UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: October 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-13403
American Italian Pasta Company
(Exact name of Registrant as specified in its charter)
Delaware 84-1032638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Italian Way, Excelsior Springs, Missouri 64024
(Address of principal executive office and Zip Code)
Registrant's telephone number, including area code: (816) 502-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Convertible Common Stock:
$.001 par value per share New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
<PAGE>
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
As of December 15, 1998 the aggregate market value of the
Registrant's Class A Convertible Common Stock held by non-affiliates
(using the New York Stock Exchange's closing price) was approximately
$376,040,369.
The number of shares outstanding as of December 10, 1998 of the
Registrant's Class A Convertible Common Stock was 18,086,775 and there
were no shares outstanding of the Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the
1999 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Report. The Definitive Proxy Statement will be filed
no later than 120 days after October 2, 1998.
Introduction and Certain Cautionary Statements
----------------------------------------------
American Italian Pasta Company ("AIPC" or the "Company") changed
its fiscal year end from December 31 to the last Friday of September
or the first Friday of October effective beginning with the nine-month
fiscal period ended September 27, 1996 and for all subsequent periods.
This change resulted in a nine-month fiscal period for 1996, a 53-week
fiscal year for 1997, a 52-week fiscal year for 1998, and a 52 or 53-
week year for all subsequent fiscal years. The Company's first three
fiscal quarters end on the Friday last preceding December 31, March
31, and June 30 or the first Friday of the following month of each
quarter. For purposes of this Annual Report on Form 10-K (this "Annual
Report"), the 1998 and 1997 fiscal years are described as having ended
on September 30 and the 1996 fiscal year is described as the nine-
month fiscal period ended September 30, 1996.
The discussion set forth below, as well as other portions of this
Annual Report, contains statements concerning potential future events.
Such forward-looking statements are based upon assumptions by the
Company's management, as of the date of this Annual Report, including
assumptions about risks and uncertainties faced by the Company.
Readers can identify these forward-looking statements by their use of
such verbs as expects, anticipates, believes or similar verbs or
conjugations of such verbs. If any of management's assumptions prove
incorrect or should unanticipated circumstances arise, the Company's
actual results could materially differ from those anticipated by such
forward-looking statements. The differences could be caused by a
number of factors or combination of factors including, but not limited
to, those factors identified in the Company's Current Report on Form
8-K dated October 29, 1997, which is hereby incorporated by reference.
This report has been filed with the Securities and Exchange Commission
(the "SEC" or the Commission ) in Washington, D.C. and can be
obtained by contacting the SEC's public reference operations or
obtaining it through the SEC's web site on the World Wide Web at
http://www.sec.gov. Readers are strongly encouraged to consider those
factors when evaluating any such forward-looking statement. The
Company will not update any forward-looking statements in this Annual
Report to reflect future events or developments.
The Company holds a number of federally registered and common law
trademarks, which are used throughout this Annual Report. The Company
has registered the following marks with the U.S. Patent and Trademark
Office: AIPC, American Italian Pasta Company, Pasta LaBella,
Montalcino, Calabria and Heartland.
Additionally, a number of federally registered trademarks are
used throughout this Annual Report that are not owned by the Company.
Mueller's is a registered trademark of Bestfoods, Inc. (formerly known
as Bestfoods International, Inc.) ("Bestfoods"). San Giorgio and
Ronzoni are registered trademarks of Hershey Foods Corporation
("Hershey"). Prince and Creamette are registered trademarks of Borden
Foods Holdings Corporation ("Borden").
<PAGE>
PART I
ITEM 1. BUSINESS.
General
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American Italian Pasta Company is the second largest and one of
the fastest-growing producers and marketers of dry 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. During the fiscal year ended September 30, 1998,
the Company had revenue of $189.4 million and earnings before
extraordinary item of $17.6 million.
The Company produces more than 80 dry pasta shapes in two
vertically-integrated milling and pasta 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 milling and pasta
production technology. Management believes that this plant continues
to be among the most efficient and highly-automated pasta facilities
in North America. The South Carolina plant, which commenced operations
in 1995, produces only pasta shapes conducive to high-volume
production and employs a highly-skilled, self-managed work force.
Management believes that the South Carolina plant is the most
efficient pasta facility in North America in terms of productivity and
conversion cost per pound. To meet the significant volume requirements
of the Bestfoods Agreement and support future growth, the Company
completed a capital expenditure program in fiscal 1998 to nearly
double the Company's annual pasta production capacity and add a
highly-automated durum wheat mill to its South Carolina plant.
The Company was incorporated under the laws of the State of
Delaware in 1991, and is the successor by merger of a Colorado
corporation incorporated in 1986. The Company's executive offices are
located at 1000 Italian Way, Excelsior Springs, Missouri 64204, and
its telephone number is (816)502-6000. The Company's home page on the
World Wide Web is located at http://www.pastalabella.com. Information
contained in the Company's home page shall not be deemed to be a part
of this Annual Report.
Recent Developments
-------------------
In 1998, AIPC completed an $86 million capital expenditure
program which increased its current aggregate pasta production
capacity by approximately 90% from over 300 million pounds per year to
over 600 million pounds per year. The additional capacity at the
Missouri facility combined high-speed, high-output pasta production
lines with the increased capability to produce a wide range of
products, and included a distribution center expansion. The capital
expenditure program included the construction of a durum wheat mill in
South Carolina that adjoins the existing pasta plant facility, a 180%
increase in the facility's pasta production capacity, and a doubling
in size of the South Carolina distribution center.
The additional production capacity is used to manufacture and
distribute Mueller's brand pasta and take advantage of other market
opportunities. In the second quarter of fiscal 1998, AIPC assumed
production of substantially all of Bestfoods Mueller's pasta, which
management estimates will require a production capacity of
approximately 180-200 million pounds a year. The 175 million pounds of
annual minimum Bestfoods' purchases that are required under the
Bestfoods Agreement utilize approximately 60% of the Company's newly-
added capacity.
On June 17, 1998, the Company's Board of Directors approved a
long-term supply agreement with Amber Milling Company, a division of
Harvest States Cooperatives ("Harvest States"), one of the largest
agribusiness cooperatives in the United States. Under the agreement,
the Company will for approximately $35 million construct a pasta
production facility adjacent to Harvest States' wheat mill in Kenosha,
Wisconsin and Harvest States will supply semolina and other raw
materials to the planned new plant.
In addition to the Kenosha project, the Company's Board of
Directors also approved approximately $40 million for additional
expansions in the Columbia, South Carolina and Excelsior Springs,
Missouri facilities. The Excelsior Springs expansion will increase
the Company's product range to include automated production and
packaging of retail lasagna, which the Company currently purchases
externally from other producers. The Columbia expansion will include
two additional production lines and highly efficient retail packaging
systems to support the Company's growth in the Retail market. With
the completion of these projects, the Company's aggregate production
capacities will be the largest in North America at approximately 800
million pounds annually. The Company anticipates completion of these
projects in the third quarter of fiscal year ending September 30,
1999.
Products and Brands
-------------------
AIPC's product line, comprising over 1,500 stockkeeping 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 smaller individually-wrapped packages
for retail consumers. AIPC contracts with third parties for the
production of certain specialized pasta shapes, such as stuffing
shells and manicotti, 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 1998, 1997 and 1996.
The Company believes that its state-of-the-art, Italian pasta
production equipment is capable of producing the highest quality
pasta. AIPC's products are produced to satisfy the specifications of
the Company's customers as well as its own product specifications,
which management believes are among the highest in the industry. The
Company's pasta is distinguished by a rich, natural "wheaty" taste and
a consistently smooth and firm ("al dente") texture with a minimum
amount of white spots or dark specks. AIPC evaluates the quality of
its products through: (i) internal laboratory evaluation against
competitive products on physical characteristics, including color,
speck count, shape and consistency, and cooking performance, including
starch release, protein content and texture; and (ii) competitive
product comparisons that AIPC's customers perform on a regular basis.
The Company submits its production facilities to semiannual
inspections by the American Institute of Baking ("AIB"), the leading
United States baking, food processing and allied industries evaluation
agency for sanitation and food safety. The Company consistently has
achieved the AIB's highest "Superior" rating. The Company also
implemented a comprehensive Hazard Analysis Critical Control Point
("HAACP") program in 1994 to continuously monitor and improve the
safety, quality and cost-effectiveness of the Company's facilities and
products. The Company believes that having an AIB rating of "Superior"
and meeting HAACP standards have helped the Company attract new
business and strengthen existing customer relationships.
In fiscal 1995, AIPC introduced a product line of all natural,
full-flavored pasta that is marketed under the Pasta LaBella brand.
Pasta LaBella flavored pasta is principally marketed as a branded
product to grocery and other retailers and to Sysco Corporation
("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 in a proprietary manufacturing process allows
the Company to provide superior product quality and flavor delivery
compared to competitive flavored pasta products. Pasta LaBella
flavored pasta was recognized as one of the top 10 new products in the
United States in 1996 by Food Processing Magazine. AIPC also intends
to continue assisting its customers with innovative products and
packaging, and the development of additional value-added products
intended to generate higher margins than traditional pasta products.
Marketing and Distribution
--------------------------
AIPC actively markets its products through approximately 20
internal sales and marketing personnel and approximately 30
independent and in-house food brokers and distributors throughout the
United States, Canada and Mexico. 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, a
complete product offering, distinctive packaging marketing and
promotional plans specifically tailored to the customers' needs,
competitive pricing and superior customer service to attract new
customers and grow existing customers' pasta sales. The Company has
established a significant market presence in North America by
developing strategic customer relationships with food industry leaders
that have substantial pasta requirements. The Company has a long-term
supply agreement with Sysco, the nation's largest marketer and
distributor of food service products. In 1998, AIPC became the
exclusive producer of Mueller's, the largest pasta brand in the United
States, pursuant to a recent long-term manufacturing and distribution
agreement with 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
8 of the 10 largest grocery retailers in the United States, including
Wal-Mart, K-Mart, A&P, Publix, Albertsons, American Stores, WinnDixie
and Ahold. AIPC also has long-term supply agreements with several
private label customers. In addition, AIPC has developed supply
relationships with leading food processors, such as Pillsbury, General
Mills and Kraft Foods, which use the Company's pasta as an ingredient
in branded food products.
One of the Company's core strengths has been the development of
strong customer relationships and the establishment of a reputation as
a technical and service expert in the pasta field. As part of its
overall customer service strategy, AIPC uses its category management
expertise to assist customers in their distribution and supply
management decisions regarding pasta and new products. The Company's
category management experts use online ACNielsen's supermarket data to
recommend pricing, SKU sets and shelf spacing to both private label
and branded customers. AIPC representatives also assist food
processors in incorporating AIPC's pasta as an ingredient in its
customers' food products. The Company sponsors an annual "Pasta
Technology Forum" which is a training and development program for its
customers' production and new product personnel. In addition to
technical education, the Company provides dedicated technical support
to its institutional customers by making recommendations regarding the
processing of pasta in their facilities. AIPC believes that these
value-added activities provide customers with a better appreciation
and awareness of the Company and its products.
The Company consistently demonstrates its commitment to customer
service through the development of enhanced customer service programs.
Examples of these programs include the creation by AIPC of an
Efficient Customer Response ("ECR") model which uses Electronic Data
Interchange ("EDI") and vendor replenishment programs to assist its
key retail customers, and category management services for its private
label and branded customers. These programs also enable the Company to
more accurately forecast production and sales demand, enabling higher
utilization of production capacities and lower average unit costs.
The Company's three distribution centers are strategically
located in South Carolina, Missouri and Southern California to serve
the national market. Additionally, the Company uses three public
warehouses, one in Central Florida, one in Massachusetts and one in
South Carolina. The Company's South Carolina and Missouri
distribution centers are integrated with the Company's production
facilities manufacture cased, finished products that are automatically
conveyed via enclosed case conveying systems from the production
facilities to the distribution centers for automated palletization and
storage until shipping. The combination of integrated facilities and
multiple distribution centers enables AIPC to realize significant
distribution cost savings and provides lead time, fill rate and
inventory management advantages to its customers. The operation of the
Missouri and South Carolina distribution centers is outsourced under a
long-term agreement with Lanter Company, a firm specializing in
warehouse and logistics management services.
Most of the Company's customers use inventory management systems
which track sales of particular products and rely on reorders being
rapidly filled by suppliers. The Company works with its customers to
forecast consumer demand which allows the Company to cost-effectively
produce inventory stocks to the forecasted demand levels.
Pasta Production
----------------
Pasta's primary ingredient is semolina, which is extracted from
durum wheat through a milling process. Durum wheat is used exclusively
for pasta. Durum wheat used in United States pasta production
generally originates from Canada, North Dakota, Montana, Arizona and
California. Each variety of durum wheat has its own unique set of
protein, gluten content, moisture, density, color and other attributes
which affect the quality and other characteristics of the semolina.
