ITEM 1. BUSINESS.
General -------
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.
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 -------------------
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.
Marketing and Distribution --------------------------
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
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.
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
(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.
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.
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.
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.
ITEM 3.
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.
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.
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.
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.
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.
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.
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
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.
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.
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
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
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.
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,
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.
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.
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
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
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 -------------------
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.
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.
ITEM 8.
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
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, stockholders' equity, comprehensive income, and cash flows for each of the three years in the period ended October 3, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Italian Pasta Company at October 3, 2003 and September 27, 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 3, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
Kansas City, Missouri November 5, 2003
AMERICAN ITALIAN PASTA COMPANY
Consolidated Balance Sheets
October 3, September 27, 2003 2002 ---- ---- (In thousands) Assets Current assets: Cash and temporary investments $ 6,465 $ 8,247 Trade and other receivables 51,730 46,463 Prepaid expenses and deposits 12,692 11,282 Inventory 78,760 49,720 Deferred income taxes (Note 3) 2,435 2,420 --------- --------- Total current assets 152,082 118,132 Property, plant and equipment: Land and improvements 14,867 11,061 Buildings 132,035 103,052 Plant and mill equipment 355,767 321,527 Furniture, fixtures and equipment 25,266 14,063 --------- --------- 527,935 449,703 Accumulated depreciation (122,811) (99,607) --------- --------- 405,124 350,096 Construction in progress 18,996 45,844 --------- --------- Total property, plant and equipment 424,120 395,940 Brands and trademarks 186,147 119,360 Other assets 8,146 7,177 --------- --------- Total assets $ 770,495 $ 640,609 ========= =========
Liabilities and stockholders' equity
Current liabilities: Accounts payable $ 42,416 $ 21,320 Accrued expenses 18,480 11,359 Income tax payable 1,096 1,585 Current maturities of long-term debt (Note 2) 2,554 4,279 --------- --------- Total current liabilities 64,546 38,543 Long-term debt (Note 2) 300,778 258,193 Deferred income taxes (Note 3) 61,666 46,767 Commitments and contingencies (Note 4) Stockholders' equity: (Notes 6, 9 & 11) Preferred stock, $.001 par value: Authorized shares - 10,000,000 -- -- Issued and outstanding shares - none Class A common stock, $.001 par value: Authorized shares - 75,000,000 20 20 Issued and outstanding shares - 20,063,827 and 18,040,709 at October 3, 2003 and 19,676,857 And 18,021,876 at September 27, 2002 Class B common stock, $.001 par value: Authorized shares - 25,000,000 -- -- Issued and outstanding shares - none Additional paid-in capital 227,234 213,671 Treasury stock at cost (46,585) (34,394) Unearned compensation (891) (940) Retained earnings 164,495 121,862 Accumulated other comprehensive loss (768) (3,113) --------- --------- Total stockholders' equity 343,505 297,106 --------- --------- Total liabilities and stockholders' equity $ 770,495 $ 640,609 ========= =========
See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Income
Year ended Year ended Year ended October 3, September 27, September 28, 2003 2002 2001 ---- ---- ---- (In thousands, except per share amounts)
Revenues (Notes 1 & 5) $438,844 $380,799 $310,789 Cost of goods sold 295,114 249,000 213,086 -------- -------- -------- Gross profit 143,730 131,799 97,703 Selling and marketing expense 51,078 48,013 30,844 General and administrative expense 13,718 11,801 10,278 Provision for acquisition and plant start-up expenses 4,939 -- 5,537 -------- -------- -------- Operating profit 73,995 71,985 51,044 Interest expense, net 10,345 9,315 8,491 Other (Note 2) -- -- 2,356 -------- -------- -------- Income before income tax expense 63,650 62,670 40,197 Income tax expense (Note 3) 21,017 21,371 13,867 -------- -------- -------- Net income $ 42,633 $ 41,299 $ 26,330 ======== ======== ========
Net income per common share $ 2.39 $ 2.31 $ 1.51
Weighted-average common shares outstanding 17,833 17,879 17,404 ======== ======== ========
Net income per common share assuming dilution $ 2.31 $ 2.21 $ 1.45
Weighted-average common shares outstanding 18,490 18,695 18,186 ======== ======== ========
See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Stockholders' Equity
Year ended Year ended Year ended October 3, September 27, September 28, 2003 2002 2001 ------------- --------------- ------------ (In thousands)
Class A Common Shares Balance, beginning of year 19,677 19,218 18,363 Issuance of shares of Class A Common stock to option holders & other issuances 387 459 855 --------- --------- --------- Balance, end of year 20,064 19,677 19,218 ========= ========= =========
Class A Common Stock Balance, beginning of year $ 20 $ 19 $ 18 Issuance of shares of Class A Common stock to option holders & other issuances -- 1 1 --------- --------- --------- Balance, end of year $ 20 $ 20 $ 19 ========= ========= =========
Additional Paid-in Capital Balance, beginning of year $ 213,671 $ 202,674 $ 177,725 Issuance of shares of Class A Common stock to option holders & other issuances 11,760 6,612 24,032 Tax benefit from stock compensation 1,803 4,385 917 --------- --------- --------- Balance, end of year $ 227,234 $ 213,671 $ 202,674 ========= ========= =========
Treasury Stock Balance, beginning of year $ (34,394) $ (34,394) $ (31,362) Purchase of treasury stock (12,191) -- (3,032) --------- --------- --------- Balance, end of year $ (46,585) $ (34,394) $ (34,394) ========= ========= =========
Notes Receivable from Officers Balance, beginning of year $ -- $ (61) $ (61) Paydown of notes receivable from officers -- 61 -- --------- --------- --------- Balance, end of year $ -- $ -- $ (61) ========= ========= =========
Unearned Compensation Balance, beginning of year $ (940) $ (223) $ -- Cancellation of common stock 400 -- -- Issuance of common stock (515) (890) (223) Earned compensation 164 173 -- --------- --------- --------- Balance, end of year $ (891) $ (940) $ (223) ========= ========= =========
Other Comprehensive Loss Foreign currency translation adjustment Balance, beginning of year $ (1,611) $ (2,957) $ (2,149) Change during the period 3,362 1,346 (808) --------- --------- --------- Balance, end of year 1,751 (1,611) (2,957) --------- --------- ---------
