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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: October 3, 2003
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
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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 filed
(as defined in Rule 12b-2 of Securities Exchange Act). Yes [X] No [ ]
As of April 4, 2003 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 $772,572,586.
The number of shares outstanding as of December 29, 2003 of the
Registrant's Class A Convertible Common Stock was 18,052,461 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 2004
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report. The Definitive Proxy Statement will be filed no later than 120 days
after October 3, 2003.
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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 was 53
weeks and ended on October 3, 2003. The 2002 and 2001 fiscal years were 52-week
years.
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.
RISK FACTORS
You should carefully consider the risks described below, as well as the
other information included or incorporated by reference in this Annual Report,
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, our common stock could decline in price, and you may lose all or part of
your investment.
Our business is dependent on several major customers.
Historically, a limited number of customers has accounted for a
substantial portion of our revenues. 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. 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.
During fiscal 2003, 2002 and 2001, Sysco Corporation accounted for
approximately 10%, 11%, and 13% of our revenues, respectively, and Wal-Mart,
Inc. accounted for approximately 15%, 13%, and 12% of our revenues,
respectively, over the same periods. We do not have supply contracts with a
substantial number of our customers, including Wal-Mart. We have a mutually
exclusive supply contract with Sysco (the "Sysco Agreement") that runs through
June 2006. 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. If we are not
able to successfully continue our relationship with Sysco, our business would be
materially and adversely affected.
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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 every aspect of our business. Our customers may not continue to buy
our products and we may not be able to compete effectively with all of these
competitors.
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 Barilla (an Italian-owned company with manufacturing
facilities in the U.S.) and U.S. producers such as New World Pasta LLC, 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.
In 2001 we commenced operations in Italy to produce pasta to sell in
the U.S., the United Kingdom, continental Europe and several other international
markets. 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 locally recognized producers. We have significantly more experience
in U.S. markets than in European markets and we may not 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. We believe currently there is excess capacity in the U.S. and Italy.
Production capacity above market demand can have a material adverse effect on
our business, financial condition and results of operations. If pasta production
capacity were to expand further 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 we, which could negatively affect our profit margins or market
shares.
Anti-dumping and countervailing duties on Italian and Turkish imports
imposed by the U.S. Department of Commerce in 1996 may enable us and our
domestic competitors to compete more favorably against Italian and Turkish
producers in the U.S. pasta market. If these duties are not maintained, or
foreign producers sell competing products in the United States at prices lower
than ours or enter the U.S. market by establishing production facilities in the
United States, this would further increase competition in the U.S. pasta market.
We may be unable to compete effectively with these competitors. This 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. We may not continue to grow or be able to effectively
manage our future growth. 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
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systems, accurately forecast and meet sales demand, control overhead and
attract, train, motivate and manage our employees effectively. 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. We may not be
able to continue to grow our business at the rates we have experienced in the
past.
Over the past three years we have acquired a portfolio of pasta brands moving us
into the branded retail pasta business where we have relatively limited
experience.
Our purchase of the Mueller's(R) pasta brand in November of 2000,
several pasta brands from Borden in July of 2001, the Golden Grain/Mission pasta
brand in 2003 and other smaller acquisitions in 2002 and 2003 significantly
increased our investments in the branded retail market, a market in which we had
relatively little direct experience prior to the acquisitions. Because we have
limited experience in this market, we may be unable 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.
As dry pasta is our only product line, any decline in demand for dry pasta could
adversely affect us.
We focus exclusively on producing and selling dry pasta. We expect to
continue this focus. Because of our product concentration, any decline in
consumer demand or preference for dry pasta, such as diets focused on low
carbohydrate foods, or any other factor that adversely affects the pasta market,
could have a significant adverse effect on our business, financial condition and
results of operations.
Cost increases or crop shortages in durum wheat or cost increases in packaging
materials could adversely affect us.
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, we do not know whether, or the
extent to which, we will be able to offset durum wheat or packaging material
cost increases with increased product prices.
The principal raw material in our products is durum wheat. During
fiscal 2003 and 2002, the cost of durum wheat represented more than 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. 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, trade relations, and
governmental programs and regulations. 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
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control. During fiscal 2003 and 2002, the cost of packaging materials
represented less than 10% of our total cost of goods sold.
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 three significant brand
acquisitions for aggregate consideration of approximately $163 million, plus
additional, smaller, acquisitions. The integration process of these and future
acquisitions 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 for which we may become responsible.
Further, the benefits that we anticipate from these acquisitions may not
develop. For example, our acquisition of the Mueller's(R) pasta brand, the
Golden Grain/Mission pasta brand or the seven pasta brands we acquired from
Borden Foods or the integration of those brands into our existing business may
not be successful, or yield the expected benefits to us or may 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. We may
not be able to find suitable acquisitions available for purchase or 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 by acquiring
an established operating business or investing 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.
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We must manage our production and inventory levels in order to operate cost
effectively.
Customer inventory management systems that are intended to reduce a
retailer's inventory investment 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.
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 subject to claims or lawsuits if the consumption
of any of our products causes injury. 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. We carry
insurance against these matters. However, our insurance coverage may not be
adequate. The cost of commercially available insurance has increased
significantly and such insurance may not be available in the future at prices
that we can afford. In addition, 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.
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.
We may not 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, Dan Trott, Walt George and other members
of management.
Our business could be subject to technological obsolescence.