The Company blends semolina from different wheat varieties as needed
to meet customer specifications.
AIPC's ability to produce high-quality pasta generally begins
with its purchasing durum wheat directly from farmers and grower-owned
cooperatives in North Dakota, Montana, Arizona and California. This
purchasing method ensures that the extracted semolina meets AIPC's
specifications. The Company has several sources for durum wheat and is
not dependent on any one supplier or sourcing area. As a result, the
Company believes that it has adequate sources of supply for durum
wheat. The Company occasionally buys and sells semolina to balance its
milling and production requirements. AIPC and Dakota Growers Pasta
Company ("Dakota Growers") are the only major producers of pasta in
North America that own vertically integrated milling and production
facilities.
Durum wheat is a cash crop whose average monthly market price has
fluctuated from a low of $3.82 per bushel to a high of $7.49 per
bushel in the last five years. Between December 1, 1997 and October 2,
1998, the market price of durum wheat decreased by approximately 38%
from $6.47 per bushel to $4.00 per bushel. Until February 1998 durum
wheat did not have a related futures market to hedge against such
price fluctuations. As of February 12, 1998, durum futures began
trading on the Minneapolis grain exchange. In managements' view,
these futures contracts have limited liquidity and other less
desirable features which have precluded their use by AIPC as a durum
cost hedge. The Company manages its durum wheat cost risk through
long-term contracts and other arrangements with its customers and
advance purchase contracts for durum wheat which are generally less
than twelve months' duration. Long-term supply agreements and other
customer arrangements which allow for the pass-through of durum wheat
cost changes in certain circumstances represented approximately 80% of
AIPC's total revenue base.
Durum wheat is shipped to the Company's production facility in
Missouri directly from North Dakota, Montana and Canada under a long-
term rail contract with its most significant rail carrier, the
Canadian Pacific Rail System. Under such agreement, the Company is
obligated to transport specified wheat volumes and, in the event such
volumes are not met, the Company must reimburse the carrier for
certain of its costs. The Company currently is in compliance with such
volume obligations.
The durum wheat delivered to AIPC's mills in Missouri and South
Carolina is first unloaded, blended and precleaned. Next, the moisture
content of the wheat is raised to the optimal level required for
milling (the "tempering process"). The cleaned and tempered wheat is
then conveyed to the mill where grinding, sifting, and purifying
processes extract the purest possible semolina. The semolina milling
is controlled from a central control room located in the mill where a
single AIPC team member monitors and directs the mill's entire
milling, cleaning and storage process. Semolina is then pneumatically
distributed from the mill to AIPC's pasta production facilities in
Missouri and South Carolina.
After being mixed with water, the semolina is extruded into the
desired shapes, travels through computer-controlled high-temperature
dryers, and is stabilized at room temperature. The Company's entire
pasta production process is electronically controlled by programmable
logic computers (PLC's) which enable all of the production lines to be
operated and monitored by minimal staff. The pasta is then packaged in
a wide variety of packaging configurations on highly-automated film,
carton and bulk packaging systems and forwarded through automated
conveyors to the distribution center to be palletized and stored prior
to shipment.
AIPC purchases its packaging supplies, including polycellophane,
paperboard cartons, boxes and totes from third parties. Management
believes the Company has adequate sources of packaging supplies.
The Company buys materials in quantities based on the anticipated
future demands of its customers.
Trademarks and Patents
----------------------
The Company holds a number of federally registered and common law
trademarks which it considers to be of considerable value and
importance to its business including: AIPC American Italian Pasta
Company, American Italian, and Pasta LaBella. The Company has
registered the AIPC American Italian Pasta Company, Pasta LaBella,
Montalcino, Calabria, Heartland and other trademarks with the U.S.
Patent and Trademark Office. Additionally, the Company has registered
the proprietary flavoring process for Pasta LaBella flavored pasta.
Dependence on Major Customers
-----------------------------
Historically, a limited number of customers have accounted for a
substantial portion of the Company's revenues. During the fiscal years
ended September 30, 1998 and 1997 and the nine-month fiscal period
ended September 30, 1996, Sysco accounted for approximately 19%, 27%
and 27%, respectively, and sales to Sam's Club accounted for
approximately 15%, 22% and 19%, respectively, of the Company's
revenues. During fiscal 1998, sales to Bestfoods accounted for
approximately 24% of the Company's revenues. There were no sales to
Bestfoods in the prior fiscal years. 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 1999 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, in addition Sysco has renewal options for two
additional three-year periods. The Company has a long-term
manufacturing and distribution agreement with Bestfoods that requires
Bestfoods to purchase a minimum of 175 million pounds of pasta
annually for nine years. The Company does not have long-term supply
contracts with a substantial number of its other customers, including
Sam's Club. Accordingly, the Company is dependent upon its other
customers to sell the Company's products and to assist the Company in
promoting market acceptance of, and creating demand for, the Company's
products. An adverse change in, or termination or expiration without
renewal of, the Company's relationships with or the financial
viability of one or more of its major customers could have a material
adverse effect on the Company's business, financial condition and
results of operations.
In addition, certain exclusivity provisions of the Sysco
Agreement and 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 certain food service businesses other than
Sysco without Sysco's prior consent. Under the Bestfoods Agreement,
AIPC may not produce branded retail pasta for Borden, Hershey or
Barilla Alimentare S.p.A. ("Barilla") without Bestfoods' consent, and
is limited to the production of an aggregate of 12 million pounds of
branded pasta products annually for other producers.
Under the Bestfoods Agreement, Bestfoods closed the facilities
dedicated to the production of Mueller's brand pasta and AIPC became
the exclusive producer of Mueller's, with the exception of certain
specialty items which are purchased from other suppliers. 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 calendar
years. AIPC is paid on a "cost plus" basis in an amount equal to total
actual cost of production plus a specified profit per pound of pasta
produced. Bestfoods has committed to 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. 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 name. Sysco, which operates from approximately
65 operations and distribution facilities nationwide, provides
products and services to approximately 230,000 restaurants, hotels,
schools, hospitals, and other institutions, as well as the U.S.
government. For the year ended September 30, 1998, sales attributed to
Sysco represented approximately 19% of the Company's net revenues.
Sysco recently exercised its option to renew its agreement with AIPC
for an additional three years through June 30, 2000, and has options
to renew the agreement for two additional three-year periods through
June 30, 2006. AIPC products are sold to Sysco on a cost-plus basis,
with annual adjustments based on the prior year's costs. Under the
Sysco Agreement, AIPC may not supply pasta products to any business
other than Sysco in the United States, Mexico or Canada that operates
as, or sells to, institutions and businesses which provide food for
consumption away from home (i.e. food service businesses) without
Sysco's prior consent. In 1998 and 1997, Sysco honored the Company as
one of its top 10 suppliers out of its over 1,300 supplier base. The
Sysco Agreement may be terminated by Sysco upon certain events,
including a substantial casualty to or condemnation of AIPC's Missouri
plant.
Competition
-----------
The Company operates in a highly competitive environment against
numerous well-established national, regional and foreign companies,
and many smaller companies. The Company's competitors include both
independent pasta producers and pasta divisions and subsidiaries of
large food products companies. The Company competes in the procurement
of raw materials, the development of new products and product lines,
the improvement and expansion of previously introduced products and
product lines and the production, marketing and distribution of its
products. Some of these companies have longer operating histories,
broader product lines, significantly greater brand recognition and
greater production capacity and financial and other resources than the
Company. AIPC's products compete with a broad range of food products,
both in the retail and institutional customer markets. Competition in
these markets generally is based on product quality and taste,
pricing, packaging and customer service and logistics capabilities.
The Company believes that it currently competes favorably with respect
to these factors.
The Company's direct competitors include large multinational
companies such as food industry leader Hershey Foods Corp. with brands
such as San Giorgio and Ronzoni; and Borden Foods Co. with brands such
as Prince and Creamette; and regional U.S. producers of retail and
institutional pasta such as Dakota Growers Pasta Co., Philadelphia
Macaroni Co. Inc. and A. Zerega's Sons, Inc., each an independent
producer, and foreign companies such as Italian pasta producers De
Cecco ("De Cecco") and Barilla. The Company also competes, indirectly,
against food processors such as Kraft Foods, General Mills, Inc.,
American Home Food Products Corporation, Campbell Soup Company and
Stouffers Corp., that produce pasta internally as an ingredient for
use in their food products.
The Company's competitive environment depends to a significant
extent on the aggregate industry capacity relative to aggregate demand
for pasta products. Several domestic pasta producers have recently
completed production facility additions or announced their intention
to increase domestic production capacity. In addition to AIPC's
planned capital expansion, management believes that these capacity
additions represent more than 150 million pounds of additional pasta
production capacity in aggregate. Dakota Growers recently increased
the capacity of its durum wheat mill and has purchased two former
Borden pasta plants in Minneapolis. In September 1997, Barilla
announced plans to build a pasta plant near Ames, Iowa with an
estimated annual pasta capacity of approximately 150 million pounds.
The plant is expected to be fully operational in early 1999. Two major
pasta producers have reduced their pasta production capacity. Borden
sold three plants and closed two plants out of its ten North American
pasta plants in 1997, and Bestfoods eliminated its capacity of
approximately 180 million pounds in 1997. Additionally, Borden has
announced plans to close a sixth plant in 1998. In October 1998,
Hershey announced that it has retained Goldman Sachs to sell its pasta
business, which includes eight regional pasta brands and production
facilities. If Hershey is successful in their sale of these assets,
the impact, if any, by AIPC or its customers will not be determinable
until the successor owner business strategies are evident. Management
believes AIPC is well positioned to maintain its competitive
advantages regardless of the Hershey sale outcome.
Several foreign producers, based principally in Italy and Turkey,
have aggressively targeted the U.S. pasta market in recent years. In
1996, a U.S. Department of Commerce investigation revealed that
several Italian and Turkish producers were engaging in unfair trade
practices by selling pasta at less than fair value in the U.S. markets
and benefiting from subsidies from their respective governments.
Effective July 1996, the U.S. International Trade Commission of the
Department of Commerce ("ITC"), imposed anti-dumping and
countervailing duties on Italian and Turkish imports ("the 1996 Anti-
dumping Order"). In December 1998, ITC announced the final results of
its review of 1996 Anti-dumping Order for three Turkish producers. The
ITC indicated that one of the producers had not had any shipments
during the review period (January 19, 1996 to June 30, 1997),
maintained the anti-dumping and countervailing duties for another
Turkish producer and repealed such duties for the third. In addition,
the ITC is conducting an administrative review of its 1996 Anti-
dumping Order relating to 16 Italian pasta producers, including
Barilla and De Cecco. The ITC recently announced that it expects to
complete this review by February 3, 1999. The Company cannot predict
the outcome of the ITC's review. While such duties may enable the
Company and its domestic competitors to compete more favorably against
Italian and Turkish producers in the U.S. pasta market, there can be
no assurance that the duties will be maintained for any length of
time, or that these or other foreign producers will not sell competing
products in the United States at prices less than those of the
Company. Bulk imported pasta, and pasta produced in the U.S. by
foreign firms, are generally not subject to such anti-dumping and
countervailing duties. Foreign pasta producers generally may avoid
such duties by importing bulk pasta into the United States and
repackaging it in U.S. facilities for distribution. A leading branded
Italian producer, Barilla, opened a bulk pasta repackaging and
distribution facility in Syracuse, New York in 1996 and is building a
pasta production plant in Ames, Iowa which is expected to be completed
in early 1999.
Pasta Industry and Markets
--------------------------
North American pasta consumption was approximately 5.0 billion
pounds in 1996. The pasta industry consists of two primary customer
markets: (i) Retail, which includes grocery stores, club stores and
mass merchants that sell branded and private label pasta to consumers;
and (ii) Institutional, which includes both food service distributors
that supply restaurants, hotels, schools and hospitals, as well as
food processors that use pasta as a food ingredient.
The expected increase in North American consumption is primarily
attributable to the widespread recognition that pasta is an
inexpensive, convenient and nutritious food. The U.S. Department of
Agriculture places pasta on the foundation level of its pyramid of
recommended food groups. Products such as flavored pasta, prepared
sauces, boxed pasta dinners, and both frozen and shelf-stable prepared
pasta entrees support consumers' lifestyle demands for convenient at-
home meals. Pasta continues to grow in popularity in restaurants as
Americans continue to dine away from home more frequently.