Interest rate swaps fair value adjustment Balance, beginning of year (1,502) (429) -- Change during the period (1,017) (1,073) (429 --------- --------- --------- Balance, end of year (2,519) (1,502) (429 --------- --------- ---------
Total accumulated other comprehensive loss $ (768) $ (3,113) $ (3,386 ========= ========= =========
Retained Earnings Balance, beginning of year $ 121,862 $ 80,563 $ 54,233 Net income 42,633 41,299 26,330 --------- --------- --------- Balance, end of year 164,495 121,862 80,563 --------- --------- ---------
Total Stockholders' Equity $ 343,505 $ 297,106 $ 245,192 ========= ========= =========
See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Comprehensive Income
Year ended Year ended Year ended October 3, 2003 September 27, September 28, 2002 2001 ------------------ ------------------ ------------------ (In thousands)
Net income $42,633 $41,299 $26,330
Other comprehensive income (loss)
Net unrealized losses on qualifying cash flow hedges (net of income tax benefit of $501,000, $553,000, and $146,000, respectively) (1,017) (1,073) (429)
Foreign currency translation adjustment (net of income tax benefit (expense) of ($1,655,000), ($693,000), and $416,000, respectively) 3,362 1,346 (808) ----- ----- ----
Total other comprehensive income (loss) 2,345 273 (1,237) ----- --- -------
Comprehensive income $44,978 $41,572 $25,093 ======= ======= =======
See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY
Consolidated Statements of Cash Flows
Year ended Year ended Year ended October 3, September 27, September 28, 2003 2002 2001 ---- ---- ---- (In thousands) Operating activities: Net income $42,633 $41,299 $26,330 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 24,630 20,791 17,513 Deferred income tax expense 17,882 17,059 9,817 Loss due to early extinguishments of long-term debt - - 2,356 Changes in operating assets and liabilities: Trade and other receivables (4,877) (9,117) (11,479) Prepaid expenses and deposits (1,716) (2,836) (3,598) Inventory (25,671) (5,710) (3,175) Accounts payable and accrued expenses 19,405 (7,888) 7,984 Income taxes 1,044 5,122 1,164 Other (1,167) (3,195) (2,665) ------- ------- ------- Net cash provided by operating activities 72,163 55,525 44,247 Investing activities: Purchase of pasta brands (59,023) (3,973) (96,454) Additions to property, plant and equipment (40,312) (72,773) (39,275) -------- -------- -------- Net cash used in investing activities (99,335) (76,746) (135,729) Financing activities: Additions to deferred debt issuance costs (1,106) -- (3,034) Proceeds from issuance of debt 87,028 60,055 247,593 Principal payments on debt and capital lease obligations (55,492) (41,368) (152,598) Proceeds from issuance of common stock, net of issuance costs 6,641 5,699 2,812 Purchases of treasury stock (12,191) -- (3,032) Other -- 264 - ------- ------ ------- Net cash provided by financing activities 24,880 24,650 91,741 Effect of exchange rate changes on cash 510 (466) (1,652) ------- ------ ------- Net increase (decrease) in cash and temporary investments (1,782) 2,963 (1,393) Cash and temporary investments at beginning of year 8,247 5,284 6,677 ------- ------ ------- Cash and temporary investments at end of year $6,465 $8,247 $5,284 ====== ====== ======
See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY
Notes to Consolidated Financial Statements October 3, 2003
1. Summary of Significant Accounting Policies
Nature of Business
American Italian Pasta Company (the Company) is a Delaware corporation which began operations in 1988. The Company believes it is the largest producer and marketer of pasta products in the United States and has manufacturing and distribution facilities located in Excelsior Springs, Missouri, Columbia, South Carolina, Kenosha, Wisconsin, Tolleson, Arizona, and Verolanuova, Italy.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all majority owned subsidiaries.
Fiscal Year End
The Company's fiscal year ends on the last Friday of September or the first Friday of October, resulting in a 52- or 53-week year depending on the calendar. The Company's first three 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.
Revenue Recognition
Sales of the Company's products, including pricing terms, are final upon shipment of the goods.
Foreign Currency
The Company's functional currency is the U.S. dollar. Accordingly, assets and liabilities of the Company's foreign operations are remeasured at year-end exchange rates; income and expenses are remeasured at the weighted-average exchange rates for the year. Foreign currency gains and losses resulting from transactions are included in consolidated operations in the year of occurrence.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Risks and Uncertainties
The Company grants credit to certain customers who meet the Company's pre-established credit requirements. Generally, the Company does not require collateral when trade credit is granted to customers. Credit losses are provided for in the financial statements and consistently have been within management's expectations. The allowance for doubtful accounts at October 3, 2003 and September 27, 2002 was $1,553,000 and $1,054,000, respectively. At October 3, 2003 and September 27, 2002, approximately 13% and 17%, respectively, of accounts receivable were due from two customers.
Pasta is made from semolina milled from durum wheat, a class of hard amber wheat purchased by the Company from certain parts of the world. The Company mills the wheat into semolina at both the Excelsior Springs and Columbia plants. Durum wheat is a narrowly traded commodity crop. The Company attempts to minimize the effect of durum wheat cost fluctuations through forward purchase contracts and raw material cost-based pricing
agreements with many of its customers. The Company's commodity procurement and pricing practices are intended to reduce the risk of durum wheat cost increases on profitability, but also may temporarily affect the timing of the Company's ability to benefit from possible durum wheat cost decreases for such contracted quantities.
Derivative Instruments
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", requires companies to recognize all of their derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.
Cash Flow Hedging Strategy
To protect against changes in the value of forecasted foreign currency cash inflows and outflows, the Company has initiated cash flow hedging programs for the Euro and British Pound. The Company hedges portions of its financial transactions with forward contracts.
The Company has entered into interest rate swap agreements that effectively convert a portion of its floating-rate debt to a fixed-rate basis for the next four years, thus reducing the impact of interest rate changes on future interest expense. Approximately 50% ($150 million) of the Company's outstanding debt was designated as the hedged items to interest rate swap agreements at October 3, 2003.
During the year ended October 3, 2003, the Company reclassified ($2,639,000) of net gains (losses) from accumulated other comprehensive income to current earnings.
At October 3, 2003, the Company expects to reclassify ($1,713,000) of net gains (losses) on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months due to the payment of variable interest associated with the floating rate debt.
Hedge of Net Investment in Foreign Operations
The Company uses foreign denominated variable-rate debt to protect the value of its investments in its foreign subsidiaries in Italy. Realized and unrealized gains and losses from these hedges are not included in the income statement, but are shown in the cumulative translation adjustment account included in other comprehensive income, with the related amounts due to or from counterparties included in other liabilities or other assets.
