563,323 shares for $18,000,000. Affiliated entities of GKB purchased 427,219
shares for $2,999,861. Mr. Schroeder, a Director of the Company, purchased
49,056 shares for $344,480. In addition, a group of executive officers of the
Company contributed an aggregate of $729,996 to the Company for 103,957 shares,
including $142,159 by Mr. Webster, $298,535 by Mr. Watson, $36,472 by Mr. Abreo,
$136,375 by Mr. Bailey, $91,472 by Mr. Potter and $7,500 by Mr. Dear. In
connection with these sales and purchases, the Company loaned an aggregate of
$297,513 to these executive officers to finance their stock purchases, including
$112,159 to Mr. Webster, $48,535 to Mr. Watson, $36,472 to Mr. Abreo, $36,375 to
Mr. Bailey $21,472 to Mr. Potter and $7,500 to Mr. Dear. Each of these loans are
evidenced by a promissory note made payable to the Company and secured by shares
of Class A Common Stock. Such loans are to be repaid over a period of three
years commencing upon termination of the transfer restrictions applicable to
such shares under the Stockholders Agreement. Such loans bear interest at the
then applicable federal rate.
FINANCIAL ADVISORY SERVICES
Messrs. Niehaus and Sorrel, both Directors of the Company, are employed by
Morgan Stanley & Co. Incorporated. Prior to October 1997, Morgan Stanley Senior
Funding, Inc., an affiliate of Morgan Stanley & Co. Incorporated, one of the
U.S. Underwriters, served as the documentation agent under the agreements
relating to the Company's Credit Facility, and acted as an arranger for the
Credit Facility for which it received a fee in the amount of $311,875. Morgan
Stanley & Co. Incorporated also served as one of the U.S. and International
Underwriters in connection with the Company's initial public offering in October
1997 for which it received customary underwriting fees.
Since 1994, the Company has paid fees to George K. Baum & Company's
Investment Banking Division for investment banking and financial advisory
services and has paid George K. Baum & Company Professional Investment Advisors
Division fees for investment advice provided with respect to the 401(k) Plan.
Jonathan E. Baum, a Director of the Company, owns all voting shares of George K.
Baum Holdings, Inc., which owns 100% of George K. Baum & Company, one of the
U.S. and International Underwriters. George K. Baum & Company also served as one
of the U.S. and International Underwriters in connection with the Company's
initial public offering in October 1997 for which it received customary
underwriting fees.
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<PAGE> 57
MANAGEMENT INDEBTEDNESS
In April 1995 and April 1997, the Company loaned funds to Messrs. Webster,
Watson, Abreo, Bailey, Potter and Dear, to purchase shares of Class A Common
Stock at prices ranging between $4.92 and $7.02 per share, respectively. Each
loan was evidenced by a promissory note bearing interest at the then applicable
federal rate and payable in equal installments over three years commencing upon
termination of the transfer restrictions applicable to such shares under the
Stockholders Agreement. The table below sets forth the aggregate number of
shares purchased with funds loaned by the Company, the original aggregate loan
amounts, and the aggregate loan balances as of March 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF ORIGINAL LOAN BALANCE AT
EXECUTIVE OFFICER SHARES BALANCE MARCH 31, 1998
----------------- --------- ------------- --------------
<S> <C> <C> <C>
Timothy S. Webster...................................... 21,339 $138,559 $120,959
David E. Watson......................................... 14,269 84,735 60,601
Norman F. Abreo......................................... 7,217 46,422 39,788
Darrel E. Bailey........................................ 8,738 53,875 --
David B. Potter......................................... 5,083 31,422 21,472
Jerry H. Dear........................................... 1,068 7,500 7,500
</TABLE>
CONSULTING AGREEMENT WITH HWS & ASSOCIATES, INC.
Pursuant to a consulting agreement between the Company and HWS &
Associates, Inc. ("HWS"), a management consulting firm of which Mr. Schroeder,
Chairman of the Board of Directors, is the sole owner, the Company paid to HWS
$133,359 during fiscal 1995 for management consulting services performed and
travel expenses incurred on behalf of the Company. The consulting arrangement
terminated January 1, 1996 upon Mr. Schroeder's execution of his employment
agreement with the Company.
The Company's policy is that all transactions between the Company and its
executive officers, directors and principal stockholders be on terms no less
favorable than could be obtained from unaffiliated third parties or are subject
to the approval of the Company's disinterested directors.
PRODUCT SALES
The Company sells milling by-products to Thompson's Pet Pasta Products,
Inc., of which Richard C. Thompson, a director of the Company, is the President
and Chief Executive Officer. Such sales were $357,000 and $648,014 for the
nine-month fiscal period ended September 30, 1996 and the fiscal year ended
September 30, 1997, respectively. Such sales were on substantially the same
terms as the Company sells such products to unaffiliated third parties.
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<PAGE> 58
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Class A Common Stock as of the date of this
Prospectus, before and after giving effect to the sale of the shares of Class A
Common Stock offered hereby, by (i) each person who is known by the Company to
own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
the Selling Stockholders, (iii) each director of the Company, (iv) each of the
Named Executive Officers and (v) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING THE OFFERING
---------------------- ----------------------
CLASS A CLASS A CLASS A
COMMON STOCK(1) SHARES COMMON STOCK(1)(2)
---------------------- BEING ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(3) OFFERED(2) NUMBER PERCENT(4)
- ------------------------ ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
The Morgan Stanley
Leveraged Equity Fund
II, L.P.(5)......... 3,830,281 22.8% 2,842,157 988,124 5.5%
1221 Avenue of the
Americas
New York, NY 10020
Morgan Stanley Capital
Partners III,
L.P.(5)............. 1,626,068 9.7 1,206,581 419,487 2.3
1221 Avenue of the
Americas
New York, NY 10020
Citicorp Venture
Capital, Ltd.(6).... 1,047,298 6.2 -- 1,047,298 5.8
399 Park Avenue
New York, NY 10043
Richard C. Thompson
(7)................. 380,753 2.3 150,000 230,753 1.3
16 Kansas Avenue
Kansas City, KS 66105
Horst W.
Schroeder(8)(9)..... 456,169 2.7 90,631 365,538 2.0
Jonathan E. Baum(10)... 376,859 2.3 -- 376,859 2.1
David Y. Howe......... -- -- -- -- --
Robert H. Niehaus..... -- -- -- -- --
John P. O'Brien....... 1,544 * -- 1,544 *
William R. Patterson... 544 * -- 544 *
Lawrence B. Sorrel.... -- -- -- -- --
Timothy S.