If other pasta producers acquire equipment similar to our equipment or
more advanced equipment that provides greater efficiencies, what we believe to
be 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 also have a rail contract to ship semolina, milled and
processed at the Missouri facility, to our South Carolina facility. 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.
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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. Our
international efforts may not 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.
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 October 3, 2003, we had approximately $303.3 million aggregate
amount of debt outstanding. 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;
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o the terms of such indebtedness may restrict our ability to pay
dividends;
o we may be more highly leveraged than some 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.
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.
We have used, and may continue to use, interest rate protection
agreements covering our variable rate debt to limit our exposure to variable
rates. However, we may not be able to enter into such agreements or such
agreements may adversely affect our financial performance.
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 may not 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. 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.
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. 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. Additional information is provided in this Form 10-K under the
heading "Business - Governmental Regulation; Environmental Matters."
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We have never paid dividends to shareholders.
We anticipate that future earnings will be used principally to support
operations and finance the growth of our business. While the Company may pay
dividends at some future date, payment of dividends is 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 could materially affect our results of
operations.
Our total assets reflect substantial 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. At October 3,
2003, intangible assets totaled $186.1 million compared to $343.5 million of
stockholders' equity. The intangibles represent brand and trademarks resulting
primarily from our acquisitions of the Mueller's(R) and Golden Grain/Mission
brands 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 operations for
impairment of intangible assets.
PART I
ITEM 1. BUSINESS.
General
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American Italian Pasta Company believes it is the largest producer and
one of the fastest-growing marketers of dry pasta in North America, based on
data available from A.C. Nielsen, published competitor financial information,
industry sources such as the National Pasta Association, suppliers, trade
magazines and our own market research. We commenced operations in 1988. We
believe that our singular focus on pasta, vertically-integrated facilities,
continued technological improvements and development of a highly-skilled
workforce enable 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
opportunities for continued growth. During the fiscal year ended October 3,
2003, we had revenue of $438.8 million and net income of $42.6 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,
Tolleson, Arizona, and Verolanuova, Italy. We have evaluated the operation and
efficiency of our plants in relation to our competitors based on discussions
with and information from industry sources such as suppliers, the National Pasta
Association and trade magazines, public disclosures by other pasta producers and
our own internal research. Based on this information, we believe 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
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 pasta for sale to food processors that use dry pasta in their
products. This is commonly referred to as industrial pasta.
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We believe the Wisconsin plant is the only pasta production facility in North
America which is 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 industrial markets internationally and the United
States. The Arizona plant, which commenced operations in fiscal 2003, serves
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 website is located at
http://www.aipc.com. We make available free of charge through our website, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports as soon as they are reasonably
available after these materials are electronically filed with or furnished to
the Securities and Exchange Commission. Information contained in our website is
not a part of this Annual Report.
Products and Brands
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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 2003.
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 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. This is the highest level of
certification available and is similar to the ratings received by our U.S.
facilities. In addition, we have implemented HACCP and Food Safety Programs
consistent with the U.S. facilities.
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Marketing and Distribution
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We actively sell and market our products through approximately 30
employees and the use of 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, Italian imports in distinctive packaging and specialty
pasta. The Company works with our retailer partners to develop marketing and
promotional programs specifically tailored to stimulating pasta consumption in
their market based upon the retailer specific strategy and role for pasta. 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 many of the largest grocery retailers in the United States,
including Kroger, Ahold, Wal-Mart, Winn Dixie, Publix, Delhaize America, A & 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 offerings enable us to offer "Made in Italy" pasta from our
Italian facility. This facility serves North American, European, and other
International 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 expertise allows us 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 Arizona to
serve the national market. Additionally, we use public warehouses to facilitate
the warehousing and distribution of our products. Our South Carolina, Arizona,
and Missouri distribution centers are integrated with our production facilities.
Prior to fiscal 2003, we utilized a public warehouse in Southern California.
With the opening of our Arizona plant, this warehouse was no longer needed and
we relocated this product to our Arizona distribution center. 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
12
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 Italy) 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.
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, and to a lesser extent,
Mexico. 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 farmer elevators 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 three major producers of
pasta that owns vertically integrated milling and production facilities.
Durum wheat is a cash crop whose market price fluctuates. 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, 90% of the volume of
wheat shipped into our Missouri mill must be carried by Canadian Pacific and 95%
of the volume of wheat shipped into our South Carolina mill must be carried by
Norfolk Southern. There are no requirements on how much total tonnage must be
shipped and we control which carriers are used. Accordingly, 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.
The Horizon Milling Supply Agreement in Kenosha, Wisconsin was signed
in 1998 for an initial period of 10 years, with renewal options. We are not
required to purchase the durum wheat nor carry the grain inventory. The contract
has a "meets competition" clause with respect to tolling fees over the life of
the contract.
We are obligated to purchase 90% of our yearly semolina and flour
requirements for our Kenosha manufacturing plant from Horizon Milling. We paid
Horizon Milling $20,962,000, $15,496,000 and $13,421,000 for our requirements in
fiscal years 2003, 2002 and 2001, respectively. In all three years we exceeded
the minimum requirement.
13
We 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.
Similarly, the Bay State Milling Supply Agreement for Tolleson, Arizona
is also a 10-year initial agreement with renewal provisions thereafter. In the
event of ownership changes or sustained under-performance, we have contractual
rights to purchase the mill at an established book value less applicable
depreciation to that point.