Financial Instruments
The carrying value of the Company's financial instruments, including cash and temporary investments, accounts receivable, accounts payable and long-term debt, as reported in the accompanying consolidated balance sheets at October 3, 2003 and September 27, 2002, approximates fair value. The estimated fair value of the interest rate swap agreement outstanding at October 3, 2003 and September 27, 2002 of ($3,792,000) and $$2,275,000), respectively, is the amount the Company would be required to pay to terminate the swap agreement at October 3, 2003 and September 27, 2002, respectively.
Cash and Temporary Investments
Cash and temporary investments include cash on hand, amounts due from banks and highly liquid marketable securities with maturities of three months or less at the date of purchase.
Inventories
Inventories are stated using product specific standard costs which approximate the lower of cost or market determined on a first-in, first-out (FIFO) basis. Inventories consist of the following:
October 3, September 27, 2003 2002 ---- ---- (In thousands) Finished goods $65,024 $38,881 Raw materials, packaging materials and work-in-process 13,736 10,839 ------- ------- $78,760 $49,720 ======= =======
Property, Plant and Equipment
Capital additions, improvements and major renewals are classified as property, plant and equipment and are recorded at cost. Depreciation is calculated for financial statement purposes using the straight-line method over the estimated useful life of the related asset for each year as follows:
Number of Years ----- Land improvements 28 - 40 Buildings 30 - 40 Plant and mill equipment 20 - 30 Packaging equipment 10 - 15 Furniture, fixtures and equipment 5 - 10
The Company capitalizes interest costs associated with the construction and installation of plant and equipment. During the years ended October 3, 2003, September 27, 2002, and September 28, 2001, approximately $1,480,000, $1,898,000, and $2,567,000, respectively, of interest cost was capitalized.
Depreciation expense for the years ended October 3, 2003, September 27, 2002 and September 28, 2001 was $22,804,000, $19,302,000, and $16,582,000, respectively.
The Company maintains certain property, plant and equipment in Italy with a net book value totaling $50.3 million and $43.9 million at October 3, 2003 and September 27, 2002, respectively.
Brands and Trademarks
During the fiscal year ended September 28, 2001, the Company acquired the Mueller's brand from Bestfoods, Inc. for $44.4 million, consisting of $23.8 million in cash and 686,666 shares of common stock valued at $30 per share. The purchase price was allocated to trademarks, brand name, and inventory. Under previous accounting rules, the trademarks and brands were assigned a life of forty years, and accordingly, the Company recognized approximately $1.0 million of amortization expense during the year ended
September 28, 2001. Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets", and assigned an indefinite life to trademarks and brand name and, as such, will no longer incur amortization expense related to these assets.
In addition, during the fiscal year ended September 28, 2001, the Company acquired seven pasta brands from Borden, Inc., including Anthony's(R), Globe/A-1®, Luxury®, Mrs. Grass®, Pennsylvania Dutch®, R&F®, and Ronco®. The purchase price in the Borden transaction was $72.6 million and has been allocated to trademarks, brand name, and inventory.
On October 2, 2002, the Company announced the purchase of the Martha Gooch and LaRosa Pasta brands from ADM in the United States and the Lensi pasta brand from Pastificio Lensi of Vinci, Italy for an approximate total of $9.5 million, including trade liabilities. The Pastificio Lensi transaction was completed prior to the fiscal year ended September 27, 2002, and the Martha Gooch and LaRosa transactions were completed in early October 2002.
On January 31, 2003, the Company purchased the Golden Grain/Mission pasta brand plus inventory from PepsiCo for approximately $46 million.
On February 27, 2003, the Company purchased the Mrs. Leeper's specialty pasta business for 100,000 shares of AIPC common stock, valued at $50.00 share, plus a cash earn out tied to sales and profit growth over the next three years.
The purchase price for each of the brand acquisitions was allocated to trademarks, brand name, and inventory. The trademarks and brand names were assigned an indefinite life, and are the Company's only intangible assets. The Company believes the trademarks and brands have an indefinite life and, as the transaction occurred after July 1, 2001, is not amortizing the amounts, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
These trademarks and brands are reviewed at least annually for impairment by comparing the Company's best estimate of fair value with the carrying amount of the intangible asset.
Other Assets
Other assets consist of the following:
October 3, September 27, 2003 2002 ---- ---- (In thousands)
Package design costs $8,653 $7,598 Deferred debt issuance costs 4,286 3,034 Other 3,635 3,145 ----- ----- 16,574 13,777 Accumulated amortization (8,428) (6,600) ------ ------ $8,146 $7,177 ====== ======
Package design costs relate to certain incremental third party costs to design artwork and produce die plates and negatives necessary to manufacture and print packaging materials according to the Company's and customers' specification. These costs are amortized ratably over a two to five year period. In the event that product packaging is discontinued prior to the end of the amortization period, the respective package design costs are written off. Package design costs, net of accumulated amortization, were $2,709,000 and $2,636,000 at October 3, 2003 and September 27, 2002, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the method prescribed by SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its employee stock options and have adopted the pro forma disclosure requirements under SFAS No. 123 "Accounting for Stock-Based Compensation." Under APB No. 25, because the exercise price of the Company's employee stock options is equal to or greater than the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 1.33% for fiscal 2003, 2.0% for fiscal 2002 and 4.5% for fiscal 2001; dividend yields of zero; volatility factors of the expected market price of the Company's common stock of .354 for fiscal 2003, .408 for fiscal 2002, and .358 for fiscal 2001; and a weighted-average expected life of the option of one to five years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
2003 2002 2001 ---- ---- ----
Net income $42,633 $41,299 $26,330 Compensation cost under the fair value method 5,486 2,997 2,406 ------- ------- ------- Pro forma net income $37,147 $38,302 $23,924 ======= ======= ======= Earnings per share as reported: Basic $2.39 $2.31 $1.51 Diluted $2.31 $2.21 $1.45 Pro forma earnings per share: Basic $2.08 $2.14 $1.37 Diluted $2.01 $2.05 $1.32
Advertising Costs
Advertising and promotion costs are expensed as incurred. Advertising costs in fiscal 2003 were $512,000, $2,153,000 in fiscal 2002, and $788,000 in fiscal 2001.
Shipping and Handling Costs
Costs incurred related to shipping and handling are included in cost of goods sold in the Company's consolidated statements of income.
