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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: September 27, 2002
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.)
4100 N. Mulberry Drive, Suite 200, Kansas City, Missouri 64116
(Address of principal executive office and Zip Code)
Registrant's telephone number, including area code: (816) 584-5000
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 (1) 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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of Securities Exchange Act). Yes [X] No [ ]
As of December 10, 2002 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 $631,599,650.
The number of shares outstanding as of December 10, 2002 of the
Registrant's Class A Convertible Common Stock was 17,700,855 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 2002
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 September 27, 2002.
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Introduction and Certain Cautionary Statements
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American Italian Pasta Company's ("we" 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. Our 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. Fiscal 2003 will be 53
weeks and end on October 3, 2003. 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 our management, as of
the date of this Annual Report, including assumptions about risks and
uncertainties faced by us. 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 our assumptions prove incorrect or should
unanticipated circumstances arise, our 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 described below under "Risk Factors." Readers are
strongly encouraged to consider those factors when evaluating any such
forward-looking statement. We will not update any forward-looking statements in
this Annual Report to reflect future events or developments.
We hold a number of federally registered and common law trademarks,
which are used throughout this Annual Report. We have registered the following
marks, among others, with the U.S. Patent and Trademark Office: AIPC, American
Italian Pasta Company, Pasta LaBella, Montalcino, Calabria, Heartland,
Mueller's, Anthony's, Globe/A-1, Luxury, Mrs. Grass, Pennsylvania Dutch, R & F,
and Ronco.
RISK FACTORS
You should carefully consider the risks described below, as well as the
other information included or incorporated by reference in this prospectus,
before making an investment in our common stock. The risks described below are
not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently believe to be immaterial may also impair our
business operations. If any of the following risks occur, our business,
financial condition or operating results could be materially harmed. In such an
event, the trading price of our common stock could decline, and you may lose all
or part of your investment.
Our business is dependent on several major customers.
Historically, a limited number of customers have accounted for a
substantial portion of our revenues. During fiscal 2002, 2001 and 2000, Sysco
accounted for approximately 11%, 13% and 15% of our revenues, respectively, and
Wal*Mart, Inc. (including Sam's Wholesale Club) accounted for approximately 13%,
12% and 15% of our revenues, respectively, over the same periods. We expect that
we will continue to rely on a limited number of major customers for a
substantial portion of our revenues in the future.
We have a mutually exclusive supply contract with Sysco (the "Sysco
Agreement") that is effective through June 2003, with a renewal option at
Sysco's discretion for an additional three-year period. The Sysco Agreement may
be terminated by Sysco upon certain events, including a substantial casualty to
or condemnation of our Missouri plant. Under the Sysco Agreement, we are
restricted from supplying pasta products to foodservice businesses other than
Sysco without Sysco's consent.
We do not have supply contracts with a substantial number of our
customers, including Wal-Mart and Sam's Wholesale Club. We depend on our
customers to sell our products and to assist us in promoting customer acceptance
of, and creating demand for,
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our products. If our relationship with one or more of our major customers
changes or ends, our sales could suffer, which could have a material adverse
effect on our business, financial condition and results of operations.
The market for pasta products is highly competitive, and we face competition
from many established domestic and foreign producers. We may not be able to
compete effectively with these producers.
The markets in which we operate are highly competitive. We compete
against numerous well-established national, regional, local and foreign
companies in the procurement of raw materials, the development of new pasta
products and product lines, the improvement and expansion of previously
introduced pasta products and product lines and the production, marketing and
distribution of pasta products. Competition for pasta products is based
primarily on product quality and taste, pricing, packaging, and customer service
capabilities. Our ability to be an effective competitor will depend on our
ability to compete on the basis of these characteristics. We believe that we
currently compete favorably with respect to these factors. However, we cannot
assure you that we will continue to be able to do so in the future. Some of our
competitors have longer operating histories, significantly greater brand
recognition and greater production capacity and financial and other resources
than we do. Our direct competitors include large multi-national companies such
as New World Pasta LLC and Barilla (an Italian-owned company with manufacturing
facilities in the U.S.), regional U.S. producers such as Dakota Growers Pasta
Company, Philadelphia Macaroni Co. Inc. and A. Zerega's Sons, Inc., each an
independent producer. We also compete against food processors such as Kraft
Foods, General Mills, Inc., ConAgra, Campbell Soup Company and Stouffers Corp.,
that produce pasta internally as an ingredient for use in food products. We also
compete with Italian producers such as De Cecco. We cannot assure you that our
customers will continue to buy our products or that we will be able to compete
effectively with all of these competitors.
In 2001 we commenced operations in Italy to produce pasta to sell in
the U.S., the United Kingdom and continental Europe. Competition in these
international markets is also intense and comes primarily from major Italian
pasta companies such as De Cecco and Barilla, and from several small, locally
recognized producers. We have significantly more experience in U.S. markets than
in European markets and there is no assurance we will be able to achieve a
significant presence in those markets.
If aggregate production capacity in the U.S. pasta industry increases, we may
have to adopt a more aggressive pricing strategy, which would negatively affect
our results of operation.
Our competitive environment depends on the relationship between
aggregate industry production capacity and aggregate market demand for pasta
products. Increases in production capacity above market demand could have a
material adverse effect on our business, financial condition and results of
operations. Over the past three years, our new plant in Arizona is the only new
pasta manufacturing facility completed in the U.S. and several smaller
facilities have been closed, resulting in a net contraction of North American
pasta production. However, if pasta production capacity were to expand in the
future as a result of, for example, a new competitor entering the market or an
existing competitor adding additional manufacturing capacity, it may increase
competition and supply of products which could lead to more aggressive pricing
strategies, potentially causing pressure on profit margins or reduced market
shares with a material adverse effect on our business, financial condition and
results of operations.
If existing anti-dumping measures imposed against certain foreign imports
terminate, we will face increased competition from foreign companies that are
subsidized by their governments and could sell their products at significantly
lower prices than us, which could negatively affect our profit margins or market
shares.
Domestic pasta prices are also influenced by competition from foreign
pasta producers and, as such, by the trade policies of both the U.S. government
and foreign governments. 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
4
of Commerce ("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, Commerce imposed anti-dumping and
countervailing duties on Italian and Turkish imports (the "Anti-dumping Order").
The Anti-dumping Order was extended for five years through 2006. While such
duties may enable us and our domestic competitors to compete more favorably
against Italian and Turkish producers in the U.S. pasta market, there can be no
assurance that these 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 lower than ours. During fiscal 2002, we received payments from
the U.S. government under the Anti-dumping Order in an aggregate amount of
approximately $7.6 million. We cannot assure you that we will continue to
receive such payments in the future. Furthermore, bulk imported pasta and pasta
produced in the U.S. by foreign firms are generally not subject to anti-dumping
and countervailing duties. If foreign pasta producers enter the U.S. market by
establishing production facilities in the United States, this would further
increase competition in the U.S. pasta market. If we are unable to compete
effectively with these competitors, it could have a material adverse effect on
our business, financial condition and results of operations.
We may experience difficulty in managing our growth.
We have experienced rapid growth and we expect to continue significant
growth in the future. Successful management of any such future growth will
require us to continue to invest in and enhance our operational, financial and
management information resources and systems, accurately forecast and meet sales
demand, accurately forecast retail sales, control overhead and attract, train,
motivate and manage our employees effectively. There can be no assurance that we
will continue to grow or that we will be effective in managing our future
growth. Any failure to effectively manage growth could be detrimental to our
goals of increasing revenues and market share and could have a material adverse
effect on our business, financial condition and results of operations.
We may not be able to sustain our historical growth rate.
We have grown our revenues and unit volumes rapidly over the last
several years. This growth has come primarily from gaining market share at the
expense of our competitors and expansion through acquisitions. There can be no
assurance that we will be able to continue to grow our business at the rates we
have experienced in the past.
The purchase of the Mueller's® pasta brand and the seven brands acquired from
Borden Foods moves us into the branded retail pasta business where we have
relatively limited experience.
Our purchase of the Mueller's® pasta brand in November of 2000, and
several pasta brands from Borden in July of 2001, and other smaller acquisitions
in 2002, significantly increases our investments in the branded retail market, a
market in which we had relatively little direct experience prior to the
acquisitions. Retail pasta sales are subject to intense competition, changes in
consumer preferences, the effects of changing prices for raw materials and local
economic conditions. The success of our branded business will be dependent upon
our ability to manage the brands successfully (including implementing effective
marketing and trade promotion programs), to anticipate and respond to new
consumer trends and to maintain key customer relationships in order to compete
effectively with lower priced products in a consolidating environment. Because
we have limited experience in this market, we cannot assure you that we will be
able to successfully manage the branded retail pasta business we acquired. If we
are unable to effectively manage this business, it could have a material adverse
effect on our business, financial condition and results of operations. In
addition, as a result of these acquisitions, we are now marketing our own brands
of pasta and therefore, in some cases, competing with our customers' private
label brand manufactured by us. This competition may have an adverse effect on
our relationships with these customers.
5
Our business is completely dependent upon dry pasta as our only product line.
We focus exclusively on producing and selling dry pasta. We expect to
continue to receive substantially all of our revenues from the wholesale and
retail sale of pasta and pasta-related products. In addition, our pasta
production equipment is highly specialized and is not adaptable to the
production of non-pasta food products. From time to time, consumer preference
for pasta and other grain-based foods has been affected by dietary changes which
de-emphasize carbohydrates and starches. Because of our product concentration,
any decline in consumer demand or preference for dry pasta, or any other factor
that adversely affects the pasta market, could have a more significant adverse
effect on our business, financial condition and results of operations than on
pasta producers that also produce other products.
Cost increases or crop shortages in durum wheat or cost increases in packaging
materials could adversely affect us.