Webster(9)(11)...... 354,837 2.1 90,631 264,206 1.5
David E. Watson(9).... 94,771 * -- 94,771 *
Norman F. Abreo(9).... 70,193 * 20,000 50,193 *
Darrel E. Bailey(9)... 59,131 * -- 59,131 *
All directors and
executive officers as
a
group (12
persons)(9)......... 1,794,801 10.2 351,262 1,443,539 7.8
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options and warrants held by that person that are currently
exercisable or will become exercisable within 60 days of the date of this
Prospectus are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of any
other person. Except as otherwise indicated in a footnote to this table or
as to be provided in the Stockholders Agreement (see "Certain Relationships
and Related Transactions -- Stockholders Agreement"), the persons in this
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) Certain Selling Stockholders have granted an option to the U.S.
Underwriters to purchase up to an aggregate of 810,000 additional Shares of
Class A Common Stock to cover over-allotments, if any. Such shares will not
be sold unless the U.S. Underwriters exercise the over-allotment option,
and the above table assumes that such over-allotment option will not be
exercised.
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<PAGE> 59
(3) Based upon 16,777,418 shares of Class A Common Stock outstanding, plus
shares of Class A Common Stock issuable upon exercise of options, warrants
and convertible securities which are included in the number of shares
beneficially owned by such person.
(4) Based upon 17,978,680 shares of Class A Common Stock to be outstanding upon
the consummation of the Offering, plus shares of Class A Common Stock
issuable upon exercise of options, warrants and convertible securities
which are included in the number of shares beneficially owned by such
person.
(5) The general partner of MSLEF and the general partner of the general partner
of the MSCP Funds are wholly owned subsidiaries of Morgan Stanley Dean
Witter & Co., the parent of Morgan Stanley & Co. Incorporated.
(6) The shares beneficially owned by Citicorp Venture Capital, Ltd. include
157,103 shares held by an affiliate of Citicorp.
(7) All of such shares are held by Thompson Holdings, L.P., a limited
partnership of which Mr. Thompson is a limited partner with a trust for the
benefit of his family. Mr. Thompson is also the sole shareholder of the
corporation which is the general partner of the limited partnership.
(8) The shares beneficially owned by Mr. Schroeder include 114,565 shares held
by The Living Trust of Horst W. Schroeder and 11,406 shares held by The
Living Trust of Gisela I. Schroeder for the benefit of Mr. and Ms.
Schroeder, respectively, and members of their family, as well as 3,066
shares held by each of Bernd Schroeder and Isabel Lange, children of Mr.
and Ms. Schroeder. Mr. Schroeder has voting power, but not investment
power, with respect to all of these shares. Upon consummation of the
Offering, Mr. Schroeder will own options to purchase 585,433 shares of
Common Stock under the Company's stock option plans, of which 263,163
options will be immediately exercisable.
(9) Includes options that are currently exercisable or will become exercisable
within 60 days of the date of this Prospectus to purchase shares of Class A
Common Stock as follows: Mr. Schroeder (318,566 shares), Mr. Webster
(318,566 shares), Mr. Watson (44,899 shares), Mr. Abreo (62,976 shares),
Mr. Bailey (36,154 shares), and all executive officers and directors as a
group (781,161 shares). Upon consummation of the Offering, Mr. Abreo will
own options to purchase 130,970 shares of Common Stock under the Company's
stock option plans, of which 53,938 options will be immediately
exercisable.
(10) Includes 355,248 shares held by George K. Baum Capital Partners, L.P. and
21,611 shares held by George K. Baum Employee Equity Fund, L.P. As an
officer and/or equity owner of the entities holding such shares, Mr. Baum
has voting power with respect to such shares. Except to the extent of his
equity interest in the entities holding such shares, Mr. Baum disclaims
beneficial ownership of such shares.
(11) Includes 14,435 shares beneficially owned by Mr. Webster which are held in
various trusts for the benefit of Mr. Webster's family members, as well as
certain members of Mr. Webster's extended family. Mr. Webster has voting
power, but not investment power, with respect to all of such shares. Upon
consummation of the Offering, Mr. Webster will own options to purchase
708,074 shares of Common Stock of the Company under the Company's stock
option plans, of which 263,163 options will be immediately exercisable.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 75,000,000 shares
of Class A Common Stock, 25,000,000 shares of Class B Common Stock, and
10,000,000 shares of preferred stock, par value $.001 per share, issuable in
series (the "Preferred Stock"). From time to time, shares of Class A Common
Stock held by the Morgan Stanley Stockholders will automatically be converted
pursuant to the Charter into shares of Class B Common Stock on a one-for-one
basis, pro rata in proportion to the number of shares of Class A Common Stock
held by all Morgan Stanley Stockholders, to the extent necessary so that the
Morgan Stanley Stockholders do not in the aggregate own more than 49% of the
then-outstanding shares of Class A Common Stock. See "-- Common Stock -- Class A
Common Stock." This limitation on the ownership of Class A Common Stock is
intended to enhance the flexibility of the Company in entering into possible
future business combinations on terms favorable to the Company and its
stockholders.
The following discussion is a summary of the more detailed provisions of
the Charter and By-Laws of the Company, forms of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part, and
of the applicable provisions of the DGCL. The term "Morgan Stanley Stockholders"
as referenced herein under the caption "Description of Capital Stock" shall have
the meaning given to it in the Company's Charter.
COMMON STOCK
Class A Common Stock. Holders of Class A Common Stock are entitled to one
vote for each share of Class A Common Stock on each matter submitted to a vote
of stockholders, including the election of directors. See "Certain Relationships
and Related Transactions -- Stockholders Agreement." Holders of Class A Common
Stock are not entitled to cumulative voting. Shares of Class A Common Stock have
no preemptive or other subscription rights. Shares of Class A Common Stock are
convertible only by the Morgan Stanley Stockholders into an equal number of
shares of Class B Common Stock; they are not convertible by any other holders.
After the consummation of the Offering, shares of Class A Common Stock held by
the Morgan Stanley Stockholders will, to the extent necessary so that the Morgan
Stanley Stockholders do not own more than 49% of the outstanding shares of Class
A Common Stock, be converted automatically into shares of Class B Common Stock
on a one-for-one basis, pro rata in proportion to the number of shares of Class
A Common Stock held by all Morgan Stanley Stockholders. In addition, shares of
Class A Common Stock held by the Morgan Stanley Stockholders are convertible
into an equal number of shares of Class B Common Stock, at the option of the
holder.
Class B Common Stock. Under the Charter, Class B Common Stock may be held
only by Morgan Stanley Stockholders. Holders of Class B Common Stock have no
right to vote on matters submitted to a vote of stockholders, except (i) as
otherwise required by law and (ii) that the holders of Class B Common Stock
shall have the right to vote as a class on any amendment, repeal or modification
to the Charter that adversely affects the powers, preferences or special rights
of the holders of the Class B Common Stock. Shares of Class B Common Stock have
no preemptive or other subscription rights and are convertible into an equal
number of shares of Class A Common Stock (x) at the option of the holder thereof
(but, after the consummation of the Offering, only 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 Class A Common Stock) and (y)
automatically upon the transfer of such shares by any Morgan Stanley Stockholder
to a person that is not a Morgan Stanley Stockholder.