Net Income Per Common Share
Net income per common share is calculated using the weighted-average number of common shares and, in the case of diluted net income per share, common equivalent shares, to the extent dilutive, outstanding during the periods.
Dilutive securities, consisting of options (see Note 6), included in the calculation of diluted weighted average common shares were 657,000 shares in fiscal 2003, 816,000 shares in fiscal 2002 and 782,000 shares in fiscal 2001.
Antidilutive shares for fiscal 2003 were 414,166, with prices ranging from $40.10 - $48.30. For fiscal 2002 antidilutive shares were 177,000, with prices ranging from $44.30 - $48.30. For fiscal 2001, antidilutive shares were 134,900, with prices ranging from $35.15 - $45.30.
Continued Dumping and Subsidy Offset Act of 2000
On October 28, 2000, the U.S. government enacted the "Continued Dumping and Subsidy Offset Act of 2000" (the "Act") 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 December 2002 and 2001, AIPC received payments from the Department of Commerce in the amounts of $2.4 million and $7.6 million, respectively, as the Company's calculated share, based on tariffs liquidated by the government from October 1, 2000 to September 30, 2002 on Italian and Turkish imported pasta.
According to Congressional documents, these payments to affected U.S. producers are for the purpose of maintaining jobs and investments that might be affected through unfair trade practices, and to offset revenues lost through foreign companies' dumping practices and foreign governments' subsidy practices. There are no specific requirements on how the funds are to be used by the Company other than the funds are intended to benefit future periods. As such, the Company used a significant portion to increase investment in brand building activities (for example, slotting to expand or recapture distribution and consumer promotion reinforcing the long-term quality tradition of the Company's brands), and continued strengthening of the Company's organization.
It is the Company's understanding that overpayments under this program may be recovered by U.S. Customs for a number of reasons up to one year after payment is made. In 2002 and 2003 the Company recognized the receipts ratably over the fiscal year.
The legislation creating the dumping and subsidy offset payment (referred to as the Byrd Amendment) provides for annual payments from the U.S. government. However it is not possible to reasonably estimate the potential amount, if any, to be received in future periods.
2. Long-Term Debt
On December 1, 2002, the Company completed an amendment to its revolving credit facility. The amendment provides the Company with an additional $100 million term loan capacity. The terms of the original credit facility provide commitment reductions of $110 million between October 1, 2002 and October 1, 2005. The original terms of the facility remain generally the same. The revolver includes a $100 million dual currency availability in Euros or U.S. dollars to finance the Company's 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.
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 plus the commitment fee is classified as interest expense.
In 2001, the Company redeemed, prior to scheduled maturities, $147.4 million of debt with interest rates ranging from 4.7% to 6.4%. This resulted in a $2.4 million ($1.5 million after tax) loss for the Company.
Long-term debt consists of the following:
October 3, September 27, 2003 2002 ---- ---- (In thousands) Term loans under credit facility $300,693 $257,639 Short term notes payable 2,492 3,894 Other 147 939 --- --- 303,332 262,472 Less current portion 2,554 4,279 ----- ----- $300,778 $258,193 ======== ========
Annual maturities of long-term debt and capital lease obligations for each of the next five years ended October 3, are as follows:
Long-Term Capital Leases Year Debt and Other Total ---- ---- ----- ----- (In thousands)
2004 $2,492 $80 2005 -- 81 2006 10,693 -- 2007 290,000 -- 2008 -- -- Thereafter -- -- ------- -------- 303,185 161 $303,346 Less imputed interest -- 14 14 ------- -------- ------- Present value of net minimum payments 303,185 147 303,332 Less current portion 2,492 62 2,554 -------- -------- -------- Long-term obligations $300,693 $85 $300,778 ======== ======== ========
The revolving credit facility contains various restrictive covenants which include, among other things, financial covenants requiring minimum and cumulative earnings levels and limitations on the payment of dividends, purchases of Company stock, and the Company's ability to enter into certain contractual arrangements. The Company was in compliance with the restrictive covenants as of October 3, 2003. The facility is unsecured.
3. Income Taxes
The Company has AMT credit carryforwards of $5,777,000 and $7,918,000 at October 3, 2003 and September 27, 2002, respectively, with no expiration date. Management believes it is more likely than not that deferred tax assets associated with these items will be realized through the generation of future taxable income and available tax planning strategies.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
October 3, September 27, 2003 2003 ---- ---- (In thousands) Deferred tax assets: AMT credit and foreign net operating loss carryforwards $6,189 $8,828 Inventory valuation 1,471 782 Other comprehensive income/loss components 5,686 2,688 Other 1,669 2,020 ----- ----- Total deferred tax assets 15,015 14,318 Deferred tax liabilities: Book basis of tangible assets greater than tax 61,602 49,653 Book basis of intangible assets greater than tax 11,012 9,012 Other 1,632 -- ----- -------- Total deferred tax liabilities 74,246 58,665 ------ -------- Net deferred tax liabilities $(59,231) $(44,347) ======== ========
Significant components of the provision for income taxes are as follows:
Year ended Year ended Year ended October 3, September 27, September 28, 2003 2002 2001 ---- ---- ---- (In thousands)
Current income tax expense $ 3,315 $ 5,655 $ 4,285 Deferred tax expense 17,882 15,716 9,582 ------ ------ ----- Total income tax expense $21,017 $21,371 $13,867 ======= ======= =======
The reconciliation of income tax computed at the U.S. statutory tax rate to income tax expense is as follows:
Year ended Year ended Year ended October 3, September 27, September 28, 2003 2002 2001 ---- ---- ---- (In thousands)
Income before income taxes $63,650 $62,670 $40,197 U.S. statutory tax rate x 35% x 35% x 35% ------ ------ ----- Federal income tax expense at U.S. statutory rate 22,278 21,935 14,069 State income tax expense, net of federal tax effect 535 526 261 Foreign tax rate differential (340) (530) (308) Foreign tax incentives (646) (498) -- Other, net (810) (62) (155) ------- ------- ------- Total income tax expense $21,017 $21,371 $13,867 ======= ======= =======
Income tax benefit allocated to other items was as follows:
Year ended Year ended Year ended October 3, September 27, September 28, 2003 2002 2001 ---- ---- ---- (In thousands)
Stock option arrangements (1) $(1,803) $(4,385) $(917)
(1) This amount has been recorded directly to "Additional Paid-In Capital".
4. Commitments and Contingencies
The Company had durum wheat purchase commitments totaling approximately $27 million and $17 million at October 3, 2003 and September 27, 2002, respectively.
