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 1, 1999
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
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, 1999 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 $482,383,506.
The number of shares outstanding as of December 16, 1999 of the
Registrant's Class A Convertible Common Stock was 18,299,813 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 1, 1999.
<PAGE>
Introduction and Certain Cautionary Statements
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American Italian Pasta Company's ("AIPC" or the "Company") fiscal year end
is the last Friday of September or the first Friday of October. This results in
a 52- or 53-week year depending on the calendar. 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"), all fiscal
years are described as having ended on September 30.
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, as amended November 2, 1999 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 New World Pasta LLC, recently acquired from Hershey ("New World
Pasta"). 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 largest producer and one of the
fastest-growing 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 AIPC's cost structure, the age of competitive production
capacity and growing pasta consumption in North America creates significant
opportunities for continued growth. During the fiscal year ended September 30,
1999, the Company had revenue of $220.1 million and net income of $23.5
million.
The Company produces more than 80 dry pasta shapes in
vertically-integrated milling, production and distribution facilities,
strategically located in Excelsior Springs, Missouri, Columbia, South Carolina
and Kenosha, Wisconsin. 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 retail 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 pasta
production capacity and add a highly-automated durum wheat mill to its South
Carolina plant. The Wisconsin plant, which commenced operations in 1999,
produces industrial pasta for the ingredient business segment. Management
believes the Wisconsin plant is the only pasta production facility in North
America which is singularly focused on serving the rapidly growing ingredient
pasta segment.
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 web site is located at http://www.aipc.com. Information contained
in the Company's web site shall not be deemed to be a part of this Annual
Report.
Recent Developments
- -------------------
On October 20, 1999 the Company's Board of Directors approved the purchase
of property in Verolanuova, Italy. The site contains a former food processing
plant built in 1987 and has been vacant since 1997. Conversion of the site into
a state of the art pasta production facility is expected to take about 12-18
months, at a total cost of $35-$40 million. The facility will contain the
latest pasta manufacturing technology and will have an initial annual
production capacity of approximately 100 million pounds. The Company will
begin supplying Italian-made product to certain customers immediately through
supply arrangements with current Italian producers. The production of these
initial volumes will transfer to AIPC once the Italian plant is operational.
The process of building a solid "on-the-ground" organization in Italy has
already begun, with the addition of two Italian nationals, with combined
experience in food processing of over forty years, to AIPC's Italian management
team. The Company has prior associations with both of these individuals.
Management believes it will have an experienced workforce to draw from, as many
of the former plant employees remain in the Verolanuova area.
Products and Brands
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AIPC's product line, comprising over 1,800 stock-keeping units ("SKUs"),
includes long goods such as spaghetti, linguine, fettuccine, angel hair and
lasagna, and short goods such as elbow macaroni, mostaccioli, rigatoni, rotini,
ziti and egg noodles. In many instances, the Company produces pasta to its
customers' specifications. AIPC makes over 80 different shapes and sizes of
pasta products in over 160 package configurations, including bulk packages for
institutional customers and 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 1% of AIPC's total unit volume in fiscal period 1999.
The Company believes that its state-of-the-art, Italian pasta production
equipment is capable of producing the highest quality pasta. AIPC's products
are produced to satisfy the specifications of the Company's customers as well
as its own product specifications, which management believes are among the
highest in the industry. The Company's pasta is distinguished by a rich,
natural "wheaty" taste and a consistently smooth and firm ("al dente") texture
with a minimum amount of white spots or dark specks. AIPC evaluates the quality
of its products through: (i) internal laboratory evaluation against competitive
products on physical characteristics, including color, speck count, shape and
consistency, and cooking performance, including starch release, protein content
and texture; and (ii) competitive product comparisons that AIPC's customers
perform on a regular basis.
The Company submits its production facilities to semi-annual inspections
by the American Institute of Baking ("AIB"), the leading United States baking,
food processing and allied industries evaluation agency for sanitation and food
safety. The Company's plants consistently achieve 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.
Marketing and Distribution
- --------------------------
AIPC actively sells and markets its products through approximately 22
internal personnel and approximately 30 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 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 15 of the 16
largest grocery retailers in the United States, including Wal-Mart, K-Mart,
A&P, Publix, Albertsons, American Stores, Winn-Dixie, Kroger, 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 their 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 development
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 on-line A.C. Nielsen's
supermarket data to recommend pricing, SKU sets and shelf spacing to both
private label and branded customers. AIPC representatives also assist food
processors in incorporating AIPC's pasta as an ingredient in its customers'
food products. The Company sponsors an annual "Pasta Technology Forum" which is
a training and development program for its customers' production and new
product personnel. 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 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 four primary distribution centers are strategically located
in South Carolina, Wisconsin, Missouri and Southern California to serve the
national market. Additionally, the Company uses public warehouses to facilitate
the warehousing and distribution of its products. The Company's South Carolina
and Missouri distribution centers are integrated with the Company's production
facilities. Finished products 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
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Pasta's primary ingredient is semolina, which is extracted from durum
wheat through a milling process. Durum wheat is used exclusively for pasta.
Durum wheat used in United States pasta production generally originates from
Canada, North Dakota, Montana, Arizona and California. Each variety of durum
wheat has its own unique set of protein, gluten content, moisture, density,
color and other attributes which affect the quality and other characteristics
of the semolina. The Company blends semolina from different wheat varieties as
needed to meet customer specifications.
AIPC's ability to produce high-quality pasta generally begins with its
purchasing durum wheat directly from farmers and grower-owned cooperatives in
Canada, North Dakota, Montana, Arizona and California. 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 1, 1999, the market price
of durum wheat decreased by approximately 36% from $6.47 per bushel to $4.15
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 management's view,
these futures contracts have limited liquidity and other less desirable quality
specifications which have precluded their use by AIPC as a durum cost hedge.
The Company manages its durum wheat cost risk through cost pass-through
mechanisms 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 pre-cleaned. Next, the moisture content of the
wheat is raised to the optimal level required for milling (the "tempering
process"). The cleaned and tempered wheat is then conveyed to the mill where
grinding, sifting, and purifying processes extract the purest possible
semolina. The semolina milling is controlled from a central control room
located in the mill where a single AIPC team member monitors and directs the
mill's entire milling, cleaning and storage process. Semolina is then
pneumatically distributed from the mill to AIPC's pasta production facilities
in Missouri and South Carolina.
With regard to the Kenosha, Wisconsin facility, AIPC purchases its raw
material requirements (including semolina and semolina/flour blends) from
CENEX/Harvest States under the terms of a long-term supply agreement. AIPC
believes the quality of the purchased raw materials is consistent with its
internally milled products. Management also believes the terms of the
CENEX/Harvest States supply agreement are favorable versus other market
options.