Pasta Production Capacity. Management believes that pasta
producers have historically rationalized their existing production
facilities. Within the past several years, however, there has been an
increase in some pasta producers' capital reinvestment. Upon
completion of the planned expansion in 1999, AIPC will have increased
its production capacity to over 800 million pounds since commencing
operations in 1988. Several domestic pasta producers have recently
completed production facility additions or announced their intention
to increase domestic production capacity. In addition to AIPC's
planned capital expansion, management believes that these capacity
additions represent more than 200 million pounds in aggregate. Dakota
Growers recently increased the capacity of its durum wheat mill. In
September 1997, Barilla announced plans to build a pasta plant near
Ames, Iowa with an estimated annual pasta capacity of approximately
150 million pounds. Two major pasta producers have also recently
announced planned reductions in pasta production capacity. Borden sold
three plants and closed two plants out of its ten North American pasta
plants in 1997, and Bestfoods eliminated its capacity of approximately
180 million pounds in 1997.
Management estimates pasta imported from foreign producers during
1997 represented approximately 13% of the U.S. dry pasta market, and
that of this amount, approximately two-thirds originated from
producers in Italy and Turkey. The primary foreign suppliers of pasta
with which the Company competes are Barilla and De Cecco.
Pricing pressures from Turkish and Italian pasta producers
aggressively targeting the U.S. markets have adversely affected
returns and earnings of some U.S. producers in recent years. In 1996,
pasta imported from Italy accounted for approximately $140 million in
sales, or around 8.0% of the U.S. pasta market. In 1996, a U.S.
Department of Commerce investigation revealed that several Italian and
Turkish producers were engaging in unfair trade practices by selling
pasta at less than fair value in the U.S. markets and benefiting from
subsidies from their respective governments. Effective July 1996, the
U.S. International Trade Commission imposed anti-dumping duties
ranging from 2.8% to 46.7% on Italian imports and from 56.8% to 63.3%
on Turkish imports, as well as countervailing duties ranging from 1.2%
to 11.2% on Italian imports and from 3.9% to 15.8% on Turkish imports.
Although Italian and Turkish importers still participate in the major
U.S. customer markets, management believes that these duties have
significantly reduced the volume of low-priced pasta from Italy and
Turkey.
Customer Markets - Retail. Hershey, Borden and 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 sold 21.0% of the total pounds sold in the
branded Retail market for the year ended September 30, 1998. Hershey
announced in October 1998 that it was seeking to sell its pasta
business. Borden, which sold 12.5% of the total pounds in the Retail
market for the year ended September 30, 1998, has shifted 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. During 1998,
Bestfoods transferred substantially all of its Mueller's brand pasta
production to AIPC.
Between the Company's first fiscal quarter of 1994 and the fourth
fiscal quarter of 1998, sales of private label pasta products
increased from 18.6% to 21.5% of the total pounds of pasta sold in the
Retail market based on A.C. Nielsen scanner data. Management believes
that sales of private label pasta products will continue to grow at a
rate in excess of the overall Retail pasta market. After Borden's
departure from the private label market, AIPC became the leading
supplier in the remaining fragmented market. Management believes that
the private label category continues to offer significant growth and
profit opportunities to retailers and efficient producers. Retailers
often prefer high-quality private label products to branded products
because private label products typically enable retailers to generate
higher margins and maintain greater control of in-store merchandising.
While consumers traditionally have viewed private label products as
having lower quality than branded products, management believes that
new high-quality private label products have begun to change this
perception. Management attributes some of this change in the private
label market to the increasingly upscale image, improved packaging,
higher product quality and competitive prices of private label
products.
Customer Markets - Institutional. The Institutional market
includes both food service distributors that supply restaurants,
hotels, schools and hospitals, as well as food processors that use
pasta as a food ingredient. Traditional food service customers include
businesses and organizations, such as Sysco and US Food service, Inc.,
that sell products to restaurants, healthcare facilities, schools,
hotels and industrial caterers. Most food service distributors obtain
their supply of pasta from third party producers such as AIPC. The
food service market is highly-fragmented and is served by numerous
regional and local food distributors, including both "traditional"
food service customers and chain restaurant customers. Sysco, the
nation's largest food service marketer and distributor of food service
products and one of the nation's largest commercial purchasers of
pasta products, serves approximately 10% of the food service customers
in the United States and has more than double the revenues of the next
largest food service distributor.
The Institutional market also includes sales to food processors
who use pasta as an ingredient in their food products such as frozen
dinner entrees and side dishes, dry side dish mixes, canned soups and
single-serve meals. Large food processors that use pasta as a food
ingredient include Kraft Foods, American Home Food Products
Corporation, Stouffers Corp., Campbell Soup Company, ConAgra, Inc.,
Pillsbury and General Mills. The consistency and quality of the color,
starch release, texture, cooking consistency, and gluten and protein
content of pasta produced for food processors is crucial to their
products' success. As a result, food processors have stringent
specifications for these attributes.
The size of the Institutional market is affected by the number of
food processors that elect to produce pasta internally rather than
out-sourcing their production. Historically, most pasta used by food
processors was manufactured internally for use in food processors' own
products. Management believes, however, that an increasing number of
food processors may discontinue the internal production of their own
pasta and outsource their production to efficient producers such as
AIPC.
Management Information Systems
------------------------------
The Company's production, distribution, sales and marketing
operations are supported by an IBM AS400-based computer hardware
system. The hardware system utilizes licensed BPCS manufacturing
software which has been tailored to the Company's management processes
and integrates its production, purchasing, order entry, inventory
management, distribution and accounting systems. The Company's
management information systems were recently upgraded in anticipation
of the Company's growth and desire to continue to offer its customers
value-added, efficient services, and the need to become "Year 2000
Compliant". The Company has invested substantial amounts in electronic
data interchange and efficient consumer response systems to streamline
the order, invoicing and inventory management functions. The
discussion under Year 2000 set forth under Item 7 is incorporated by
reference herein.
Government Regulation; Environmental Matters
--------------------------------------------
The Company is subject to various laws and regulations relating
to the operation of its production facilities, the production,
packaging, labeling and marketing of its products and pollution
control, including air emissions, which are administered by federal,
state, and other governmental agencies. The Company's production
facilities are subject to inspection by the U.S. Food and Drug
Administration and Occupational Safety and Health Administration, the
Missouri Department of Natural Resources and the South Carolina
Department of Health and Environmental Control.
Employees
---------
As of September 30, 1998, the Company employed 360 full-time
persons, of whom 120 were salaried employees and 240 were hourly
employees. As of September 30, 1997, the Company employed 289 full-
time persons, of whom 130 were salaried employees and 159 were hourly
employees. The Company's employees are not represented by any labor
unions. AIPC considers its employee relations to be good.
ITEM 2. PROPERTIES.
Production Facilities. AIPC's pasta production plants are located
near Kansas City in Excelsior Springs, Missouri, and in Columbia,
South Carolina. The Company's facilities are strategically located to
support North American distribution of AIPC's products and benefit
from the rail and interstate highway infrastructure. At September 30,
1998, the Company's facilities had combined annual milling and
production capacity of approximately 600 million pounds of durum
semolina and 620 million pounds of pasta.
During fiscal 1998, the Company's capital expenditure program
increased AIPC's current pasta production capacity by nearly 90% from
330 million pounds per year to 620 million pounds per year. At the
Company's Missouri facility, the Company added high-speed, high-output
pasta production lines with the increased capability to produce a full
range of products and expanded the distribution center. The capital
expenditures program included the construction of a durum wheat mill
in South Carolina which adjoins the existing pasta plant facility, a
180% increase in the facility's pasta production capacity, and a
doubling of the South Carolina distribution center capacity.
The additional capacity is used to produce and distribute
Mueller's brand pasta and take advantage of other market
opportunities. The 175 million pounds of Bestfoods' annual minimum
purchases that are required under the Bestfoods Agreement utilize
approximately 60% of the Company's newly-added pasta production
capacity.
AIPC's 1999 capital expenditure program will increase AIPC's
current pasta production capacity from 620 million pounds per year to
over 800 million pounds per year. At the Company's Missouri facility,
the Company will expand its product range to include automated
production and packaging of lasagna. Additionally, the Company will
be adding two production lines and highly efficient retail packaging
systems to the South Carolina facility. The capital expenditures
program also includes the construction of a pasta production facility
which adjoins a Harvest States' owned wheat mill in Kenosha,
Wisconsin.
Distribution Centers. The Company currently owns the distribution
center adjoining its Missouri plant and leases under a capital lease
its distribution centers in South Carolina. In addition, the Company
leases space in three public warehouses, one in Southern California,
one in Central Florida and one in Northern South Carolina.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently is not a party to any litigation, nor is it
aware of any litigation threatened against it which, if commenced and
adversely determined, management expects would likely have a material
adverse effect upon the business or financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to its stockholders during
the fourth quarter of the Company's most recent fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K and instruction
3 to paragraph (b) of Item 401 of Regulation S-K, the following list
is included as an unnumbered Item in Part I of this Annual Report in
lieu of being included in AIPC's Definitive Proxy Statement which will
be filed no later than 120 days after September 30, 1998. All
executive officers are elected annually and serve at the discretion of
the Board of Directors. Certain of the executive officers have
employment agreements with the Company.
The following table sets forth certain information concerning
each of the executive officers of the Company as of September 30,
1998.
NAME AGE POSITION
---- --- --------
Horst W. Schroeder....... 57 Chairman of the Board
of Directors
Timothy S. Webster....... 36 President and
Chief Executive Officer;
Director
Norman F. Abreo.......... 48 Executive Vice President--
Operations
David E. Watson.......... 43 Executive Vice President --
Operations Support and
Technology
David B. Potter.......... 39 Executive Vice President and
General Manager -- Industrial
Markets
Jerry H. Dear.......... 51 Senior Vice President-Retail
Markets
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 was a manager of PSF
Holdings, L.L.C. and served as Chairman of the Board of its wholly-
owned subsidiary, Premium Standard Farms, Inc., a vertically-
integrated pork producer, from 1996 to May 1998.
Timothy S. Webster has served as President of the Company since
June 1991, as President and Chief Executive Officer of the Company
since May 1992, and as a Director since June 1989. Mr. Webster joined
the Company in April 1989, and served as Chief Financial Officer from
May 1989 to December 1990 and as Chief Operating Officer from December
1990 to June 1991.
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. He
was promoted to Executive Vice President - Operations Support and
Technology in July 1998. Prior to joining AIPC, Mr. Watson spent 18
years with the accounting firm of Arthur Andersen & Co., most recently
as partner-in-charge of its Kansas City and Omaha Business Consulting
Group practice. Mr. Watson is a certified public accountant.
David B. Potter joined the Company in 1993 as its Director of
Procurement. He was named Vice President in 1994 and Senior Vice
President Procurement in June 1997. He was promoted to Executive Vice
President and General Manager Industrial Markets in July 1998.
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 joined the Company in 1993 as a Business
Development Manager. He was named Vice President - Retail Sales in
1995 and Senior Vice President - Retail Markets in February 1998.
Before joining the Company, Mr. Dear had worked at Pillsbury from 1983
to 1993, most recently as a Region Business Manager.
There are no arrangements or understandings between the executive
officers and any other person pursuant to which the executive officer
was or is to be selected as an officer, except with respect to the
executive officers who have entered into employment agreements, which
agreements designate the position(s) to be held by the executive
officer.
None of the above officers are related to one another by family.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Class A Convertible Common Stock, par value $0.001
per share (the "Class A common stock") is traded on the New York Stock
Exchange under the symbol "PLB". Trading of the Company's Class A
common stock began October 9, 1997.
The range of the high and low prices per share of the Company's
common stock for fiscal 1998;
Year Ended
September 30, 1998
High Low
---- ---
First Quarter $26.00 $19.25
Second Quarter $37.25 $23.25
Third Quarter $38.75 $30.00
Fourth Quarter $39.50 $24.625
As of December 16, 1998, there were approximately 5,360 holders
of the Company's Class A common stock. No shares of the Company's
Class B Convertible Common Stock, par value $0.001 per share (the
"Class B common stock" and together with the Class A common stock, the
"Common Stock") are outstanding on the date of this Annual Report.
The Company has not declared or paid any dividends on its Common
Stock to date and does not anticipate paying any such dividends in the
foreseeable future. The Company intends to retain earnings for the
foreseeable future to provide funds for the operation and expansion of
its business and for the repayment of indebtedness. The borrowing
agreements relating to the Company's current credit facility contain
certain provisions which effectively prohibit the payment of
dividends. Future borrowing agreements of the Company may also contain
limitations on the payment of dividends. Any determination to pay
dividends in the future will be at the discretion of the Company's
Board of Directors and will depend upon the Company's financial
condition, capital requirements, results of operations and other
factors, including any contractual or statutory restrictions on the
Company's ability to pay dividends. The Company has no restricted
retained earnings at September 30, 1998.
Securities Sold in Unregistered Offerings during Fiscal Year 1998
-----------------------------------------------------------------
None.
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of operations data for the fiscal years
ended September 30, 1998 and 1997, the nine-month fiscal period ended
September 30, 1996, and the selected balance sheet data as of
September 30, 1998 and 1997 are derived from the Financial Statements
including the Notes thereto of the Company audited by Ernst & Young
LLP, independent auditors, appearing elsewhere in this Annual Report.