Under agreements with its primary rail carriers, the Company is obligated to transport specified wheat volumes. In the event the specified transportation volumes are not met, the Company is required to reimburse certain rail carrier costs. The Company is in compliance with the volume obligations at October 3, 2003.
5. Major Customers
Sales to a certain customer during the years ended October 3, 2003, September 27, 2002, and September 28, 2001 represented 10%, 11% and 13% of revenues, respectively. Sales to a second customer during the years ended October 3, 2003, September 27, 2002, and September 28, 2001 represented 15%, 13% and 12% of revenues, respectively.
6. Equity Incentive Plans
In October 1992, a stock option plan was established that authorizes the granting of options to purchase up to 1,201,880 shares of the Company's common stock by certain officers and key employees. In October 1993, an additional plan was established that authorizes the granting of options to purchase up to 82,783 shares of the Company's common stock. In October 1997, a third stock option plan was established that authorizes the granting of restricted shares and/or options to purchase up to 2,000,000 shares of the Company's common stock by certain officers and key employees. In December 2000, a fourth stock option plan was established that authorizes the granting of restricted shares and/or options to purchase up to 1,000,000 shares of the Company's common stock by certain officers and key employees. The stock options expire 10 years from the date of grant and become exercisable over the next one to five years in varying amounts depending on the terms of the individual option agreements.
A summary of the Company's stock option activity, and related information is as follows:
Weighted Average Option Price Exercise Number of Shares Per Share Price Exercisable ---------------- --------- ----- ----------- Outstanding at September 29, 2000 2,588,524 $4.92-$30.00 $17.91 1,445,693 Exercised (139,369) $4.92-$32.00 $18.22 Granted 204,900 $18.375-$45.30 $36.04 Cancelled/Expired (23,191) $18.00-$26.75 $24.42 --------- Outstanding at September 28, 2001 2,630,864 $4.92-$45.30 $19.25 1,679,454 Exercised (427,966) $4.92-$29.95 $12.49 Granted 521,490 $34.62-$48.30 $40.72 Cancelled/Expired (58,567) $18.00-$45.30 $25.78 --------- Outstanding at September 27, 2002 2,665,821 $4.92-$48.30 $24.39 1,680,274 Exercised (268,876) $12.23-$39.89 $22.86 Granted 508,500 $32.40-$43.27 $38.97 Cancelled/Expired (111,852) $16.63-$48.27 $36.96 --------- Outstanding at October 3, 2003 2,793,593 $4.92-$48.30 $26.68 2,086,618 =========
The following table summarizes outstanding and exercisable options at October 3, 2003:
Options Outstanding Options Exercisable ------------------- ------------------- Number Weighted Average Number Weighted Average Exercise Prices Outstanding Exercise Price Exercisable Exercise Price --------------- ----------- --------------- ----------- ------------------- $ 4.92 734 $ 4.92 734 $ 4.92 $ 7.02 84,622 $ 7.02 84,622 $ 7.02 $ 12.23 226,369 $ 12.23 226,369 $12.23 $ 16.375-16.625 14,500 $ 16.45 10,500 $16.48 $ 18.00-18.50 932,163 $ 18.10 926,693 $18.10 $ 21.88-26.50 412,420 $ 24.62 337,342 $24.68 $ 26.69-30.00 53,700 $ 28.10 27,700 $28.16 $ 31.30-38.00 388,020 $ 35.92 144,927 $36.03 $ 38.40-48.30 681,066 $ 41.81 327,731 $41.24
7. Employee Benefit Plans
The Company has a defined contribution plan organized under Section 401(k) of the Internal Revenue Code covering substantially all employees. The plan allows all qualifying employees to contribute up to the tax deferred contribution limit allowable by the Internal Revenue Service. The Company currently matches 50% of the employee contributions, with the Company's match not to exceed 6% - 12% of the employee's salary, depending on the length of the employee's service to the Company, and may contribute additional amounts to the plan as determined annually by the Board of Directors. Employer contributions related to the plan totaled $730,000, $577,000, and $976,000, for the years ended October 3, 2003, September 27, 2002, and September 28, 2001, respectively.
The Company sponsors an Employee Stock Purchase Plan (ESPP) which offers all employees the election to purchase AIPC common stock at a price equal to 90% of the market value on the first or last day of the calendar quarter, whichever is less. For the three years ended October 3, 2003, authorized shares under this plan were 50,000.
8. Supplemental Cash Flow Information
Year ended Year ended Year ended October 3, September 27, September 28, 2003 2002 2001 ---- ---- ---- (In thousands) Supplemental disclosure of cash flow information: Cash paid for interest $ 12,166 $ 11,899 $ 10,158 ======== ======== ======== Cash paid for income taxes $ 2,214 $ 789 $ 2,992 ======== ======== ======== Pasta brands acquired in exchange for common stock $ 5,000 $ -- $ 20,600 ======= ======== ========
9. Stock Repurchase Plan
In November 2002, the Company's Board of Directors authorized up to $20 million to implement a common stock repurchase plan. The Company purchased 366,398 shares for $12,119,000, at prices ranging from $32.52 to $34.45 per share during the year ended October 3, 2003.
During the year ended September 28, 2001, the Company purchased 154,849 shares for $3,032,000, at $19.58 per share.
Total shares held in treasury as of October 3, 2003 and September 27, 2002 were 2,023,118 and 1,654,981, respectively.
10. Board of Directors Remuneration Policy
The Company provides outside directors with an annual retainer amount in common stock equal to $20,000 per director, as well as a cash payment of $5,000. The issuance occurs immediately following the annual meeting of the stockholders. These shares are not registered and are restricted for a twelve-month period.
11. Unearned Compensation
During the years ended October 3, 2003 and September 27, 2002, the Company issued 13,000 and 20,629 shares of restricted stock to certain officers of the Company. The Company recorded the fair value of the awards at the market price on the grant date. The value of the awards was recorded as unearned compensation. The awards contained either a cliff or straight line vesting provision and therefore expense will be recognized on a straight-line basis over the vesting period. The unearned compensation is classified as a reduction to stockholder's equity in the accompanying consolidated balance sheet at October 3, 2003.