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 (PLCs) which
enable all of the production lines to be operated and monitored by minimal
staff. The pasta is then packaged in a wide variety of packaging configurations
on highly-automated film, carton and bulk packaging systems and forwarded
through automated conveyors to the distribution center to be palletized and
stored prior to shipment.
AIPC purchases its packaging supplies, including poly-cellophane,
paperboard cartons, boxes and totes from third parties. Management believes the
Company has adequate sources of packaging supplies.
The Company buys materials in quantities based on the anticipated future
demands of its customers.
Trademarks and Patents
- ----------------------
The Company holds a number of federally registered and common law
trademarks which it considers to be of considerable value and importance to its
business including: AIPC American Italian Pasta Company, American Italian, and
Pasta LaBella. The Company has registered the AIPC American Italian Pasta
Company, Pasta LaBella, Montalcino, 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
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Historically, a limited number of customers have accounted for a
substantial portion of the Company's revenues. During the fiscal years ended
September 30, 1999, 1998 and 1997, Sysco accounted for approximately 16%, 19%
and 27%, respectively, and sales to Sam's Club accounted for approximately 13%,
15% and 22%, respectively, of the Company's revenues. During fiscals 1999 and
1998, sales to Bestfoods accounted for approximately 29% and 24% of the
Company's revenues. There were no sales to Bestfoods in 1997. 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. The Company has an exclusive
supply contract with Sysco (the "Sysco Agreement") through June 2003, with a
renewal option by Sysco for one additional three-year period. The Company has a
long-term manufacturing and distribution agreement with Bestfoods that includes
a minimum volume commitment of 175 million pounds per calendar year. The term
of the contract is through December 31, 2006, with a three-year renewal term at
the option of Bestfoods. 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, New World
Pasta 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 branded marketers.
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 180 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 a minimum volume commitment of 175 million pounds
per calendar year. 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, New World Pasta 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,
1999, sales to Sysco represented approximately 16% 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, 2003, and has an option to renew
the agreement for one additional three-year period. 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.
Sysco has honored the Company as one of its top 10 suppliers out of its over
1,500 supplier base for four consecutive years. The Sysco Agreement may be
terminated by Sysco upon certain events, including a substantial casualty to or
condemnation of AIPC's Missouri plant.
Competition
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The Company operates in a highly competitive environment against numerous
well-established national, regional and foreign companies, and many smaller
companies. The Company's competitors include both independent pasta producers
and pasta divisions and subsidiaries of large food products companies. The
Company competes in the procurement of raw materials, the development of new
products and product lines, the improvement and expansion of previously
introduced products and product lines and the production, marketing and
distribution of its products. Some of these companies have longer operating
histories, significantly greater brand recognition and financial and other
resources than the Company. AIPC's products compete with a broad range of food
products, both in the retail and institutional customer markets. Competition in
these markets generally is based on product quality and taste, pricing,
packaging and customer service and logistics capabilities. The Company believes
that it currently competes favorably with respect to these factors.
The Company's direct competitors include large multi-national companies
such as Borden Foods Co. with brands such as Prince and Creamette; and New
World Pasta LLC with brands such as American Beauty, San Giorgio and Ronzoni,
(which New World recently acquired from Hershey) 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 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
capacity additions. In addition to AIPC's capital expansions, management
believes that these capacity additions represent more than 200 million pounds
of additional pasta production capacity in aggregate. Dakota Growers increased
the capacity of its durum wheat mill and has purchased two former Borden pasta
plants in Minneapolis. Barilla completed a pasta production plant near Ames,
Iowa with an estimated annual pasta capacity of 150-200 million pounds. Two
major pasta producers have reduced their pasta production capacity. Borden
sold three plants and closed three plants out of its ten North American pasta
plants in 1997 and 1998, and Bestfoods eliminated its capacity of approximately
180 million pounds in 1997.
Several foreign producers, based principally in Italy and Turkey, have
aggressively targeted the U.S. pasta market in recent years. In 1996, a U.S.
Department of Commerce investigation revealed that several Italian and Turkish
producers were engaging in unfair trade practices by selling pasta at less than
fair value in the U.S. markets and benefiting from subsidies from their
respective governments. Effective July 1996, the U.S. International Trade
Commission of the Department of Commerce ("Commerce"), imposed anti-dumping and
countervailing duties on Italian and Turkish imports ("the 1996 Anti-dumping
Order"). In December 1998, Commerce announced the final results of its review
of 1996 Anti-dumping Order for three Turkish producers. Commerce 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, Commerce is conducting an administrative review of its
1996 Anti-dumping Order relating to 8 Italian pasta producers, including
Barilla and De Cecco. Commerce maintained the anti-dumping duties for most of
the Italian pasta producers, including Barilla. 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, completed a pasta production plant in Ames, Iowa in 1999.
Pasta Industry and Markets
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North American pasta consumption was approximately 5.0 billion pounds in
1997. 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.
Pasta is a staple of the North American diet. It is widely recognized
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
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. Barilla recently completed a pasta production plant near
Ames, Iowa with an estimated annual pasta capacity of over 150-200 million
pounds. Two major pasta producers have also recently announced planned
reductions in pasta production capacity. Borden sold three plants and closed
three plants out of its ten North American pasta plants in 1997 and 1998, and
Bestfoods eliminated its capacity of approximately 180 million pounds in 1997.
Management estimates pasta imported from foreign producers during 1999
represented approximately 8-10% of the U.S. dry pasta market, and that of this
amount, approximately 80% 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. New World Pasta, Borden, Barilla, and Bestfoods
together represent a majority of the branded Retail market. New World Pasta,
which primarily competes in the branded Retail market and whose retail brands
include Ronzoni, San Giorgio, Skinner and American Beauty, is the industry's
branded leader and sold 23.7% of the total pounds sold in the branded Retail
market for the year ended September 30, 1999. During 1999, Hershey sold its
pasta business to New World Pasta LLC. Borden, which sold 16.7% of the total
pounds in the Retail market for the year ended September 30, 1999, 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 indirectly participates in such
market by processing and distributing Mueller's brand pasta for Bestfoods.
Between the Company's first fiscal quarter of 1994 and the fourth fiscal
quarter of 1999, sales of private label pasta products increased from 18.6% to
23.4% of the total pounds of pasta sold in the Retail market according to A.C.
Nielsen. Management believes that sales of private label pasta products will
continue to grow at a rate in excess of the overall Retail pasta market. AIPC
is the leading supplier of private label retail pasta, and 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 outsourcing their
production. Historically, most pasta used by food processors was manufactured
internally for use in food processors' own products. Management believes,
however, that an increasing number of food processors may discontinue the
internal production of their own pasta and outsource their production to
efficient producers such as AIPC.