The principal raw material in our products is durum wheat. During
fiscal 2002 and 2001, the cost of durum wheat represented in excess of 30% of
our total cost of goods sold. Durum wheat is used almost exclusively in pasta
production and is a narrowly traded, cash-only commodity crop. We attempt to
minimize the effects of durum wheat cost fluctuations through forward purchase
contracts with suppliers and agreements with many of our customers that include
cost adjustment provisions. Our commodity procurement and pricing practices are
intended to reduce the risk of durum wheat cost increases on our profitability,
but by doing so we may temporarily affect our ability to benefit from possible
durum wheat cost decreases. The supply and price of durum wheat is subject to
market conditions and is influenced by several factors beyond our control,
including general economic conditions, natural disasters and weather conditions,
competition, and governmental programs and regulations. Currently, there is an
ongoing investigation by the International Trade Commission (ITC) and the
Department of Commerce on alleged dumping of Canadian durum wheat into the U.S.
market. Preliminary and final determinations are expected by March and summer
2003, respectively. If tariffs are imposed on Canadian durum imports, the supply
and cost of durum wheat may be adversely affected. The supply and cost of durum
wheat may also be adversely affected by insects and plant diseases. We also rely
on the supply of plastic, corrugated and other packaging materials, which
fluctuate in price due to market conditions beyond our control. During fiscal
2002 and 2001, the cost of packaging materials represented less than 10% of our
total cost of goods sold.
The costs of durum wheat and packaging materials have varied widely in
recent years and future changes in such costs may cause our results of
operations and our operating margins to fluctuate significantly. Increases in
the cost of durum wheat or packaging materials could have a material adverse
effect on our operating profit and margins unless and until we are able to pass
the increased cost along to our customers. Historically, changes in sale prices
of our pasta products have lagged changes in our materials costs. Competitive
pressures may also limit our ability to raise prices in response to increased
raw or packaging material costs. Accordingly, there can be no assurance as to
whether, or the extent to which, we will be able to offset durum wheat or
packaging material cost increases with increased product prices.
The costs associated with any strategic acquisitions we make may outweigh the
benefits we expect to receive from the acquired business or assets.
Since November 2000, we have completed two brand acquisitions for
aggregate consideration of approximately $119.4 million. During the same period,
we looked at other acquisition opportunities and we expect to continue doing so
in the future. As we complete these acquisitions, we must then integrate the
acquired assets or business into our existing operations. This integration
process may result in unforeseen difficulties and could require significant time
and attention from our management that would otherwise be directed at developing
our existing business. In addition, we could discover undisclosed liabilities
resulting from any acquisitions that we may become responsible for. Further, we
cannot be certain that the benefits that we anticipate from these acquisitions
will develop. For example, we cannot assure you that our acquisition of the
Mueller's® pasta brand or the seven pasta brands we acquired from Borden Foods
or the
6
integration of those brands into our existing business will be successful, will
yield the expected benefits to us or will not adversely affect our business.
We may acquire additional pasta brands or other pasta-related businesses,
products or processes. If we cannot do so cost-effectively, our business and
financial results may be adversely affected.
Our future growth depends in part on our acquisition of additional
pasta brands or other pasta-related businesses, products or processes. There is
no assurance that we will be able to find suitable acquisitions available for
purchase or that we will be able to make acquisitions at favorable prices. In
addition, if we do successfully identify and complete acquisitions in the
future, the acquisitions may involve the following risks:
o increases in our debt and contingent liabilities;
o entering geographic markets in which we have little or no direct prior
experience;
o unanticipated or undiscovered legal liabilities or other obligations
of acquired businesses; and
o the integration of acquired businesses into our existing business may
not be successful.
We may acquire one or more additional complementary businesses other than the
production of pasta. Operating more than one type of business presents many
significant risks that could, individually or together, have a material adverse
effect on our business and financial results.
We may expand beyond our current single-product business. To do so, we
may acquire an established operating business or we may invest in another
complementary business in its early development. Our success in acquiring or
investing in other businesses is subject to the following risks:
o we do not have a history of operating, and may not be able to
successfully operate, another business that has different operating
dynamics, competition, customers and suppliers from our existing
business;
o we may not be able to hire and train experienced and dedicated
operating personnel; and
o our management resources will be placed under additional burdens.
We must manage our production and inventory levels in order to operate cost
effectively.
Most of our customers use, to some extent, inventory management systems
that track sales of particular products and rely on reorders being rapidly
filled by suppliers to meet consumer demand rather than on large inventories
being maintained by retailers. Although these systems reduce a retailer's
investment in inventory, they increase pressure on suppliers like us to fill
orders promptly and thereby shift a portion of the retailer's inventory
management cost to the supplier. This results in our carrying extra inventory to
meet customers demands. Our production of excess inventory to meet anticipated
retailer demand could result in markdowns and increased inventory carrying
costs. In addition, if we underestimate the demand for our products, we may be
unable to provide adequate supplies of pasta products to retailers in a timely
fashion, and may consequently lose sales.
7
Because we produce food products, we may be subject to product liability claims
and have costs related to product recalls.
We may need to recall some of our products if they become adulterated
or misbranded. We may also be liable if the consumption of any of our products
causes injury. Although we have never been involved in a product liability
lawsuit, the sale of food products for human consumption involves the risk of
injury to consumers as a result of tampering by unauthorized third parties,
product contamination or spoilage, including the presence of foreign objects,
substances, chemicals, aflatoxin and other agents, or residues introduced during
the growing, storage, handling or transportation phases. As a result of these
issues, we are subject to U.S. Food & Drug Administration inspection and
regulations and we believe our facilities comply in all material respects with
all applicable laws and regulations, but there can be no assurance that we will
not be subject to claims or lawsuits for injuries related to the consumption of
our products. In addition, we often indemnify our customers against product
liability claims related to our products and for the costs related to product
recalls. We carry insurance against these matters and we believe that we would
have claims against our suppliers in situations where their products were the
cause of the recall or product liability claims. However, there can be no
assurance that our insurance coverage would be adequate or that we would be able
to recover against our suppliers. The cost of commercially available insurance
has increased significantly and there can be no assurance that such insurance
will be available in the future at prices that we can afford. In addition,
although we have never incurred significant costs related to any product
recalls, because we often indemnify our customers for costs related to product
recalls, we could be subject to such expenses and any significant expenses not
covered by insurance would negatively impact our operating results. A widespread
product recall or a significant product liability judgment against us could
cause products to be unavailable for a period of time and a loss of consumer
confidence in our food products and could have a material adverse effect on our
business.
Our success is dependent on the efforts of several key executives.
Our operations and prospects depend in large part on the performance of
our senior management team. The loss of the services of one or more members of
our senior management team could have a material adverse effect on our ability
to manage our growth and develop our existing business and could have a material
adverse effect on our business, financial condition and results of operations.
No assurance can be given that we would be able to find qualified replacements
for any of these individuals if their services were no longer available. We do
not currently maintain key person life insurance on any of our key employees. We
do, however, have employment agreements with Timothy Webster, Horst Schroeder,
David Watson, David Potter, Warren Schmidgall, Jerry Dear and Walt George.
Our business could be subject to technological obsolescence.
We believe that one of our current competitive advantages is our
state-of-the-art production equipment, which reduces our production costs and
provides a cost advantage when compared to production facilities using less
advanced equipment. If other pasta producers acquire similar or more advanced
equipment that provides greater efficiencies, our current competitive advantage
might be diminished or eliminated, potentially causing pressure on profit
margins or reducing our market shares. Erosion of this advantage could have a
material adverse effect on our business, financial condition and results of
operations.
Disruptions in transportation of raw materials or finished products or increases
in transportation costs could adversely affect our financial results.
Durum wheat is shipped to our production facilities in Missouri and
South Carolina directly from North Dakota, Montana and Canada under long-term
rail contracts. Under these agreements, we are obligated to transport specified
wheat volumes and, in the event we do not, we must reimburse the carrier for
certain of its costs. We have always greatly exceeded these volume obligations.
We also have a rail contract to ship semolina, milled and processed at the
Missouri facility, to our South Carolina facility.
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An extended interruption in our ability to ship durum wheat by railroad to the
Missouri or South Carolina plants, or semolina to our South Carolina facility,
could cause us to incur significantly higher costs and longer lead times
associated with the distribution of our pasta to our customers. If we are unable
to provide adequate supplies of pasta products to our customers in a timely
fashion due to such delays, we may subsequently lose sales. This could have a
material adverse effect on our business, financial condition and results of
operations. For example, in 1994 we experienced a significant interruption in
railroad shipments due to a railroad strike. While we would attempt to find
alternative transportation if we were to experience another interruption due to
a strike or other event, such as a natural disaster, there can be no assurance
that we would be able to do so in a timely and cost-effective manner.
Our international expansion efforts may not be successful.
We completed the construction of a pasta-producing facility in Italy in
2000. Prior to opening this plant, we had no experience in operating or
distributing products on an international basis. We also do not have the same
competitive advantages in these overseas markets that we do in the U.S. We
cannot assure you that our international efforts will be successful. We expect
to incur significant costs in:
o establishing international distribution networks;
o complying with local regulations;
o overseeing the distribution of products in foreign markets; and
o modifying our business and accounting processing system for each
international market we enter.
If our international revenues are inadequate to offset the expense of
establishing and maintaining foreign operations, our business and results of
operations could be harmed. In addition, there are several risks inherent in
doing business on an international level. These risks include:
o export and import restrictions;
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o fluctuations in currency exchange rates and inflation risks;
o seasonal fluctuations in business activity in other parts of the
world;
o changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
o potentially adverse tax consequences; and
o difficulty in securing or transporting raw materials or transporting
finished product.
Any of these risks could adversely impact the success of our
international operations, which could cause our results to fluctuate and our
stock price to decline.
During fiscal 2002 less than 10% of our revenues were attributable to
our international operations.