Dividends. All holders of Common Stock are entitled to receive such
dividends or other distributions, if any, as may be declared from time to time
by the Board of Directors in its discretion out of funds legally available
therefor, subject to the prior rights of any Preferred Stock then outstanding,
and to share equally, share for share, in such dividends or other distributions
as if all shares of Common Stock were a single class. Dividends or other
distributions declared or paid in shares of Common Stock, or options, warrants
or rights to acquire such stock or securities convertible into or exchangeable
for shares of such stock, are payable to all of the holders of Common Stock
ratably according to the number of shares held by them, in shares of Class A
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Common Stock to holders of that class of stock and in shares of Class B Common
Stock to holders of that class of stock. Delaware law generally requires that
dividends be paid only out of the Company's surplus or current net profits in
accordance with the DGCL. See "Dividend Policy."
Liquidation. Subject to the rights of any holders of Preferred Stock
outstanding, upon the dissolution, liquidation or winding up of the Company, the
holders of Common Stock are entitled to share equally and ratably in the assets
available for distribution after payments are made to the Company's creditors.
Other. Holders of Common Stock have no preemptive, subscription or
redemption rights. The outstanding shares of Common Stock are, and the shares of
Class A Common Stock offered by the Company hereby will be, when issued and paid
for, fully paid and nonassessable.
PREFERRED STOCK
The Company's Charter provides 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.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The provisions of the Company's Charter, By-Laws and Delaware statutory law
described in this section may delay or make more difficult acquisitions or
changes in control of the Company that are not approved by the Board of
Directors. See "Risk Factors -- Possible Anti-takeover Effect of Certain
Charter, By-law and Statutory Provisions."
The Company is subject to the provisions of Section 203 of the DGCL.
Subject to certain exceptions, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the Board of Directors or
unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Charter provides for the division of the Board of Directors into three
classes as nearly equal in size as possible with staggered three-year terms. See
"Management." Except as may be provided in any class or series of Preferred
Stock with respect to any directors elected by the holders of such class or
series, any director, or the entire Board of Directors, may be removed from
office at any time, but only for cause and only by the affirmative vote of the
holders of at least two-thirds of the voting power of all of the shares of
capital stock of the corporation then entitled to vote generally in the election
of directors, voting together as a single class, unless the removal of a
director has been requested by a shareholder who designated such director as a
nominee for election pursuant to the Stockholders Agreement, in which case such
director can be removed with or without cause by the affirmative vote of holders
of a simple majority of such shares.
The Company's Charter provides that special meetings of the stockholders
may be called at any time by resolution of the Board of Directors, the Chairman
of the Board, or the Chief Executive Officer, but may not be called by other
persons. The Charter also provides that any stockholder action may not be taken
by written
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consent of stockholders without a meeting, unless the action to be effected by
written consent of stockholders and the taking of such action by written consent
have been approved in advance by the Board of Directors or unless the
shareholder action involves the removal of a director nominated pursuant to the
Stockholders Agreement and the person who nominated such director pursuant to
the Stockholders Agreement votes in favor of the removal of such director
pursuant to such written consent.
The Charter further provides that stockholders may make, alter, amend, add
to or repeal the By-laws only if, in addition to any vote of the holders of any
class or series of capital stock of the Corporation required by law or the
Charter, such action is approved by the affirmative vote of the holders of at
least 80% of the voting power of all of the then outstanding shares of capital
stock of the Company entitled to vote generally in the election of directors,
voting together as a single class. The affirmative approval of at least 80% of
the voting power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of directors, voting
together as a single class, is also required to reduce or eliminate the number
of authorized shares of any capital stock set forth in the Charter or to amend,
repeal or adopt any provision inconsistent with specified provisions of the
Charter.
As permitted by DGCL, the Charter provides that directors of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director by reason of any act or
omission, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, (iv) for any transaction from which
the director shall derive an improper personal benefit or (v) to any extent that
such liability shall not be limited or eliminated by virtue of the provisions of
Section 102(b)(7) of the DGCL or any successor thereof. In addition, the Charter
provides that the Company shall, to the fullest extent authorized by the DGCL,
as amended from time to time, indemnify and hold harmless all directors and
officers against all expense, liability and loss reasonably incurred or suffered
by such indemnitee in connection therewith. Such indemnification shall continue
as to an indemnitee who has ceased to be a director or officer and shall inure
to the benefit of the indemnitee's heirs, executors and administrators. The
right to indemnification includes the right to be advanced funds from the
Company for expenses incurred in defending any proceeding for which a right to
indemnification is applicable.
STOCKHOLDERS AGREEMENT
Pursuant to the Stockholders Agreement, the Morgan Stanley Stockholders
have the right to designate one director nominee so long as the Morgan Stanley
Stockholders own any shares of the outstanding Common Stock of the Company. See
"Certain Relationships and Related Transactions -- Stockholders Agreement."
LISTING
The Class A Common Stock is traded on the New York Stock Exchange.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is UMB Bank, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have outstanding an
aggregate of 17,978,680 shares of Common Stock assuming no exercise of
outstanding stock options. Of these shares, all of the 5,400,000 shares of
Common Stock sold in the Offering will be freely tradable without restriction or
further registration under the Securities Act by persons other than "affiliates"
of the Company as that term is defined in Rule 144 under the Securities Act (the
"Affiliates"). Of the remaining 12,578,680 shares, 3,493,680 shares of Common
Stock held by certain existing stockholders are "restricted securities" as that
term is defined in Rule 144 under the Securities Act (the "Restricted Shares").
These Restricted Shares were acquired in transactions exempt from registration
under the Securities Act and may not be resold unless they are
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registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, such as Rule 144, Rule 144(k) or Rule 701
promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated in accordance with the Rule) who has beneficially
owned Restricted Shares for at least one year or any person who may be deemed an
affiliate of the Company is entitled, subject to certain conditions, to sell
within any three-month period a number of shares of which does not exceed the
greater of (i) one percent of the Company's then outstanding shares of Common
Stock (approximately 179,787 shares immediately after the Offering, assuming no
exercise of outstanding stock options) or (ii) the average weekly trading volume
of the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner-of-sale and notice
requirements and the availability of current public information about the
Company. A person (or persons whose shares are aggregated in accordance with the
Rule) who is not an "affiliate" of the Company at any time during the 90 days
preceding a sale and who beneficially owns shares that were not acquired from
the Company or an affiliate of the Company within the past two years is entitled
to sell such shares under Rule 144(k) without regard to volume limitations,
manner of sale provisions, notice requirements or the availability of current
public information on the Company. In general, under Rule 701 as currently in
effect, any employee, consultant or advisor of the Company who purchased shares
from the Company in connection with a compensatory stock or option plan or other
written agreement is eligible to resell such shares 90 days after the effective
date of this Offering in reliance on Rule 144, but without compliance with
certain restrictions, including the holding period, contained in Rule 144. The
Commission has proposed an amendment to Rule 144 which may further liberalize
the provisions of Rule 144.