Management Information Systems
- ------------------------------
The Company's production, distribution, sales and marketing operations are
supported by an IBM AS400-based computer 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, 1999, the Company employed 562 full-time persons, of
whom 162 were salaried employees and 400 were hourly employees. The Company's
employees are not represented by any labor unions. AIPC considers its employee
relations to be excellent.
ITEM 2. PROPERTIES.
Production Facilities. AIPC's pasta production plants are located near
Kansas City in Excelsior Springs, Missouri, in Columbia, South Carolina and in
Kenosha, Wisconsin. These 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, 1999, the Company's
facilities had combined annual milling and production capacity of approximately
600 million pounds of durum semolina and approximately 800 million pounds of
pasta. On October 20, 1999 the Company's Board of Directors approved the
purchase of property in Verolanuova, Italy. The site contains a former food
processing plant built in 1987 and has been vacant since 1997. Conversion of
the site into a state of the art pasta production facility is expected to take
about 12-18 months, at a total cost of $35-$40 million. The facility will
contain the latest pasta manufacturing technology and will have an initial
annual production capacity of approximately 100 million pounds.
AIPC's 1999 capital expenditure program increased AIPC's pasta production
capacity from 620 million pounds per year to over 800 million pounds per year.
At the Company's Missouri facility, the Company expanded its product range to
include automated production and packaging of lasagna. Additionally, the
Company added two production lines and highly efficient retail packaging
systems to the South Carolina facility. The capital expenditures program also
included 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
center in South Carolina. In addition, the Company leases space in public
warehouses located in California, Florida, South Carolina, Missouri and
Massachusetts.
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, 1999. 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, 1999.
NAME AGE POSITION
- ---- --- --------
Horst W. Schroeder . . . . 58 Chairman of the Board
of Directors
Timothy S. Webster . . . . 38 President and
Chief Executive Officer;
Director
Norman F. Abreo. . . . . . 49 Executive Vice President -
Operations
David E. Watson. . . . . . 44 Executive Vice President -
Operations Support and Technology
David B. Potter. . . . . . 40 Executive Vice President and General
Manager -- Industrial Markets
Warren B. Schmidgall . . . 49 Senior Vice President and
Chief Financial Officer
Jerry H. Dear. . . . . . . 52 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.
Warren B. Schmidgall joined the Company in October 1998 as Senior Vice
President and Chief Financial Officer. Prior to AIPC, Mr. Schmidgall worked in
various executive positions at Hill's Pet Nutrition, Inc. from February 1980 to
October 1998, including Chief Financial Officer and, most recently, Executive
Vice President, Business Development.
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.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Class A Convertible Common Stock, par value $0.001 per share
(the "Class A common stock") is traded on the New York Stock Exchange under the
symbol "PLB". Trading of the Company's Class A common stock began October 9,
1997.
The range of the high and low prices per share of the Company's common
stock for fiscal 1999 and 1998 is as follows:
Year Ended Year Ended
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
High Low High Low
---- --- ---- ---
First Quarter $26.50 $17.625 $26.00 $19.25
Second Quarter $29.00 $22.25 $37.25 $23.25
Third Quarter $30.625 $24.125 $38.75 $30.00
Fourth Quarter $30.625 $25.625 $39.50 $24.625
As of December 16, 1999, there were 5,265 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,
1999.
Securities Sold in Unregistered Offerings during Fiscal Year 1999
- -----------------------------------------------------------------
None.
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of operations data for the fiscal years ended
September 30, 1999, 1998 and 1997, and the selected balance sheet data as of
September 30, 1999 and 1998 are derived from the Consolidated 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 nine-month fiscal period ended
September 30, 1996 and the year ended December 31, 1995 and the selected
balance sheet data as of September 30, 1997, 1996, and December 31, 1995 have
been derived from financial statements of the Company not included herein,
which have been audited by Ernst & Young LLP. The selected statement of
operations data for the twelve-month period ended September 30, 1996 and the
balance sheet data as of September 30, 1996 has 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 twelve-
month period ended September 30, 1996 is included herein only for comparison
purposes. The selected financial 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 Consolidated 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
TWELVE-MONTH FISCAL PERIOD FISCAL YEAR
FISCAL YEARS ENDED PERIOD ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1999 1998 1997 1996 1996(1) 1995
---- ---- ---- ---- ------- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $220,149 $189,390 $129,143 $121,149 $92,074 $92,903
Cost of goods sold 160,449 140,110 93,467 91,230 68,555 73,851
Plant expansion costs(2) 130 1,606 -- -- -- 2,065
-------- -------- -------- -------- ------- -------
Gross profit 59,570 47,674 35,676 29,919 23,519 16,987
Selling and marketing expense,
including product
introduction costs(3) 14,855 12,984 13,664 18,445 16,798 5,303
General and administrative
expense 5,580 4,948 3,766 3,686 2,805 2,930
-------- -------- -------- -------- ------- -------
Operating profit 39,135 29,742 18,246 7,788 3,916 8,754
Interest expense, net 2,098 1,539 10,119 10,770 8,023 8,008
-------- -------- -------- -------- ------- -------
Income (loss) before income tax
Expense (benefit) and
Extraordinary loss 37,037 28,203 8,127 (2,982) (4,107) 746
Income tax expense (benefit) 13,519 10,557 3,070 (1,139) (1,556) 270
Extraordinary loss, net of
Income taxes(4) -- 2,332 -- 1,647 1,647 --
-------- -------- -------- -------- ------- -------
Net income (loss) $23,518 $15,314 $5,057 $(3,490) $(4,198) $476
======== ======== ======== ======== ======= =======
Net income (loss) per
Common share (Basic):
Before extraordinary item $1.30 $1.03 $0.44 $(0.18) $(0.25) $0.05
Extraordinary item -- (0.14) -- (0.16) (0.16) --
-------- -------- -------- -------- ------- -------
Total $1.30 $0.89 $0.44 $(0.34) $(0.41) $0.05
======== ======== ======== ======== ======= =======
Weighted average
Common shares outstanding 18,108 17,223 11,466 10,219 10,223 10,445
Net income (loss) per
Common share assuming dilution:
Before extraordinary item $1.26 $0.98 $0.42 $(0.18) $(0.25) $0.05
Extraordinary item -- (0.13) -- (0.16) (0.16) --
-------- -------- -------- -------- ------- -------
Total $1.26 $0.85 $0.42 $(0.34) $(0.41) $0.05
======== ======== ======== ======== ======= =======
Weighted average common
Shares outstanding 18,621 17,937 12,119 10,219 10,223 10,433
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and temporary investments $3,088 $5,442 $2,724 $1,818 $1,818 $18
Working capital 29,222 23,242 12,188 (1,601) (1,601) 6,632
Current Ratio 212% 89% 181% 95% 95% 137%
Net Property, Plant & Equipment 266,124 205,607 125,234 103,753 103,753 105,379
Total assets 322,222 259,381 158,175 141,688 141,688 135,424
Long-term debt, less current
Maturities 81,467 48,519 100,137 93,284 93,284 97,452
Stockholders' equity 201,730 176,784 42,984 15,969 15,969 20,067
Total Debt/Total Capitalization 29% 22% 70% 88% 88% 83%
<FN>
<F1>
(1) 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 1999, 1998 and 1997 fiscal years and the 1996 nine-month fiscal period are shown as having
ended on September 30.