We are obligated to purchase 80% of our annual Tolleson requirements
for semolina from Bay State with an annual minimum of 50 million pounds. We paid
Bay State $9,443,000 in fiscal 2003, and exceeded the minimum requirement. We
purchased no semolina from Bay State in fiscal 2002 and fiscal 2001 because our
plant in Tolleson was not yet operating.
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.
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, R &
F, Ronco, Anthony's, Luxury, Pennsylvania Dutch, Martha Gooch, Golden Grain,
Mission and Pasta Lensi. The Company has also registered other marks. Although
we hold numerous patents, we do not believe any of the patents to be material to
our business.
Dependence on Major Customers
- -----------------------------
Historically, a limited number of customers has accounted for a
substantial portion of our revenues. During the fiscal years ended October 3,
2003, September 27, 2002, and September 28, 2001, Sysco Corporation accounted
for approximately 10%, 11%, and 13%, respectively, and sales to Wal*Mart, Inc.
accounted for approximately 15%, 13%, and 12%, respectively, of our revenues. 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"), which was renewed for an additional
three years in the third quarter of fiscal 2003. 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 146 operating
companies and distribution facilities in the U.S. and Canada, provides products
and services to approximately 415,000 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 December 31,
2006, and has an option to renew the agreement up to a maximum of two additional
three-year terms. Under the Sysco agreement, we may not supply pasta products to
any business other than Sysco in the United Sates that operates as, or sells to,
institutions and businesses which provide food for consumption away from home
14
(i.e. food service businesses) without Sysco's prior consent. The Sysco
agreement may be terminated by Sysco upon certain events, including AIPC's
inability to perform its obligations under the agreement, and such inability to
perform persists for three months or more.
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.
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. In late 2003, Barilla opened a plant in Mexico with
annual capacity of 150 million pounds through a 50%/50% joint venture with Grupo
of Mexico.
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. A leading branded Italian producer, Barilla, completed a
pasta production plant in Ames, Iowa in 1999. In late 2003, Barilla opened a
plant in Mexico with annual capacity of 150 million pounds through a 50%/50%
joint venture with Grupo of Mexico.
15
Pasta Industry and Markets
- --------------------------
Although we have sales in Europe, more than 95% of revenues in fiscal
2003 were from sales in North America.
North American pasta consumption is estimated to have been
approximately 4.0 billion pounds in fiscal 2003. 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. Recent attention to low carbohydrate diets by certain segments
of the U.S. population has impacted the consumption of pasta, and as a percent
of grocery sales in the U.S. pasta sales have declined.
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 approximately one-third on a volumetric basis consisting of
AIPC's brands and our customers' Private Label businesses. The second and third
largest purveyors of retail pasta are New World Pasta and Barilla, respectively.
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.
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 Foodservice, 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 13% of the
food service customers in the United States.
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.
16
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.
Our facilities are subject to air permitting by the U.S. Environmental
Protection Agency and/or authorized States' under federal and/or state
regulations implementing the federal Clean Air Act. Each of our facilities is
currently operating under valid permits. Costs to renew these permits are
immaterial.
Our facilities are also subject to annual reporting requirements under
the Emergency Planning and Community Right-to-Know Act and its implementing
regulations. No permit is required, but we do submit Tier II reports to federal
and/or state regulators, local emergency planning organizations, and the local
fire department with jurisdiction over the facilities quantifying all hazardous
materials stored on our property that meet or exceed threshold quantities. Costs
associated with this annual reporting are minimal.
To the best of the Company's knowledge, the Company is in compliance
with all applicable environmental laws and regulations.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), as amended, and other similar state laws require the
cleanup of hazardous waste disposal sites. Parties that may be liable under
CERCLA for the cleanup of a hazardous waste disposal site include the current
property owner, the operator, owners and operators of the property at the time
of a release of hazardous substances, the arranger of the disposal, and the
transporter of hazardous substances. To date, we have not been notified by the
U.S. Environmental Protection Agency, any state agency, or any other private
party that we are considered responsible or potentially responsible for some
aspect of the cleanup of any hazardous waste disposal site under CERCLA or any
other similar state laws.
Employees
- ---------
As of October 3, 2003, we employed 710 full-time persons worldwide, of
whom 148 were exempt, 48 salaried non-exempt, 271 manufacturing non-exempt, and
243 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, Verolanuova, Italy, and Tolleson, Arizona. Our U.S. facilities are
strategically located to support North American distribution of our products and
benefit from the rail and interstate highway infrastructure. At October 3, 2003,
our U.S. facilities had combined annual milling and production capacity of
approximately 1.0 billion pounds of durum semolina and approximately 1.1 billion
pounds of pasta.
During the fiscal year ended October 3, 2003, we completed our fifth
plant in Tolleson, Arizona, which added capacity of approximately 100 million
pounds of pasta, and serves 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 Northern California, Missouri, South
Carolina, Arizona, and Indiana.
17
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
October 3, 2003. 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 October 3, 2003.
NAME AGE POSITION
- ---- --- --------
Horst W. Schroeder....... 62 Chairman of the Board of Directors
Timothy S. Webster....... 41 President and Chief Executive Officer; Director
Daniel W. Trott.......... 42 Executive Vice President - Sales and Marketing
President - AIPC Sales Co.