Beginning 90 days after the date of this Prospectus, 3,492,680 of the
Restricted Shares will be eligible for sale on the public market under Rule 144,
provided the conditions of that rule have been met. All of such Restricted
Shares are subject to lock-up agreements with the Underwriters that prohibit
their sale or other disposition for 90 days from the date of this Prospectus
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the Underwriters (except with respect to shares of Common Stock held by the
Morgan Stanley Stockholders, for which prior written consent of all the U.S.
Representatives is required).
Pursuant to the Stockholders Agreement, the Company has granted the Morgan
Stanley Stockholders and Citicorp certain "demand" registration rights with
respect to the shares of Common Stock held by them. The other Existing
Stockholders are entitled, subject to certain limitations, to register shares of
Common Stock in connection with a registration statement prepared by the
Company. See "Certain Relationships and Related Transactions -- Stockholders
Agreement."
Certain members of the Company's senior management, including Messrs.
Schroeder, Webster, Watson, Abreo, Potter, Dear and Bailey have agreed to
certain restrictions and limitations on the transferability of shares of Common
Stock owned by them as provided in the Stockholders Agreement. See "Certain
Relationships and Related Transactions -- Stockholders Agreement." Subject to
the lock-up period describe above, the Morgan Stanley Stockholders may choose to
dispose of the Common Stock owned by them. The timing of such sales or other
dispositions by such stockholders (which could include distributions to the
Morgan Stanley Stockholders' limited partners) will depend on market and other
conditions, but could occur relatively soon after the lock-up period, including
pursuant to the exercise of their registration rights. The Morgan Stanley
Stockholders are unable to predict the timing of sales by any of their limited
partners in the event of a distribution to them. Such dispositions could be
privately negotiated transactions or public sales.
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CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS FOR NON-U.S. HOLDERS
In the opinion of Sonnenschein Nath & Rosenthal, the following is a summary
of certain of the material United States federal income and estate tax
consequences of the ownership and disposition of Class A Common Stock applicable
to "Non-United States Holders." A "Non-United States Holder" is any beneficial
owner of Class A Common Stock that, for United States federal income or estate
tax purposes, as the case may be, is a non-resident alien individual, a foreign
corporation, a foreign partnership or a foreign estate or trust as such terms
are defined in the Internal Revenue Code of 1986, as amended (the "Code"). This
summary is based on the Code and administrative and judicial interpretations as
of the date hereof, all of which are subject to change either retroactively or
prospectively. This summary does not address all aspects of United States
federal income and estate taxation that may be relevant to Non-United States
Holders in light of their particular circumstances (such as certain tax
consequences applicable to United States expatriates, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers and
pass-through entities) and does not address any tax consequences arising under
the laws of any state, local or foreign taxing jurisdiction or the application
of a particular tax treaty. Prospective investors are urged to consult their tax
advisors regarding the United States federal, state and local income and other
tax consequences, and the non-United States tax consequences, of owning and
disposing of Class A Common Stock.
DIVIDENDS
Subject to the discussion below, any dividend paid to a Non-United States
Holder generally will be subject to United States withholding tax either at a
rate of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable tax treaty. For purposes of determining whether tax
is to be withheld at a 30% rate, or at a reduced rate as specified by an
applicable tax treaty, under current United States Treasury Regulations the
Company ordinarily will presume that dividends paid on or before December 31,
1999 to a holder with an address in a foreign country are paid to a resident of
such country absent knowledge that such presumption is not warranted. Under such
Regulations, dividends paid on or before December 31, 1999 to a holder with an
address within the United States generally will be presumed to be paid to a
holder who is not a Non-United States Holder and will not be subject to the 30%
withholding tax, unless the Company has actual knowledge that the holder is a
Non-United States Holder.
Recently finalized United States Treasury Regulations applicable to
dividends paid after December 31, 1999 (the "Final Regulations") (which, until
such date was extended, was to apply to dividends paid after December 31, 1998)
provide for certain presumptions (which differ from those described above) upon
which the Company may generally rely to determine whether, in the absence of
certain documentation, a holder should be treated as a Non-United States Holder
for purposes of the 30% withholding tax described above (rather than a U.S.
person subject to the backup withholding rules discussed below). The
presumptions would not apply for purposes of granting a reduced rate of
withholding under a treaty. Under the Final Regulations, to obtain a reduced
rate of withholding under a treaty a Non-United States Holder will be required
either (i) to provide an Internal Revenue Service Form W-8 certifying such
Non-United States Holder's entitlement to benefits under a treaty together with,
in certain circumstances, additional information or (ii) satisfy certain other
applicable certification requirements. The Final Regulations also provide
special rules to determine whether, for purposes of determining the
applicability of a tax treaty and for purposes of the 30% withholding tax
described above, dividends paid to a Non-United States Holder that is an entity
should be treated as paid to the entity or those holding an interest in that
entity.
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from withholding tax. However, such effectively
connected dividends are subject to regular United States income tax in the same
manner as if the Non-United States Holder were a United States person for
federal income tax purposes. Effectively connected dividends may be subject to a
different treatment under an applicable tax treaty depending on whether such
dividends are attributable to a permanent establishment of the Non-United States
Holder in the United States. A Non-United States Holder may claim exemption from
withholding under the effectively connected income exception by filing Internal
Revenue Service Form 4224 (Exemption from Withholding of
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Tax on Income Effectively Connected With the Conduct of a Trade or Business in
the United States) each year with the Company or its paying agent prior to the
payment of the dividends for such year. The Final Regulations will replace Form
4224 with Form W-8 and certain additional information. Effectively connected
dividends received by a corporate Non-United States Holder may be subject to an
additional "branch profits tax" at a rate of 30% (or such lower rate as may be
specified by an applicable tax treaty) of such corporate Non-United States
Holder's effectively connected earnings and profits, subject to certain
adjustments.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
United States Internal Revenue Service ("IRS").