<F2>
(2) 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>
(3) 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 market. The Company did not incur such product introduction costs prior to the fiscal period ended September 30,
1996. There were no such costs during the fiscal year ended September 30, 1999 and 1998. Product introduction costs were
incurred as follows: $2.9 million for the fiscal year ended September 30, 1997 and $8.1 million for the nine-month and
twelve-month periods ended September 30, 1996.
<F4>
(4) Represents losses due to early extinguishment of long-term debt, net of income taxes.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
Introduction and Certain Cautionary Statements
- ----------------------------------------------
Management's discussion and analysis of the Company's financial condition
and results of its operations focuses on and is intended to clarify the
Company's results of operations, certain changes in its financial position,
liquidity, capital structure and business developments for the periods covered
by the consolidated financial statements included in this Annual Report. This
discussion should be read in conjunction with, and is qualified by reference
to, the other related information including, but not limited to, the audited
consolidated financial statements (including the notes thereto and the
independent auditor's report 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"), and amended November 2, 1999, 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 Company's
fiscal years are described as having ended on September 30.
Results of Operations
- ---------------------
The following table sets forth certain statement of income data of the
Company, expressed as a percentage of revenues, for each of the periods
presented.
FISCAL YEARS ENDED
SEPTEMBER 30,
1999 1998 1997
---- ---- ----
Revenues:
Retail 72.8% 71.0% 56.7%
Institutional 27.2% 29.0% 43.3%
------ ------ ------
Total Revenues 100.0% 100.0% 100.0%
------ ------ ------
Cost of goods sold 72.9 74.0 72.4
Gross profit before plant
expansion costs 27.1 26.0 27.6
Plant expansion costs -- 0.8 --
------ ------ ------
Gross profit 27.1 25.2 27.6
Selling and marketing expense 6.8 6.9 10.6
General and administrative expense 2.5 2.6 2.9
Operating profit 17.8 15.7 14.1
Interest expense, net 1.0 0.8 7.8
Income tax expense 6.1 5.6 2.4
Extraordinary loss, net of income tax -- 1.2 --
------ ------ ------
Net income 10.7% 8.1% 3.9%
====== ====== ======
<PAGE>
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998
REVENUES. Revenues increased $30.8 million, or 16.2%, to $220.1 million
for the fiscal year ended September 30, 1999, from $189.4 million for the
fiscal year ended September 30, 1998. The revenue increase was primarily due
to volume growth of 28.6% over the prior year, offset by lower average
selling prices. The pass-through of lower durum wheat costs, along with
changes in sales mix, created a 10.2% reduction in average selling prices.
Management expects increases in revenue in fiscal 2000 due to grow with
existing customers and new customer accounts.
Revenues for the Retail market increased $25.7 million, or 19.1%, to
$160.2 million for the fiscal year ended September 30, 1999, from $134.5
million for the fiscal year ended September 30, 1998. The increase primarily
reflects volume growth of 27.3% over the prior year, offset by lower average
selling prices. The pass-through of lower durum wheat costs, primarily,
created a 7.2% reduction in average selling prices.
Revenues for the Institutional market increased $5.1 million, or 9.3%,
to $60.0 million for the fiscal year ended September 30, 1999, from $54.9
million for the fiscal year ended September 30, 1998. This increase was
primarily a result of volume growth of 31.2% over the prior year, offset by
lower average selling prices. The pass-through of lower durum wheat costs,
along with changes in sales mix, generated by rapid growth of ingredient
revenues, created an 18.4% reduction in average selling prices.
GROSS PROFIT. Gross profit increased $11.9 million, or 25.0%, to $59.6
million for the fiscal year ended September 30, 1999, from $47.7 million for
the fiscal year ended September 30, 1998. Gross profit increased generally as
a result of the volume and revenue gains referenced above. Gross profit as a
percentage of revenues increased to 27.1% for the fiscal year ended September
30, 1999 from 25.2% for the fiscal year ended September 30, 1998. The
increase in gross profit as a percentage of revenues relates to lower raw
material costs, lower operating costs per unit and lower plant expansion
costs. Management expects increases in gross profit in 2000 as a result of
volume and related revenue increases.
SELLING AND MARKETING EXPENSE. Selling and marketing expense increased
$1.9 million, or 14.4%, to $14.9 million for the fiscal year ended September
30, 1999, from $13.0 million reported for the fiscal year ended September 30,
1998. Selling and marketing expense as a percentage of revenues decreased to
6.8% for the fiscal year ended September 30, 1999, from 6.9% for the
comparable prior period.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $0.6 million, or 12.8%, to $5.6 million for the fiscal year ended
September 30, 1999, from $4.9 million reported for the comparable period last
year, but decreased as a percentage of revenues from 2.6% to 2.5%.
OPERATING PROFIT. Operating profit for the fiscal year ended September
30, 1999, was $39.1 million, an increase of 31.6% over the $29.7 million
reported for the fiscal year ended September 30, 1998. Operating profit
increased as a percentage of revenues to 17.8% for the fiscal year ended
September 30, 1999, from 15.7% for the fiscal year ended September 30, 1998.
INTEREST EXPENSE. Interest expense for the fiscal year ended September
30, 1999, was $2.1 million, increasing 36.3% from the $1.5 million reported
for the fiscal year ended September 30, 1998. The increase was primarily the
result of increased borrowing for the Company's expansion programs, net of
capitalized interest.
INCOME TAX. Income tax for the fiscal year ended September 30, 1999,
was $13.5 million, increasing $3.0 million from the $10.5 million reported
for the fiscal year ended September 30, 1998, and reflects an effective
income tax rate of approximately 37%.
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 1999 period.
NET INCOME. Net income for the fiscal year ended September 30, 1999,
was $23.5 million, increasing from the $15.3 million reported for the fiscal
year ended September 30, 1998. Net income per common share-assuming dilution
was $1.26 in fiscal 1999 compared to $0.85 per share for the fiscal year
ended September 30, 1998.
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 selling prices
related to the pass through of higher durum wheat costs.
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 profit 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.
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 prior
period, 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.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of liquidity are cash provided by operations
and borrowings under its 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 $3.1
million and net working capital totaled $29.2 million at September 30, 1999.