9
Our business requires substantial capital and we carry a significant amount of
debt that restricts our operating and financial flexibility.
Our business requires a substantial capital investment, which we
currently finance, and expect to continue to finance, through third-party
lenders. As of September 30, 2002, we had approximately $262.5 million aggregate
amount of debt outstanding, representing approximately 47% of total
capitalization. The amount of debt we carry and the terms of our indebtedness
could adversely affect us in several ways, including:
o our ability to obtain additional financing in the future for working
capital, capital expenditures, and general corporate purposes,
including strategic acquisitions, may be impaired;
o our ability to use operating cash flow in other areas of our business
may be limited because a substantial portion of our cash flow from
operations may have to be dedicated to the payment of the principal of
and interest on our indebtedness;
o the terms of such indebtedness may restrict our ability to pay
dividends;
o we may be more highly leveraged than many of our competitors, which
may place us at a competitive disadvantage; and
o the level of debt we carry could restrict our corporate activities,
including our ability to respond to competitive market conditions, to
provide for capital expenditures beyond those permitted by our loan
agreements, or to take advantage of acquisition opportunities and grow
our business.
We have used, and may continue to use, interest rate protection
agreements covering our variable rate debt to limit our exposure to variable
rates. There can be no assurance, however, that we will be able to enter into
such agreements or that such agreements will not adversely affect our financial
performance.
In the event that we fail to comply with the covenants in our current
or any future loan agreements, there could be an event of default under the
applicable instrument, which could in turn cause a cross default to other debt
instruments. As a result, all amounts outstanding under our various current or
any future debt instruments may become immediately due and payable.
If interest rates were to significantly increase or if we are unable to
generate sufficient cash flow from operations in the future, we may not be able
to service our debt and may have to refinance all or a portion of our debt,
obtain additional financing or sell assets to repay such debt. We cannot assure
you that we will be able to effect such refinancing, additional financing or
asset sales on favorable terms or at all.
Our competitive position could be adversely impacted if we are unable to protect
our intellectual property.
Our brand trademarks are important to our success and our competitive
position. In addition, we have several patents on unique pasta shapes. Our
actions to establish and protect our brand trademarks and other proprietary
rights may be inadequate to prevent imitation of our products by others.
Moreover, we may face claims by a third party that we violate their intellectual
property rights. Any litigation or claims against us, whether or not successful,
could result in substantial cost, divert management's time and attention from
our core business, and harm our reputation.
10
Our operations are subject to significant government and environmental laws and
regulations.
We are subject to various laws and regulations administered by federal,
state, and other governmental agencies relating to the operation of our
production facilities, the production, packaging, labeling and marketing of our
products and pollution control, including air emissions. Our production
facilities are subject to inspection by the U.S. Food and Drug Administration,
Occupational Safety and Health Administration, and the various state agencies.
Any determination by the FDA or such other agencies that our facilities are not
in compliance with applicable regulations could interfere with the continued
manufacture and distribution of the affected products, up to the entire output
of the facility or facilities involved, and, in some cases, might also require
the recall of previously distributed products. Any such determination could have
a material adverse effect on our business, financial condition and results of
operations. Under environmental laws, we are exposed to liability primarily as
an owner and operator of real property, and as such, we may be responsible for
the clean-up or other remediation of contaminated property. Environmental laws
and regulations can change rapidly and we may become subject to more stringent
environmental laws and regulations in the future that may be retroactively
applied to earlier events. In addition, compliance with more stringent
environmental laws and regulations could involve significant capital
investments.
We do not expect to pay dividends in the foreseeable future.
We anticipate that future earnings will be used principally to support
operations and finance the growth of our business. Thus, we do not intend to pay
cash dividends on our common stock in the foreseeable future. Payment of
dividends is also restricted by provisions in our credit facility. If our
lenders permit us to declare dividends, the dividend amounts, if any, will be
determined by our board. Our board will consider a number of factors, including
our financial condition, capital requirements, funds generated from operations,
future business prospects, applicable contractual restrictions and any other
factors our board may deem relevant.
A write-off of our intangible assets would affect our results of operations and
could cause our stock price to decline.
Our total assets reflect substantial intangible assets. At September
30, 2002, intangible assets totaled $119.4 million compared to $297.1 million of
stockholders' equity. The intangibles represent brand and trademarks resulting
primarily from our acquisitions of the Mueller's® brand and the seven pasta
brands from Borden Foods. At each balance sheet date, we assess whether there
has been an impairment in the value of our intangible assets. If future
operating performance of one or more of our acquired brands were to fall
significantly below current or expected levels, we could reflect, under current
applicable accounting rules, a non-cash charge to operating earnings for
impairment of intangible assets. Any determination requiring the write-off of a
significant portion of our intangible assets would have a material negative
effect on our results of operations and total capitalization. This could cause
our stock price to decline. As of September 30, 2002, we have determined that no
impairment existed.
Terrorist attacks or acts of war may seriously harm our business.
Terrorist attacks or acts of war may cause damage or disruption to our
Company, our employees, our facilities, our suppliers or our customers, which
could significantly impact our revenues, costs and expenses and financial
condition. The terrorist attacks that took place in the United States on
September 11, 2001 were unprecedented events that have created many economic and
political uncertainties. The long-term effects on our Company of the September
11, 2001 attacks are unknown. The potential for future terrorist attacks, the
national and international responses to terrorist attacks, and other acts of war
or hostility may cause greater uncertainty and cause our business to suffer in
ways that we currently cannot predict.
11
PART I
ITEM 1. BUSINESS.
General
- -------
American Italian Pasta Company is the largest producer and one of the
fastest-growing marketers of dry pasta in North America. We commenced operations
in 1988 with the North American introduction of new, highly-efficient durum
wheat milling and pasta production technology. We believe that our singular
focus on pasta, vertically-integrated facilities, continued technological
improvements and development of a highly-skilled workforce enables us to produce
high-quality pasta at costs below those of many of our competitors. We believe
that the combination of our cost structure, the age of competitive production
capacity and our key customer relationships create significant opportunities for
continued growth. During the fiscal year ended September 30, 2002, we had
revenue of $380.8 million and net income of $41.3 million.
We produce more than 175 dry pasta shapes in vertically-integrated
milling, production and distribution facilities, strategically located in
Excelsior Springs, Missouri, Columbia, South Carolina, Kenosha, Wisconsin, and
Verolanuova, Italy. We are building our fifth plant in Tolleson, Arizona. 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. We believe 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. We believe that the South Carolina
plant is the most efficient retail pasta facility in North America in terms of
productivity and conversion cost per pound. The Wisconsin plant, which commenced
operations in 1999, produces industrial pasta for the ingredient business
segment. We believe the Wisconsin plant is the only pasta production facility in
North America which is singularly focused on serving the rapidly growing
ingredient pasta segment. We also believe the Kenosha plant is the most
efficient ingredient pasta plant in North America in terms of productivity and
conversion cost per pound. The Italy plant, which commenced operations in 2001,
serves private label, foodservice, and ingredient markets in continental Europe
and the United States. The Arizona plant, which will commence operations in
fiscal 2003, will serve both retail and institutional customers, and is
strategically located to serve western U.S. markets.
The Company is incorporated in Delaware, our executive offices are
located at 4100 N. Mulberry Drive, Suite 200, Kansas City, Missouri 64116, and
our telephone number is (816)584-5000. Our web site is located at
http://www.aipc.com. Information contained in our web site is not a part of this
Annual Report.
Recent Developments
- -------------------
On October 2, 2002, we announced we had purchased the Martha Gooch and
LaRosa pasta brands from ADM in the United States and the Lensi brand of pasta
products from Pastificio Lensi of Vinci, Italy for an approximate total of $9.5
million, including trade liabilities. The Pastificio Lensi transaction was
completed prior to our fiscal year end, and the Martha Gooch and LaRosa
transactions were completed in early October 2002. No manufacturing assets were
included in the transactions.
In November 2002, the Board of Directors authorized up to $20 million
to implement a common stock repurchase program. During November 2002, we
purchased 323,398 shares for $10,634,000, at prices ranging from $32.52 to
$33.00 per share.
On December 13, 2002, we completed an amendment to our revolving credit
facility. The amendment provides an additional $100 million term loan capacity.
The terms of the original revolving credit facility provide commitment
reductions of $110 million between October 1, 2002 and October 1, 2005. The
additional term loan capacity is nearly sufficient to offset the cumulative
annual reductions in credit availability required by
12
the original credit facility. The original terms of the facility remain
generally the same.
Products and Brands
- -------------------
Our product line, comprising over 3,500 items or 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, we produce pasta to our
customers' specifications. We make over 175 different shapes and sizes of pasta
products in over 190 package configurations, including bulk packages for
institutional customers and smaller individually-wrapped packages for retail
consumers. We contract 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 our total unit volume in fiscal period 2002.
We believe that our state-of-the-art, Italian pasta production
equipment is capable of producing the highest quality pasta. Our products are
produced to satisfy the specifications of our customers as well as our own
product specifications, which we believe are among the highest in the industry.
Our 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. We evaluate the quality of our products in two ways. We conduct
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
our customers perform competitive product comparisons on a regular basis.
Our U.S. production facilities are inspected twice each year by the
American Institute of Baking ("AIB"), the leading United States baking, food
processing and allied industries evaluation agency for sanitation and food
safety. Our plants consistently achieve the AIB's highest "Superior" rating. We
also implemented a comprehensive Hazard Analysis Critical Control Point
("HACCP") program in 1994 to continuously monitor and improve the safety,
quality and cost-effectiveness of the Company's facilities and products. We
believe that having an AIB rating of "Superior" and meeting HACCP standards have
helped us attract new business and strengthen existing customer relationships.
Our Italian plant is our first ISO 9002 certified production facility.