Warren B. Schmidgall..... 53 Executive Vice President and
Chief Financial Officer
Walter N. George......... 47 Executive Vice President -
Operations & Supply Chain
Jerry H. Dear............ 56 Executive Vice President -
Special Channels and Private Label
David E. Watson.......... 48 Executive Vice President -
Corporate Development and Strategy
David B. Potter.......... 44 Executive Vice President -
Procurement and Industrial Markets
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
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.
18
Daniel W. Trott joined us in August 2003 as Executive Vice President -
Sales and Marketing. Prior to joining AIPC, Mr. Trott had worked at PepsiCo from
July 1989 to August 2003, most recently as Vice President, Pepsi-Cola North
America Sales Strategy and Development and Vice President of Sales, Pepsi-Cola
Non-carbonated Beverages.
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., a pet food producer,
from February 1980 to October 1998, including Chief Financial Officer and
Executive Vice President of Operations.
Walter N. George joined us in January 2001 as Senior Vice President -
Supply Chain and Logistics. He was promoted to Executive Vice President -
Operations and Supply Chain in January 2003. Prior to joining AIPC, Mr. George
was Vice President of Supply Chain for Hill's Pet Nutrition, Inc., a pet food
producer, from February 1989 to January 2001.
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.
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. He was
promoted to Executive Vice President - Corporate Development and Strategy in
January 2003. 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.
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 2003 and 2002 was as follows:
Year Ended Year Ended
October 3, 2003 September 27, 2002
High Low High Low
---- --- ---- ---
First Quarter $41.88 $31.50 $47.00 $35.02
Second Quarter $46.01 $34.15 $46.74 $39.65
Third Quarter $47.28 $41.23 $52.56 $43.75
Fourth Quarter $46.71 $36.88 $51.85 $32.45
As of December 22, 2003, there were 7,211 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.
19
We have not declared or paid any dividends on our common stock to date.
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 October 3, 2003.
For information on our equity compensation plans, refer to Item 12,
"Security Ownership of Certain Beneficial Owners and Management".
The Company's Board of Directors has adopted a set of Corporate
Governance Principles and has established three standing committees: Audit,
Compensation, and Nominating/Governance. A copy of the Corporate Governance
Principles and the Charter of each of these Committees will be available on the
Company's website at http://www.aipc.com by February 19, 2004, and will be
mailed to any stockholder upon written request delivered to the Corporate
Secretary of AIPC, 4100 N. Mulberry Drive, Suite 200, Kansas City, Missouri
64116.
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of income data for the fiscal years ended
October 3, 2003, September 27, 2002, and September 28, 2001 and the selected
balance sheet data as of October 3, 2003 and September 27, 2002 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 29, 2000 and October 1, 1999, and the selected balance sheet data as
of September 28, 2001, September 29, 2000, and October 1, 1999, 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.
20
FISCAL YEARS ENDED
Oct. 3, Sept. 27, Sept. 28, Sept. 29, Oct. 1,
2003 2002 2001 2000 1999
-------- --------- --------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues(1) $438,844 $380,799 $310,789 $248,795 $220,149
Cost of goods sold 295,114 249,000 213,086 178,810 160,449
Plant expansion costs(2) -- -- -- -- 130
-------- -------- -------- -------- --------
Gross profit 143,730 131,799 97,703 69,985 59,570
Selling and marketing expense 51,078 48,013 30,844 16,065 14,855
General and administrative expense 13,718 11,801 10,278 6,263 5,580
Provision for acquisition and plant start-up
expenses (3) 4,939 -- 5,537 -- --
-------- -------- -------- -------- --------
Operating profit 73,995 71,985 51,044 47,657 39,135
Interest expense, net 10,345 9,315 8,491 4,777 2,098
Other -- -- 2,356 -- --
-------- -------- -------- -------- --------
Income before income tax expense 63,650 62,670 40,197 42,880 37,037
Income tax expense 21,017 21,371 13,867 15,426 13,519
-------- -------- -------- -------- --------
Net income $ 42,633 $ 41,299 $ 26,330 $ 27,454 $ 23,518
======== ======== ======== ======== ========
Net income per
common share (basic): $ 2.39 $ 2.31 $ 1.51 $ 1.53 $ 1.30
======== ======== ======== ======== ========
Weighted average common shares outstanding 17,833 17,879 17,404 17,895 18,108
======== ======== ======== ======== ========
Net income per
common share assuming dilution: $ 2.31 $ 2.21 $ 1.45 $ 1.50 $ 1.26
======== ======== ======== ======== ========
Weighted average common shares outstanding 18,490 18,695 18,186 18,298 18,621
======== ======== ======== ======== ========
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and temporary investments $ 6,465 $ 8,247 $ 5,284 $ 6,677 $ 3,088
Working capital 87,536 79,589 53,781 46,941 29,222
Current ratio 236% 306% 221% 304% 212%
Net property, plant & equipment 424,120 395,940 339,162 311,668 266,124
Total assets 770,495 640,609 560,143 383,771 322,222
Long-term debt, less current maturities 300,778 258,193 236,783 138,502 81,467
Stockholders' equity 343,505 297,106 245,192 198,404 201,730
Total Debt/Total Capitalization 47% 47% 49% 41% 29%
(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 and 2002, AIPC received payments from the Department of
Commerce of $7.6 million and $2.4 million, respectively, as our calculated
share, based on tariffs liquidated by the government from October 1, 2000 to
September 30, 2001, and October 1, 2001 to September 30, 2002, on Italian and
Turkish imported pasta.