At September 30, 1998, cash and temporary cash investments totaled $5.4 million
and working capital totaled $23.2 million. The $6.0 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 operating activities totaled $38.0
million for the fiscal year ended September 30, 1999 compared to $28.4 million
for the fiscal year ended September 30, 1998 and $23.1 million for the fiscal
year ended September 30, 1997. The increases during these periods are primarily
a result of increases in net income before non-cash charges, offset by volume
related increases in net working capital investment.
Cash flow used in investing activities principally relates to the
Company's investments in production, distribution, milling and MIS assets.
Capital expenditures were $74.0 million for the fiscal year ended September 30,
1999, $84.8 million for the year ended September 30, 1998 and $28.4 million for
the fiscal year ended September 30, 1997. The increase in spending for the
fiscal years ending September 30, 1999 and 1998 was planned and is a result of
the Company's previously referenced capital expansion programs.
Net cash provided by financing activities was $33.7 million for the fiscal
year ended September 30, 1999 compared to $59.0 million for the fiscal year
ended September 30, 1998. The $33.7 million is primarily a result of $34.0
million proceeds from issuance of debt. 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, 1999, the three-month LIBOR rate was 6.08%, and the
Company's aggregate, weighted average bank debt borrowing rate was 6.3%.
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 $11 million on raw material purchases
for fiscal year 2000. The Company has committed approximately $25 million to
expand its existing manufacturing, milling and distribution facilities.
Additionally, the Company has committed approximately $35-40 million to
construct a pasta manufacturing facility in Verolanuova, Italy. The site
contains a former food processing plant built in 1987 and has been vacant since
1997. Conversion of the site into a state of the art pasta production facility
is expected to take about 12-18 months, at a total cost of $35-$40 million.
The facility will contain the latest pasta manufacturing technology and will
have an initial annual production capacity of approximately 100 million
pounds. The expansion costs will be funded from the available bank credit
facilities and cash provided by operations. 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 that began at the end of fiscal year 1999. At this
time, the expected borrowings outstanding under the current credit facility
(assuming the full $65 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 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 and other
technology-based 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 conversion of all computer hardware and
software systems to "year 2000 compliant" status. Although the Company is
not aware of any material operational impediments associated with upgrading
its technology based systems to be year 2000 compliant, the Company cannot
make any assurances that the upgrade of the Company's computer systems will
be free of defects. 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 complicating, or otherwise
affecting, the operations of any one or more of the Company's suppliers and
customers. The Company has contacted its significant suppliers and customers
in an attempt to identify any potential year 2000 compliance issues with
them. The Company anticipates limited operational or financial impact on the
Company related to year 2000 compliance issues with its suppliers and
customers.
Because of uncertainty outside the scope of suppliers and customers with
respect to year 2000 compliance issues, the Company has various contingency
alternatives to support business operations. These alternatives may require
the diversion of financial and other resources to fund execution of
retainers, storage, transportation and inventory solutions. The Company is
unable to determine the amount of these financial and other resources. The
Company will also continue its communication with customers with respect to
their contingency plans and initiatives such as changes to their year-end
inventory position.
The Company incurred approximately $330,000 in fiscal year 1998 and
approximately $250,000 in fiscal year 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
Consolidated Balance Sheets at September 30, 1999 and 1998 31
Consolidated Statements of Income for the years ended
September 30, 1999, 1998 and 1997 32
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999, 1998 and 1997 33
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997 34
Notes to Consolidated Financial Statements 35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Italian Pasta Company
We have audited the accompanying consolidated balance sheets of American
Italian Pasta Company (the Company) as of September 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended September 30, 1999. 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 consolidated financial position of American
Italian Pasta Company at September 30, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1999, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
October 27, 1999
<PAGE>
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
(In thousands)
ASSETS
Current assets:
Cash and temporary investments $ 3,088 $ 5,442
Trade and other receivables 22,018 16,971
Prepaid expenses and deposits 3,952 1,736
Inventory 25,227 28,051
Deferred income taxes (Note 3) 1,031 802
-------- --------
Total current assets 55,316 53,002
Property, plant and equipment:
Land and improvements 6,953 4,834
Buildings 75,677 60,196
Plant and mill equipment 219,725 149,027
Furniture, fixtures and equipment 7,239 4,731
-------- --------
309,594 218,788
Accumulated depreciation (51,156) (38,250)
-------- --------
258,438 180,538
Construction in progress 7,686 25,069
-------- --------
Total property, plant and equipment 266,124 205,607
Other assets 782 772
-------- --------
Total assets $322,222 $259,381
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,187 $ 14,030
Accrued expenses 9,763 7,225
Advance customer payments -- 5,957
Income tax payable -- 1,342
Current maturities of long-term debt
(Note 2) 1,144 1,206
-------- --------
Total current liabilities 26,094 29,760
Long-term debt (Note 2) 81,467 48,519
Deferred income taxes (Note 3) 12,931 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 18
Class B common stock, $.001 par value:
Authorized shares - 25,000,000 -- --
Additional paid-in capital 175,030 173,642
Treasury stock (26) (13)
Notes receivable from officers (71) (124)
Retained earnings 26,779 3,261
-------- --------
Total stockholders' equity 201,730 176,784
-------- --------
Total liabilities and stockholders'
equity $322,222 $259,381
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues (Note 5) $220,149 $189,390 $129,143
Cost of goods sold 160,449 140,110 93,467
Plant expansion costs (Note 8) 130 1,606 --
-------- -------- -------
Gross profit 59,570 47,674 35,676
Selling and marketing expense,
including product introduction
costs (Note 10) 14,855 12,984 13,664
General and administrative expense 5,580 4,948 3,766
-------- ------- -------
Operating profit 39,135 29,742 18,246
Interest expense, net 2,098 1,539 10,119
-------- ------- -------
Income before income tax expense
and extraordinary item 37,037 28,203 8,127
Income tax expense (Note 3) 13,519 10,557 3,070
-------- ------- -------
Income before extraordinary item 23,518 17,646 5,057
Extraordinary item:
Loss due to early extinguishment
of long-term debt, net of income
taxes (Note 2) -- (2,332) --
------- ------- -------
Net income $ 23,518 $ 15,314 $ 5,057
======== ======== ========
Net income per common share:
Before extraordinary item $ 1.30 $ 1.03 $ 0.44
Extraordinary item -- (0.14) --
-------- -------- --------
Total $ 1.30 $ 0.89 $ 0.44
======== ======== ========
Weighted-average common
shares outstanding 18,108 17,223 11,466
======== ======== ========
Net income per common share
assuming dilution:
Before extraordinary item $ 1.26 $ 0.98 $ 0.42
Extraordinary item -- (0.13) --
-------- -------- -------
Total $ 1.26 $ 0.85 $ 0.42
======== ======= ========
Weighted-average common
shares outstanding 18,621 17,937 12,119