GAIN ON DISPOSITION OF CLASS A COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax with respect to gain realized upon the sale or other
disposition of Class A Common Stock unless (i) such gain is effectively
connected with a United States trade or business of the Non-United States
Holder; (ii) the Non-United States Holder is a non-resident alien individual who
holds the Class A Common Stock as a capital asset, is present in the United
States for a period or periods aggregating 183 days or more during the calendar
year in which such sale or disposition occurs, and either the non-resident alien
individual has a "tax home" in the United States or the sale is attributable to
an office or other fixed place of business maintained by the non-resident alien
individual in the United States; or (iii) the Company is or has been a "United
States real property holding corporation" for federal income tax purposes at any
time within the shorter of the five-year period ending on the date of the
disposition or such holder's holding period (the "determination period"). The
Company has determined that it is not, and does not anticipate becoming a
"United States real property holding corporation" for federal income tax
purposes. Even if the Company is a United States real property holding
corporation for federal income tax purposes at any time during the determination
period, the disposition of Class A Common Stock by a Non-United States Holder
that did not own more than five percent of the Class A Common Stock during the
determination period will not be treated as a disposition of an interest in a
United States real property holding corporation if the Class A Common Stock is
treated as "regularly traded on an established securities market" during the
calendar year. Non-United States Holders should consult applicable tax treaties,
which might result in a United States federal income tax treatment on the sale
or other disposition of Class A Common Stock different than as described above.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
The information reporting requirements apply regardless of whether withholding
was reduced by an applicable tax treaty or if withholding was not required
because the dividends were effectively connected with a trade or business in the
United States of the Non-United States Holder. A similar report is sent to the
holder. Pursuant to tax treaties or other agreements, the IRS may make its
reports available to tax authorities in the recipient's country of residence.
Under current United States Treasury Regulations, unless the Company has
actual knowledge that a holder is a Non-United States Holder, dividends paid on
or before December 31, 1999 to a holder at an address within the United States
may be subject to backup withholding at a rate of 31% and additional information
reporting if the holder is not an "exempt recipient" as defined in Treasury
Regulations (which includes corporations) and fails to provide a correct
taxpayer identification number and other information to the Company. In
addition, backup withholding and such additional information reporting will
generally not apply to dividends paid on or before December 31, 1999 to holders
at an address outside the United States (unless the Company has knowledge that
the holder is a United States person) or to dividends paid on or before December
31, 1999 to Non-United States Holders that are either subject to the United
States withholding tax (whether at 30% or a reduced rate) or that are exempt
from such withholding because such dividends constitute effectively connected
income. For dividends paid after December 31, 1999, the Final Regulations
provide certain presumptions and other rules under which Non-United States
Holders may be subject to backup withholding and related information reporting
in the absence of required certifications.
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Under current United States Treasury Regulations, proceeds from the
disposition of Class A Common Stock by a Non-United States Holder effected by or
through a United States office of a broker will be subject to information
reporting and to backup withholding at a rate of 31% of the gross proceeds
unless such Non-United States Holder certifies under penalties of perjury as to
its name, address and status as a Non-United States Holder or otherwise
establishes an exemption. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
transaction is effected outside the United States by or through a non-United
States office of a broker. However, United States information reporting
requirements (but not backup withholding) will apply to a payment of disposition
proceeds where the transaction is effected outside the United States if (a) the
disposition is made through an office outside the United States of a broker that
is either (i) a United States person for United States federal income tax
purposes, (ii) a "controlled foreign corporation" for United States federal
income tax purposes, (iii) a foreign person which derives 50% or more of its
gross income for certain periods from the conduct of a United States trade or
business or (iv) effective after December 31, 1999, certain brokers that are
foreign partnerships with U.S. partners or that are engaged in a U.S. trade or
business, and (b) the broker fails to maintain documentary evidence in its files
that the holder is a Non-United States Holder and that certain conditions are
met or that the holder otherwise is entitled to an exemption. For proceeds from
the disposition of the Class A Common Stock after December 31, 1999, the Final
Regulations provide more detailed rules concerning such documentation.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If backup withholding results in an overpayment of United States
income taxes, a refund may be obtained, provided that the required documents are
filed with the IRS.
ESTATE TAX
An individual Non-United States Holder who is treated as the owner of Class
A Common Stock at the time of such individual's death or has made certain
lifetime transfers of an interest in Class A Common Stock will be required to
include the value of such Class A Common Stock in such individual's gross estate
for United States federal estate tax purposes and may be subject to United
States federal estate tax, unless an applicable tax treaty provides otherwise.
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UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters
named below for whom Morgan Stanley & Co. Incorporated, BT Alex. Brown
Incorporated, Goldman, Sachs & Co. and George K. Baum & Company are acting as
U.S. Representatives, and the International Underwriters named below for whom
Morgan Stanley & Co. International Limited, BT Alex. Brown International, a
division of Bankers Trust International PLC, Goldman Sachs International and
George K. Baum & Company are acting as International Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective numbers of shares of Class A Common Stock set forth
opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated......................... 761,250
BT Alex. Brown Incorporated............................... 761,250
Goldman, Sachs & Co....................................... 761,250
George K. Baum & Company.................................. 761,250
Burnham Securities Inc.................................... 75,000
Donaldson, Lufkin & Jenrette Securities Corporation....... 150,000
A.G. Edwards & Sons, Inc.................................. 150,000
Furman Selz LLC........................................... 150,000
Janney Montgomery Scott Inc............................... 75,000
Edward D. Jones & Co., L.P................................ 75,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated........ 150,000
Nationsbanc Montgomery Securities......................... 150,000
Prudential Securities Incorporated........................ 150,000
Wasserstein Perella Securities, Inc....................... 150,000
Subtotal............................................... 4,320,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited................ 270,000
BT Alex. Brown International, a division of Bankers Trust
International PLC...................................... 270,000
Goldman Sachs International............................... 270,000
George K. Baum & Company.................................. 270,000
---------
Subtotal............................................... 1,080,000
---------
Total.................................................. 5,400,000
=========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Class A Common Stock offered
hereby are subject to the approval of certain legal matters by their counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all of the shares of Class A Common Stock offered hereby (other than those
covered by the U.S. Underwriters' over-allotment option described below) if any
such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any prospectus relating to the Shares outside the United
States or Canada or to anyone other than a United States or Canadian Person.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States or
Canadian Person. With respect to any Underwriter that is a U.S.
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Underwriter and an International Underwriter, the foregoing representations and
agreements (i) made by it in its capacity as a U.S. Underwriter apply only to it
in its capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement between
U.S. and International Underwriters. As used herein, "United States or Canadian
Person" means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person), and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Class A Common Stock to be purchased by the Underwriters under the
Underwriting Agreement are referred to herein as the "Shares".
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of Shares as may be mutually agreed. The per share price of any
Shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may otherwise
lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such Shares, directly or indirectly, in Japan or
to or for the account of any resident thereof
68
<PAGE> 69
except for offers or sales to Japanese International Underwriters or dealers and
except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such Shares a notice containing substantially the same
statement as is contained in this sentence.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $.817 a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $.10 a share to other Underwriters or to certain other dealers. After the
initial offering of the shares of Class A Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
The Selling Stockholders have granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 810,000 additional shares of Class A Common Stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The U.S. Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Class A Common Stock offered hereby. To the extent
such option is exercised, each U.S. Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares of Class A Common Stock as the number set forth next to such
U.S. Underwriter's name in the preceding table bears to the total number of
shares of Class A Common Stock set forth next to the names of all U.S.