Similar to the U.S., the facility is inspected by a European representative
similar to AIB, EFSIS, one of the recognized European Food Safety Bodies. Our
facility received the "Higher Level" certification from EFSIS, the only European
pasta plant to receive this accreditation. In addition, we have implemented
HACCP and Food Safety Programs consistent with the U.S. facilities.
Marketing and Distribution
- --------------------------
We actively sell and market our products through approximately 30
employees and approximately 70 food brokers and distributors throughout the
United States, Canada and Mexico. Our senior management is directly involved in
the selling process in all customer markets. Our over-arching sales and
marketing strategy is to provide superior quality, a complete product offering,
competitive pricing and superior customer service to attract new customers and
grow existing customers' pasta sales. In the retail segment, we additionally
provide a focused mass approach supplying consumer preferred regional brands,
private label brands and Italian imports in distinctive packaging. The Company
works with our retailer partners to develop marketing and promotional programs
specifically tailored to stimulating pasta consumption in their market. We have
established a significant market presence in North America by developing
strategic customer relationships with food industry leaders that have
substantial pasta requirements. We have a long-term supply agreement with Sysco,
the nation's largest marketer and distributor of food service products. We are
also the primary supplier of pasta to Sam's Wholesale Club ("Sam's Club"), the
largest club store chain in the United States, and we supply private label and
branded pasta to 18 of the 20
13
largest grocery retailers in the United States, including Kroger, Albertson's,
Ahold, Wal-Mart, Winn Dixie, Publix, Delhaize America, A &2 P, and H.E. Butt. We
also have long-term supply agreements with several private label customers, and
have developed supply relationships with leading food processors, such as
ConAgra, General Mills and Kraft Foods, which use our pasta as an ingredient in
their branded food products.
Our product offering has expanded to offer "Made in Italy" pasta from
our Italian facility. This facility serves both the North American and European
markets with Private Label, Industrial and Food Service products.
One of our 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 our overall customer development strategy,
we use our category management expertise to assist customers in their
distribution and supply management decisions regarding pasta and new products.
Our category management experts use on-line A.C. Nielsen's supermarket data to
recommend pricing, SKU assortment and shelf space allocation to both private
label and branded customers. Our representatives also assist food processors in
incorporating our pasta as an ingredient in their customers' food products. We
regularly sponsor a "Pasta Technology Forum" which is a training and development
program for our customers' production and new product personnel. In addition to
technical education, we provide dedicated technical support to our institutional
customers by making recommendations regarding the processing of pasta in their
facilities. We believe that these value-added activities provide customers with
a better appreciation and awareness of our products.
We consistently demonstrate our commitment to customer service through
the development of enhanced customer service programs. Examples of these
programs include our creation of an Efficient Customer Response ("ECR") model
which uses Electronic Data Interchange ("EDI") and vendor replenishment programs
to assist key customers, and category management services for our private label
and branded customers. These programs also enable us to more accurately forecast
production and sales demand, enabling higher utilization of production
capacities and lower average unit costs.
Our four primary distribution centers in North America are
strategically located in South Carolina, Wisconsin, Missouri and Southern
California to serve the national market. Additionally, we use public warehouses
to facilitate the warehousing and distribution of our products. Our South
Carolina and Missouri distribution centers are integrated with our production
facilities, and in fiscal 2003 we will close our Southern California warehouse
and integrate it with our new Arizona manufacturing facility. 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 us to realize significant distribution
cost savings and provides lead time, fill rate and inventory management
advantages to our 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.
Our European facility uses two public warehouses to serve the European
market (located in the U.K. and Germany) and the U.S. distribution centers for
our U.S. import business.
Most of our customers use inventory management systems which track
sales of particular products and rely on reorders being rapidly filled by
suppliers. We work with our customers to forecast consumer demand which allows
us to cost-effectively produce inventory stocks to the forecasted demand levels.
14
Pasta Production
- ----------------
Pasta's primary ingredient is semolina, which is extracted from durum
wheat through a milling process. Durum wheat is used exclusively for pasta.
Durum wheat used in United States pasta production generally originates from
Canada, North Dakota, Montana, Arizona and California. Durum wheat used in
Europe generally originates from Italy, France, Spain, Canada, U.S., Greece and
Syria. 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. We blend semolina from different
wheat varieties as needed to meet customer specifications.
Our ability to produce high-quality pasta generally begins with
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 our specifications. We have several
sources for durum wheat and are not dependent on any one supplier or sourcing
area. As a result, we believe that we have adequate sources of supply for durum
wheat. We occasionally buy and sell semolina to balance our milling and
production requirements. We are one of only two 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
fluctuates. 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. Because in our view,
these futures contracts have limited liquidity and other less desirable quality
specifications we have not used them as a durum cost hedge. We manage our durum
wheat cost risk through cost pass-through mechanisms and other arrangements with
our customers and advance purchase contracts for durum wheat which are generally
less than twelve months' duration.
Durum wheat is shipped to our production facilities in Missouri and
South Carolina directly from North Dakota, Montana and Canada under long-term
rail contracts with our most significant rail carriers, the Canadian Pacific
Rail System and Norfolk Southern. Under these agreements, we are obligated to
transport specified wheat volumes. If we do not meet the volumes, we must
reimburse the carrier for certain of its costs. Currently, we are in compliance
with such volume obligations.
We purchase the raw material requirements (including semolina and
semolina/flour blends) for our Kenosha, Wisconsin facility from Horizon Milling,
LLC (a joint venture between Harvest States and Cargill) under the terms of a
long-term supply agreement. We believe the quality of the purchased raw
materials is consistent with our internally milled products. We also believe the
terms of the supply agreement are favorable versus other market options.
We will purchase the raw material requirements (including semolina and
semolina/flour blends) for our Tolleson, Arizona facility from Bay State Milling
Company under the terms of a long-term supply agreement. We also believe the
terms of the Bay State Milling Company supply agreement are favorable versus
other market options.
In Europe, we purchase our semolina requirements from Italian mills to
meet our specific quality and customer needs.
We purchase our packaging supplies, including poly-cellophane,
paperboard cartons, boxes and totes from third parties. We believe we have
adequate sources of packaging supplies.
15
Trademarks and Patents
- ----------------------
We hold a number of federally registered and common law trademarks
which we consider to be of considerable value and importance to our business
including AIPC American Italian Pasta Company, American Italian, Mueller's, and
Pasta LaBella. The Company has registered the AIPC, American Italian Pasta
Company, Pasta LaBella, Montalcino, Calabria, Heartland, Mueller's, Anthony's,
Globe/A-1, Luxury, Mrs. Grass, Pennsylvania Dutch, R & F, and Ronco.
Dependence on Major Customers
- -----------------------------
Historically, a limited number of customers have accounted for a
substantial portion of our revenues. During the fiscal years ended September 30,
2002, 2001 and 2000, Sysco accounted for approximately 11%, 13% and 15%,
respectively, and sales to Wal*Mart, Inc. (including Sam's Wholesale Club)
accounted for approximately 13%, 12% and 15%, respectively, of our revenues.
During fiscal 2000, sales to Bestfoods accounted for approximately 23% of our
revenues. With our acquisition of the Mueller's brand on November 14, 2000, we
no longer have revenues arising from transactions with Bestfoods. We expect to
continue to rely on a limited number of major customers for a substantial
portion of our revenues in the future. We have an exclusive supply contract with
Sysco (the "Sysco Agreement") through June 2003, with a renewal option by Sysco
for one additional three-year period. We do not have long-term supply contracts
with a substantial number of our other customers, including Wal*Mart and Sam's
Club. Accordingly, we are dependent upon our other customers to sell our
products and to assist us in promoting market acceptance of, and creating demand
for, our products. An adverse change in, or termination or expiration without
renewal of, our relationships with or the financial viability of one or more of
our major customers could have a material adverse effect on our business,
financial condition and results of operations.
Pursuant to the Sysco Agreement, we are the primary supplier of pasta
for Sysco and have the exclusive right to supply pasta to Sysco for sale under
Sysco's brand names. Sysco, which operates from approximately 65 operating
companies and distribution facilities nationwide, provides products and services
to approximately 350,000 restaurants, hotels, schools, hospitals, and other
institutions, as well as the U.S. government. Sysco exercised its option to
renew its agreement for an additional three years through June 30, 2003, and has
an option to renew the agreement for one additional three-year period. Our
products are sold to Sysco on a cost-plus basis, with annual adjustments based
on the prior year's costs. Under the Sysco Agreement, we 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. The Sysco Agreement may be terminated by Sysco upon certain
events, including a substantial casualty to or condemnation of our Missouri
plant. We are currently discussing certain contract modifications with Sysco in
connection with its exercise of this extension option.
Competition
- -----------
We operate in a highly competitive environment against numerous
well-established national, regional and foreign companies, and many smaller
companies. Our competitors include both independent pasta producers and pasta
divisions and subsidiaries of large food products companies. We compete 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 these products. Some of
these companies have longer operating histories, significantly greater brand
recognition and financial and other resources. Our 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. We believe
that we currently compete favorably with respect to these factors.
16
Our direct competitors include large multi-national companies such as
New World Pasta LLC, and Barilla (an Italian-owned company with manufacturing
facilities in the U.S.), regional U.S. producers of retail and institutional
pasta such as Dakota Growers Pasta Company, Philadelphia Macaroni Co. Inc. and
A. Zerega's Sons, Inc., each an independent producer, and foreign companies such
as Italian pasta producers De Cecco. We also compete against food processors
such as Kraft Foods, General Mills, Inc., ConAgra, Campbell Soup Company and
Stouffers Corp., that produce pasta internally as an ingredient for use in their
food products. For sales in Europe, our Italian plant competes with Barilla and
other small regional pasta producers.
Our competitive environment depends to a significant extent on the
aggregate industry capacity relative to aggregate demand for pasta products.