The selected statement of operations data for the years ended December
31, 1995 and 1994 and the selected balance sheet data as of September
30, 1996, December 31, 1995 and 1994 have been derived from financial
statements of the Company not included herein, which have been audited
by Ernst & Young LLP. The selected statement of operations data for
the calendar year ended December 31, 1996 and the twelve-month period
ended September 30, 1996 and the balance sheet data as of December 31,
1996 have been derived from the Company's unaudited internal financial
statements, which in the opinion of management, have been prepared on
the same basis as the audited financial statements and reflect all
adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of the results of operations and financial
position of the Company. The statement of operations data of the
Company for the calendar year ended December 31, 1996 and the
twelve-month period ended September 30, 1996 and the balance sheet
data as of December 31, 1996 are included herein only for comparison
purposes. The selected other data has been derived from the accounting
records of the Company and has not been audited. The selected
financial and other data set forth below should be read in conjunction
with, and is qualified by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Company's Financial Statements, including the Notes thereto, appearing
elsewhere in this Annual Report. The Company has not paid any
dividends on its Class A common stock during the periods indicated
below.
<PAGE>
<TABLE>
<CAPTION>
NINE-MONTH
FISCAL YEAR TWELVE-MONTH FISCAL PERIOD CALENDAR
ENDED PERIOD ENDED ENDED YEAR ENDED FISCAL YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1996(1) 1996 1995 1994
---- ---- ---- ------- ---- ---- ----
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $189,390 $129,143 $121,149 $92,074 $121,621 $92,903 $69,465
Cost of goods sold 140,110 93,467 91,230 68,555 89,704 73,851 54,393
Plant expansion costs (2) 1,606 -- -- -- -- 2,065 484
------- ------- ------- ------ ------- ------ ------
Gross profit 47,674 35,676 29,919 23,519 31,917 16,987 14,588
Selling and marketing expense,
including product introduction
costs (3) 12,984 13,664 18,445 16,798 21,250 5,303 3,792
General and administrative
expense 4,948 3,766 3,686 2,805 3,498 2,930 1,951
------ ------ ------ ------ ------ ------ ------
Operating profit 29,742 18,246 7,788 3,916 7,169 8,754 8,845
Interest expense, net 1,539 10,119 10,770 8,023 10,575 8,008 4,975
------- ------- ------ ------ ------ ------ -----
Income (loss) before income tax
and extraordinary loss 28,203 8,127 (2,982) (4,107) (3,406) 746 3,870
Income tax expense (benefit) 10,557 3,070 (1,139) (1,556) (1,288) 270 1,484
Extraordinary loss, net of
income tax (4) 2,332 __ 1,647 1,647 1,647 -- 204
------- ------ ------ ------ ------ ----- ------
Net income (loss) $15,314 $5,057 ($3,490) ($4,198) ($3,765) $ 476 $2,182
======= ====== ====== ====== ====== ====== =====
Net income (loss per
common share (Basic):
Before extraordinary item $ 1.03 $ 0.44 $ (0.18) $ (0.25) $ (0.20) $0.05 $ 0.23
Extraordinary item (0.14) -- (0.16) (0.16) (0.16) -- (0.02)
-------- ------ ------- ------- -------- ------ -------
Total $ 0.89 $ 0.44 ($ 0.34) ($ 0.41) ($ 0.36) $ 0.05 $ 0.21
======== ====== ======= ======= ======== ====== =======
Weighted average
common shares outstanding 17,223 11,466 10,219 10,223 10,475 10,445 10,401
Net income (loss) per
common share assuming dilution:
Before extraordinary item $ 0.98 $ 0.42 $ (0.18) $ (0.25) $ (0.20) $ 0.05 $ 0.23
Extraordinary item (0.13) -- (0.16) (0.16) (0.16) -- (0.02)
-------- ------ ------- ------- -------- ------ -------
Total $ 0.85 $ 0.42 ($ 0.34) ($ 0.41) ($ 0.36) $ 0.05 $ 0.21
======== ====== ======= ======= ======== ====== =======
Weighted average common
shares outstanding 17,937 12,119 10,219 10,223 10,480 10,433 10,389
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and temporary
investments $ 5,442 $ 2,724 $ 1,818 $ 1,818 $ 1,678 $ 18 $ 11
Working capital 23,242 12,188 (1,601) (1,601) (1,965) 6,632 4,830
Total assets 259,381 158,175 141,688 141,688 137,974 135,424 93,629
Long-term debt,
less current maturities 48,519 100,137 93,284 93,284 92,143 97,452 62,375
Stockholders' equity 176,784 42,984 15,969 15,969 16,402 20,067 19,401
<FN>
<F1> The Company adopted a fiscal year ending on the last Friday of
September or the first Friday of October, effective beginning with the
nine-month fiscal period ended September 27, 1996 and for all
subsequent fiscal periods. For purposes of this Form 10-K, the 1998
and 1997 fiscal years and the 1996 nine-month fiscal period are shown
as having ended on September 30.
<F2> Plant expansion costs include incremental direct and indirect
manufacturing and distribution costs which are incurred as a result of
construction, commissioning and start-up of new capital assets. These
costs are expensed as incurred but are unrelated to current production
and, therefore, are reported as a separate line item in the statement
of operations.
<F3> Selling and marketing expense includes incremental product
introduction costs, including payment of product placement or
"slotting" fees, related to the Company's launch of its Pasta LaBella
flavored pasta products into the U.S. retail grocery market. The
Company did not incur such product introduction costs prior to the
calendar year ended December 31, 1996. There were no such costs during
the fiscal year ended September 30, 1998. Product introduction costs
were incurred as follows: $2.9 million for the fiscal year ended
September 30, 1997, $8.1 million for the nine-month and twelve-month
periods ended September 30, 1996, and $9.6 million in calendar year
ended December 31, 1996.
<F4> Represents losses due to early extinguishment of long-term debt,
net of income tax.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
Introduction and Certain Cautionary Statements
----------------------------------------------
Management's discussion and analysis of the Company's financial
condition and results of its operations focuses on and is intended to
clarify the Company's results of operations, certain changes in its
financial position, liquidity, capital structure and business
developments for the periods covered by the financial statements
included in this Annual Report. This discussion should be read in
conjunction with, and is qualified by reference to, the other related
information including, but not limited to, the audited financial
statements (including the notes thereto and the independent auditor's
opinion thereon), the description of the Company's business, all as
set forth in this Annual Report, as well as the risk factors discussed
in the Company's Current Report on Form 8-K dated October 29, 1997
(the "Risk Factors"), which has been incorporated by reference into
this Annual Report as if it is fully set forth herein.
As previously noted, the discussion set forth below, as well as
other portions of this Annual Report, contains statements concerning
potential future events. Readers can identify these forward-looking
statements by their use of such verbs as expects, anticipates,
believes or similar verbs or conjugations of such verbs. If any of
management's assumptions on which the statements are based prove
incorrect or should unanticipated circumstances arise, the Company's
actual results could materially differ from those anticipated by such
forward-looking statements. The differences could be caused by a
number of factors or combination of factors including, but not limited
to, the Risk Factors. Readers are strongly encouraged to consider
those factors when evaluating any such forward-looking statement. The
Company will not update any forward-looking statements in this Annual
Report to reflect future events or developments.
The Company changed its fiscal year end from December 31 to the
last Friday of September or the first Friday of October. This change
resulted in a nine-month fiscal year for 1996 and a 53-week year for
fiscal 1997, a 52-week year for fiscal 1998, and a 52 or 53-week year
for all subsequent fiscal years. The Company's first three fiscal
quarters end on the Friday last preceding December 31, March 31, and
June 30 or the first Friday of the following month of each quarter.
For purposes of this Form 10-K, the 1996 fiscal year is described as
the nine-month fiscal period ended September 30, 1996. The statement
of operations data of the Company for the unaudited nine-month period
ended September 30, 1995 and the unaudited twelve-month period ended
September 30, 1996 and the calendar year ended December 31, 1996 are
included herein only for comparison purposes.
For purposes of management's discussion and analysis of results
of operations, fiscal year 1997 is compared to the unaudited twelve
month period ended September 30, 1996 and the fiscal year 1996 is
compared to the unaudited nine month period ended September 1995.
Although the comparative periods are unaudited, the financial
statements on which the discussion is based contain all adjustments
necessary to fairly present the financial position of the Company and
the results of its operations for those periods.
Recent Events
-------------
On December 3, 1998, the Company's Board of Directors adopted a
Stockholder Rights Plan. The rights are triggered if any person
becomes the beneficial owner of 15% or more of the Company's Common
Stock. The rights are intended to protect stockholders against, among
other things, unsolicited attempts to acquire control of American
Italian Pasta Company that do not offer an adequate price to all
stockholders or are otherwise not in the best interests of the Company
and its stockholders.
AIPC and Harvest States/Amber Milling Arrangement
On June 17, 1998, the Company's Board of Directors approved a
long-term supply agreement with Amber Milling Company, a division of
Harvest States Cooperatives ("Harvest States"), one of the largest
agribusiness cooperatives in the United States. Under the agreement,
the Company will construct a pasta production facility adjacent to
Harvest States' wheat mill in Kenosha, Wisconsin and Harvest States
will supply semolina and other raw materials to the planned new plant.
The Company estimates that it will invest approximately $35 million in
capital expenditures to construct the new plant.
In addition to the $35 million Kenosha project, the Company's
Board of Directors also approved another $40 million to again expand
the Columbia, South Carolina and Excelsior Springs, Missouri
facilities. The Excelsior Springs investment will expand the
Company's product range to include automated production and packaging
of lasagna, products which the Company currently purchases externally
from other producers. The Columbia investment will include two
additional production lines and highly efficient retail packaging
systems to support the Company's growth in the Retail market. With
the completion of these projects, the Company's production capacities
will exceed 800 million pounds annually, making it the largest pasta
producer in North America. The Company anticipates completion of
these projects in the third quarter of fiscal year ending September
30, 1999.
Completion of Public Offerings
In October 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, 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 $86.7 million, after deducting the underwriting discount
and the expenses of the Offering. The Company used the proceeds of
the Offering to reduce outstanding debt.
In May 1998, the Company completed a secondary public offering
(the Secondary Offering ) of 6,210,000 shares of Class A Common
Stock, par value of $.001 per share, at $30 per share, of which
1,000,000 shares were offered by the Company and 5,210,000 shares were
sold by certain selling shareholders. The Secondary Offering generated
$30 million of gross proceeds. Net proceeds of the Secondary Offering
were $27.8 million after deducting the underwriting discount and the
expenses of the Secondary Offering. The Company used the net proceeds
of the Secondary Offering to reduce outstanding debt. In connection
with the Secondary Offering, certain executive officers exercised
options to purchase and sell 239,620 shares of Class A Common 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. 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
In October 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 indexed to LIBOR. As a
result of the restructuring, the Company incurred a first quarter
extraordinary charge of approximately $2.3 million, net of tax,
related to the write off of deferred debt issuance costs.
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.
<PAGE>
<TABLE>
<CAPTION>
NINE-MONTH
FISCAL YEAR FISCAL YEAR TWELVE MONTH FISCAL PERIOD CALENDAR
ENDED ENDED PERIOD ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Retail 71.0% 56.7% 59.5% 60.7% 59.6%
Institutional 29.0 43.3 40.5 39.3 40.4
----- ----- ----- ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Cost of goods sold 74.0 72.4 75.3 74.5 73.7
----- ----- ----- ----- -----
Gross profit before plant
expansion costs 26.0 27.6 24.7 25.5 26.3
Plant expansion costs 0.8 -- -- -- --
----- ----- ----- ----- -----
Gross profit 25.2 27.6 24.7 25.5 26.3
Selling and marketing expense,
including product
introduction costs 6.9 10.6 15.2 18.2 17.5
General and administrative
expense 2.6 2.9 3.0 3.0 2.9
----- ----- ----- ----- ----
Operating profit 15.7 14.1 6.5 4.2 5.9
Interest expense, net 0.8 7.8 8.9 8.7 8.7
Income tax expense (benefit) 5.6 2.4 (0.9) (1.7) (1.1)
Extraordinary loss, net of
income tax 1.2 -- 1.4 1.8 1.4
----- ----- ----- ----- -----
Net income (loss) 8.1% 3.9% (2.9)% (4.6)% (3.1)%
===== ===== ===== ===== =====
</TABLE>
<PAGE>
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues increased $60.2 million, or 46.7%, to $189.4
million for the fiscal year ended September 30, 1998, from $129.1
million for the fiscal year ended September 30, 1997. The revenue
increase for the fiscal year ended September 30, 1998 was primarily
due to increases in unit volume including the initiation of sales of
Mueller's brand pasta to Bestfoods, favorable changes in sales mix and
increases in average sales prices related to the pass through of
higher durum wheat costs. Management expects increases in revenue in
fiscal 1999 primarily as a result of the Company's long-term supply
agreement with Bestfoods and growth with existing and new accounts.