Underwriters in the preceding table.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
Each of the Company and the directors, executive officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters (except with
respect to shares of Common Stock held by the Morgan Stanley Stockholders, for
which prior written consent of all the U.S. Representatives is required), it
will not, during the period ending 90 days after the date of this Prospectus,
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of Class A Common Stock or any securities convertible
into or exercisable or exchangeable for Class A Common Stock (provided that such
shares or securities are either owned on the date of this Prospectus or are
hereinafter acquired prior to or in connection with the Offering) or (ii) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Class A Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Class A Common Stock or such other securities, in cash or
otherwise. The restrictions described in this paragraph do not apply to (a) the
sale of the Shares to the Underwriters, (b) the issuance by the Company of
shares of Common Stock upon the exercise of an option or a warrant or the
conversion of a security outstanding on the date of this Prospectus, (c) the
issuance of shares in connection with the conversion from time to time of the
Class A Common Stock into Class B Common Stock (and vice versa), (d) the grants
of stock options to employees, directors or consultants pursuant to the terms of
a plan disclosed herein which first became exercisable more than 90 days after
the date of the Prospectus, (e) the issuance by the Company of shares of Common
Stock pursuant to any existing 401(k) plan, (f) bona fide charitable donations
or estate planning dispositions, provided that, prior to such transfer, the
transferee in any such transaction agrees in writing to be bound by the terms of
this paragraph and the form and substance of such writing has received written
approval from Morgan Stanley & Co. Incorporated or (g) transfers due to the
death or disability of a seller, provided that the transferee agrees in writing
to be bound by the terms of this paragraph and the form and substance of such
writing has received written approval from Morgan Stanley & Co. Incorporated.
In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters may
over-allot in connection with the Offering, creating a short position in the
Class A Common Stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the
69
<PAGE> 70
Class A Common Stock, the Underwriters may bid for, and purchase, shares of
Class A Common Stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Class A Common Stock in the Offering, if the syndicate
repurchases previously distributed Class A Common Stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the Class A
Common Stock above independent market levels. The Underwriters are not required
to engage in these activities, and may end any of these activities at any time.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Underwriters have agreed to pay certain expenses, other than
underwriting discounts and commissions, incurred in connection with the
Offering.
Upon consummation of the Offering, affiliates of Morgan Stanley & Co.
Incorporated and Morgan Stanley & Co. International Limited will own 7.8% of the
Common Stock (3.4% if the over-allotment option granted to the U.S. Underwriters
is exercised in full). Currently, affiliates of Morgan Stanley & Co.
Incorporated and Morgan Stanley & Co. International Limited have designated two
members to the Board of Directors (Messrs. Niehaus and Sorrel). Messrs. Niehaus
and Sorrel are employees of Morgan Stanley & Co. Incorporated. See "Management."
From time to time, Morgan Stanley & Co. Incorporated and its affiliates have
provided, and continue to provide, investment banking and financial advisory
services to the Company for which they have received customary fees and
commissions.
Prior to October 1997, Morgan Stanley Senior Funding, Inc., an affiliate of
Morgan Stanley & Co. Incorporated, one of the U.S. Underwriters, served as
documentation agent under the agreements relating to the Company's Credit
Facility, and acted as arranger for the Credit Facility for which it received a
customary fee. Morgan Stanley Senior Funding, Inc. also provides other general
financing and banking services to the Company and its affiliates from time to
time. Morgan Stanley & Co. Incorporated also served as one of the U.S. and
International Underwriters in connection with the Company's initial public
offering in October 1997 for which it received customary underwriting fees.
Bankers Trust Company, an affiliate of BT Alex. Brown Incorporated (which is one
of the U.S. Underwriters) and BT Alex. Brown International (which is one of the
International Underwriters), is administrative agent and a lender under the
Company's Credit Facility. From time to time, George K. Baum & Company has
provided, and continues to provide, investment banking and financial advisory
services to the Company for which it has received customary fees and
commissions. George K. Baum & Company also served as one of the U.S. and
International Underwriters in connection with the Company's initial public
offering in October 1997 for which it received customary underwriting fees. One
of the Company's nine directors is a director of George K. Baum & Company.
The Class A Common Stock is traded on the New York Stock Exchange under the
symbol "PLB."
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby and
certain other matters will be passed upon for the Company by Sonnenschein Nath &
Rosenthal, Kansas City, Missouri. Certain legal matters will be passed upon for
the Underwriters by Davis Polk & Wardwell, New York, New York. Davis Polk &
Wardwell has performed, and will continue to perform, legal services for the
Morgan Stanley Stockholders and has acted as counsel to the Morgan Stanley
Stockholders in connection with their investments in the Company.
EXPERTS
The financial statements of the Company at September 30, 1996 and 1997, and
for the fiscal year ended December 31, 1995, for the nine-month fiscal period
ended September 30, 1996 and the fiscal year ended September 30, 1997 appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
70
<PAGE> 71
AMERICAN ITALIAN PASTA COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets at September 30, 1996 and 1997 and December
31, 1997 (unaudited)...................................... F-3
Statements of Operations for the fiscal year ended December
31, 1995, the fiscal nine-months ended September 30, 1996
and the fiscal year ended September 30, 1997 and for the
three-month periods ended December 31, 1996 and 1997
(unaudited)............................................... F-4
Statements of Stockholders' Equity for the fiscal year ended
December 31, 1995, the fiscal nine-months ended September
30, 1996 and the fiscal year ended September 30, 1997 and
for the three-month period ended December 31, 1997
(unaudited)............................................... F-5
Statements of Cash Flows for the fiscal year ended December
31, 1995, the fiscal nine-months ended September 30, 1996
and the fiscal year ended September 30, 1997 and for the
three-month periods ended December 31, 1996 and 1997
(unaudited)............................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 72
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
fiscal 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 fiscal year ended June 30, 1997 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
October 27, 1997 except Note 13, as
to which the date is April 6, 1998
F-2
<PAGE> 73
AMERICAN ITALIAN PASTA COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
------------- ------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS (Note 2)
Current assets:
Cash and temporary investments........................ $ 1,818 $ 2,724 $ 1,687
Trade and other receivables........................... 12,494 9,180 12,799
Prepaid expenses and deposits......................... 1,879 1,028 2,656
Inventory............................................. 14,374 13,675 15,282
Deferred income taxes (Note 3)........................ 269 635 257
-------- -------- --------
Total current assets.................................... 30,834 27,242 32,681
Property, plant and equipment:
Land and improvements................................. 4,413 4,540 4,540