Over the past years, the North American pasta production capacity has
contracted. Borden completed the sale of its pasta business during 2001. AIPC
bought seven Borden pasta brands, while New World Pasta purchased the remainder
of the Borden brands and all of the Borden manufacturing facilities.
Subsequently, New World Pasta announced that it is closing three of its North
American pasta manufacturing facilities. AIPC management estimates the closing
of these plants represents a 200 million lb. reduction in the North American
pasta production capacity.
Several foreign producers, based principally in Italy and Turkey,
aggressively targeted the U.S. pasta market in the mid-nineties. 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"). The Anti-dumping Order was extended five years through 2006.
Accordingly, all Italian and Turkish producers, (including our Italian
subsidiary), are assessed duties of 15% on U.S. imports, subject to review by
Department of Commerce. Once reviewed by Commerce, an importer's duties may
increase or decrease depending on Commerce findings. Such duties enable us and
our domestic competitors to compete more favorably against Italian and Turkish
producers in the U.S. pasta market. 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
- --------------------------
Although we have sales in the competitive European markets, the
majority of revenues in fiscal 2002 were for sales in North America.
North American pasta consumption is estimated to have been between 4.0
to 4.5 billion pounds in 2002. 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.
Customer Markets - Retail. The U.S. retail market includes traditional
grocery retailers and fast-growing club store and mass merchants, such as
Wal*Mart. AIPC is the leading producer of retail dry pasta in the U.S. with a
market share of 33.5% for the year
17
ended September 30, 2002 (per A.C. Nielsen on pound basis). The second largest
purveyor of pasta is New World Pasta with a 26% market share, while Barilla is
third at 11%. AIPC's strategy is to provide our retailer partners with a full
portfolio of pasta alternatives from consumer preferred regional brands to high
margin store brands to "Made in Italy" imported products, all delivered within
the highest quality standards and with exceptional customer service. This
strategy appears to be working for the Company and our retail partners as AIPC's
market share grew from 31.5% in the first fiscal quarter to 35.2% in the fourth
fiscal quarter.
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 like us.
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,
Stouffers Corp., Campbell Soup Company, ConAgra, Inc., 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. We believe, however, that
an increasing number of food processors may discontinue the internal production
of their own pasta and outsource their production to efficient producers
including us.
Government Regulation; Environmental Matters
- --------------------------------------------
We are subject to various laws and regulations relating to the
operation of our production facilities, the production, packaging, labeling and
marketing of our products and pollution control, including air emissions, which
are administered by federal, state, and other governmental agencies. Our
production facilities are subject to inspection by the U.S. Food and Drug
Administration and Occupational Safety and Health Administration, and the
various state agencies.
Employees
- ---------
As of September 30, 2002, we employed 627 full-time persons worldwide,
of whom 124 were exempt, 62 salaried non-exempt, 190 manufacturing non-exempt,
and 251 manufacturing hourly employees. Our U.S. employees are not represented
by any labor unions. We consider our employee relations to be excellent.
ITEM 2. PROPERTIES.
Production Facilities. Our pasta production plants are located near
Kansas City in Excelsior Springs, Missouri, Columbia, South Carolina, Kenosha,
Wisconsin, and Verolanuova, Italy. Our U.S. facilities are strategically located
to support North American distribution
18
of our products and benefit from the rail and interstate highway infrastructure.
At September 30, 2002, our U.S. facilities had combined annual milling and
production capacity of approximately 1.0 billion pounds of durum semolina and
approximately 1.0 billion pounds of pasta.
During the fiscal year ended September 30, 2002, we began construction
of our fifth plant in Tolleson, Arizona, which will add capacity of
approximately 100 million pounds of pasta, and will serve the western markets.
Distribution Centers. We own the distribution centers adjoining our
Missouri, South Carolina, Wisconsin, and Arizona plants. In addition, we lease
space in public warehouses located in California, Missouri, Texas, and Indiana.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any litigation, and we know of no litigation
threatened against us which, if commenced and adversely determined, we expect
would likely have a material adverse effect upon our business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to the vote of our stockholders during
the fourth quarter of the 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
our Definitive Proxy Statement which will be filed no later than 120 days after
September 30, 2002. All executive officers are elected annually and serve at the
discretion of the Board of Directors. We have employment agreements with all of
these listed below and certain other of our executive officers.
The following table sets forth certain information about each of our
executive officers as of September 30, 2002.
NAME AGE POSITION
- ---- --- --------
Horst W. Schroeder....... 61 Chairman of the Board of Directors
Timothy S. Webster....... 40 President and Chief Executive Officer; Director
David E. Watson.......... 47 Executive Vice President -
Operations - Corporate Development
David B. Potter.......... 43 Executive Vice President -
Procurement and Industrial Markets
Warren B. Schmidgall..... 52 Executive Vice President and
Chief Financial Officer
Jerry H. Dear............ 55 Executive Vice President -
Store Brands, Wal*Mart, Special Channels
Keith A. Conard.......... 41 Executive Vice President - Sales and Marketing
Walter N. George......... 46 Senior Vice President - Supply Chain and Logistics
Horst W. Schroeder has served as the Chairman of the Board of Directors
since June 1991, and as a Director 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
19
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 our President 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 us 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.
David E. Watson joined us in June 1994 as 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. He was promoted to Executive
Vice President - Operations and Corporate Development in October 2000. Prior to
joining us, 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 us in 1993 as our 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. He was promoted to Executive Vice President -
Procurement and Industrial Markets in October 2002. Before joining us, 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 us in October 1998 as Senior Vice President
and Chief Financial Officer. He was promoted to Executive Vice President and
Chief Financial Officer in January 2000. Prior to that, Mr. Schmidgall worked in
various executive positions at Hill's Pet Nutrition, Inc. from February 1980 to
October 1998, including Chief Financial Officer and Executive Vice President of
Operations.
Jerry H. Dear joined us in 1993 as a Business Development Manager. He
was named Vice President - Retail Sales in 1995, Senior Vice President - Retail
Markets in February 1998, and Executive Vice President - Retail Markets in
January 2000. Before joining us, Mr. Dear had worked at Pillsbury from 1983 to
1993, most recently as a Region Business Manager.
Keith A. Conard joined us in September 2001 as Executive Vice President
- - Sales and Marketing. Prior to joining AIPC, Mr. Conard worked at Borden Foods
as Vice President of Sales and Customer Marketing and at Campbell Soup Company
in a variety of sales and marketing assignments.
Walter N. George joined us in January 2001 as Senior Vice President -
Supply Chain and Logistics. Prior to joining AIPC, Mr. George was Vice President
of Supply Chain for Hill's Pet Nutrition.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Class A Convertible Common Stock, par value $0.001 per share (the
"common stock") is traded on the New York Stock Exchange under the symbol "PLB".
The range of the high and low prices per share of the common stock for
fiscal 2002 and 2001 was as follows:
Year Ended Year Ended
September 30, 2002 September 30, 2001
High Low High Low
---- --- ---- ---
First Quarter $47.00 $35.02 $29.4375 $17.9375
Second Quarter $46.74 $39.65 $36.25 $26.75
Third Quarter $52.56 $43.75 $46.75 $31.00
Fourth Quarter $51.85 $32.45 $48.15 $38.28
As of December 10, 2002, there were 6,932 holders of the common stock.
No shares of the Company's Class B Convertible Common Stock, par value $0.001
per share (the "Class B common stock") are outstanding on the date of this
Annual Report.
We have not declared or paid any dividends on our common stock to date
and do not anticipate paying any such dividends in the foreseeable future. We
intend to retain earnings for the foreseeable future to provide funds for the
operation and expansion of our business and for the repayment of indebtedness.
Our current credit facility contains certain provisions which effectively limit
the payment of dividends. Future borrowing agreements may also contain
limitations on the payment of dividends. Any determination to pay dividends in
the future will be at the discretion of our Board of Directors and will depend
upon our financial condition, capital requirements, results of operations and
other factors, including any contractual or statutory restrictions. We have no
restricted retained earnings at September 30, 2002.
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of income data for the fiscal years ended
September 30, 2002, 2001 and 2000 and the selected balance sheet data as of
September 30, 2002 and 2001 are derived from our Consolidated Financial
Statements including the Notes thereto audited by Ernst & Young LLP, independent
auditors, appearing elsewhere in this Annual Report. The selected statement of
income data for the fiscal years ended September 30, 1999 and 1998, and the
selected balance sheet data as of September 30, 2000, 1999 and 1998, have been
derived from our financial statements not included herein, which have been
audited by Ernst & Young LLP. 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
our Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere in this Annual Report.