Revenues for the Retail market increased $61.2 million, or 83.6%,
to $134.5 million for the fiscal year ended September 30, 1998, from
$73.3 million for the fiscal year ended September 30, 1997. The
increase primarily reflects the initiation of sales of Mueller's brand
pasta to Bestfoods and gains in private label volumes which are offset
by lower sales volumes of Pasta LaBella flavored pasta.
Revenues for the Institutional market decreased $1.0 million, or
1.8%, to $54.9 million for the fiscal year ended September 30, 1998,
from $55.9 million for the fiscal year ended September 30, 1997. This
decrease was primarily a result of reductions in opportunistic
contract volumes versus the prior period due to high capacity
utilization in the current period to support the Retail market volume
gains. Non-contract Institutional market unit volumes and revenues
were generally consistent between periods.
GROSS PROFIT. Gross Profit increased $12.0 million, or 33.6%, to
$47.7 million for the fiscal year ended September 30, 1998, from $35.7
million for the fiscal year ended September 30, 1997. Gross profits
increased generally as a result of the volume and revenue gains
referenced above. Gross profit as a percentage of revenues decreased
to 25.2% for the fiscal year ended September 30, 1998 from 27.6% for
the fiscal year ended September 30, 1997. The decrease in gross
profit as a percentage of revenues relates to the relatively lower
gross margin earned on Bestfoods volumes, lower sales volumes of the
relatively higher margin Pasta LaBella flavored pasta and plant
expansion costs. Management expects increases in gross profit in 1999
as a result of volume and related revenue increases. However,
management expects gross profit as a percentage of revenues to
decrease in fiscal 1999 versus fiscal 1998 based on anticipated higher
Bestfoods volumes and related revenue share.
SELLING AND MARKETING EXPENSE. Selling and marketing expense
decreased $0.7 million, or 5.0%, to $13.0 million for the fiscal year
ended September 30, 1998, from $13.7 million reported for the fiscal
year ended September 30, 1997. Selling and marketing expense as a
percentage of revenues decreased to 6.9% for the fiscal year ended
September 30, 1998, from 10.6% for the comparable prior period. The
decreases are primarily due to product introduction costs, as the
Company incurred no product introduction costs for the fiscal year
ended September 30, 1998, compared to $2.9 million of such costs for
the fiscal year ended September 30, 1997. The decrease in product
introduction costs was partially offset by increases in other selling
and marketing expenses which are required to support the increases in
private label revenues.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative
expense increased $1.2 million, or 31.4%, to $4.9 million for the
fiscal year ended September 30, 1998, from $3.8 million reported for
the comparable period last year, but decreased as a percentage of
revenues from 2.9% to 2.6%. The increase in general and
administrative costs primarily relates to increases in legal and
accounting fees, shareholder communication expenses and other
incremental costs related to the Company's first year as a public
company.
OPERATING PROFIT. Operating profit for the fiscal year ended
September 30, 1998, was $29.7 million, an increase of 63.0% over the
$18.2 million reported for the fiscal year ended September 30, 1997.
Operating profit increased as a percentage of revenues to 15.7% for
the fiscal year ended September 30, 1998, from 14.1% for the fiscal
year ended September 30, 1997.
INTEREST EXPENSE. Interest expense for the fiscal year ended
September 30, 1998, was $1.5 million, decreasing 84.8% from the $10.1
million reported for the fiscal year ended September 30, 1997. The
decrease was primarily the result of reduced borrowings under the
Company's credit facility as a result of the reduction of the
Company's outstanding debt with the net proceeds realized from the
Company's fiscal 1998 initial and secondary public offerings of common
stock. In addition, the Company is incurring lower effective interest
rates as a result of the Company's October 1997 credit facility
restructuring.
INCOME TAX. Income tax for the fiscal year ended September 30,
1998, was $10.6 million, increasing $7.5 million from the $3.1 million
reported for the fiscal year ended September 30, 1997, and reflects an
effective income tax rate of approximately 38%.
EXTRAORDINARY ITEM. During the fiscal year ended September 30,
1998, 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 October 1997 extinguishment and restructuring of
the Company's principal bank credit agreement. There was no such item
in the 1997 period.
NET INCOME. Net income for the fiscal year ended September 30,
1998, was $15.3 million, increasing from the $5.1 million reported for
the fiscal year ended September 30, 1997. Net income per common
share-assuming dilution was $0.85 in fiscal 1998 compared to $0.42 per
share for the fiscal year ended September 30, 1997.
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.
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 19.2%, to
$35.7 million for the fiscal year ended September 30, 1997, from $29.9
million for the twelve-month period ended September 30, 1996. Gross
profit as a percentage of revenues increased to 27.6% for the fiscal
year ended September 30, 1997 from 24.7% for the twelve-month period
ended September 30, 1996. These increases were the result of increases
in revenues and lower product costs due to improved plant efficiencies
and capacity utilization.
SELLING AND MARKETING EXPENSE. Selling and marketing expense
decreased $4.8 million, or 25.9%, 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%, to $3.8 million for the fiscal
year ended September 30, 1997, from $3.7 million reported for the
comparable period last year, but decreased as a percentage of revenues
from 3% to 2.9%.
OPERATING PROFIT. Operating profit for the fiscal year ended
September 30, 1997, was $18.2 million, an increase of 134.3% over the
$7.8 million reported for the twelve-month period ended September 30,
1996. Excluding product introduction costs, operating profit increased
$5.2 million, or 32.7%, to $21.1 million for the fiscal year ended
September 30, 1997, from $15.9 million reported 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 6.0% from the $10.8
million reported for the twelve-month period ended September 30,
1996. The decrease was primarily the result of reduced borrowings
under the Company's term and revolving credit facilities resulting
from the $22.3 million in proceeds realized from the April 1997
private equity financing.
INCOME TAX. Income tax for the fiscal year ended September 30,
1997, was $3.1 million, increasing $4.2 million from the $(1.1)
million reported for the twelve-month period ended September 30, 1996,
and reflects an effective income tax rate of approximately 38%.
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 fiscal year ended September 30, 1997.
NET INCOME. Net income for the fiscal year ended September 30,
1997, was $5.1 million, increasing from the $(3.5) million reported
for the twelve-month period ended September 30, 1996. Diluted net
income per common share was $0.42 in fiscal 1997 compared to a loss of
$0.34 per share for the twelve-month period ended September 30, 1996.
NINE-MONTH FISCAL PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO THE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
REVENUES. Revenues increased $28.3 million, or 44.4%, to $92.1
million for the nine-month fiscal period ended September 30, 1996,
from $63.8 million for the nine-month period ended September 30, 1995.
This increase was primarily due to higher unit volume, favorable
changes in product sales mix and higher average prices resulting from
the introduction of the Company's new, higher-priced Pasta LaBella
flavored pasta.
Revenues for the Retail market increased $23.1 million, or 70.4%,
to $55.9 million for the nine-month fiscal period ended September 30,
1996, from $32.8 million for the nine-month period ended September 30,
1995. This increase was due to (i) higher sales volume, with the
largest increases coming from private label and club stores customers;
(ii) higher average unit prices due to the introduction of the
Company's new, higher-priced Pasta LaBella flavored pasta into the
U.S. retail grocery market; (iii) improved product sales mix in the
club store category; and (iv) the pass-through of higher durum wheat
costs.
Revenues for the Institutional market increased $5.2 million, or
16.8%, to $36.2 million for the nine-month fiscal period ended
September 30, 1996, from $31.0 million for the nine-month period ended
September 30, 1995. The volume gains in ingredient and food service
categories were partially offset by lower Contract Sales volumes as
available production capacity was utilized by retail sales growth. The
average 1996 institutional unit price also increased due to the pass-
through of higher durum wheat costs.
GROSS PROFIT. Gross profit increased $12.9 million, or 121.7%, to
$23.5 million for the nine-month fiscal period ended September 30,
1996, from $10.6 million for the nine-month period ended September 30,
1995. Gross profit as a percentage of revenues increased to 25.5% for
the nine-month fiscal period ended September 30, 1996, from 16.6% for
the nine-month period ended September 30, 1995. These increases were
primarily the result of (i) higher sales volumes; (ii) higher average
unit prices, primarily as a result of Pasta LaBella flavored pasta
sales; (iii) the absence of plant expansion costs; (iv) lower per unit
warehousing and distribution costs resulting from outsourcing
logistics functions through a new strategic alliance with Lanter
Company; and (v) improved plant efficiencies and capacity utilization,
including the impact of the new South Carolina production and
distribution facilities.
SELLING AND MARKETING EXPENSE. Selling and marketing expense
increased $13.1 million, or 354.1%, to $16.8 million for the nine-
month fiscal period ended September 30, 1996, from $3.7 million for
the nine-month period ended September 30, 1995. Selling and marketing
expense as a percentage of revenues increased to 18.2% for the nine-
month fiscal period ended September 30, 1996 from 5.7% for the nine-
month period ended September 30, 1995. These increases in selling and
marketing expense were primarily due to the Company's incurrence of
$8.1 million of product introduction costs during the nine-month
fiscal period ended September 30, 1996 related to the retail
introduction of the Company's Pasta LaBella flavored pasta products.
These costs included payment of product placement fees or "slotting,"
introductory consumer sampling, couponing, advertising and trade
promotions. There were no comparable 1995 expenditures. Selling and
marketing expenses also increased due to Pasta LaBella flavored pasta
sales and increases in club store and private label revenues.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative
expense increased $0.8 million, or 40.0%, to $2.8 million for the
nine-month fiscal period ended September 30, 1996, from $2.0 million
for the nine-month period ended September 30, 1995, but decreased as a
percentage of revenues from 3.2% for the nine-month period ended
September 30, 1995 to 3.0% for the nine-month fiscal period ended
September 30, 1996. The increase in general and administrative expense
was primarily due to increases in Management Information Systems (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%.
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 LOSS. Net loss increased $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.
Liquidity and Capital Resources
-------------------------------
The Company's primary sources of liquidity are cash provided by
operations and borrowings under its existing credit facility. The
Company also generated liquidity through the sale of equity in 1998,
which proceeds were used to reduce debt and to finance capital
expansions. Cash and temporary investments totaled $5.4 million and
net working capital totaled $23.2 million at September 30, 1998. At
September 30, 1997, cash and temporary investments totaled $2.7
million and working capital totaled $12.2 million. The $11.0 million
increase in working capital was financed with the existing credit
facility and the increases in the Company's operating results.
The Company's net cash provided by (used in) operating activities
totaled $28.4 million for the fiscal year ended September 30, 1998
compared to $23.1 million for the fiscal year ended September 30, 1997
and $(7.5) million for the nine-month period ended September 30, 1996.
The increases during these periods are primarily a result of increases
in net income, and non-cash charges which were offset by volume
related increases in net working capital investment.
Cash flow used in investing activities principally relates to the
Company's investments in manufacturing, distribution, milling and MIS
assets. Capital expenditures were $84.8 million for the fiscal year
ended September 30, 1998, $28.4 million for the year ended September
30, 1997 and $3.0 million for the nine-month period ended September
30, 1996, respectively. The increase in spending for the fiscal year
ending September 30, 1998 was planned and is a result of the Company's
previously referenced $86.0 million capital expansion program.
Net cash provided by financing activities was $59.0 million for
the fiscal year ended September 30, 1998 compared to $6.3 million for
the fiscal year ended September 30, 1997. The $59.0 million is
primarily a result of (1) $114.5 million in net proceeds from the
fiscal 1998 Initial and Secondary Public Equity Offerings, which were
substantially used for repayment of short-term and long-term
borrowings (2) $60.8 million proceeds from issuance of debt (net of
$.3 million deferred debt issuance costs) partially offset by the
$117.1 million principal payments on debt and capital lease
obligations. Net cash provided by financing activities was $6.3
million for the year ended September 30, 1997, as a result of net
borrowings required to fund the Company's operations and working
capital.
At September 30, 1998, the three-month LIBOR rate was 5.3%, and
the Company's aggregate, weighted average bank debt borrowing rate was
7.9%.
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 Credit Agreement.
The Company currently uses cash to fund capital expenditures,
repayments of debt and working capital requirements. The Company
expects that future cash requirements will principally be for capital
expenditures, repayments of indebtedness under the Credit Agreement
and working capital requirements.