======== ======= ========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED 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> <C> <C> <C>
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 issuances 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
Paydown of notes
receivable from
officers -- -- -- -- 53 -- 53
Issuance of shares of
Class A Common stock
to option holders &
other issuances 89,944 -- 1,388 -- -- -- 1,388
Purchase of treasury
Stock -- -- -- (13) -- -- (13)
Net income -- -- -- -- -- 23,518 23,518
---------- --- -------- --- ----- --------- --------
Balance at September 30,
1999 18,176,554 $18 $175,030 $(26) $ (71) $ 26,779 $201,730
========== === ======== ==== ====== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Operating activities:
Net income $ 23,518 $ 15,314 $ 5,057
Adjustments to reconcile net
income to net cash provided
by operations:
Depreciation and amortization 13,701 9,576 7,828
Deferred income tax expense 8,384 5,275 2,989
Extraordinary loss due to early
extinguishment of long-term
debt -- 2,332 --
Changes in operating assets and
liabilities:
Trade and other receivables (4,520) (7,790) 3,347
Prepaid expenses and deposits (2,216) (710) 464
Inventory 2,824 (14,376) 1,086
Accounts payable and accrued
Expenses 4,252 7,708 2,658
Advance customer payments (5,957) 5,957 --
Income taxes (1,214) 5,432 134
Other (805) (290) (492)
------- -------- -------
Net cash provided by operating
activities 37,967 28,428 23,071
Investing activities:
Additions to property, plant
and equipment (73,980) (84,757) (28,428)
------- -------- -------
Net cash used in investing
activities (73,980) (84,757) (28,428)
Financing activities:
Additions to deferred debt
issuance costs -- (325) (2,115)
Proceeds from issuance of debt 34,115 60,763 11,730
Net borrowings under revolving
line of credit facility -- -- (5,500)
Principal payments on debt and
capital lease obligations (1,229) (117,083) (19,810)
Proceeds from issuance of common
stock, net of issuance costs 786 115,692 21,958
Other (13) -- --
------- -------- -------
Net cash provided by financing
activities 33,659 59,047 6,263
------- -------- -------
Net increase (decrease) in cash
and temporary investments (2,354) 2,718 906
Cash and temporary investments
at beginning of year 5,442 2,724 1,818
------- -------- -------
Cash and temporary investments at
end of year $ 3,088 $ 5,442 $ 2,724
========= ======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
AMERICAN ITALIAN PASTA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 largest producer and
marketer of pasta products in the United States and has manufacturing and
distribution facilities located in Excelsior Springs, Missouri, Kenosha,
Wisconsin, and Columbia, South Carolina.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all majority owned subsidiaries.
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 Company's fiscal year is described as having ended on
September 30.
REVENUE RECOGNITION
Sales of the Company's products, including pricing terms, are final upon
shipment of the goods, except for certain supply contracts where the
requirements have been met for recognizing revenue upon completion of
production. Revenue is recognized accordingly.
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, 1999 and 1998 was $184,000 and $111,000, respectively. At
September 30, 1999 and 1998, approximately 35% and 49%, respectively, of
accounts receivable were due from three customers.
Pasta is made from semolina milled from durum wheat, a class of hard amber
wheat grown in certain parts of the world and purchased by the Company from
United States and Canadian sources. The Company mills the wheat into semolina
at both the Excelsior Springs and Columbia plants. Durum wheat is a narrowly
traded 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, 1999 and 1998, approximates fair value. The estimated fair value of the
interest rate swap agreements of $(34,617) and ($248,769) are the amounts the
Company would be required to pay to terminate the swap agreements at
September 30, 1999 and 1998, respectively.
INTEREST RATE SWAP AGREEMENT
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
adjustment to interest expense. The Company had interest rate swap
agreements with notional amounts of $10 million and $20 million outstanding
at September 30, 1999 and 1998, respectively. There were no deferred gains
or losses related to any terminated interest rate swap agreements at
September 30, 1999 and 1998.
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,
1999 1998
---- ----
(IN THOUSANDS)
Finished goods $18,123 $20,054
Raw materials, packaging materials
and work-in-process 7,104 7,997
------- -------
$25,227 $28,051
======= =======
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,
1999, 1998 and 1997, approximately $2,713,000, $2,032,000 and $488,000,
respectively, of interest cost was capitalized.
OTHER ASSETS
Other assets consist of the following:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
(IN THOUSANDS)
Package design costs $ 3,385 $ 2,571
Other 1,010 1,019
-------- --------
4,395 3,590
Accumulated amortization (3,613) (2,818)
-------- --------
$ 782 $ 772
======== ========
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 $736,000 and
$714,000 at September 30, 1999 and 1998, 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 have adopted
the pro forma disclosure requirements under SFAS No. 123 "Accounting for
Stock-Based Compensation." Under APB No. 25, because the exercise price of the
Company's employee stock options is equal to or greater than the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
NET INCOME PER COMMON SHARE
Net income per common share is calculated using the weighted-average
number of common shares and, in the case of diluted net income 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.
Dilutive securities, consisting of options (see NOTE 6), included in the
calculation of diluted weighted average common shares were 513,000 shares in
fiscal 1999, 714,000 shares in fiscal 1998 and 653,000 shares in fiscal 1997.
2. LONG-TERM DEBT
On October 17, 1997, the Company refinanced certain of its credit
facilities. The principal maturity terms of the $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 1/2
of 1% in excess of the federal funds effective rate) or LIBOR plus an
applicable margin based on a sliding scale of the ratio of the Company's total
indebtedness divided by earnings before interest, taxes, depreciation and
amortization (EBITDA). In addition, a commitment fee is to be charged on the
unused facility balance based on the sliding scale of the Company's total
indebtedness divided by EBITDA. The stated interest plus the commitment fee 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.
Long-term debt consists of the following:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
(IN THOUSANDS)
Term loans under Credit Facility $ 72,000 $ 38,000
Capital lease, 12-year term with
three, five-year renewal options,
at an imputed interest rate of 7.2% 4,651 4,912
Capital lease, 15-year term with three,
five-year renewal options, at an
imputed interest rate of 8.5% 3,215 3,363
Capital lease, eight-year term at
an imputed interest rate of 8.5% 1,589 1,832
Other 1,156 1,618
-------- --------
82,611 49,725
Less current portion 1,144 1,206
-------- --------
$ 81,467 $ 48,519
======== ========
The Company's weighted average interest rates for the years ended
September 30, 1999 and September 30, 1998, relating to the new credit
facility, and the year ended September 30, 1997, relating to the old credit
facility, are as follows:
1999 1998 1997
---- ---- ----
Weighted-average interest rate 6.8% 8.6% 8.5%
Annual maturities of long-term debt and capital lease obligations for each
of the next five years ended September 30, are as follows:
LONG-TERM CAPITAL LEASES
YEAR DEBT AND OTHER TOTAL
- ---- ---- --------- -----
(IN THOUSANDS)
2000 $ -- $ 1,934
2001 -- 1,673
2002 72,000 1,645
2003 -- 2,023
2004 -- 1,245
Thereafter -- 6,091
------- -------
72,000 14,611 $ 86,611
Less imputed interest -- 4,000 4,000
------- ------- --------
Present value of net
minimum payments 72,000 10,611 82,611
Less current portion -- 1,144 1,144
------- ------- --------
Long-term obligations $72,000 $ 9,467 $ 81,467
======= ======= ========
The 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, 1999. The facility is unsecured.