12. Stockholder Rights Plans
On December 3, 1998, The Company's Board of Directors adopted a Stockholder Rights Plan. Under the Plan, each common stockholder at the close of business on December 16, 1998 received a dividend of one right for each share of Class A Common Stock held. Each right entitles the holder to purchase from the Company one one-hundredth of a share of a new series of participating Preferred Stock at an initial purchase price of $110.00. The rights will become exercisable and will detach from the Common Stock a specified period of time after any person has become the beneficial owner of 15% (20% if an institutional investor) or more of the Company's Common Stock or commenced a tender or exchange offer which, if consummated, would result in any person becoming the beneficial owner of 15% (20% if an institutional investor) or more of the Common Stock. When exercisable, each right will entitle the holder, other than the acquiring person, to purchase for the purchase price the Company's Common Stock having a value of twice the purchase price.
If, following an acquisition of 15% (20% if an institutional investor) or more of the Company's Common Stock, the Company is involved in certain mergers or other business combinations or sells or transfers more than 50% of its assets or earning power, each right will entitle the holder to purchase for the purchase price common stock of the other party to such transaction having a value of twice the purchase price.
At any time after a person has acquired 15% (20% if an institutional investor) or more (but before any person has acquired more than 50%) of the Company's Common Stock, the Company may exchange all or part of the rights for shares of Common Stock at an exchange ratio of one share of Common Stock per right.
The Company may redeem the rights at a price of $.01 per right at any time prior to a specified period of time after a person has become the beneficial owner of 15% (20% if an institutional investor) or more of its Common Stock. The rights will expire on December 16, 2008, unless earlier exchanged or redeemed.
13. Quarterly Financial Data - Unaudited
(In thousands, except per share data)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Year ended October 3, 2003 Revenues $ 107,036 $ 110,652 $ 104,302 $116,854 Gross profit 33,577 35,281 36,441 38,431 Operating profit 15,744 15,482 20,740 22,029 Net income 8,923 8,870 12,034 12,806 Basic net income per common share 0.50 0.50 0.67 0.71 Net income per common share --assuming dilution 0.49 0.48 0.65 0.69
Year ended September 27, 2002 Revenues $ 92,003 $ 94,843 $ 91,773 $102,180 Gross profit 32,844 33,717 32,490 32,748 Operating profit 16,071 17,663 18,838 19,413 Net income 8,852 10,059 11,007 11,381 Basic net income per common share 0.50 0.56 0.61 0.63 Net income per common share --assuming dilution 0.48 0.54 0.59 0.61
The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these interim periods presented have been included.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
As of the end of the period, Mr. Webster, our CEO, and Mr. Schmidgall, our CFO, evaluated our disclosure controls and procedures and, based on this evaluation, concluded that the Company's disclosure controls and procedures were appropriate and effective in causing information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the required time periods. There have been no changes in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART III
AIPC has incorporated by reference certain responses to the Items of this Part III pursuant to Rule 12b-23 under the Exchange Act and General Instruction G(3) to Form 10-K. AIPC's definitive proxy statement for the 2004 Annual Meeting of stockholders (the "Definitive Proxy Statement") will be filed no later than 120 days after October 3, 2003.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation S-K under the heading "Proposal 1 - Election of Three Directors" and "The Board of Directors" in our Definitive Proxy Statement is incorporated herein by reference in partial response to this Item 10.
The information set forth under the heading "The Board of Directors" in our Definitive Proxy Statement regarding our audit committee financial expert is incorporated herein by reference in partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under "Executive Officers of the Registrant" an unnumbered Item in Part 1 (immediately following Item 4 Submission of Matters to a Vote of Security Holders) of this Form 10-K is incorporated herein by reference in partial response to this Item 10.
The information set forth in response to Item 405 of Regulation S-K under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in our Definitive Proxy Statement is incorporated herein by reference in partial response to this Item 10.
(c) Code of Ethics
We are in the process of finalizing our Code of Ethics (the "Code"). The Code will be adopted by the date of our 2004 Annual Meeting of Stockholders and will be applicable to all directors and employees. The Code will be posted on our website at http://www.aipc.com. We will satisfy any disclosure requirements under Item 10 of Form 8-K regarding an amendment to, or waiver from, any provision of the Code with respect to our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions by disclosing the nature of such amendment or waiver on our website or in a report on Form 8-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth in response to Item 402 of Regulation S-K under "Management Compensation" and the subheading "Compensation of Directors" under "The Board of Directors" in our Definitive Proxy Statement, (other than The Compensation Committee Report on Executive Compensation) is incorporated by reference in response to this Item 11.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth in response to Item 201(d) (Equity Compensation Plan table) under the subheading "Equity Compensation Plan Information" under the heading "Management Compensation" and in response to Item 403 of Regulation S-K under the headings "Stock Owned Beneficially by Directors, Nominees and Certain Executive Officers" and "Principal Stockholders" in our Definitive Proxy Statement is hereby incorporated by reference in response to this Item 12.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in response to Item 404 of Regulation S-K under the heading "Certain Relationships and Related Transactions" in our Definitive Proxy Statement is incorporated herein by reference in response to this Item 13.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 regarding information with respect to principal accountant fees and services under the subheading "Fees and Services of Ernst & Young LLP" under the heading "Proposal 3 - Ratification of the Board of Directors Selection of Independent Auditors" in our Definitive Proxy Statement is incorporated by reference in response to this Item 14.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following items are filed as a part of the report:
1. The Company's consolidated financial statements prepared in accordance with Regulation S-X, including the consolidated statements of income, cash flows, stockholders' equity, and comprehensive income for the three fiscal periods ended October 3, 2003, September 27, 2002, and September 28, 2001 and the consolidated balance sheets as of October 3, 2003 and September 27, 2002, and related notes and the independent auditor's report thereon are included under Item 8 of this Annual Report.
2. Valuation and Qualifying Accounts Schedule. Other financial statement schedules have been omitted because they either are not required, are immaterial or are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.
3. The list of exhibits following the signature page of this Annual Report is incorporated by reference herein in partial response to this Item.
(b) Reports on Form 8-K.
We furnished a report on Form 8-K on July 31, 2003 announcing third quarter earnings.
We furnished a report on Form 8-K on May 5, 2003 announcing second quarter earnings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN ITALIAN PASTA COMPANY
By: /s/ Timothy S. Webster --------------------------------------- Timothy S. Webster President and Chief Executive Officer
Date December 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY AND SIGNATURES
Each of the undersigned hereby severally constitute and appoint Timothy S. Webster and Warren B. Schmidgall, and each of them singly, with power of substitution and resubstitution, as his true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicted below, all amendments to this Annual Report on Form 10-K and generally to do all things in our names and on our behalf in such capacities to enable American Italian Pasta Company to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission with respect to this Annual Report on Form 10-K.