The Company has committed to spend $39 million on raw material
purchases for fiscal year 1999 and has approximately $60 million
remaining on the $75 million capital expenditure program which it
initiated in 1998, a program which the Company anticipates will be
fully funded by the fourth quarter of fiscal year 1999. The Company
expects to fund these commitments from operations and borrowings under
the current revolving credit facility. The current credit facility has
scheduled reductions in the amount of the commitment beginning at the
end of fiscal year 1999. At this time, the expected borrowings
outstanding under the current credit facility (assuming the full $60
million remaining capital expenditure commitment is funded under the
facility) do not exceed the facility's minimum commitment. The
facility matures at the end of fiscal year 2002. The Company
anticipates that any borrowing outstanding at that time will be
satisfied with funds from operations or will be refinanced.
Management believes that net cash provided by operating
activities and net cash provided by financing activities will be
sufficient to meet the Company's expected capital and liquidity needs
for the foreseeable future.
Year 2000
---------
Many 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 completed its assessment of its computer hardware
and software systems and has recently begun upgrading those systems
that were identified as not being year 2000 compliant. The existing
systems are being upgraded either through modification or replacement.
The Company expects to complete testing of the systems upgrades by the
end of its first fiscal 1999 quarter and to convert all critical
systems to year 2000 compliant status during the second fiscal 1999
quarter. The Company has alternate plans in the event that critical
system upgrading is not completed on time, which include short term,
less-efficient programming modifications or manual operations. The
Company believes these options are sufficient to meet the Company's
internal needs.
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, the Company cannot make
any assurances that the upgrade of the Company's computer systems will
be completed on schedule, that the upgraded systems will be free of
defects or that the Company's alternate plans will meet the Company's
needs. If any such risks materialize, the Company could experience
material adverse consequences to the Company's operations and
financial performance, 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 is in the
process of contacting its significant suppliers and customers in 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.
The Company incurred approximately $330,000 in the fiscal year of
1998 and expects to incur approximately $250,000 in the fiscal year of
1999 to resolve the Company's year 2000 compliance issues. All
expenses incurred in connection with year 2000 compliance are being
expensed as incurred, other than acquisitions of new software or
hardware, which are capitalized.
Other Matters
-------------
None.
Effect of Inflation
-------------------
During the last three fiscal periods, inflation has not had a
material effect on the Company. The Company has experienced increases
in its cost of borrowing and raw materials, though generally not
related to inflation. In general, the Company has increased the
majority of customer sales prices to recover significant raw material
cost increases. However, these changes in prices have historically
lagged price increases in the Company's raw material costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposure to market risk through financial
instruments such as long-term debt is not material.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN ITALIAN PASTA COMPANY
INDEX TO AUDITED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors 30
Balance Sheets at September 30, 1998 and 1997 31
Statements of Operations for the years ended
September 30, 1998 and 1997 and the fiscal
nine-months ended September 30, 1996 32
Statements of Stockholders' Equity for the years
ended September 30, 1998 and 1997 and the fiscal
nine-months ended September 30, 1996 33
Statements of Cash Flows for the years ended
September 30, 1998 and 1997 and the fiscal
nine-months ended September 30, 1996 34
Notes to Financial Statements 35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Italian Pasta Company
We have audited the accompanying balance sheets of American
Italian Pasta Company (the Company) as of September 30, 1998 and 1997,
and the related statements of operations, stockholders' equity and
cash flows for the years ended September 30, 1998 and 1997 and the
nine-month fiscal period ended September 30, 1996. 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, 1998 and 1997, and the
results of its operations and its cash flows for the years ended
September 30, 1998 and 1997 and the nine-month fiscal period ended
September 30, 1996 in conformity with generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
_____________________
Kansas City, Missouri
October 29, 1998
<PAGE>
AMERICAN ITALIAN PASTA COMPANY
BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and temporary investments $ 5,442 $ 2,724
Trade and other receivables 16,971 9,180
Prepaid expenses and deposits 1,736 1,028
Inventory 28,051 13,675
Deferred income taxes (Note 3) 802 635
-------- --------
Total current assets 53,002 27,242
Property, plant and equipment:
Land and improvements 4,834 4,540
Buildings 60,196 37,491
Plant and mill equipment 149,027 84,233
Furniture, fixtures and equipment 4,731 4,581
-------- --------
218,788 130,845
Accumulated depreciation (38,250) (29,332)
-------- --------
180,538 101,513
Construction in progress 25,069 23,721
-------- --------
Total property, plant and equipment 205,607 125,234
Deferred income taxes (Note 3) -- 1,124
Other assets 772 4,575
-------- --------
Total assets $259,381 $158,175
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,030 $ 8,644
Accrued expenses 7,225 5,447
Advance customer payments 5,957 --
Income tax payable 1,342 134
Current maturities of long-term debt
(Note 2) 1,206 829
-------- --------
Total current liabilities 29,760 15,054
Long-term debt (Note 2) 48,519 100,137
Deferred income taxes (Note 3) 4,318 --
Commitments and contingencies (Note 4)
Stockholders' equity: (Notes 6 & 11)
Preferred stock, $.001 par value:
Authorized shares - 10,000,000 -- --
Class A common stock, $.001 par value:
Authorized shares 75,000,000 18 11
Class B common stock, $.001 par value:
Authorized shares 25,000,000 -- --
Additional paid-in capital 173,642 55,324
Treasury stock (13) --
Notes receivable from officers (124) (298)
Retained earnings (accumulated deficit) 3,261 (12,053)
-------- --------
Total stockholders' equity 176,784 42,984
-------- --------
Total liabilities and stockholders' equity $259,381 $158,175
======== ========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ITALIAN PASTA COMPANY
STATEMENTS OF OPERATIONS
TWELVE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1996
---- ---- ---- ----
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues (Note 5) $189,390 $129,143 $121,149 $ 92,074
Cost of goods sold 140,110 93,467 91,230 68,555
Plant expansion costs (Note 8) 1,606 -- -- --
-------- -------- -------- --------
Gross profit 47,674 35,676 29,919 23,519
Selling and marketing expense,
including product introduction
costs (Note 10) 12,984 13,664 18,445 16,798
General and administrative expense 4,948 3,766 3,686 2,805
-------- -------- -------- --------
Operating profit 29,742 18,246 7,788 3,916
Interest expense, net 1,539 10,119 10,770 8,023
-------- -------- -------- --------
Income (loss) before income tax
expense (benefit) and
extraordinary item 28,203 8,127 (2,982) (4,107)
Income tax expense (benefit) (Note 3) 10,557 3,070 (1,139) (1,556)
------- ------- -------- --------
Income (loss) before extraordinary item 17,646 5,057 (1,843) (2,551)
Extraordinary item:
Loss due to early extinguishment
of long-term debt, net of
income taxes (Note 2) (2,332) -- (1,647) (1,647)
-------- -------- -------- --------
Net income (loss) $ 15,314 $ 5,057 $ (3,490) $ (4,198)
======== ======== ======== ========
Net income (loss) per common share:
Before extraordinary item $ 1.03 $ 0.44 $ (0.18) $ (0.25)
Extraordinary item (0.14) -- (0.16) (0.16)
-------- -------- -------- ---------
Total $ 0.89 $ 0.44 $ (0.34) $ (0.41)
======== ======== ======== ========
Weighted-average common shares outstanding 17,223 11,466 10,219 10,223
======== ======== ======== ========
Net income (loss) per common
share assuming dilution:
Before extraordinary item $ 0.98 $ 0.42 $ (0.18) $ (0.25)
Extraordinary item (0.13) -- (0.16) (0.16)
-------- -------- -------- --------
Total $ 0.85 $ 0.42 $ (0.34) $ (0.41)
======== ======== ======== =======
Weighted-average common shares outstanding 17,937 12,119 10,219 10,223
======== ======== ======== ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ITALIAN PASTA COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
RETAINED
CLASS A CLASS A ADDITIONAL NOTES EARNINGS TOTAL
COMMON COMMON PAID-IN TREASURY RECEIVABLE (ACCUMULATED STOCKHOLDERS
SHARES STOCK CAPITAL STOCK FROM OFFICERS DEFICIT) EQUITY
------- ------- ---------- --------- ------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
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 5,310,000 5 86,684 -- -- -- 86,689
Issuance of 1,000,000
shares of Class A
Common stock, net of
issuance costs 1,000,000 1 27,844 -- -- -- 27,845
Paydown of notes
receivable from
officers -- -- -- -- 174 -- 174
Issuance of shares of
Class A Common stock
to option holders &
other issuanc es 310,554 1 3,790 -- -- -- 3,791
Purchase of treasury
stock -- -- -- (13) -- -- (13)
Net income -- -- -- -- -- 15,314 15,314
---------- ----- -------- ----- ------ -------- --------
Balance at September 30,
1998 18,086,610 $18 $173,642 $(13) $ (124) $3,261 $176,784
========== ===== ======== ====== ======= ======== ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ITALIAN PASTA COMPANY
STATEMENTS OF CASH FLOWS
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income (loss $ 15,314 $ 5,057 $ (4,198)
Adjustments to rconcile net income
(loss) to net cash provided by (used in)
operations:
Depreciation and amortization 9,576 7,828 5,434
Deferred income tax expense
(benefit) 5,275 2,989 (1,556)
Extraordinary loss due to early
extinguishment of long-term debt 2,332 -- 1,647
Changes in operating assets and
liabilities:
Trade and other receivables (7,790) 3,347 (1,785)
Prepaid expenses and deposits (710) 464 (952)
Inventory (14,376) 1,086 (1,830)
Accounts payable and
accrued expenses 7,708 2,658 (3,961)
Advance customer payments 5,957 -- --
Income tax payable 5,432 134 --
Other (290) (492) (276)
--------- ------- --------
Net cash provided by (used in) operating 28,428 23,071 (7,477)
activities
Investing activities:
Additions to property, plant and equipment (84,757) (28,428) (3,041)
-------- ------- --------
Net cash used in investing activities (84,757) (28,428) (3,041)
Financing activities:
Additions to deferred debt issuance costs (325) (2,115) (2,083)
Proceeds from issuance of debt 60,763 11,730 86,470
Net borrowings under revolving line of
credit facility -- (5,500) 13,500
Principal payments on debt and
capital lease obligations (117,083) (19,810) (85,669)
Proceeds from issuance of common
stock, net of issuance costs 115,692 21,958 100
-------- ------- --------
Net cash provided by financing activities 59,047 6,263 12,318
-------- ------- --------
Net increase in cash and temporary
investments 2,718 906 1,800
Cash and temporary investments at
beginning of period 2,724 1,818 18
-------- ------- --------
Cash and temporary investments at
end of period $ 5,442 $ 2,724 $ 1,818
======== ======= ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
AMERICAN ITALIAN PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 second largest producer
and marketer of pasta products in the United States and has 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 1998 fiscal year is described as having
ended on September 30, 1998.
UNAUDITED FINANCIAL INFORMATION
The Company has included information for the twelve months ended
September 30, 1996 in the statements of operations for comparative
purposes. This information is unaudited.
REVENUE RECOGNITION
Sales of the Company's products, including pricing terms, are final
upon shipment of the goods. Accordingly, revenue is recognized at such
time.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES
The Company grants credit to certain customers who meet the Company's
pre-established credit requirements. Generally, the Company does not
require collateral security when trade credit is granted to customers.
Credit losses are provided for in the financial statements and consistently
have been within management's expectations. The allowance for doubtful
accounts at September_30, 1998 and 1997 was $111,000 and $196,000,
respectively. At September_30, 1998 and 1997, approximately 49% and 37%,
respectively, of accounts receivable were due from three and two customers,
respectively.
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 both the Excelsior Springs and Columbia plants.
Durum wheat is a narrowly traded, cash only commodity crop. The Company
attempts to minimize the effect of durum wheat cost fluctuations through
forward purchase contracts and raw material cost-based pricing agreements
with many of its customers. The Company's commodity procurement and
pricing practices are intended to reduce the risk of durum wheat cost
increases on profitability, but also may temporarily affect the timing of
the Company's ability to benefit from possible durum wheat cost decreases
for such contracted quantities.
FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including
cash and temporary investments, accounts receivable, accounts payable and
long-term debt, as reported in the accompanying balance sheets at September
30, 1998 and 1997, approximates fair value.
INTEREST RATE SWAP AGREEMENT
The estimated fair value of the interest rate swap agreement of
$<248,769> is the amount the Company would be required to pay to terminate
the swap agreement at September 30, 1998. The Company uses an interest
rate swap agreement as part of its interest rate risk management program.
Net interest paid or received related to this agreement is recorded using
the accrual method and is recorded as an adjuster to interest expense. The
Company had an interest rate swap agreement with a notional amount of $20
million outstanding at September 30, 1998. There were no deferred gains or
losses related to any terminated interest rate swap agreements at September
30, 1998. The Company was not a party to an interest rate swap agreement
at September 30, 1997.