(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), in fiscal year
2001 and incremental costs associated with
21
brand acquisitions (primarily Golden Grain) and plant start-up costs related to
our new Arizona facility ($4.9 million) in fiscal year 2003.
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.
Fiscal 2003 was 53 weeks and ended on October 3, 2003. The 2002 and 2001 fiscal
years were 52-week years.
22
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
October 3, September 27, September 28,
2003 2002 2001
---- ---- ----
Revenues:
Retail 75.1% 74.1% 71.9%
Institutional 24.9% 25.9% 28.1%
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
------ ------ ------
Cost of goods sold 67.2 65.4 68.6
------ ------ ------
Gross profit 32.8 34.6 31.4
Selling and marketing expense 11.7 12.6 9.9
General and administrative expense 3.1 3.1 3.3
Provision for acquisition and plant
start-up expenses 1.1 -- 1.8
----- ----- ----
Operating profit 16.9 18.9 16.4
Interest expense, net 2.4 2.5 2.7
Income tax expense 4.8 5.6 4.5
Other -- -- 0.7
----- ----- -----
Net income 9.7% 10.8% 8.5%
===== ===== =====
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
We believe we are the largest producer and one of the fastest-growing
major marketers of dry pasta in North America. We began operations in 1988. 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 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
75.1% and 74.1% of our total revenue for the years ended October 3, 2003 and
September 27, 2002, 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 24.9% and 25.9% of our total
revenue for the years ended October 3, 2003 and September 27, 2002,
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
23
sales mix). Generally, average retail sales prices are higher than institutional
sales prices. Selling prices of our branded products are significantly higher
than selling prices in our other business units including private label. This
results in higher revenues, gross profits, and gross margin percentages than our
non-branded businesses. Revenues are reported net of cash discounts 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, which was renewed for an additional three years in the
third quarter of fiscal 2003, 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 the capital-intensive nature of our
business and our current and future facilities expansion plans, 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 manufacturing
capacity. 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 increased substantially in both fiscal
years 2002 and 2001, in line with the significant expansion of our retail
business. These costs constituted 11.7% and 12.6% of revenues for the years
ended October 3, 2003 and September 27, 2002.
In November 2000, we purchased the Mueller's(R) pasta brand from
Bestfoods. In July 2001, we purchased seven pasta brands from Borden Foods. In
September 2002, we purchased the Lensi brand, and in October 2002, we purchased
the Martha Gooch and LaRosa brands. In addition, we purchased the Golden
Grain/Mission pasta brand and Mrs. Leeper's pasta brand in January 2003 and
February 2003, 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 October 3, 2003 consolidated
financial statements, the preparation of financial statements in conformity with
accounting principles generally
24
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 results 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 October 3,
2003 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 accordance with Statement
of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other
Intangible Assets," we do not amortize the cost of intangible assets with
indefinite lives. SFAS No. 142 requires that we perform certain fair value based
tests of the carrying value of indefinite lived intangible assets 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 sell. Future events
could cause our management to conclude that impairment indicators exist and that
the value of intangible assets is 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 have adopted
the pro forma disclosure requirements under SFAS No. 123 "Accounting for
Stock-Based Compensation." Under APB No. 25, because the exercise price of our
employee stock options is equal to 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 1.33% for fiscal 2003; dividend yield of zero; a volatility
factor of the expected market price of our common stock of .354 for fiscal 2003;
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.
Accounts Receivable - Significant Customers. We generate approximately
25% of our revenues and corresponding accounts receivable from sales to two
international 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 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.
25
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 variable
rate long-term debt and foreign currency risks associated with our Italy
operations. These derivatives qualify for hedge accounting as discussed in
detail in Note 1 to our October 3, 2003 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. 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 risks, an interest rate swap is used to effectively convert a portion of
variable rate debt to 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 October 3, 2003 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 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 counter
parties 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.
FISCAL YEAR ENDED OCTOBER 3, 2003 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 27, 2002
Revenues. Revenues increased $58.0 million, or 15.2%, to $438.8 million
for the fiscal year ended October 3, 2003, from $380.8 million for the fiscal
year ended September 27, 2002. Revenues increased $48.4 million, or 12.7%, due
to volume growth, and $14.8 million, or 3.9%, due to higher average selling
prices. Revenues declined by $5.2 million, or 1.4%, due to a reduction in
payments received from the U.S. government under the Continued Dumping and
Subsidy Offset Act of 2000. Revenues for 2003 are based on a 53-week year, while
revenues for 2002 were based on a 52-week year.
Revenues for the Retail market increased $43.6 million, or 15.2%, to
$329.7 million for the fiscal year ended October 3, 2003, from $286.1 million
for the fiscal year ended September 27, 2002. Revenues increased $32.4 million,
or 11.3%, due to volume growth,
26
and $16.4 million, or 5.7%, due to higher average selling prices. Revenues
declined by $5.2 million, or 1.8%, due to a reduction in payments received from
the U.S. government under the Continued Dumping and Subsidy Offset Act of 2000.
Revenues for the Institutional market increased $14.4 million, or
15.2%, to $109.1 million for the fiscal year ended October 3, 2003, from $94.7
million for the fiscal year ended September 27, 2002. Revenues increased $14.1
million, or 13.4%, due to volume growth and $0.3 million, or 1.8%, due to higher
average selling prices and changes in sales mix.