21
FISCAL YEARS ENDED
SEPTEMBER 30,
2002 2001 2000 1999 1998
------------- ------------- ------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues(1) $380,799 $310,789 $248,795 $220,149 $189,390
Cost of goods sold 249,000 213,086 178,810 160,449 140,110
Plant expansion costs(2) -- -- -- 130 1,606
----------- ----------- ----------- ------------ ------------
Gross profit 131,799 97,703 69,985 59,570 47,674
Selling and marketing expense 48,013 30,844 16,065 14,855 12,984
General and administrative expense 11,801 10,278 6,263 5,580 4,948
Provision for acquisition expenses (3) -- 5,537 -- -- --
----------- ----------- ----------- ------------ ------------
Operating profit 71,985 51,044 47,657 39,135 29,742
Interest expense, net 9,315 8,491 4,777 2,098 1,539
----------- ----------- ----------- ------------ ------------
Income before income tax expense and
extraordinary loss 62,670 42,553 42,880 37,037 28,203
Income tax expense 21,371 14,680 15,426 13,519 10,557
Extraordinary loss, net of income taxes (4) -- (1,543) -- -- (2,332)
----------- ----------- ----------- ------------ ------------
Net income $41,299 $26,330 $27,454 $23,518 $15,314
=========== =========== =========== ============ ============
Net income per
common share (basic):
Before extraordinary item $2.31 $1.60 $1.53 $1.30 $1.03
Extraordinary item -- (.09) -- -- (0.14)
----------- ----------- ----------- ------------ ------------
Total $2.31 $1.51 $1.53 $1.30 $0.89
=========== =========== =========== ============ ============
Weighted average common shares outstanding 17,879 17,404 17,895 18,108 17,223
=========== =========== =========== ============ ============
Net income per
common share assuming dilution:
Before extraordinary item $2.21 $1.53 $1.50 $1.26 $0.98
Extraordinary item -- (.08) -- -- (0.13)
----------- ----------- ----------- ------------ ------------
Total $2.21 $1.45 $1.50 $1.26 $0.85
=========== =========== =========== ============ ============
Weighted average common shares outstanding 18,695 18,186 18,298 18,621 17,937
=========== =========== =========== ============ ============
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and temporary investments $8,247 $5,284 $6,677 $3,088 $5,442
Working capital 79,589 53,781 46,941 29,222 23,242
Current ratio 306% 221% 304% 212% 89%
Net property, plant & equipment 395,940 339,162 311,668 266,124 205,607
Total assets 640,609 560,143 383,771 322,222 259,381
Long-term debt, less current maturities 258,193 236,783 138,502 81,467 48,519
Stockholders' equity 297,106 245,192 198,404 201,730 176,784
Total Debt/Total Capitalization 47% 49% 41% 29% 22%
(1) On October 28, 2000, the U.S. Government enacted the "Continued
Dumping and Subsidy Offset Act of 2000" which provides that assessed
anti-dumping and subsidy duties liquidated by the Department of Commerce after
October 1, 2000 will be distributed to affected domestic producers. Accordingly,
in late December 2001, AIPC received payment from the Department of Commerce of
$7.6 million as our calculated share, based on tariffs liquidated by the
government from October 1, 2000 to September 30, 2001 on Italian and Turkish
imported pasta. The intent of the Act, according to Congressional records, is
that any funds received pursuant to the Continued Dumping and Subsidy Offset Act
would be used, prospectively, by affected domestic producers to invest in
personnel and make other investments as necessary to remain competitive and
regain lost market share from the previously "dumped" imports. In accordance
with the intent of the Act, we implemented incremental spending programs,
including slotting fees to expand distribution, adding
22
personnel and increased promotions. After considering the incremental
expenditures, most of which were recorded as a reduction of gross revenue, the
net revenue impact of the dumping and subsidy offset payment was approximately
$3.7 million. Revenue was recognized over the balance of the year to match it
with the incremental expenditures. The earning per share impact was
approximately $.03 in the first quarter, and $.02 per quarter thereafter, for a
total of $.09. There was no such revenue recognized in prior years.
(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 income.
(3) Provision for acquisition expenses include incremental costs
associated with the Mueller's brand acquisition ($1.8 million) and the
acquisition of the seven brands from Borden Foods ($3.7 million).
(4) Represents losses due to early extinguishment of long-term debt,
net of income taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Introduction and Certain Cautionary Statements
- ----------------------------------------------
The following discussion and analysis of our financial condition and
results of operations focuses on and is intended to clarify the results of our
operations, certain changes in our 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 our business, all as set forth in this Annual
Report, as well as the risk factors discussed above (the "Risk Factors").
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 our assumptions on which the statements are based prove
incorrect or should unanticipated circumstances arise, our 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. We
will not update any forward-looking statements in this Annual Report.
Our 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. Our
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, our fiscal years are described as having ended on
September 30. The 2002, 2001, and 2000 fiscal years were 52-week years.
23
Results of Operations
- ---------------------
The following table sets forth certain data from our statements of
income, expressed as a percentage of revenues, for each of the periods
presented.
FISCAL YEARS ENDED
SEPTEMBER 30,
2002 2001 2000
---- ---- ----
Revenues:
Retail 74.1% 71.9% 71.5%
Institutional 25.9% 28.1% 28.5%
------ ------- ------
Total revenues 100.0% 100.0% 100.0%
------ ------ ------
Cost of goods sold 65.4 68.6 71.9
------ ------- ------
Gross profit 34.6 31.4 28.1
Selling and marketing expense 12.6 9.9 6.5
General and administrative expense 3.1 3.3 2.5
Provision for acquisition expenses -- 1.8 --
------ ------- ------
Operating profit 18.9 16.4 19.1
Interest expense, net 2.5 2.7 1.9
Income tax expense 5.6 4.7 6.2
Extraordinary loss, net of income tax -- 0.5 --
------ ------- ------
Net income 10.8% 8.5% 11.0%
======= ======= =======
Net income excluding provision for acquisition expense N/A 10.1% N/A
======= ======= =======
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are the largest producer and one of the fastest-growing major
marketers of dry pasta in North America. We began operations in 1988 with the
introduction of new, highly-efficient durum wheat milling and pasta production
technology. We believe our singular focus on pasta, our vertically-integrated
facilities and highly efficient production facilities focused primarily on
specific market segments and our highly skilled workforce make us a more
efficient company and enable us to produce high-quality pasta at very
competitive costs. We believe that the combination of our low cost structure,
the addition of several new brands to our portfolio of brands, our scalable
production facilities and our key customer relationships create significant
opportunity for continued growth.
We generate revenues in two customer markets: retail and institutional.
Retail market revenues include the revenues from sales of our pasta products to
customers who resell the pasta in retail channels. These revenues represented
74.1% and 71.9% of our total revenue for the years ended September 30, 2002 and
2001, respectively, and include sales to club stores and grocery retailers, and
encompass sales of our private label and branded products. Institutional market
revenues include revenues from product sales to customers who use our pasta as
an ingredient in food products or who resell our pasta in the foodservice
market. It also includes revenues from opportunistic sales to government
agencies and other customers that we pursue periodically when capacity is
available to increase production volumes and thereby lower average unit costs.
The institutional market represented 25.9% and 28.1% of our total revenue for
the years ended September 30, 2002 and 2001, respectively. Average sales prices
in the retail and institutional markets vary depending on customer-specific
packaging and raw material requirements, product manufacturing complexity and
other service requirements. Average retail and institutional prices will also
vary due to changes in the relative share of customer revenues and item specific
sales volumes (i.e., product sales mix). Generally, average retail sales prices
are higher than institutional sales prices. We anticipate continued changes to
historical income statement patterns resulting from the Mueller's(R) brand
acquisition in November 2000, the acquisition of seven pasta brands from Borden
Foods in July 2001, and subsequent smaller acquisitions in September and October
2002. Selling prices of our branded products are significantly higher than
selling prices in our other business units including private label. This is
expected to result in higher revenues, gross profits, and gross margin
percentages. Revenues are reported net of cash discounts, pricing allowances and
product returns.
We seek to develop strategic customer relationships with food industry
leaders that have substantial pasta requirements. We have a long-term supply
agreement with Sysco and other arrangements with food industry leaders, such as
Sam's Club, that provide for the "pass-through" of direct material cost changes
as pricing adjustments. The pass-throughs are generally limited to actual
changes in cost and, as a result, impact percentage profitability in periods of
changing costs and prices. The pass-throughs are generally effective 30 to 90
days following such cost changes and thereby significantly reduce the long-term
exposure of our operating results to the volatility of raw material costs. These
pass-through arrangements also require us to pass on the benefits of any price
decrease in raw material cases.
Our cost of goods sold consists primarily of raw materials, packaging,
manufacturing (including depreciation) and distribution costs. A significant
portion of our cost of goods sold is durum wheat. We purchase durum wheat on the
open market and, consequently, those purchases are subject to fluctuations in
cost. We manage our durum wheat cost risk through durum wheat cost
"pass-through" agreements in long-term contracts and other noncontractual
arrangements with our customers and advance purchase contracts for durum wheat
which are generally less than twelve months' duration.
Our capital asset strategy is to achieve low-cost production through
vertical integration and investment in the most current pasta-making assets and
technologies. The manufacturing- and distribution-related capital assets that
have been or will be acquired to support this strategy are depreciated over
their respective economic lives. Because of
25
the capital-intensive nature of our business and our current and future
facilities expansion plans, including completion of our new facility in Arizona,
we believe our depreciation expense for production and distribution assets may
be higher than that of many of our competitors. Depreciation expense is a
component of inventory cost and cost of goods sold. Plant expansion costs
include incremental direct and indirect manufacturing and distribution costs
that are incurred as a result of construction, commissioning and start-up of new
capital assets. These costs are expensed as incurred but are unrelated to
current production and, therefore, reported as a separate line item in the
statement of operations. By locating our newest facility in Arizona closer to
our western U.S. customers, we believe we will generate significant logistical
savings and provide superior service to our west coast customers, while creating
additional capacity to support the continued rapid growth of our business
sourced from our existing plants. We believe adding this strategic location will
further enhance our low-cost producer leadership in the industry.
Selling and marketing costs have increased substantially over the last
two years in line with the significant expansion of our retail business. These
costs increased 198.9% from fiscal year 2000 through fiscal year 2002, and
constituted 12.6% of revenues for the year ended September 30, 2002. We do not
expect continued rapid growth in our selling and marketing expenditures because
we have substantially completed the development of the selling and marketing
infrastructure needed to support our branded businesses. We expect selling and
marketing expense to exceed 10% of revenues for the foreseeable future.
As noted, in November 2000, we purchased the Mueller's® pasta brand
from Bestfoods. In July 2001, we purchased seven pasta brands from Borden Foods.
In addition, we purchased Lensi and Gooch in September and October 2002,
respectively. As discussed below, the timing of these brand acquisitions had an
impact on the period to period comparisons.