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:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------------ ------------------
(IN THOUSANDS)
Finished goods $20,054 $ 9,310
Raw materials, packaging
materials and work-in-process 7,997 4,365
------- -------
$28,051 $13,675
======= =======
PROPERTY, PLANT AND EQUIPMENT
Capital additions, improvements and major renewals are classified as
property, plant and equipment and are recorded at cost. Depreciation is
calculated for financial statement purposes using the straight-line method
over the estimated useful life of the related asset for each year as
follows:
NUMBER OF
YEARS
---------
Land improvements 40
Buildings 30
Plant and mill equipment 20
Packaging equipment 10
Furniture, fixtures and equipment 5
The Company capitalizes interest costs associated with the
construction and installation of plant and equipment. During the years
ended September 30, 1998 and 1997, approximately $2,032,000 and $488,000,
respectively, of interest cost was capitalized. There was no interest cost
capitalized in fiscal 1996.
OTHER ASSETS
Other assets consist of the following:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(IN THOUSANDS)
Debt issuance costs (Note 2) $ -- $ 4,258
Package design costs 2,571 1,598
Other 1,019 1,702
-------- --------
3,590 7,558
Accumulated amortization (2,818) (2,983)
-------- --------
$ 772 $ 4,575
======== ========
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. There were no
debt issuance costs at September 30, 1998. (See Note 2). 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 to
five 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 $714,000 and $378,000 at September 30, 1998 and 1997,
respectively.
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 has
adopted the pro forma disclosure requirements under SFAS No. 123
"Accounting for Stock-Based Compensation." Under APB No. 25, because the
exercise price of the Company's employee stock options is equal to or
greater than the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, "Earnings per Share." This new standard simplifies
the EPS calculation and makes the U.S. standard for computing EPS more
consistent with international accounting standards. The Company adopted
SFAS 128 in its first quarter of fiscal 1998, December 31, 1997. EPS for
prior years has been restated to comply with SFAS 128.
Under SFAS 128, primary EPS was replaced with a simpler calculation
called basic EPS. Basic EPS is calculated by dividing income available to
common shareholders by the weighted average common shares outstanding.
Previously, primary EPS was based on the weighted average of both
outstanding and issuable shares assuming all dilutive options had been
exercised. Under SFAS 128, fully diluted EPS has not changed
significantly, but has been renamed diluted EPS. Diluted EPS includes the
effect of all potentially dilutive securities, such as options and
convertible preferred stock.
Dilutive securities, consisting of options (see NOTE 6), included in
the calculation of diluted weighted average common shares were 714,000
shares in fiscal 1998, 653,000 shares in fiscal 1997 and no shares in
fiscal 1996.
Net income (loss) per common share is calculated using the weighted-
average number of common shares and, in the case of diluted net income
(loss) per share, common equivalent shares, to the extent dilutive,
outstanding during the periods. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No._83, stock issued and common stock
options granted by the Company during the 12 months preceding the October
1997 filing date for its initial public offering have been included in the
calculation of weighted-average common and common equivalent shares
outstanding, using the treasury stock method based on the initial public
offering price of $18 per share, as if the stock and options were
outstanding for all periods presented.
2. LONG-TERM DEBT
On October 17, 1997, the Company refinanced certain of its credit
facilities. The principal maturity terms of the new $150 million
unsecured, long-term revolving credit facility are as follows:
SCHEDULED COMMITMENT
AMOUNT REDUCTION
------ ---------
(IN THOUSANDS)
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
========
Interest is to be charged at either the base rate (higher of prime or
of 1% in excess of the federal funds effective rate) or LIBOR plus an
applicable margin based on a sliding scale of the ratio of the Company's
total indebtedness divided by earnings before interest, taxes, depreciation
and amortization (EBITDA). In addition, a commitment fee is to be charged
on the unused facility balance based on the sliding scale of the Company's
total indebtedness divided by EBITDA. The stated interest plus the
commitment fee is classified as interest expense.
In conjunction with the October 1997 refinancing, the unamortized
balance of debt issuance costs of $3.8 million which were related to the
previous credit facility, net of related tax benefits of $1.5 million, were
written off as an extraordinary loss on debt extinguishment as required by
generally accepted accounting principles.
In February 1996, the Company also refinanced certain of its credit
facilities. The unamortized balance of debt issuance costs of $2.6 million
which related to the previous debt, net of related tax benefits of $1
million, were written off as an extraordinary loss on debt extinguishment
as required by generally accepted accounting principles.
Long-term debt consists of the following:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
(IN THOUSANDS)
Term loans under Credit Facility $ 38,000 $ 93,938
Capital lease, 12-year term with three,
five-year renewal options, at an
imputed interest rate of 10.3% 4,912 --
Capital lease, 15-year term with three,
five-year renewal options, at an
imputed interest rate of 12.5% 3,363 3,482
Capital lease, eight-year term at
an imputed interest rate of 8.5 1,832 2,054
Other 1,618 1,492
-------- ---------
49,725 100,966
Less current portion 1,206 829
-------- --------
$ 48,519 $100,137
======== ========
The Company's weighted average interest rates for the year ended
September 30, 1998, relating to the new credit facility, the year ended
September 30, 1997 and the nine-month fiscal period ended September 30,
1996, both of which related to the old credit facility, are as follows:
1998 1997 1996
---- ---- ----
Weighted-average interest rate 8.6% 8.5% 8.4%
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 new credit agreement, are as follows:
LONG-TERM CAPITAL LEASES
YEAR DEBT AND OTHER TOTAL
---- ---- --------- -----
(IN THOUSANDS)
1999 $ -- $ 2,314
2000 -- 2,044
2001 -- 1,811
2002 38,000 1,790
2003 -- 2,182
Thereafter -- 8,684
------- -------
38,000 18,825 $ 56,825
Less imputed interest -- 7,100 7,100
------- ------- --------
Present value of net minimum
payments 38,000 11,725 49,725
Less current portion -- 1,206 1,206
------- ------- --------
Long-term obligations $38,000 $10,519 $ 48,519
======= ======= ========
The new revolving credit facility contains 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 Company was in compliance with the
restrictive covenants as of September 30, 1998. The facility is unsecured.
The Company leases certain assets under capital lease agreements. At
September 30, 1998 and 1997, the cost of these assets was $13,094,000 and
$7,949,000, respectively, and related accumulated amortization was
$1,357,000 and $687,000, respectively.
3. INCOME TAXES
At September 30, 1998, the Company has net operating loss carry-
forwards for federal income tax purposes that expire as follows:
2010 $ 4,192
2011 12,584
2012 3,063
-------
$19,839
=======
The Company also had state income enterprise zone credits of approximately
$1_million that expired in 1997. These credits were fully reserved through
a valuation allowance as they were 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:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carry-forward $ 7,539 $10,183
State enterprise zone credits -- 1,031
AMT credit carry-forward 1,976 676
Other 690 732
------- -------
Total deferred tax assets 10,205 12,622
Deferred tax liabilities:
Book basis of tangible assets
greater than tax 13,285 9,404
Other 436 428
------- -------
Total deferred tax liabilities 13,721 9,832
------- -------
Net deferred tax assets (liabilities)
before allowance (3,516) 2,790
Valuation allowance for deferred
tax assets -- (1,031)
------- -------
Net deferred tax assets (liabilities) $(3,516) $ 1,759
======= =======
Significant components of the provision for income taxes are as follows:
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Current income tax expense $ 5,282 $ 81 $ --
Deferred tax expense (benefit) 5,275 2,989 (1,556)
------- ------- -------
Net income tax expense (benefit) $10,557 $ 3,070 $(1,556)
======= ======= =======
The reconciliation of income tax computed at the U.S._statutory tax
rate to income tax expense is as follows:
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Income (loss) before
income taxes $28,203 $ 8,127 $(4,107)
U.S. statutory tax rate x 35% x 34% X 34%
------- ------- -------
Federal income tax expense
(benefit) at U.S.statutory
rate 9,871 2,763 (1,396)
State income tax expense
(benefit), net of federal
tax effect 1,146 325 (165)
Other, net (460) (18) 5
------- ------- -------
Net income tax expense (benefit) $10,557 $ 3,070 $(1,556)
======= ======= =======
Income tax expense (benefit) allocated to other items was as follows:
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Extraordinary item $(1,429) $ -- $(1,010)
Stock option arrangements (1 (3,024) -- --
(1) This amount has been recorded directly to "Additional Paid-In Capital".
4. COMMITMENTS AND CONTINGENCIES
The Company has committed approximately $40 million to expand
significantly its existing manufacturing, milling and distribution
facilities. Additionally, the Company has committed approximately $35
million to construct its third manufacturing facility in Kenosha,
Wisconsin. The expansion assets are anticipated to be placed in service
during fiscal 1999. As of September 30, 1998, cumulative expansion
expenditures are $25,069,000, including capitalized interest of $293,000.
The remaining expansion costs will be funded from the available bank credit
facilities and cash provided by operations.
The Company had durum wheat purchase commitments totaling
approximately $39 million and $15 million at September_30, 1998 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, 1998.
5. MAJOR CUSTOMERS
Sales to a certain customer during the years ended September 30, 1998
and 1997 and the fiscal nine months ended September 30, 1996 represented
19%, 27% and 27% of revenues, respectively. Sales to a second customer
during the years ended September 30, 1998 and 1997 and the fiscal nine
months ended September 30, 1996 represented 15%, 22% and 19% of revenues,
respectively. Sales to a third customer during fiscal 1998 were 24% of
revenues. There were no sales to this customer in the prior fiscal years.
6. STOCK OPTION PLAN
In October 1992, a stock option plan was established that authorizes
the granting of options to purchase up to 1,201,880 shares of the Company's
common stock by certain officers and key employees. In October 1993, an
additional plan was established that authorizes the granting of options to
purchase up to 82,783 shares of the Company's common stock. In October
1997, a third stock option plan was established that authorizes the
granting of options to purchase up to 2,000,000 shares of the Company's
common stock by certain officers and key employees. The stock options
expire 10 years from the date of grant and become exercisable over the next
three to five years in varying amounts depending on the terms of the
individual option agreements.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS No. 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal 1998, 1997 and 1996, respectively:
risk-free interest rates of 6%, dividend yields of zero, volatility factors
of the expected market price of the Company's common stock of .429 for 1998
and none was assumed for the previous years; and a weighted-average
expected life of the option of one to five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings
per share information):
1998 1997
---- ----
Pro forma net income $13,961 $4,923
Pro forma earnings per share:
Basic $0.81 $0.43
Diluted $0.78 $0.41
Amounts for the 1996 pro forma net income were not materially
different from amounts reported in the accompanying statements of
operations.
A summary of the Company's stock option activity, and related
information is as follows:
Weighted
Average
Number of Option Price Exercise
Shares per Share Price Exercisable
--------- ------------ -------- -----------
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
Exercised (309,187) $2.33-$12.23 $ 3.10
Granted 1,084,145 $12.23-$30.00 $ 18.98
Canceled/Expired (31,979) $4.92-$18.00 $ 15.43
---------
Outstanding at
September 30, 1998 1,922,305 $4.92-$30.00 $14.14 626,985
=========
The following table summarizes outstanding and exercisable options at
September 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
EXERCISE NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- ----------- ----------------
$4.92 361,024 $4.92 342,949 $4.92
$7.02 169,244 $7.02 112,829 $7.02
$12.23 331,071 $12.23 171,207 $12.23
$18.00 959,327 $18.00 -- --
$23.25-$27.56 45,889 $27.31 -- --
$29.38-$30.00 55,750 $29.49 -- --
7. EMPLOYEE BENEFIT PLANS
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 $270,000, $200,000 and $124,000 for the
years ended September 30, 1998 and 1997 and the fiscal nine months
ended September 30, 1996, respectively.
The Company sponsors an Employee Stock Purchase Plan (ESPP) which
offers all employees the election to purchase AIPC common stock at a
price equal to 95% of the market value on the first or last day of the
calendar quarter, whichever is less. At September 30, 1998,
authorized shares under this plan were 50,000.
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 $1,606,000 for the year
ended September 30, 1998.
9. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996
------------- ------------- ----------------
(IN THOUSANDS)
Supplemental
disclosure of cash
flow information:
Cash paid for
interest $ 3,670 $ 9,899 $ 8,101
======== ======== ========
Cash paid for
income taxes $ 226 $ -- $ 50
======== ======== ========
Warehouse acquired
in exchange for
capital lease $ 5,079 $ -- $ --
======== ======== ========
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:
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
---- ----
(IN THOUSANDS)
Introductory advertising $ 137 $3,587
In-store product demonstrations 307 692
Direct response advertising amortization 200 166
Product placement fees paid 1,633 3,113
Introductory trade incentives -- 268
Other 588 296
----- -----
Total product introduction costs $2,865 $8,122
====== ======
There were no such costs in fiscal 1998.
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, of which $124,000 remains outstanding at September
30, 1998. 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 are classified as a
reduction to stockholders' equity in the accompanying balance sheet at
September 30, 1998 and 1997.