Gross Profit. Gross profit increased $11.9 million, or 9.1%, to $143.7
million for the fiscal year ended October 3, 2003, from $131.8 million for the
fiscal year ended September 27, 2002. This increase was primarily due to revenue
growth associated with increased volumes and higher selling prices. These
increases were partially offset by higher raw material costs, principally durum
wheat. Gross profit as a percentage of revenues decreased to 32.8% for the
fiscal year ended October 3, 2003 from 34.6% for the fiscal year ended September
27, 2002. This change in gross margin percentage is due to a number of
offsetting factors. Factors putting downward pressure on margins included sales
mix changes (greater growth in private label and ingredient versus branded), the
inherent margin reduction that mathematically occurs with the pass through of
durum cost increases, and lower net revenues associated with the Department of
Commerce payments. Factors having a positive impact on gross margins included
branded acquisitions, and lower costs resulting from the Company's "Funding the
Growth" cost reduction initiative, generally related to production and logistics
costs.
Selling and Marketing Expense. Selling and marketing expense increased
$3.1 million, or 6.4%, to $51.1 million for the fiscal year ended October 3,
2003, from $48.0 million reported for the fiscal year ended September 27, 2002.
The increase in selling and marketing relates primarily to our increased branded
business. Selling and marketing expense as a percentage of revenues decreased to
11.7% for the fiscal year ended October 3, 2003, from 12.6% for the comparable
prior period. The lower selling and marketing expense as a percentage of revenue
is attributable primarily to higher rates of revenue growth in the businesses
which require less selling and marketing support, and the leverage benefits of
controlling our overhead costs.
General and Administrative Expense. General and administrative expense
increased $1.9 million, or 16.2%, to $13.7 million for the fiscal year ended
October 3, 2003, from $11.8 million reported for the comparable period last
year. This is attributable primarily to increased MIS cost, and the cost
associated with Sarbanes-Oxley compliance, including legal and insurance costs.
General and administrative expense as a percentage of revenues was 3.1% for both
periods.
Provision for Acquisition and Plant Start-Up Expenses. For the year
ended October 3, 2003, the provision for acquisition and plant start-up expenses
of $4.9 million consisted of incremental costs associated with the brand
acquisitions and plant start-up costs related to the Arizona facility.
Operating Profit. Operating profit for the fiscal year ended October 3,
2003, was $74.0 million, an increase of 2.8% over the $72.0 million reported for
the fiscal year ended September 27, 2002. Operating profit decreased as a
percentage of revenues to 16.9% for the fiscal year ended October 3, 2003, from
18.9% for the fiscal year ended September 27, 2002, as a result of the factors
discussed above. Included in operating profit is the impact of the $4.9 million
charge for incremental costs associated with the acquisitions and plant start-up
expenses discussed above.
Interest Expense. Interest expense for the fiscal year ended October 3,
2003, was $10.3 million, increasing 11.1% from the $9.3 million reported for the
fiscal year ended September 27, 2002. The effect of higher borrowings and lower
capitalized interest was partially offset by lower interest rates in fiscal
2003.
Income Tax Expense. Income tax expense for the fiscal year ended
October 3, 2003, was $21.0 million, decreasing $0.4 million from the $21.4
million reported for the fiscal year ended September 27, 2002, and reflects
effective income tax rates of approximately 33.0% and 34.1%, respectively.
27
Net Income. Net income for the fiscal year ended October 3, 2003, was
$42.6 million, increasing from the $41.3 million reported for the fiscal year
ended September 27, 2002. Included in net income is the impact of the $4.9
million ($3.3 million after tax) charge for incremental costs associated with
the acquisitions and plant start-up costs. Diluted earnings per common share
were $2.31 per share for the year ended October 3, 2003 compared to $2.21 per
share for the year ended September 27, 2002. Included in the diluted earnings
per share is the ($0.18 after tax) per share effect of incremental costs related
to acquisitions and plant start-up costs. Net income as a percentage of net
revenues was 9.7% versus 10.8% in the prior year.
FISCAL YEAR ENDED SEPTEMBER 27, 2002 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 28, 2001
Revenues. Revenues increased $70.0 million, or 22.5%, to $380.8 million
for the fiscal year ended September 27, 2002, from $310.8 million for the fiscal
year ended September 28, 2001. Revenues increased $60.3 million, or 20.1%, due
to volume growth and $9.7 million, or 2.4%, due to higher average selling prices
and the U.S. government dumping and subsidy offset payment. We benefited from a
U.S. government dumping and subsidy offset payment of $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. Volume growth was led
by the July 2001 acquisition of seven pasta brands from Borden Foods and by
growth in private label (24.1%) and ingredient volumes (13.2%).
Revenues for the Retail market increased $58.6 million, or 26.2%, to
$282.2 million for the fiscal year ended September 27, 2002, from $223.6 million
for the fiscal year ended September 28, 2001. Revenues increased $52.0 million,
or 23.2%, due to volume growth and $6.6 million, or 3.0%, due to higher average
selling prices and the U.S. government dumping and subsidy offset payment.
Revenues for the Institutional market increased $11.4 million, or
13.1%, to $98.6 million for the fiscal year ended September 27, 2002, from $87.1
million for the fiscal year ended September 28, 2001. Revenues increased $11.0
million, or 12.7%, due to volume growth and $0.4 million, or 0.4%, due to higher
average selling prices.