The Company leases certain assets under capital lease agreements. At
September 30, 1999 and 1998, the cost of these assets was $13,210,000 and
$13,094,000, respectively, and related accumulated amortization was $2,085,000
and $1,357,000, respectively.
3. INCOME TAXES
At September 30, 1999, the Company has net operating loss carryforwards
for federal income tax purposes that expire as follows:
2011 $9,106
2012 9,499
-------
$18,605
=======
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,
1999 1998
---- ----
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards $ 6,799 $ 7,539
Missouri Expansion Credits 250 --
AMT credit carryforward 5,470 1,976
Other 1,251 690
-------- -------
Total deferred tax assets 13,770 10,205
Deferred tax liabilities:
Book basis of tangible assets
greater than tax 25,670 13,285
Other -- 436
-------- -------
Total deferred tax liabilities 25,670 13,721
-------- -------
Net deferred tax liabilities $(11,900) $(3,516)
======== =======
Significant components of the provision for income taxes are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Current income tax expense $ 5,135 $ 5,282 $ 81
Deferred tax expense 8,384 5,275 2,989
------- ------- -------
Total income tax expense $13,519 $10,557 $ 3,070
======= ======= =======
The reconciliation of income tax computed at the U.S. statutory tax rate
to income tax expense is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Income before income taxes $37,037 $28,203 $ 8,127
U.S. statutory tax rate x 35% x 35% x 34%
-------- -------- --------
Federal income tax expense
at U.S. statutory rate 12,963 9,871 2,763
State income tax expense,
net of federal tax effect 741 1,146 325
Other, net (185) (460) (18)
------- ------- -------
Total income tax expense $13,519 $10,557 $ 3,070
======= ======= =======
Income tax benefit allocated to other items was as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Extraordinary item $ -- $(1,429) $ --
Stock option arrangements (1) (655) (3,024) --
(1) This amount has been recorded directly to "Additional Paid-In Capital."
4. Commitments and Contingencies
The Company has committed approximately $25 million to expand its existing
manufacturing, milling and distribution facilities. Additionally, the Company
has committed approximately $35-40 million to construct a pasta manufacturing
facility in Verolanuova, Italy. The site contains a former food processing
plant built in 1987 and has been vacant since 1997. Conversion of the site
into a state of the art pasta production facility is expected to take about 12-
18 months. The facility will contain the latest pasta manufacturing technology
and will have an initial capacity of approximately 100 million pounds. The
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
$11 million and $39 million at September 30, 1999 and 1998, 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, 1999.
5. MAJOR CUSTOMERS
Sales to a certain customer during the years ended September 30, 1999,
1998 and 1997 represented 16%, 19% and 27% of revenues, respectively. Sales to
a second customer during the years ended September 30, 1999, 1998 and 1997
represented 13%, 15% and 22% of revenues, respectively. Sales to a third
customer during fiscal 1999 and 1998 were 29% and 24%, respectively, of
revenues. There were no sales to this customer in 1997.
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: risk-free interest rates of 6.0%; dividend yields of zero;
volatility factors of the expected market price of the Company's common stock
of .507 for fiscal 1999, .429 for fiscal 1998 and none was assumed for fiscal
1997; 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):
1999 1998 1997
---- ---- ----
Pro forma net income $22,325 $13,961 $4,923
Pro forma earnings per share:
Basic $1.24 $0.81 $0.43
Diluted $1.20 $0.78 $0.41
A summary of the Company's stock option activity, and related information
is as follows:
<PAGE>
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE EXERCISABLE
------ --------- ----- -----------
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
Exercised (83,533) $ 4.92-$18.00 $ 6.72
Granted 147,416 $22.50-$27.875 $24.32
Canceled/Expired (41,480) $12.23-$27.56 $22.18
---------
Outstanding at
September 30, 1999 1,944,708 1,044,066
=========
The following table summarizes outstanding and exercisable options at
September 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- ----------- --------------
$ 4.92 292,195 $ 4.92 292,197 $ 4.92
$ 7.02 169,244 $ 7.02 169,244 $ 7.02
$ 12.23 319,542 $ 12.23 231,207 $12.23
$ 18.00 935,672 $ 18.00 334,890 $18.00
$ 22.50-26.50 147,805 $ 24.28 978 $25.91
$ 26.69-30.00 80,250 $ 28.88 15,550 $28.94
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 f
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 $380,000, $270,000 and $200,000 for the years ended
September 30, 1999 and 1998 and 1997, 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, 1999 and 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 income. Plant
expansion costs amounted to $130,000 and $1,606,000 for the years ended
September 30, 1999 and 1998, respectively.
9. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Supplemental disclosure of cash
flow information:
Cash paid for interest $ 4,942 $ 3,670 $ 9,899
======== ======== ========
Cash paid for income taxes $ 5,944 $ 226 $ --
======== ======== ========
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 SEPTEMBER 30,
1997
----
(IN THOUSANDS)
Introductory advertising $ 137
In-store product demonstrations 307
Direct response advertising amortization 200
Product placement fees paid 1,633
Other 588
------
Total product introduction costs $2,865
======
There were no such costs in fiscal 1999 and 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 $71,000 remains outstanding at September 30, 1999. 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, 1999 and 1998.
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.
13. QUARTERLY FINANCIAL DATA - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Year ended September 30, 1999
Revenue $ 47,849 $ 55,867 $ 55,278 $ 61,155
Gross profit 12,099 14,435 15,876 17,160
Operating profit 7,748 9,249 10,367 11,771
Net income 4,607 5,526 6,507 6,878
Basic net income per
common share 0.25 0.31 0.36 0.38
Net income per common share
--assuming dilution 0.25 0.30 0.35 0.37
Year ended September 30, 1998
Revenue $ 35,536 $ 46,034 $ 53,785 $ 54,035
Gross profit 9,510 11,107 12,991 14,066
Operating profit 5,691 6,804 8,338 8,909
Net income 1,033 4,079 4,952 5,250
Basic net income per
common share 0.06 0.24 0.28 0.29
Net income per common share
--assuming dilution 0.06 0.23 0.27 0.28
The above quarterly financial data is unaudited, but in the opinion of
management, all adjustments necessary for a fair presentation of the selected
data for these interim periods presented have been included.