12. BOARD OF DIRECTORS REMUNERATION POLICY
The Company provides outside directors with an annual retainer
amount in common stock equal to $15,000 per director. The issuance is
in lieu of a cash payment and occurs immediately following the annual
meeting of the stockholders. These shares are not registered and are
restricted for a twelve-month period.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
AIPC has incorporated by reference certain responses to the Items
of this Part III pursuant to Rule 12b-23 under the Exchange Act and
General Instruction G(3) to Form 10-K. AIPC's definitive proxy
statement for the 1998 annual meeting of stockholders (the "Definitive
Proxy Statement") will be filed no later than 120 days after October
2, 1998.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation
S-K under the heading "Proposal 1 - Election of Three Directors" and
"The Board of Directors" in AIPC's Definitive Proxy Statement is
incorporated herein by reference in partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation
S-K under "Executive Officers of the Registrant" an unnumbered Item in
Part 1 (immediately following Item 4 Submission of Matters to a Vote
of Security Holders) of this Form 10-K is incorporated herein by
reference in partial response to this Item 10.
The information set forth in response to Item 405 of Regulation
S-K under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" in AIPC's Definitive Proxy Statement is incorporated
herein by reference in partial response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth in response to Item 402 of Regulation
S-K under "Management Compensation" in AIPC's Definitive Proxy
Statement, (other than The Compensation Committee Report on Executive
Compensation and Stock Performance graph) is incorporated by reference
in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information set forth in response to Item 403 of Regulation
S-K under the heading "Stock Beneficially Owned by Directors, Nominees
and Certain Executive Officers" in AIPC's Definitive Proxy Statement
is hereby incorporated by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in response to Item 404 of Regulation
S-K under the heading "Certain Relationships and Related Transactions"
in AIPC's Definitive Proxy Statement is incorporated herein by
reference in response to this Item 13.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) The following items are filed as a part of the report:
1. The Company's financial statements prepared in
accordance with Regulation S-X, including the
statements of operations, cash flow and
stockholder's equity for the three fiscal periods
September 30, 1998, September 30, 1997 and
September 30, 1996 and the balance sheets as of
September 30, 1998 and 1997, and related notes and
the independent auditor's opinion thereon are
included under Item 8 of this Annual Report.
2. No financial statement schedules are required to
be included in this Annual Report by the
Securities and Exchange Commission's regulations.
3. The list of exhibits following the signature page
of this Annual Report is incorporated by reference
herein in partial response to this Item.
(b) Reports on Form 8-K.
The Company did not file any current reports on Form 8-K during
the last fiscal quarter covered by this Annual Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN ITALIAN PASTA COMPANY
By: /S/ Timothy S. Webster
---------------------------------
Timothy S. Webster
President and Chief
Executive Officer
Date December 16, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
POWER OF ATTORNEY AND SIGNATURES
Each of the undersigned hereby severally constitute and appoint
Timothy S. Webster and David E. Watson, and each of them singly, with
power of substitution and resubstitution, as his or her true and
lawful attorneys, with full power to them and each of them singly, to
sign for us in our names in the capacities indicted below, all
amendments to this Annual Report on Form 10-K and generally to do all
things in our names and on our behalf in such capacities to enable
American Italian Pasta Company to comply with the provisions of the
Securities Exchange Act of 1934, and all requirements of the
Securities and Exchange Commission with respect to this Annual Report
on Form 10-K.
/S/ Horst W. Schroeder Chairman of the December 16, 1998
------------------------ Board of Directors
/S/ Timothy S. Webster President, Chief December 16, 1998
------------------------ Executive Officer
and Director
(Principal Executive
Officer)
/S/ David E. Watson Executive Vice December 16, 1998
------------------------ President-Operations
Support and Technology,
Treasurer and
Secretary (Principal
Financial and
Accounting Officer)
/S/ Robert H. Niehaus Director December 16, 1998
------------------------
/S/ Richard S. Thompson Director December 16, 1998
------------------------
/S/ Jonathan E. Baum Director December 16, 1998
------------------------
/S/ David Y. Howe Director December 16, 1998
------------------------
/S/ Mark C. Demetree Director December 16, 1998
------------------------
/S/ William R. Patterson Director December 16, 1998
-----------------------
- -
/S/ John P. O'Brien Director December 16, 1998
------------------------
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
Not applicable.
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
(2) Plan of Acquisition, Reorganization,Arrangement, Liquidation
or Succession
Not applicable.
(3) Articles and By-Laws
3.1 The Company's amended and restated Certificate of
Incorporation dated October 7, 1997, which is
attached as Exhibit 3.1 to the Company's
registration statement on Form S-1, as amended
(Commission file no. 333-32827) (the "IPO
Registration Statement"), is incorporated by
reference herein as Exhibit 3.1.
3.2 The Company's amended and restated By-Laws dated
October 7, 1997, which is attached as Exhibit 3.2
to the IPO Registration Statement, are
incorporated by reference herein as Exhibit 3.2.
(4) Instruments Defining the Rights of Security Holders,
Including Indentures
4.1 The specimen certificate representing the
Company's Class A Convertible Common Stock, par
value $0.001 per share, which is attached as
Exhibit 4.1 to the Registration Statement, are
incorporated by reference herein as Exhibit 4.1.
4.2 The specimen certificate representing the
Company's Class B Convertible Common Stock, par
value $0.001 per share, which is attached as
Exhibit 4.2 to the Registration Statement, are
incorporated by reference herein as Exhibit 4.2.
4.3 Section 7.1 of the Company's amended and restated
Certificate of Incorporation, which is
incorporated herein as Exhibit 3.1, is
incorporated by reference herein as Exhibit 4.3.
4.4 Article II of the Company's amended and restated
Bylaws, which is incorporated herein as Exhibit
3.2, is incorporated by reference herein as
Exhibit 4.4.
4.5 Sections 1, 2, 3, 4 of Article III of the
Company's amended and restated Bylaws, which is
incorporated herein as Exhibit 3.2, is
incorporated by reference herein as Exhibit 4.5.
4.6 Article VII of the Company's amended and restated
Bylaws, which is incorporated herein as Exhibit
3.2, is incorporated by reference herein as
Exhibit 4.6.
4.7 Article IX of the Company's amended and restated
Bylaws, which is incorporated herein as Exhibit
3.2, is incorporated by reference herein as
Exhibit 4.7.
4.8 Amended and Restated $150,000,000 revolving credit
facility dated October 17, 1997 by and between the
Company and Bankers Trust, which is attached as
Exhibit 10 to the Company's quarterly report dated
January 29, 1998 on Form 10-Q (Commission file no.
001-13403), is incorporated by reference hereto as
Exhibit 4.8. Such agreement replaces the
Company's Amended and Restated Revolving Credit
Agreement dated April 11, 1997 (which is Exhibit
10.1 to the Company's Annual report on Form 10-K
for the year ended October 3, 1997).
(9) Voting Trust Agreements
Not applicable.
(10) Material Contracts
10.1 Board of Directors Remuneration Policy is attached
hereto as Exhibit 10.1.
10.2 Manufacturing and Distribution Agreement dated as
of April 15, 1997 between Bestfoods International
Inc. and the Company, which is attached as Exhibit
10.2 to the IPO Registration Statement, is
incorporated by reference herein as Exhibit 10.2.
10.3 Amended and Restated Supply Agreement dated
October 29, 1992, as amended July 1, 1997, between
the Company and Sysco Corporation, which is
attached as Exhibit 10.3 to the IPO Registration
Statement, is incorporated by reference herein as
Exhibit 10.3.
10.4 Warehouse Lease dated May 23, 1995 between the
Company and Lanter Company, which is attached as
Exhibit 10.4 to the IPO Registration Statement, is
incorporated by reference herein as Exhibit 10.4.
10.5 Employment Agreement between the Company and
Timothy S. Webster effective October 8, 1997,
which is attached as Exhibit 10.5 to the IPO
Registration Statement, is incorporated by
reference herein as Exhibit 10.5.
10.6 Employment Agreement dated September 30, 1997
between the Company and Horst W. Schroeder, which
is attached as Exhibit 10.6 to the IPO
Registration Statement, is incorporated by
reference herein as Exhibit 10.6.
10.7 Employment Agreement dated September 30, 1997
between the Company and David E. Watson, which is
attached as Exhibit 10.7 to the IPO Registration
Statement, is incorporated by reference herein as
Exhibit 10.7.
10.8 Employment Agreement dated September 30, 1997
between the Company and Norman F. Abreo, which is
attached as Exhibit 10.8 to the IPO Registration
Statement, is incorporated by reference herein as
Exhibit 10.8.
10.9 Employment Agreement dated September 30, 1997
between the Company and David B. Potter, which is
attached as Exhibit 10.9 to the IPO Registration
Statement, is incorporated by reference herein as
Exhibit 10.9.
10.10 Second Amended and Restated Shareholders'
Agreement dated April 7, 1998 by and
between the parties named therein, which
is attached as Exhibit 10.10 to the
registration statement dated April 9,
1998, as amended (file no. 333-49719) (the
"Second Registration Statement"), is
incorporated by reference herein as
Exhibit 10.10.
10.11 American Italian Pasta Company 1992 Stock
Option Plan, which is attached as Exhibit
10.11 to the IPO Registration Statement, is
incorporated by reference herein as Exhibit
10.11.
10.12 American Italian Pasta Company 1993
Non-Qualified Stock Option Plan, which is
attached as Exhibit 10.12 to the IPO
Registration Statement, is incorporated by
reference herein as Exhibit 10.12.
10.13 1996 Salaried Bonus Plan, which is attached
as Exhibit 10.13 to the IPO Registration
Statement, is incorporated by reference
herein as Exhibit 10.13.
10.14.1 1997 Equity Incentive Plan, which is attached as
Exhibit 10.14 to the IPO Registration Statement,
is incorporated by reference herein as Exhibit
10.14.1.
10.14.2 First amendment to 1997 Equity Incentive Plan,
which is attached as Exhibit 10.1 to the Company's
July 3, 1998 Form 10-Q (Commission file no. 001-
13403), is incorporated by reference here in as
Exhibit 10.14.2.
10.15 Product Supply and Pasta Production
Cooperation Agreement dated May 7, 1998
between the Registrant and Harvest States
Cooperatives which is attached as Exhibit
10.2 to the Company's July 3, 1998 Form 10-Q
(Commission file no. 001-13403), is
incorporated by reference herein as Exhibit
10.15.
10.16 Warehouse lease dated September 2, 1997 between
the Company and Lanter Company, which is attached
Exhibit 10.5 to the Second Registration Statement,
is incorporated by reference herein as Exhibit
10.16.
(11) Statement recomputation of per share earnings
Not applicable.
(12) Statements re computation of ratios
Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly
report to security holders
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(21) Subsidiaries of the registrant
Not applicable.
(22) Published report regarding matters submitted to vote of
security holders
Not applicable.
(23) Consents of experts and counsel
Consent of Ernst & Young LLP is attached hereto as Exhibit
23.
(24) Power of Attorney
The power of attorney is set forth on the signature page of
this Annual Report.
(27) Financial Data Schedule
The Company's Financial Data Schedule is attached hereto as
Exhibit 27.
(99) Additional Exhibits
Not applicable.
AMERICAN ITALIAN PASTA COMPANY
Board of Directors Remuneration Policy
December, 1997
This policy is to become effective January 1, 1998.
Background/Scope
----------------
The Board of Directors of AIPC consists of (1) AIPC management, (2)
employees of significant stakeholders (e.g.: Morgan Stanley Capital
Partners, Citibank Venture Capital and George K. Baum), and (3)
"outside" directors. This policy applies to only the outside
directors as the other directors are directly compensated by AIPC or
their employer for their time and effort dedicated to AIPC's Board,
including committee assignments.
Remuneration Policy
-------------------
1. Retainer - $15,000 per year, payable in AIPC common stock,*
to be paid at the time of AIPC's annual meeting
2. Meeting Per Diem - $1,500 per meeting attended
3. Committee Participation - $500 per meeting attended plus a
$2,500 annual payment for Committee Chairman
/s/ Horst W. Schroeder /s/ T. S. Webster
------------------------------ ------------------------------
Horst W. Schroeder Timothy S. Webster
12/97 12/97
*Valuation to be determined the day of board meeting.
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-52315) pertaining to the 1992 Stock Option
Plan, 1993 Nonqualified Stock Option Plan and 1997 Equity Incentive
Plan and the Registration Statement (Form S-8 No. 333-57411)
pertaining to the Employee Stock Purchase Plan of American Italian
Pasta Company of our report dated October 29, 1998, with respect to
the financial statements of American Italian Pasta Company included in
the Annual Report (Form 10-K) for the year ended October 2, 1998.
/s/ Ernst & Young LLP
Kansas City, Missouri
December 15, 1998
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