Critical Accounting Policies
This discussion and analysis discusses our results of operations and
financial condition as reflected in our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. As discussed in note 1 to our consolidated financial
statements, the preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires our
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting periods. On an ongoing basis, our management
evaluates its estimates and judgments, including those related to the impairment
of intangible assets, the method of accounting for stock options, the estimates
used to record product return reserves, accounts receivable and allowance for
doubtful accounts and derivatives. Our management bases its estimates and
judgments on its substantial historical experience and other relevant factors,
the result of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. See note 1 to our consolidated financial statements for a complete
listing of our significant accounting policies. Our most critical accounting
policies are described below.
Impairment Testing of Intangible Assets. In June 2001, the FASB issued
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and
Other Intangible Assets." The provisions of SFAS No. 142, which we adopted on
October 1, 2001, require us to discontinue the amortization of the cost of
intangible assets with indefinite lives and to perform certain fair value based
tests of the carrying value of indefinite lived intangible assets. SFAS No. 142
requires this testing to be performed at least annually and more frequently
should events or changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. These impairment tests are impacted by
judgments as to future cash flows and brand performance. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to
26
sell. Future events could cause our management to conclude that impairment
indicators exist and that the value of intangible assets are impaired.
Stock Options. We have elected to follow Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for our employee stock options and adopted the pro
forma disclosure requirements under SFAS No. 123 "Accounting for Stock-Based
Compensation." Under APB No. 25, because the exercise price of our 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.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if we had accounted for our
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 rate of 2.0% for fiscal 2002 and 4.5% for fiscal 2001 and 2000;
dividend yields of zero; volatility factors of the expected market price of our
common stock of .408 for fiscal 2002, .358 for fiscal 2001, and .483 for fiscal
2000; and a weighted-average expected life of the options 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 our employee stock options have characteristics
significantly different from those 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 our 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. Our pro forma
information follows (in thousands except for earnings per share information):
2002 2001 2000
---- ---- ----
Pro forma net income $38,302 $23,924 $25,543
Pro forma earnings per share:
Basic $2.14 $1.37 $1.43
Diluted $2.05 $1.32 $1.40
Product Return Reserves. Revenue is recognized generally when our
products are shipped to our customers. It is our policy across all classes of
customers that all sales are final. As is common in the consumer products
industry, customers occasionally return products for a variety of reasons.
Examples include product damages in transit, discontinuance of a particular size
or form of product and shipping errors. We record an estimate of products to be
returned by customers as a reserve against sales. We generally base this reserve
on our historical returns experience and sales volume. Significant judgment is
required when estimating the reserves for product returns and there is a risk
that actual product returns may differ from our estimates.
Accounts Receivable - Significant Customers. We generate approximately
25% of our revenues and corresponding accounts receivable from sales to two
customers. If our primary customers experience significant adverse conditions in
their industry or operations, our customers may not be able to meet their
ongoing financial obligations to us for prior sales or complete the purchase of
additional products from us under the terms of our existing firm purchase and
sale commitments.
Allowance for Doubtful Accounts - Methodology. We evaluate the
collectibility of our accounts receivable based on a combination of factors. In
circumstances where we are aware of a specific customer's inability to meet its
financial obligations to us (e.g.
27
bankruptcy filings, substantial down-grading of credit scores), we record a
specific reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount we reasonably believe will be collected. For all other
customers, we recognize reserves for bad debts based on the length of time the
receivables are past due, and our historical experience. If circumstances change
(i.e., higher than expected defaults or an unexpected material adverse change in
a major customer's ability to meet its financial obligations to us), our
estimates of the recoverability of amounts due us could be reduced by a material
amount.
Derivatives. We hold derivative financial instruments to hedge a
variety of risk exposures including interest rate risks associated with our
long-term debt and foreign currency fluctuations for transactions with our
overseas subsidiary. These derivatives qualify for hedge accounting as discussed
in detail in Note 1 to our consolidated financial statements. We do not
participate in speculative derivatives trading. Hedge accounting results when we
designate and document the hedging relationships involving these derivative
instruments. While we intend to continue to meet the conditions for hedge
accounting, if hedges did not qualify as highly effective or if we did not
believe that forecasted transactions would occur, the changes in the fair value
of the derivatives used as hedges would be reflected in earnings.
To hedge foreign currency risks, we use futures contracts. The fair
values of these instruments are determined from market quotes. In addition, we
use some over-the-counter forward contracts in hedging these risks. These
forward contracts are valued in a manner similar to that used by the market to
value exchange-traded contracts; that is, using standard valuation formulas with
assumptions about future foreign currency exchange rates derived from existing
exchange rates, and interest rates observed in the market. To hedge interest
rate risk, an interest rate swap is used in which we pay a variable rate and
receive a fixed rate. This instrument is valued using the market standard
methodology of netting the discounted future fixed cash receipts and the
discounted expected variable cash payments. The variable cash payments are based
on an expectation of future interest rates derived from observed market interest
rate curves. We have not changed our methods of calculating these fair values or
developing the underlying assumptions. The values of these derivatives will
change over time as cash receipts and payments are made and as market conditions
change. Our derivative instruments are not subject to multiples or leverage on
the underlying commodity or price index. Information about the fair values,
notional amounts, and contractual terms of these instruments can be found in
Note 1 to our consolidated financial statements and the section titled
"Quantitative and Qualitative Disclosures About Market Risk."
We consider our budgets and forecasts in determining the amounts of our
foreign currency denominated purchases to hedge. We combine the forecasts with
historical observations to establish the percentage of our forecast we are
assuming to be probable of occurring, and therefore eligible to be hedged. The
purchases are hedged for exposures to fluctuations in foreign currency exchange
rates.
We do not believe we are exposed to more than a nominal amount of
credit risk in our interest rate and foreign currency hedges as the
counterparties are established, well-capitalized financial institutions. Our
exposure is in liquid currency (Euros), so there is minimal risk that
appropriate derivatives to maintain our hedging program would not be available
in the future.
28
FISCAL YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2001
Revenues. Revenues increased $70.0 million, or 22.5%, to $380.8 million
for the fiscal year ended September 30, 2002, from $310.8 million for the fiscal
year ended September 30, 2001. The revenue increase was primarily due to volume
growth of 20.1% over the prior year, and higher per unit selling prices
primarily associated with the branded product line pasta acquisitions. In
addition, we benefited from a U.S. government dumping and subsidy offset
payment, with $7.6 million recorded as gross retail revenue in the year. In
accordance with the intent of the Act, we implemented incremental spending
programs, including slotting fees to expand distribution, adding personnel and
increased promotions. After considering the incremental expenditures, most of
which were recorded as a reduction of gross revenue, the net revenue impact of
the dumping and subsidy offset payment was approximately $3.7 million. Revenue
was recognized over the balance of the year to match it with the incremental
expenditures. The earnings per share impact was approximately $.03 in the first
quarter, and $.02 per quarter thereafter, for a total of $.09. Volume growth was
led by the July 2001 acquisition of seven pasta brands from Borden Foods, and by
private label (24.1%) and ingredient (13.2%). We expect increases in revenue in
fiscal 2003 primarily due to growth with existing customers, new customer
accounts and higher revenues resulting from durum pass-throughs as the cost of
durum wheat has increased significantly in recent months. We also expect
potential revenue increases from branded acquisitions which have not been
finalized.
Revenues for the Retail market increased $58.6 million, or 26.2%, to
$282.2 million for the fiscal year ended September 30, 2002, from $223.6 million
for the fiscal year ended September 30, 2001. The increase primarily reflects
volume growth of 23.2% over the prior year, including the benefit of the brands
acquired in July 2001 and the benefit of the dumping and subsidy offset payment,
and higher per unit selling prices associated with the branded product line
pasta acquisitions.
Revenues for the Institutional market increased $11.4 million, or
13.1%, to $98.6 million for the fiscal year ended September 30, 2002, from $87.1
million for the fiscal year ended September 30, 2001. This increase was
primarily a result of volume growth of 12.7% over the prior year.
Gross Profit. Gross profit increased $34.1 million, or 34.9%, to $131.8
million for the fiscal year ended September 30, 2002, from $97.7 million for the
fiscal year ended September 30, 2001. Gross profit increased generally as a
result of the volume and revenue gains referenced above. Gross profit as a
percentage of revenues increased to 34.6% for the fiscal year ended September
30, 2002 from 31.4% for the fiscal year ended September 30, 2001. The increase
in gross profit as a percentage of revenues relates primarily to incremental
gross profit on branded products subsequent to the acquisitions and lower
operating costs as a percentage of revenues. For the fiscal year 2003, we expect
increases in gross profit due to volume growth, but expect decreases in gross
profit percentage due to the recent increase in the cost of durum wheat.
Selling and Marketing Expense. Selling and marketing expense increased
$17.2 million, or 55.7%, to $48.0 million for the fiscal year ended September
30, 2002, from $30.8 million reported for the fiscal year ended September 30,
2001. Selling and marketing expense as a percentage of revenues increased to
12.6% for the fiscal year ended September 30, 2002, from 9.9% for the comparable
prior period. This increase was primarily due to higher marketing costs
associated with higher retail revenues, as well as the incremental marketing and
personnel costs associated with the branded pasta acquisitions. For the fiscal
year 2003, we are expecting selling and marketing expenses to be greater than
the 10% of revenues but lower than the percentage in 2002.
General and Administrative Expense. General and administrative expense
increased $1.5 million, or 14.8%, to $11.8 million for the fiscal year ended
September 30, 2002, from $10.3 million reported for the comparable period last
year. General and administrative expense as a percentage of revenues decreased
to 3.1% from 3.3%. The majority of the decrease relates to intangible
amortization costs associated with the Mueller's brand acquisition which were
expensed in fiscal 2001, but were no longer incurred in fiscal 2002 as a result
of the adoption of SFAS No. 142.