/s/ Horst W. Schroeder Chairman of the December 29, 2003 ------------------------------------ Board of Directors
/s/ Timothy S. Webster President, Chief December 29, 2003 ------------------------------------ Executive Officer and Director (Principal Executive Officer)
/s/ Warren B. Schmidgall Executive Vice December 29, 2003 ------------------------------------ President-Chief Financial Officer, (Principal Financial and Accounting Officer)
/s/ Robert H. Niehaus Director December 29, 2003 ------------------------------------
/s/ Richard C. Thompson Director December 29, 2003 ------------------------------------
/s/ Jonathan E. Baum Director December 29, 2003 ------------------------------------
/s/ Tim M. Pollak Director December 29, 2003 ------------------------------------
/s/ Mark C. Demetree Director December 29, 2003 ------------------------------------
/s/ William R. Patterson Director December 29, 2003 ------------------------------------
/s/ James A. Heeter Director December 29, 2003 ------------------------------------
/s/ Terence C. O'Brien Director December 29, 2003 ------------------------------------
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
Not applicable.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
AMERICAN ITALIAN PASTA COMPANY
Balance at Charged to Costs Balance at End Description Beginning of Period and Expenses Deductions of Period ------------------- ---------------- ---------- --------- Year Ended October 3, 2003: Deducted from asset accounts: Allowance for doubtful accounts $1,054,000 $625,000 $126,000(1) $1,553,000 Allowance for obsolete inventory 861,000 1,146,000 609,000(2) 1,399,000 ---------- ----------- -------- ---------- Total $1,915,000 $1,771,000 $734,000 $2,952,000 =========== =========== ======== ========== Year Ended September 27, 2002: Deducted from asset accounts: Allowance for doubtful accounts $847,000 $295,000 $88,000(1) $1,054,000 Allowance for obsolete inventory 585,000 404,000 128,000(2) 861,000 ---------- ---------- --------- ---------- Total $1,432,000 $699,000 $ 216,000 $1,915,000 ========== ========== ========= ========== Year Ended September 28, 2001: Deducted from asset accounts: Allowance for doubtful accounts $178,000 $669,000 $ -0-(1) $847,000 Allowance for obsolete inventory 479,000 291,000 185,000(2) 585,000 -------- ------- --------- ---------- Total $657,000 $960,000 $185,000 $1,432,000 ======== ========= ======== ==========
(1) Uncollectible accounts written off, net of recoveries.
(2) Damaged and obsolete inventory written off.
EXHIBIT INDEX
Exhibit Number Description ------- -----------
(3) Articles and By-Laws
3.1 The Company's amended and restated Certificate of Incorporation dated October 7, 1997, which is attached as Exhibit 3.1 to the Company's registration statement on Form S-1, as amended (Commission file no. 333-32827) (the "IPO Registration Statement"), is incorporated by reference herein as Exhibit 3.1.
3.2 The Company's amended and restated Bylaws dated October 7, 1997, which is attached as Exhibit 3.2 to the IPO Registration Statement, are incorporated by reference herein as Exhibit 3.2.
(4) Instruments Defining the Rights of Security Holders, Including Indentures
4.1 The specimen certificate representing the Company's Class A Convertible Common Stock, par value $0.001 per share, which is attached as Exhibit 4.1 to the IPO Registration Statement, are incorporated by reference herein as Exhibit 4.1.
4.2 The specimen certificate representing the Company's Class B Convertible Common Stock, par value $0.001 per share, which is attached as Exhibit 4.2 to the IPO Registration Statement, are incorporated by reference herein as Exhibit 4.2.
4.3 Section 7.1 of the Company's amended and restated Certificate of Incorporation, which is incorporated herein as Exhibit 3.1, is incorporated by reference herein as Exhibit 4.3.
4.4 Article II of the Company's amended and restated Bylaws, which is incorporated herein as Exhibit 3.2, is incorporated by reference herein as Exhibit 4.4.
4.5 Sections 1, 2, 3, 4 of Article III of the Company's amended and restated Bylaws, which is incorporated herein as Exhibit 3.2, is incorporated by reference herein as Exhibit 4.5.
4.6 Article VII of the Company's amended and restated Bylaws, which is incorporated herein as Exhibit 3.2, is incorporated by reference herein as Exhibit 4.6.
4.7 Article IX of the Company's amended and restated Bylaws, which is incorporated herein as Exhibit 3.2, is incorporated by reference herein as Exhibit 4.7.
4.8 Credit Agreement, dated July 16, 2001, among American Italian Pasta Company, Financial Institutions, Firstar Bank, N.A., as Syndication Agent, Bank One, NA, as Documentation Agent, Credit Agricole Indosuez, Fleet National Bank, Keybank National Association, Cooperative Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New York Branch, Wachovia Bank, N.A., and Wells Fargo Bank, N.A., as Co-Agents, and Bank of America, N.A., as Administrative Agent, Bank of America Securities LLC, Sole Lead Arranger and Sole Book Manager, which is attached as Exhibit 10.4 to the Company's quarterly report dated August 13, 2001 on Form 10-Q (Commission File No. 001-13403), is incorporated by reference herein as Exhibit 4.8.
4.9 Shareholders Rights Agreement, dated December 3, 1998, between American Italian Pasta Company and UMB Bank, N.A. as Rights Agent, which is attached as Exhibit 1 to the Company's Registration Statement dated December 14, 1998 on Form 8-A12B (Commission File No. 001-13403), is incorporated by reference herein as Exhibit 4.9.
4.10 Certificate and First Amendment to Rights Agreement, which is attached as Exhibit 4 to the Company's Form 8-K filed on January 6, 2003, is incorporated by reference herein as Exhibit 4.10.
4.11 First Amendment to the Credit Agreement, dated December 12, 2002, among American Italian Pasta Company, various financial institutions and Bank of America, N.A. as administrative agent, which is attached as Exhibit 4.2 to the Company's quarterly report on Form 10-Q for the period ending December 30, 2002, incorporated by reference herein as Exhibit 4.11.
(10) Material Contracts
10.1 Board of Directors Remuneration Policy, which is attached as Exhibit 10.1 to the Company's Annual Report on Form 10-K405 for the fiscal year ended October 2, 1998 (Commission file no. 001-13403), is incorporated by reference herein as Exhibit 10.1.