Buildings............................................. 37,491 37,491 37,491
Plant and mill equipment.............................. 81,461 84,233 84,685
Furniture, fixtures and equipment..................... 3,635 4,581 4,900
-------- -------- --------
127,000 130,845 131,616
Accumulated depreciation.............................. (23,247) (29,332) (31,019)
-------- -------- --------
103,753 101,513 100,597
Construction in progress.............................. -- 23,721 49,637
-------- -------- --------
Total property, plant and equipment..................... 103,753 125,234 150,234
Deferred income taxes (Note 3).......................... 4,479 1,124 1,359
Other assets............................................ 2,622 4,575 659
-------- -------- --------
Total assets............................................ $141,688 $158,175 $184,933
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 7,193 $ 8,644 $ 10,729
Income tax payable.................................... -- 134 1,003
Accrued expenses...................................... 3,664 5,447 5,919
Current maturities of long-term debt (Notes 2 & 12)... 8,078 829 913
Revolving line of credit facility (Notes 2 & 12)...... 13,500 -- --
-------- -------- --------
Total current liabilities............................... 32,435 15,054 18,564
Long-term debt (Notes 2 & 12)........................... 93,284 100,137 35,638
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 16
Class B common stock, $.001 par value:
Authorized shares -- 25,000,000.................... -- -- --
Additional paid-in capital............................ 33,071 55,324 142,008
Notes receivable from officers........................ -- (298) (273)
Accumulated deficit................................... (17,110) (12,053) (11,020)
-------- -------- --------
Total stockholders' equity.............................. 15,969 42,984 130,731
-------- -------- --------
Total liabilities and stockholders' equity.............. $141,688 $158,175 $184,933
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 74
AMERICAN ITALIAN PASTA COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------
1995 1996 1996 1997 1996 1997
------------ ------------- ------------- ------------- -------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues (Note 5)............ $92,903 $92,074 $121,149 $129,143 $29,547 $35,536
Cost of goods sold........... 73,851 68,555 91,230 93,467 21,149 25,760
Plant expansion costs (Note
8)......................... 2,065 -- -- -- -- 266
------- ------- -------- -------- ------- -------
Gross profit................. 16,987 23,519 29,919 35,676 8,398 9,510
Selling and marketing
expense, including product
introduction costs (Note
10)........................ 5,303 16,798 18,445 13,664 4,453 2,631
General and administrative
expense.................... 2,930 2,805 3,686 3,766 693 1,188
------- ------- -------- -------- ------- -------
Operating profit............. 8,754 3,916 7,788 18,246 3,252 5,691
Interest expense, net........ 8,008 8,023 10,770 10,119 2,552 264
------- ------- -------- -------- ------- -------
Income (loss) before income
tax expense (benefit) and
extraordinary item......... 746 (4,107) (2,982) 8,127 700 5,427
Income tax expense (benefit)
(Note 3)................... 270 (1,556) (1,139) 3,070 268 2,062
------- ------- -------- -------- ------- -------
Income (loss) before
extraordinary item......... 476 (2,551) (1,843) 5,057 432 3,365
Extraordinary item:
Loss due to early
extinguishment of
long-term debt, net of
income taxes (Note 2)... -- (1,647) (1,647) -- -- (2,332)
------- ------- -------- -------- ------- -------
Net income (loss)............ $ 476 $(4,198) $ (3,490) $ 5,057 $ 432 $ 1,033
======= ======= ======== ======== ======= =======
Net income (loss) per common
share (Note 13):
Before extraordinary item.... $ 0.05 $ (0.25) $ (0.18) $ 0.44 $ 0.04 $ 0.20
Extraordinary item........... -- (0.16) (0.16) -- -- (0.14)
------- ------- -------- -------- ------- -------
Total........................ $ 0.05 $ (0.41) $ (0.34) $ 0.44 $ 0.04 $ 0.06
======= ======= ======== ======== ======= =======
Weighted-average common
shares outstanding......... 10,195 10,223 10,219 11,466 10,230 16,430
======= ======= ======== ======== ======= =======
Net income (loss) per common
share -- assuming dilution
(Note 13):
Before extraordinary item.... $ 0.05 $ (0.25) $ (0.18) $ 0.42 $ 0.04 $ 0.19
Extraordinary item........... -- (0.16) (0.16) -- -- (0.13)
------- ------- -------- -------- ------- -------
Total -- assuming dilution... $ 0.05 $ (0.41) $ (0.34) $ 0.42 $ 0.04 $ 0.06
======= ======= ======== ======== ======= =======
Weighted-average common
shares outstanding......... 10,433 10,223 10,219 12,119 10,480 17,455
======= ======= ======== ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 75
AMERICAN ITALIAN PASTA COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
CLASS A CLASS A ADDITIONAL RECEIVABLE TOTAL
COMMON COMMON PAID-IN FROM ACCUMULATED STOCKHOLDERS'
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 3,174,528 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
Issuance of 5,310,000 shares of Class A Common
Stock, net of issuance costs (unaudited).... 5,310,000 5 86,684 -- -- 86,689
Payment on notes receivable from officers
(unaudited)................................. -- -- -- 25 -- 25
Net income (unaudited)........................ -- -- -- -- 1,033 1,033
---------- --- -------- ----- -------- --------
Balance at December 31, 1997 (unaudited)...... 16,776,056 $16 $142,008 $(273) $(11,020) $130,731
========== === ======== ===== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 76
AMERICAN ITALIAN PASTA COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, -------------------
1995 1996 1997 1996 1997
------------ ------------- ------------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)........................ $ 476 $ (4,198) $ 5,057 $ 432 $ 1,033
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operations:
Depreciation and amortization.......... 6,279 5,434 7,828 1,787 1,868
Deferred income tax expense
(benefit)........................... 264 (1,556) 2,989 -- 1,194
Extraordinary loss due to early
extinguishment of long-term debt.... -- 1,647 -- -- 2,332
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 2,955 (3,619)
Prepaid expenses and deposits.......... (364) (952) 464 42 (1,250)
Inventory.............................. (2,814) (1,830) 1,086 233 (1,607)
Accounts payable and accrued
expenses............................ 6,610 (3,961) 2,792 (2,104) 3,041
Other.................................. (574) (276) (492) (881) 299
-------- -------- -------- ------- -------
Net cash provided by (used in) operating
activities............................. 5,730 (7,477) 23,071 2,464 3,291
Investing activities:
Additions to property, plant and
equipment........................... (38,789) (3,041) (28,428) (829) (26,302)
-------- -------- -------- ------- -------
Net cash used in investing activities.... (38,789) (3,041) (28,428) (829) (26,302)
Financing activities:
Additions to deferred debt issuance
costs............................... (71) (2,083) (2,115) -- (325)
Proceeds from issuance of debt......... 40,795 86,470 11,730 320 21,763
Net borrowings under revolving line of
credit facility..................... -- 13,500 (5,500) (2,000) --
Principal payments on debt and capital
lease obligations................... (7,848) (85,669) (19,810) (95) (86,178)
Proceeds from issuance of common stock,
net of issuance costs............... 190 100 21,958 -- 86,714
-------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities............................. 33,066 12,318 6,263 (1,775) 21,974
-------- -------- -------- ------- -------
Net increase (decrease) in cash and
temporary investments.................. 7 1,800 906 (140) (1,037)
Cash and temporary investments at
beginning of period.................... 11 18 1,818 1,818 2,724
-------- -------- -------- ------- -------
Cash and temporary investments at end of
period................................. $ 18 $ 1,818 $ 2,724 $ 1,678 $ 1,687
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 77
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. In addition, the financial information as of December
31, 1997 and for the three-month periods ended December 31, 1996 and 1997 is
unaudited. The Company believes that such information includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows.