29
Provision for Acquisition Expenses. For the year ended September 30,
2001, the provision for acquisition expenses of $5.5 million consisted of
incremental costs associated with the Mueller's brand acquisition ($1.8 million)
and the acquisition of the seven brands from Borden Foods ($3.7 million).
Operating Profit. Operating profit for the fiscal year ended September
30, 2002, was $72.0 million, an increase of 41.0% over the $51.0 million
reported for the fiscal year ended September 30, 2001. Operating profit
increased as a percentage of revenues to 18.9% for the fiscal year ended
September 30, 2002, from 16.4% for the fiscal year ended September 30, 2001, as
a result of the factors discussed above. Operating profit as a percentage of net
revenues, excluding the provision for acquisition expenses, was 18.2% for the
fiscal year ended September 30, 2001.
Interest Expense. Interest expense for the fiscal year ended September
30, 2002, was $9.3 million, increasing 9.7% from the $8.5 million reported for
the fiscal year ended September 30, 2001. The effect of higher borrowings
associated with the fiscal 2001 brand acquisitions and capital expenditures was
offset by lower interest rates in the current period.
Income Tax Expense. Income tax for the fiscal year ended September 30,
2002, was $21.4 million, increasing $6.7 million from the $14.7 million reported
for the fiscal year ended September 30, 2001, and reflects effective income tax
rates of approximately 34.1% and 34.5%, respectively. For the fiscal year 2003,
our effective income tax rate will be approximately 33%.
Extraordinary Item. During the year ended September 30, 2001, we
incurred a $1.5 million (net of tax) extraordinary loss in conjunction with the
July 2001 extinguishment of our previous line of credit following our completion
of a new $300 million credit agreement. There was no such item in the current
year.
Net Income. Net income for the fiscal year ended September 30, 2002,
was $41.3 million, increasing from the $26.3 million reported for the fiscal
year ended September 30, 2001. Excluding the impact of the $5.5 million
provision for acquisition expense, net income for the prior year totaled $30.0
million. Net income per common share-assuming dilution was $2.21 in fiscal 2002
compared to $1.45 per share for the fiscal year ended September 30, 2001.
Excluding the impact of the $5.5 million charge for non-recurring acquisition
costs and the extraordinary item, diluted earnings per common share was $1.73 in
the prior year. Net income as a percentage of net revenue was 10.8% versus 8.5%
in the prior year or 10.1% before the provision for acquisition expense.
30
FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2000
Revenues. Revenues increased $62.0 million, or 24.9%, to $310.8 million
for the fiscal year ended September 30, 2001, from $248.8 million for the fiscal
year ended September 30, 2000. The revenue increase was primarily due to volume
growth of 16.0% over the prior year, and higher per unit selling prices
primarily associated with the branded product line pasta acquisitions. Volume
growth was led by private label (26.8%) and ingredient (35.4%).
Revenues for the Retail market increased $46.1 million, or 25.9%, to
$223.6 million for the fiscal year ended September 30, 2001, from $177.6 million
for the fiscal year ended September 30, 2000. The increase primarily reflects
volume growth of 10.4% over the prior year, and higher per unit selling prices
associated with the branded product line pasta acquisitions.
Revenues for the Institutional market increased $15.9 million, or
22.4%, to $87.1 million for the fiscal year ended September 30, 2001, from $71.2
million for the fiscal year ended September 30, 2000. This increase was
primarily a result of volume growth of 17.4% over the prior year and higher
average selling prices.
Gross Profit. Gross profit increased $27.7 million, or 39.6%, to $97.7
million for the fiscal year ended September 30, 2001, from $70.0 million for the
fiscal year ended September 30, 2000. Gross profit increased generally as a
result of the volume and revenue gains referenced above. Gross profit as a
percentage of revenues increased to 31.4% for the fiscal year ended September
30, 2001 from 28.1% for the fiscal year ended September 30, 2000. The increase
in gross profit as a percentage of revenues relates to incremental gross profit
on branded products subsequent to the brand acquisitions.
Selling and Marketing Expense. Selling and marketing expense increased
$14.8 million, or 92.0%, to $30.8 million for the fiscal year ended September
30, 2001, from $16.1 million reported for the fiscal year ended September 30,
2000. Selling and marketing expense as a percentage of revenues increased to
9.9% for the fiscal year ended September 30, 2001, from 6.5% for the comparable
prior period. This increase was primarily due to higher marketing costs
associated with higher retail revenues, as well as the incremental marketing and
personnel costs associated with the Mueller's brand acquisition.
General and Administrative Expense. General and administrative expense
increased $4.0 million, or 64.1%, to $10.3 million for the fiscal year ended
September 30, 2001, from $6.3 million reported for the comparable period last
year. General and administrative expense as a percentage of revenues increased
to 3.3% from 2.5%. The majority of the increase relates to incremental personnel
and intangible amortization costs associated with the Mueller's brand
acquisition.
Provision for Acquisition Expenses. The provision for acquisition
expenses of $5.5 million for the year consisted of incremental costs associated
with the Mueller's brand acquisition ($1.8 million) and the acquisition of the
seven brands from Borden Foods ($3.7 million).
Operating Profit. Operating profit for the fiscal year ended September
30, 2001, was $51.0 million, an increase of 7.1% over the $47.7 million reported
for the fiscal year ended September 30, 2000. Operating profit decreased as a
percentage of revenues to 16.4% for the fiscal year ended September 30, 2001,
from 19.1% for the fiscal year ended September 30, 2000, as a result of the
factors discussed above. Excluding the $5.5 million charge for incremental
acquisition expenses, operating profit was $56.6 million, an $8.9 million or
18.7% increase over that reported in the prior year. Operating profit as a
percentage of net revenues, excluding the non-recurring charge, was 18.2% versus
19.1% in the prior year.
Interest Expense. Interest expense for the fiscal year ended September
30, 2001, was $8.5 million, increasing 77.7% from the $4.8 million reported for
the fiscal year ended September 30, 2000. The increase related to borrowings
associated with the brand
31
acquisitions, our stock repurchase program, and capital expenditures. These
increases were partially offset by cash flow from operations.
Income Tax Expense. Income tax for the fiscal year ended September 30,
2001, was $14.7 million, decreasing $.7 million from the $15.4 million reported
for the fiscal year ended September 30, 2000, and reflects effective income tax
rates of approximately 34.5% and 36.0%, respectively.
Extraordinary Item. During the year ended September 30, 2001, we
incurred a $1.5 million (net of tax) extraordinary loss in conjunction with the
July 2001 extinguishment of our previous line of credit following our completion
of a new $300 million credit agreement. There was no such item in the prior
year.
Net Income. Net income for the fiscal year ended September 30, 2001,
was $26.3 million, decreasing from the $27.5 million reported for the fiscal
year ended September 30, 2000. Excluding the impact of the $5.5 million charge
for unusual incremental acquisition costs, net income for the year totaled $30.0
million, an increase of $2.5 million or 9.1% over the prior year. Net income per
common share-assuming dilution was $1.45 in fiscal 2001 compared to $1.50 per
share for the fiscal year ended September 30, 2000. Excluding the impact of the
$5.5 million charge for non-recurring acquisition costs and the extraordinary
item, diluted earnings per common share was $1.73, and net income as a
percentage of net revenue was 10.1% versus 11.0% in the prior year.
32
Liquidity and Capital Resources
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Our primary sources of liquidity are cash provided by operations and
borrowings under our credit facility. Cash and temporary investments totaled
$8.2 million and net working capital totaled $79.6 million at September 30,
2002. At September 30, 2001, cash and temporary cash investments totaled $5.3
million and working capital totaled $53.8 million. The $25.8 million increase in
working capital in fiscal year 2002 was financed with the existing credit
facility and cash generated by operations.
Our net cash provided by operating activities totaled $57.5 million for
the fiscal year ended September 30, 2002 compared to $44.2 million for the
fiscal year ended September 30, 2001 and $38.9 million for the fiscal year ended
September 30, 2000. The increases are primarily related to increases in net
income before non-cash charges, offset by increases in net working capital
requirements.
Cash flow used in investing activities principally relates to our
branded product acquisitions and investments in production, distribution,
milling and management information system assets. Capital expenditures, were
$72.8 million for the fiscal year ended September 30, 2002, $39.3 million for
the year ended September 30, 2001 and $57.7 million for the fiscal year ended
September 30, 2000.
Net cash provided by financing activities was $24.7 million for the
fiscal year ended September 30, 2002 compared to $91.7 million for the fiscal
year ended September 30, 2001, and $21.1 million for the fiscal year ended
September 30, 2000. The $24.7 million in fiscal 2002 is primarily a result of
$60.1 million proceeds from issuance of debt, offset by $41.4 million principal
payment on debt and capital lease obligations. The $91.7 million in fiscal 2001
is primarily a result of $244.6 million proceeds from issuance of debt (net of
$3.0 million deferred issuance costs) offset by $152.6 million principal payment
on debt and capital lease obligations. The $21.1 million in fiscal 2000 is
primarily a result of $57.3 million proceeds from issuance of debt, offset by
$31.3 million used to purchase treasury stock.
We currently use cash to fund capital expenditures, repayments of debt
and working capital requirements. We expect that future cash requirements will
principally be for capital expenditures, repayments of debt and working capital
requirements.
On July 16, 2001, we secured a new five-year, $300 million revolving
credit facility to replace the previous $190 million facility. The revolver
includes $100 million of dual currency availability in Euros or U.S. dollars to
finance our international business in Italy.
Our 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
our ability to enter into certain contractual arrangements. We do not expect
these limitations to have a material effect on business or results of
operations. We are in compliance with all financial covenants contained in the
credit agreement.
At September 30, 2002, the three-month LIBOR rate was 1.80625%, the
three-month Euribor rate was 3.30%, and our weighted average bank debt borrowing
rate was 3.32%.
We utilize interest rate swap agreements and foreign exchange contracts
to manage in