Gross Profit. Gross profit increased $34.1 million, or 34.9%, to $131.8
million for the fiscal year ended September 27, 2002, from $97.7 million for the
fiscal year ended September 28, 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
27, 2002 from 31.4% for the fiscal year ended September 28, 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.
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
27, 2002, from $30.8 million reported for the fiscal year ended September 28,
2001. Selling and marketing expense as a percentage of revenues increased to
12.6% for the fiscal year ended September 27, 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.
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 27, 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.
28
Provision for Acquisition Expenses. For the year ended September 28,
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
27, 2002, was $72.0 million, an increase of 41.0% over the $51.0 million
reported for the fiscal year ended September 28, 2001. Operating profit
increased as a percentage of revenues to 18.9% for the fiscal year ended
September 27, 2002, from 16.4% for the fiscal year ended September 28, 2001, as
a result of the factors discussed above.
Interest Expense. Interest expense for the fiscal year ended September
27, 2002, was $9.3 million, increasing 9.7% from the $8.5 million reported for
the fiscal year ended September 28, 2001. The effect of higher borrowings
associated with the fiscal 2001 brand acquisitions and capital expenditures was
offset by lower interest rates in fiscal 2002.
Other. During the year ended September 28, 2001, we incurred a $2.4
million loss in conjunction with the July 2001 extinguishment of our previous
line of credit following our completion of a new $300 million credit agreement.
Income Tax Expense. Income tax for the fiscal year ended September 27,
2002, was $21.4 million, increasing $7.5 million from the $13.9 million reported
for the fiscal year ended September 28, 2001, and reflects effective income tax
rates of approximately 34.1% and 34.5%, respectively.
Net Income. Net income for the fiscal year ended September 27, 2002,
was $41.3 million, increasing from the $26.3 million reported for the fiscal
year ended September 28, 2001. Included in net income for fiscal year ended
September 28, 2001, is the impact of the $5.5 million ($3.6 million after tax)
charge for incremental costs associated with the fiscal 2001 brand acquisitions.
Diluted earnings per common share were $2.21 in fiscal 2002 compared to $1.45
per share for the fiscal year ended September 28, 2001. Included in the diluted
earnings per share for fiscal year ended September 28, 2001, is the ($0.28 after
tax) per share effect of incremental costs related to brand acquisitions and the
loss incurred due to the early extinguishment of debt.
Liquidity and Capital Resources
- -------------------------------
Our primary sources of liquidity are cash provided by operations and
borrowings under our credit facility. Cash and temporary investments totaled
$6.5 million and net working capital totaled $87.5 million at October 3, 2003.
At September 27, 2002, cash and temporary cash investments totaled $8.2 million
and working capital totaled $79.6 million. The $7.9 million increase in working
capital in fiscal year 2003 was financed with cash generated by operations.
Our net cash provided by operating activities totaled $72.2 million for
the fiscal year ended October 3, 2003 compared to $55.5 million for the fiscal
year ended September 27, 2002 and $44.2 million for the fiscal year ended
September 28, 2001. Improved operating results were partially offset by
increased working capital requirements, primarily related to an increase in
inventory.
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
$40.3 million for the fiscal year ended October 3, 2003, $72.8 million for the
year ended September 27, 2002 and $39.3 million for the fiscal year ended
September 28, 2001.
Net cash provided by financing activities was $24.9 million for the
fiscal year ended October 3, 2003 compared to $24.7 million for the fiscal year
ended September 27, 2002, and $91.7 million for the fiscal year ended September
28, 2001. The $24.9 million in fiscal 2003 is primarily a result of $87.0
million proceeds from issuance of debt, offset
29
by $55.5 million principal payment on debt and capital lease obligations, offset
by $12.2 million used to purchase treasury stock. 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 $93.3 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.
We currently use cash to fund capital expenditures, repayments of debt
and working capital requirements and acquisitions. 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. The credit facility matures on
October 2, 2006. Available borrowings under the credit facility were $54,681,000
at October 3, 2003.
On December 13, 2002, we completed a $100 million term loan facility as
an amendment to our existing revolving credit agreement. The terms of the
original revolving credit facility provide commitment reductions of $110 million
between October 1, 2002 and October 1, 2005. There are no material differences
between the terms of the original credit facility and the amended credit
facility.
The principal maturity terms of the $400 million, long-term revolving
credit facility are as follows:
Amount Date
------ ----
(in thousands)
Scheduled Commitment Reduction $ 25,000 October 1, 2002
Scheduled Commitment Reduction 25,000 October 1, 2003
Scheduled Commitment Reduction 30,000 October 1, 2004
Scheduled Commitment Reduction 30,000 October 1, 2005
Final Maturity 290,000 October 2, 2006
--------
$400,000
========
Interest is charged at LIBOR/Euribor plus an applicable margin based on
a sliding scale of the ratio of the Company's total indebtedness divided by
earnings before interest, taxes, depreciation and amortization (EBITDA). In
addition, a commitment fee is charged on the unused facility balance based on
the sliding scale of the Company's total indebtedness divided by EBITDA. The
stated interest per the credit facility plus the commitment fee is classified as
interest expense.
At October 3, 2003, the three-month LIBOR rate was 1.15%, the
three-month Euribor rate was 2.127%, and our weighted average bank debt
borrowing rate per the credit facility was 3.9%.