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
F-7
<PAGE> 78
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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:
<TABLE>
<CAPTION>
NUMBER OF
YEARS
---------
<S> <C>
Land improvements........................................... 40
Buildings................................................... 30
Plant and mill equipment.................................... 20
Packaging equipment......................................... 10
Furniture, fixtures and equipment........................... 5
</TABLE>
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.
F-8
<PAGE> 79
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
2. LONG-TERM DEBT
The Company refinanced certain of its credit facilities subsequent to
September 30, 1997 as more fully described in Note 12.
F-9
<PAGE> 80
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
2. LONG-TERM DEBT -- (CONTINUED)
The principal maturity terms of the new $150 million unsecured, revolving
credit facility are as follows:
<TABLE>
<CAPTION>
FACILITY AMOUNT SCHEDULED COMMITMENT 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 1/2
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.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average interest rate...................... 9.0% 8.4% 8.5%
</TABLE>
F-10
<PAGE> 81
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
2. LONG-TERM DEBT -- (CONTINUED)
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
---- --------- -------------- --------
<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:
<TABLE>
<S> <C>
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
=======
</TABLE>
F-11
<PAGE> 82
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
3. INCOME TAXES -- (CONTINUED)
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 MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 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>
F-12
<PAGE> 83
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
3. INCOME TAXES -- (CONTINUED)
The reconciliation of income tax computed at the U.S. statutory tax rate to
income tax expense is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 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
F-13
<PAGE> 84
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
6. STOCK OPTION PLAN -- (CONTINUED)
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>
NUMBER OF OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE 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
------------------------------- -------------------------------
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE 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
F-14
<PAGE> 85
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
6. STOCK OPTION PLAN -- (CONTINUED)
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 MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 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>
F-15
<PAGE> 86
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
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
ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 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
====== ======
</TABLE>
There were no such costs in 1995.
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
F-16
<PAGE> 87
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
12. SUBSEQUENT EVENTS -- (CONTINUED)
Stanley Dean Witter & Co. (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.
13. NET INCOME (LOSS) PER COMMON SHARE
The Company adopted SFAS No. 128 "Earnings Per Share" in its first quarter
ended on December 31, 1997. SFAS No. 128 replaced the former reporting of
primary and fully diluted earnings per share with its required reporting of
basic and diluted earnings per share. Under the new requirements, the dilutive
effect of
F-17
<PAGE> 88
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
13. NET INCOME (LOSS) PER COMMON SHARE -- (CONTINUED)
stock options is excluded from basic earnings per share but included in the
computation of diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
SFAS No. 128 requirements.
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.
The following table sets forth the computation of the numerator and
denominator used in the calculation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------
1995 1996 1996 1997 1996 1997
------------ ------------- ------------- ------------- -------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Income (loss) before
extraordinary item..... $ 476 $(2,551) $(1,843) $ 5,057 $ 432 $ 3,365
Extraordinary item:
Loss due to early
extinguishment of
long-term debt, net
of income taxes...... -- (1,647) (1,647) -- -- (2,332)
------- ------- ------- ------- ------- -------
Numerator for basic and
diluted earnings per
share..................... $ 476 $(4,198) $(3,490) $ 5,057 $ 432 $ 1,033
======= ======= ======= ======= ======= =======
Denominator:
Denominator for basic
earnings per share --
weighted average
shares................. 10,195 10,223 10,219 11,466 10,230 16,430
Effect of dilutive
securities:
Employee stock options.... 238 -- -- 653 250 1,025
------- ------- ------- ------- ------- -------
Dilutive potential common
shares.................... 238 -- -- 653 250 1,025
------- ------- ------- ------- ------- -------
Denominator for diluted
earnings per share --
adjusted weighted average
shares.................... 10,433 10,223 10,219 12,119 10,480 17,455
======= ======= ======= ======= ======= =======
</TABLE>
F-18
<PAGE> 89
AIPC'S PASTA PRODUCTION FACILITIES
PICTURE PICTURE
*Muellers(R) is a registered trademark of Bestfoods
Picture Picture
<PAGE> 90
AIPC LOGO
<PAGE> 91
PROSPECTUS
5,400,000 Shares
AIPC LOGO
American Italian Pasta Company
CLASS A COMMON STOCK
------------------------
OF THE 5,400,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, 1,000,000
SHARES ARE BEING SOLD BY THE COMPANY AND 4,400,000 SHARES ARE BEING SOLD BY THE
SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL
NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES OF CLASS A COMMON STOCK
BY SUCH SELLING STOCKHOLDERS. OF THE 5,400,000 SHARES OF CLASS A COMMON STOCK
BEING OFFERED HEREBY, 1,080,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 4,320,000 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS. SEE "UNDERWRITERS." THE CLASS A COMMON STOCK OF THE COMPANY IS
LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "PLB." ON APRIL 30, 1998,
THE REPORTED LAST SALE PRICE OF THE CLASS A COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE COMPOSITE TRANSACTIONS TAPE WAS $31 PER SHARE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $30 A SHARE
------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
-------- -------------- ----------- -------------------
<S> <C> <C> <C> <C>
Per Share............... $30.00 $1.387 $28.613 $28.613
Total(3)................ $162,000,000 $7,489,800 $28,613,000 $125,897,200
</TABLE>
- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $710,000. See
"Underwriters" for additional information relating to the payment of
expenses in connection with the Offering.
(3) Certain Selling Stockholders have granted to the U.S. Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 810,000 additional Shares of Class A Common Stock at the price
to public less underwriting discounts and commissions, for the purpose of
covering over-allotments, if any. If the U.S. Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions and proceeds to selling stockholders will be $186,300,000,
$8,613,270 and $149,073,730, respectively. The Company will not receive any
proceeds from the sale of Shares of Class A Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders" and "Underwriters."
------------------------
The Shares of Class A Common Stock are offered, subject to prior sale,
when, as and if accepted by the Underwriters named herein and subject to
approval of certain legal matters by Davis Polk & Wardwell, counsel for the
Underwriters. It is expected that delivery of the Shares of Class A Common Stock
will be made on or about May 6, 1998 at the office of Morgan Stanley & Co.
Incorporated, New York, N.Y., against payment therefor in immediately available
funds.
------------------------
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
GEORGE K. BAUM & COMPANY
April 30, 1998