10.2 N/A
10.3 N/A
10.4 N/A
10.5* Employment Agreement between the Company and Timothy S. Webster dated May 30, 2002, which is attached as Exhibit 10 to the Company's quarterly report on Form 10-Q for the period ending June 30, 2002, is incorporated by reference herein as Exhibit 10.5.
10.6.1* N/A
10.6.2* N/A
10.7.1* Employment Agreement dated September 1, 2002 between the Company and David E. Watson, which is attached as Exhibit 10.7.1 to the Company's Form 10-K for the period ending September 30, 2002 is incorporated by reference herein as Exhibit 10.7.1.
10.7.2 N/A
10.8.1 N/A
10.8.2 N/A
10.9.1* Employment Agreement dated September 1, 2002 between the Company and David B. Potter, which is attached as Exhibit 10.9.1 to the Company's Form 10-K for the period ending September 30, 2002 is incorporated by reference herein as Exhibit 10.9.1.
10.9.2 N/A
10.9.3 N/A
10.10* Employment Agreement dated September 1, 2002 between the Company and Warren B. Schmidgall, which is attached as Exhibit 10.10 to the Company's Form 10-K for the period ending September 30, 2002 is incorporated by reference herein as Exhibit 10.10.
10.11 Letter Agreement between the Registrant and HWS & Associates, Inc. dated October 1, 1999, which is attached as Exhibit 10.6 to the Company's Current Report on Form 8-K (Commission File no. 001-13403), dated November 17, 1999, is incorporated by reference herein as Exhibit 10.11.
10.12 N/A
10.13* Employment Agreement dated September 1, 2002 between the Company and Walter George, which is attached as Exhibit 10.13 to the Company's Form 10-K for the period ending September 30, 2002 is incorporated by reference herein as Exhibit 10.13.
10.14* American Italian Pasta Company 1992 Stock Option Plan, which is attached as Exhibit 10.10 to the IPO Registration Statement, is incorporated by reference herein as Exhibit 10.14.
10.15* American Italian Pasta Company 1993 Non-Qualified Stock Option Plan, which is attached as Exhibit 10.11 to the IPO Registration Statement, is incorporated by reference herein as Exhibit 10.15.
10.16* 1996 Salaried Bonus Plan, which is attached as Exhibit 10.13 to the IPO Registration Statement, is incorporated by reference herein as Exhibit 10.16.
10.17.1* 1997 Equity Incentive Plan, which is attached as Exhibit 10.14 to the IPO Registration Statement, is incorporated by reference herein as Exhibit 10.17.1.
10.17.2* First amendment to 1997 Equity Incentive Plan, which is attached as Exhibit 10.1 to the Company's July 31, 1998 Form 10-Q (Commission file no. 001-13403), is incorporated by reference here in as Exhibit 10.17.2.
10.17.3* American Italian Pasta Company 2000 Equity Incentive Plan, as amended, which is attached as Exhibit 10.5 to the Company's quarterly report dated August 13, 2001 on Form 10-Q (Commission File No. 001-13403), is incorporated by reference herein as Exhibit 10.17.3.
10.18 Product Supply and Pasta Production Cooperation Agreement dated May 7, 1998 between the Registrant and Harvest States Cooperatives which is attached as Exhibit 10.2 to the Company's July 31, 1998 Form 10-Q Commission file no. 001-13403), is incorporated by reference herein as Exhibit 10.18.
10.19 N/A
10.20 N/A
10.21 N/A
10.22 Flour Purchase Agreement by and between American Italian Pasta Company and Bay State Milling Company dated August 7, 2002, which is attached as Exhibit 10.22 to the Company's Form 10-K for the period ending September 30, 2002 is incorporated by reference herein as Exhibit 10.22. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement, "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission," as indicated throughout the document with an asterisk in brackets ([*])).
10.23* Employment Agreement dated September 1, 2002 between the Company and Jerry H. Dear, which is attached as Exhibit 10.23 to the Company's Form 10-K for the period ending September 30, 2002 is incorporated by reference herein as Exhibit 10.23.
10.24* N/A
10.25* Form of Restricted Stock Agreement for Restricted Stock Awards granted pursuant to the Company's 2000 Equity Incentive Plan, which is attached as Exhibit 10.25 to the Company's Form 10-K for the period ending September 30, 2002 is incorporated by reference herein as Exhibit 10.25.
10.26 Asset Purchase Agreement, dated September 30, 2002, among American Italian Pasta Company, Gooch Foods, Inc. and Archer-Daniels-Midland Company, which is attached as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the period ending December 30, 2002 is incorporated by reference herein as Exhibit 10.26.
10.27 Employment Agreement by and between American Italian Pasta Company and Horst W. Schroeder dated January 14, 2003, which is attached as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the period ending March 31, 2003, is incorporated by reference herein as Exhibit 10.27.
10.28 Asset Purchase and Sale Agreement by and among American Italian Pasta Company, PepsiCo Puerto Rico, Inc. and Golden Grain Company dated January 28, 2003, which is attached as Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the period ending March 31, 2003, is incorporated by reference herein as Exhibit 10.28.
10.29 Asset Purchase Agreement by and between American Italian Pasta Company, Mrs. Leeper's, Inc. and Edwin J. Muscat and Michelle M. Muscat dated February 27, 2003, which is attached as Exhibit 10.3 to the Company's quarterly report on Form 10-Q for the period ending March 31, 2003, is incorporated by reference herein as Exhibit 10.29. 10.30 Form of Stock Option Award Agreement for Stock Option Awards Pursuant to the Company's 2000 Equity Incentive Plan, which is attached as Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the period ending March 31, 2003, is incorporated by reference herein as Exhibit 10.30.
10.31 Second Amended and Restated Supply Agreement by and between AIPC Sales Co. and Sysco Corporation dated July 1, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b -2. We have identified the omitted confidential information by the following statement, "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission," as indicated throughout the document with an asterisk in brackets ([*]), which is attached as Exhibit 10.0 to the Company's quarterly report on Form 10-Q for the period ending June 30, 2003, incorporated by reference herein as Exhibit 10.31.
10.32 Employment Agreement dated August 25, 2003, between the Company and Daniel W. Trott.
21 Subsidiaries of the registrant
List of subsidiaries is attached hereto as Exhibit 21.
23 Consent of Ernst & Young LLP
24 Power of Attorney
The power of attorney is set forth on the signature page of this Annual Report.
31.1 Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32. Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
99 None
* Represents a management contract or a compensatory plan or arrangement.