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 1999 annual
meeting of stockholders (the "Definitive Proxy Statement") will be filed no
later than 120 days after October 1, 1999.
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 Four Directors" and "The Board of
Directors" in AIPC's Definitive Proxy Statement is incorporated herein by
reference in partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under
"Executive Officers of the Registrant" an unnumbered Item in Part 1
(immediately following Item 4 Submission of Matters to a Vote of Security
Holders) of this Form 10-K is incorporated herein by reference in partial
response to this Item 10.
The information set forth in response to Item 405 of Regulation S-K under
the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in AIPC's
Definitive Proxy Statement is incorporated herein by reference in partial
response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth in response to Item 402 of Regulation S-K under
"Management Compensation" in AIPC's Definitive Proxy Statement, (other than The
Compensation Committee Report on Executive Compensation) is incorporated by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth in response to Item 403 of Regulation S-K under
the heading "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 consolidated financial statements prepared in
accordance with Regulation S-X, including the consolidated
statements of income, cash flows and stockholders' equity for the
three fiscal periods September 30, 1999, September 30, 1998 and
September 30, 1997 and the balance sheets as of September 30,
1999 and 1998, and related notes and the independent auditor's
report 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 filed a Form 8-K on September 24, 1999 regarding the increase
in the size of the Company's Board from nine to ten directors, and appointing
Karen Bechtel to fill the newly created seat.
<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
Date December 16, 1999 --------------------------------------
Timothy S. Webster
President and Chief Executive Officer
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 Warren B. Schmidgall, 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, 1999
- ---------------------------- Board of Directors
/s/ Timothy S. Webster President, Chief December 16, 1999
- ---------------------------- Executive Officer
and Director
(Principal Executive
Officer)
/s/ Warren B. Schmidgall Senior Vice December 16, 1999
- ---------------------------- President-Chief
Financial Officer,
(Principal Financial
and Accounting Officer)
/s/ Robert H. Niehaus Director December 16, 1999
- ----------------------------
/s/ Richard S. Thompson Director December 16, 1999
- ----------------------------
/s/ Jonathan E. Baum Director December 16, 1999
- ----------------------------
/s/ David Y. Howe Director December 16, 1999
- ----------------------------
/s/ Mark C. Demetree Director December 16, 1999
- ----------------------------
/s/ William R. Patterson Director December 16, 1999
- ----------------------------
/s/ John P. O'Brien Director December 16, 1999
- ----------------------------
/s/ Karen Bechtel Director December 16, 1999
- ----------------------------
<PAGE>
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
herein 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, which is attached
as Exhibit 10.1 to the Company's Annual Report on Form 10-
K405 for the fiscal year ended October 2, 1998 (Commission
File No. 001-13403), is incorporated by reference herein 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.
10.6.1 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 10.6.1.
10.6.2 First Amendment to Employment Agreement between the
Registrant and Horst W. Schroeder dated October 1, 1999,
which is attached as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated November 17, 1999, is incorporated
by reference herein as Exhibit 10.6.2.
10.7.1 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 10.7.1.
10.7.2 First Amendment to Employment Agreement between the
Registrant and David E. Watson dated September 30, 1999,
which is attached as Exhibit 10.2 to the Company's Current
Report on Form 8-K (Commission File no. 001-13403), dated
November 17, 1999, is incorporated by reference herein as
Exhibit 10.7.2.
10.8.1 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 10.8.1.
10.8.2 First Amendment to Employment Agreement between the
Registrant and Norman F. Abreo dated September 30, 1999,
which is attached as Exhibit 10.3 to the Company's Current
Report on Form 8-K (Commission File no. 001-13403), dated
November 17, 1999, is incorporated by reference herein as
Exhibit 10.8.2.
10.9.1 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 10.9.1.
10.9.2 First Amendment to Employment Agreement between the Company
and David B. Potter, dated January 21, 1999, which is
attached as Exhibit 10 to the Company's quarterly report
dated January 28, 1999 on Form 10-Q (Commission File no.
001-13403), is incorporated by reference herein as Exhibit
10.9.2.
10.9.3 Second Amendment to Employment Agreement between the
Registrant and David B. Potter dated October 27, 1999,
which is attached as Exhibit 10.4 to the Company's Current
Report on Form 8-K (Commission File no. 001-13403), dated
November 17, 1999, is incorporated by reference herein as
Exhibit 10.9.3.
10.10 Employment Agreement between the Registrant and Warren B.
Schmidgall dated September 30, 1999, which is attached as
Exhibit 10.5 to the Company's Current Report on Form 8-K
(Commission File no. 001-13403), dated November 17, 1999,
is incorporated by reference herein as Exhibit 10.10.
10.11 Letter Agreement between the Registrant and HWS &
Associates, Inc. dated October 1, 1999, which is attached
as Exhibit 10.6 to the Company's Current Report on Form 8-
K (Commission File no. 001-13403), dated November 17,
1999, is incorporated by reference herein as Exhibit
10.11.
10.12 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-
9719), is incorporated by reference herein as Exhibit 10.12.
10.13 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
10.13.
10.14 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 10.14.
10.15 1996 Salaried Bonus Plan, which is attached as Exhibit 10.13
to the IPO Registration Statement, is incorporated by
reference herein as Exhibit 10.15.
10.16.1 1997 Equity Incentive Plan, which is attached as Exhibit
10.14 to the IPO Registration Statement, is incorporated
by reference herein as Exhibit 10.16.1.
10.16.2 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 10.16.2.
10.17 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
10.17.
10.18 Warehouse lease dated September 2, 1997 between the
Company and Lanter Company, which is attached as Exhibit
10.5 to the Second Registration Statement, and is
incorporated by reference herein as Exhibit 10.18.
(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
List of subsidiaries is attached hereto as Exhibit 21.
(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.
LIST OF SUBSIDIARIES
--------------------
AIPC Sales Co.
AIPC Wisconsin, Limited Partnership
IAPC Italia S.r.l.
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 27, 1999, with respect to the consolidated financial statements of
American Italian Pasta Company included in the Annual Report (Form 10-K) for
the year ended October 1, 1999.
/s/ Ernst & Young LLP
---------------------------
Ernst & Young LLP
Kansas City, Missouri
December 15, 1999
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<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM Balance Sheets
at September 30, 1999 and 1998; Statement
of Operations for the fiscal years ended
September 30, 1998 and 1999; Statement of
Stockholders' Equity for the fiscal years
ended September 30, 1998 and 1999; the
Statements of Cash Flows for the fiscal
years ended September 30, 1998 and 1999
AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
AND THE NOTES THERETO
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