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.
We utilize interest rate swap agreements and foreign exchange contracts
to manage interest rate and foreign currency exposures. The principal objective
of such financial derivative contracts is to moderate the effect of fluctuations
in interest rates and foreign exchange rates. We, as a matter of policy, do not
speculate in financial markets and therefore do not hold these contracts for
trading purposes. We utilize what are
30
considered simple instruments, such as forward foreign exchange contracts and
non-leveraged interest rate swaps, to accomplish our objectives.
At this time, the current and projected borrowings under our credit
facility do not exceed the facility's available commitment. The facility matures
on October 2, 2006. We anticipate that any borrowings outstanding at that time
will be satisfied with funds from operations or will be refinanced. We have no
other material commitments.
We believe that net cash expected to be provided by operating
activities and net cash provided by financing activities will be sufficient to
meet our expected capital and liquidity needs for the foreseeable future.
Certain Contractual Payment Obligations Payments Due by Period
----------------------------------------------------------------------------------------------
Total Less than 1-3 years 4-5 years After
1 year 5 years
----------------------------------------------------------------------------------------------
(in thousands)
------------------- ------------------- ---------------- ------------------- -----------------
Long term debt $303,185 $2,492 $10,693 $290,000 $--
Capital lease obligations 161 80 81 -- --
Unconditional durum wheat purchase
obligations 27,000 27,000 -- -- --
------ ------ ------- -------- ----
Total contractual cash obligations $330,346 $29,572 $10,774 $290,000 $--
======== ======= ======= ======== ===
Recently Issued Accounting Pronouncements
- -----------------------------------------
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." Interpretation No. 46 requires that the assets, liabilities and
results of the activity of variable interest entities be consolidated into the financial statements of the
company that has the controlling financial interest. Interpretation No. 46 also provides the framework for
determining whether a variable interest entity should be consolidated based on voting interests or significant
financial support provided to it. Interpretation No. 46 will become effective for us on December 31, 2003 for
variable interest entities created prior to February 1, 2003. We do not expect the adoption of Interpretation
No. 46 to have a material impact on our consolidated financial statements.
On May 15, 2003, the FASB issued Statement of SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for
classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity. SFAS No. 150 requires liability classification for
mandatorily redeemable equity instruments. The provisions of SFAS No. 150 are effective for our 2004 fiscal
year. We do not expect the adoption of SFAS No. 150 to have a material impact on our consolidated financial
statements.
Other Matters
- -------------
None.
Effect of Inflation
- -------------------
31
During the last three fiscal periods, inflation has not had a material
effect on our business. We have experienced increases in our cost of borrowing
and raw materials, though generally not related to inflation. In general, we
have increased the majority of customer sales prices to recover significant raw
material cost increases. However, these changes in prices have historically
lagged price increases in our raw material costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our principal exposure to market risk associated with financial
instruments relates to interest rate risk associated with variable rate
borrowings and foreign currency exchange rate risk. To manage our interest rate
risk associated with variable rate borrowings, we utilize simple derivative
instruments such as interest rate swaps. We had various fixed interest rate swap
agreements with notional amounts of $150 million outstanding at October 3, 2003.
The estimated fair value of the interest rate swap agreements of $(3,792,000) is
the amount we would be required to pay to terminate the swap agreements at
October 3, 2003. If interest rates for our long-term debt under our credit
facility had averaged 10% more and the full amount available under our credit
facility had been outstanding for the entire year, our interest expense would
have increased, and income before taxes would have decreased by $0.6 million for
the year ended October 3, 2003.
At October 3, 2003 we had investment in our Italy operations of
(euro)44.5 million ($52.0 million). We hedge our net investment in our foreign
subsidiaries with euro borrowings under our credit facility in the U.S. At
October 3, 2003, long-term debt includes obligations of (euro)37.5 million
($43.8 million). Interest on our Euro debt is at variable rates and based on
Euribor market rates. Changes in the U.S. dollar equivalent of euro-based
borrowings is recorded as a component of the net translation adjustment in the
consolidated statement of stockholder's equity.
The functional currency for our Italy operations is the Euro. We have
transactional exposure to various other European currencies, primarily the
British pound. Our net exposure is approximately (euro)13.0 million ($15.2
million). We occasionally use forward purchase contracts to hedge this exposure.
At October 3, 2003, we have outstanding forward contracts of (euro)8.0 million
and (pound)1.2 million.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN ITALIAN PASTA COMPANY
Index to Audited Consolidated Financial Statements
Page
Report of Independent Auditors 34
Consolidated Balance Sheets at October 3, 2003 and September 27, 2002 35
Consolidated Statements of Income for the years ended
October 3, 2003, September 27, 2002, and September 28, 2001 36
Consolidated Statements of Stockholders' Equity for the years ended
October 3, 2003, September 27, 2002, and September 28, 2001 37
Consolidated Statements of Comprehensive Income for the years ended
October 3, 2003, September 27, 2002, and September 28, 2001 38
Consolidated Statements of Cash Flows for the years ended
October 3, 2003, September 27, 2002, and September 28, 2001 39
Notes to Consolidated Financial Statements 40
33
Report of Independent Auditors
The Board of Directors
American Italian Pasta Company
We have audited the accompanying consolidated balance sheets of
American Italian Pasta Company (the Company) as of October 3, 2003 and September
27, 2002, and the related consolidated statements of income, stockh