UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended: March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-13403 American Italian Pasta Company (Exact name of Registrant as specified in its charter) Delaware 84-1032638 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4100 N. Mulberry Drive, Suite 200, Kansas City, Missouri 64116 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (816) 584-5000 -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant has (1) filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding as of May 6, 2002 of the Registrant's Class A Convertible Common Stock was 17,959,372 and there were no shares outstanding of the Class B Common Stock.
American Italian Pasta Company Form 10-Q Quarter Ended March 31, 2002 Table of Contents Part I - Financial Information Page Item 1. Consolidated Financial Statements (unaudited) Consolidated Balance Sheets at March 31, 2002 and September 30, 2001. 3 Consolidated Statements of Income for the three months ended March 31, 2002 and 2001. 4 Consolidated Statements of Income for the six months ended March 31, 2002 and 2001. 5 Consolidated Statements of Stockholders' Equity for the six months ended March 31, 2002. 6 Consolidated Statements of Cash Flows for the six months ended March 31, 2002 and 2001. 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Part II - Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature Page 17
PART I - FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements (Unaudited) AMERICAN ITALIAN PASTA COMPANY Consolidated Balance Sheets March 31, September 30, 2002 2001 ---- ---- (In thousands) (Unaudited) Assets Current assets: Cash and temporary investments $4,726 $5,284 Trade and other receivables 36,074 37,546 Prepaid expenses and deposits 6,337 8,024 Inventory 53,248 43,866 Deferred income taxes 2,689 3,565 -------- -------- Total current assets 103,074 98,285 Property, plant and equipment: Land and improvements 10,843 8,123 Buildings 101,134 99,548 Plant and mill equipment 272,319 269,751 Furniture, fixtures and equipment 13,563 10,957 -------- -------- 397,859 388,379 Accumulated depreciation (89,625) (80,453) ------- -------- 308,234 307,926 Construction in progress 49,060 31,236 -------- -------- Total property, plant and equipment 357,294 339,162 Intangible assets 117,042 116,707 Other assets 5,916 5,989 -------- -------- Total assets $583,326 $560,143 ======== ======== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 19,597 $ 22,416 Accrued expenses 15,839 19,652 Income tax payable 2,304 877 Current maturities of long-term debt 2,404 1,559 -------- -------- Total current liabilities 40,144 44,504 Long-term debt 233,646 236,783 Deferred income taxes 38,623 33,664 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value: Authorized shares - 10,000,000 -- -- Class A common stock, $.001 par value: Authorized shares - 75,000,000 20 19 Class B common stock, $.001 par value: Authorized shares - 25,000,000 -- -- Additional paid-in capital 209,564 202,674 Treasury stock (34,394) (34,394) Notes receivable from officers (61) (61) Unearned compensation (173) (223) Retained earnings 99,474 80,563 Accumulated other comprehensive loss (3,517) (3,386) -------- -------- Total stockholders' equity 270,913 245,192 ------- ------- Total liabilities and stockholders' equity $583,326 $560,143 ======== ======== See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY Consolidated Statements of Income Three Months Ended March 31, 2002 2001 ---- ---- (In thousands) (Unaudited) Revenues $94,843 $75,030 Cost of goods sold 61,126 51,642 ------ ------ Gross profit 33,717 23,388 Selling and marketing expense 12,845 7,022 General and administrative expense 3,209 2,562 ----- ----- Operating profit 17,663 13,804 Interest expense, net 2,422 2,073 ----- ----- Income before income tax expense 15,241 11,731 Income tax expense 5,182 4,041 ----- ----- Net income $10,059 $7,690 ======= ====== Earnings Per Common Share: Net income per common share $.56 $.44 ======= ======= Weighted-average common shares outstanding 17,835 17,453 ======= ======= Earnings Per Common Share - Assuming Dilution: Net income per common share assuming dilution $.54 $.42 ======= ======= Weighted-average common shares outstanding 18,653 18,161 ======= ======= See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY Consolidated Statements of Income Six Months Ended March 31, 2002 2001 ---- ---- (In thousands) (Unaudited) Revenues $186,846 $141,434 Cost of goods sold 120,285 98,956 ------- ------ Gross profit 66,561 42,478 Selling and marketing expense 26,641 12,562 General and administrative expense 6,186 4,744 Provision for acquisition expenses -- 1,827 ------- ------ Operating profit 33,734 23,345 Interest expense, net 4,978 3,601 ------- ------ Income before income tax expense 28,756 19,744 Income tax expense 9,845 6,805 ------- ------ Net income $18,911 $12,939 ======= ======= Earnings Per Common Share: Net income per common share $1.06 $.75 ======= ======= Weighted-average common shares outstanding 17,764 17,290 Earnings Per Common Share - Assuming Dilution: Net income per common share assuming dilution $1.02 $.72 ======= ======= Weighted-average common shares outstanding 18,605 17,857 ======= ======= See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY Consolidated Statements of Stockholders' Equity Six months ended March 31, 2002 --------------------------- (In thousands) (unaudited) Class A Common Shares Balance, beginning of period 19,218 Issuance of shares of Class A Common stock to option holders & other issuances 321 ------ Balance, end of period 19,539 ====== Class A Common Stock Balance, beginning of period $ 19 Issuance of shares of Class A Common stock to option holders & other issuances 1 --------- Balance, end of period $ 20 ========= Additional Paid-in Capital Balance, beginning of period $ 202,674 Issuance of shares of Class A Common stock to option holders & other issuances 6,890 --------- Balance, end of period $ 209,564 ========= Treasury Stock Balance, beginning and end of period $ (34,394) ========= Notes Receivable from Officers Balance, beginning and end of period $ (61) ========= Unearned compensation Balance, beginning of period $ (223) Earned compensation 50 Balance, end of period $ (173) ========= Accumulated Other Comprehensive Loss Balance, beginning of period $ (3,386) Foreign currency translation adjustment (53) Interest rate swaps fair value adjustment (78) --------- Balance, end of period $ (3,517) ========= Retained Earnings Balance, beginning of period $ 80,563 Net income 18,911 -------- Balance, end of period 99,474 -------- Total Stockholders' Equity $ 270,913 ========= See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY Consolidated Statements of Cash Flows Six Months Ended March 31, 2002 2001 ---- ---- (In thousands) (Unaudited) Operating activities: Net income $18,911 $12,939 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 9,984 8,052 Deferred income tax expense 4,959 4,998 Changes in operating assets and liabilities, net of Mueller's brand acquisition: Trade and other receivables 1,137 (590) Prepaid expenses and deposits 1,687 (2,062) Inventory (9,453) 863 Accounts payable and accrued expenses (5,558) 4,645 Income tax payable 4,132 1,296 Other (551) (979) -------- -------- Net cash provided by operating activities 25,248 29,162 Investing activities: Purchase of Mueller's pasta brand -- (23,552) Additions to property, plant and equipment (29,593) (17,020) -------- -------- Net cash used in investing activities (29,593) (40,572) Financing activities: Proceeds from issuance of debt 979 20,000 Principal payments on debt and capital lease obligations (789) (727) Proceeds from issuance of common stock, net of issuance costs 3,668 1,718 Purchase of treasury stock -- (3,032) -------- -------- Net cash provided by financing activities 3,858 17,959 Effect of exchange rate changes on cash (71) (1,724) -------- -------- Net increase (decrease) in cash and temporary investments (558) 4,825 Cash and temporary investments at beginning of period 5,284 6,677 -------- -------- Cash and temporary investments at end of period $ 4,726 $11,502 ======== ======= See accompanying notes to consolidated financial statements.
AMERICAN ITALIAN PASTA COMPANY Notes to Consolidated Financial Statements March 31, 2002 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended September 30, 2002. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto and management's discussion and analysis thereof included in the Company's Annual Report on Form 10-K for the year ended September 29, 2001 and management's discussion and analysis included in Item 2 hereof. American Italian Pasta Company (the "Company" or "AIPC") uses a 52/53 week financial reporting cycle with a fiscal year which ends on the last Friday of September or the first Friday of October. The Company's first three fiscal quarters end on the Friday last preceding December 31, March 31, and June 30 or the first Friday of the following month. For purposes of this Form 10-Q, the second fiscal quarter of fiscal years 2002 and 2001 both included thirteen weeks of activity and are described as the three month periods ended March 31, 2002 and 2001. 2. Earnings Per Share Dilutive securities, consisting of options to purchase the Company's Class A common stock, included in the calculation of diluted weighted average common shares were 818,000 and 841,000 shares for the three-month and six-month periods ended March 31, 2002, respectively, and 708,000 and 567,000 shares for the three-month and six-month periods ended March 31, 2001, respectively. A summary of the Company's stock option activity: Number of Shares Outstanding at September 30, 2001 2,630,864 Exercised (313,781) Granted 91,490 Canceled/Expired (30,314) --------- Outstanding at March 31, 2002 2,378,259 ========= 3. 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 late December, AIPC received payment from the Department of Commerce of $7.6 million as the Company's calculated share, based on tariffs liquidated by the government from October 1, 2000 to September 30, 2001 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 long-term brand building activities (for example, slotting to expand or recapture distribution; cooperative advertising and consumer promotion reinforcing the long-term quality tradition of the Company's brands), and continued strengthening of the Company's organization. The Company is recognizing the receipt ratably over the current fiscal year which patterns the program year under which the payment was received. Accordingly, during the first six months of 2002, the Company recognized $3.8 million of retail revenue, which equals 50% of the $7.6 million payment received. The Company expects to recognize an additional 25%, or $1.9 million, in each of the next two quarters of the fiscal year. It is the Company's understanding that procedures will be established by U.S. Customs to recover potential overpayments under this program to U.S. producers. Overpayments may be recovered by U.S. Customs for a number of reasons up to one year after payment is made. The Company has not received any claims of overpayment. At this time, indications are that the Company may receive additional payments under this Act in subsequent years, along with others in the industry. It is not possible to reasonably estimate the potential amount to be received in future periods, or to state with certainty whether any payment will be received at all. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion set forth below, as well as other portions of this Quarterly Report, contains statements concerning potential future events. Such forward-looking statements are based upon assumptions by our management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by AIPC. 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 management assumptions prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors, including but not limited to, our dependence on a limited number of customers for a substantial portion of our revenue, our ability to manage rapid growth, our ability to obtain necessary raw materials and minimize fluctuations in raw material prices, the impact of the highly competitive environment in which we operate, reliance exclusively on a single product category, our limited experience in the branded retail pasta business, our ability to attract and retain key personnel, our ability to cost-effectively transport our products and the significant risks inherent in our recent international expansion. For additional discussion of the principal factors that could cause actual results to be materially different, refer to our Annual Report on Form 10-K dated December 19, 2001, filed by the Company with the Securities and Exchange Commission (Commission File No. 001-13403), any amendments thereto and other matters disclosed in the Company's other public filings. This report has been filed with the Securities and Exchange Commission (the "SEC" or the "Commission") in Washington, D.C. and can be obtained by contacting the SEC's public reference operations or obtaining it through the SEC's web site on the World Wide Web at http://www.sec.gov. Readers are strongly encouraged to
consider those factors when evaluating any such forward-looking statement. We will not update any forward-looking statements in this Quarterly Report to reflect future events or developments. Results of Operations General Markets. We are the largest producer and one of the fastest-growing marketers of dry pasta in North America. We produce and sell our pasta products from three plants in the United States and one plant in Italy. Our customers are generally separated into two groups: Retail, which includes our own product brands (e.g. Mueller's, Anthony's, Globe/A-1, Luxury, Mrs. Grass, Pennsylvania Dutch, R & F, and Ronco), and our private label business and comprised 73.6% and 74.9% of revenue for the three and six month periods ended March 31, 2002, respectively; and Institutional, which includes ingredient, food service and contract, and comprised 26.4% and 25.1% of revenue for the three and six month periods ended March 31, 2002, respectively. Costs. Our primary costs are durum wheat, packaging materials, labor, and selling and marketing (personnel, trade spending). Durum wheat is a cash crop, the average monthly market price of which fluctuates. We manage our durum wheat cost risk through cost pass-through mechanisms and other arrangements with our customers and advance purchase contracts which are generally less than twelve months' duration. Our labor costs remain relatively stable, but are declining as a percentage of revenue. Selling and marketing costs have increased substantially over the last two years in line with the significant expansion of our Retail business. These costs increased 114.4% from FY1999 through FY2001, increasing from $14.9 million to $31.8 million over this three-year period, and constituted 14.3% of revenues for the six months ended March 31, 2002. We expect to continue to increase our selling and marketing expenditures although not at the rate seen through FY 2001, because we have substantially completed the development of the selling and marketing infrastructure needed to support our branded business. We expect selling and marketing expense to exceed 10% of revenues for the foreseeable future. Brand Acquisitions. In November 2000, we purchased the Mueller's pasta brand from Bestfoods. In July 2001, we purchased seven pasta brands from Borden Foods. As discussed below, the timing of these brand acquisitions had an impact on the period to period comparisons. Second quarter fiscal 2002 compared to second quarter fiscal 2001. Revenues. Total revenues increased $19.8 million, or 26.4%, to $94.8 million for the three-month period ended March 31, 2002, from $75.0 million for the three-month period ended March 31, 2001. The increase for the three-month period ended March 31, 2002 was primarily due to higher volume due to the acquisitions along with strong organic volume growth. In addition to volume growth, average prices were higher primarily due to the brand acquisitions. Also included in Retail revenue is $1.9 million, which represents 25% of the $7.6 million Department of Commerce payment received in December 2001 (see Note 3 to the Consolidated Financial Statements). Revenues for the Retail market increased $17.4 million, or 33.2%, to $69.8 million for the three-month period ended March 31, 2002, from $52.4 million for the three-month period ended March 31, 2001. The increase
primarily reflects volume growth of 21.3%, much of which came from the brand acquisitions, and the higher per unit selling prices of the acquired brands. Revenues for the Institutional market increased $2.4 million, or 10.7%, to $25.0 million for the three-month period ended March 31, 2002, from $22.6 million for the three-month period ended March 31, 2001. This increase was primarily a result of ingredient volume growth of 12.3%, along with growth in our food service business, partially offset by lower contract volumes. Gross Profit. Gross profit increased $10.3 million, or 44.2%, to $33.7 million for the three-month period ended March 31, 2002, from $23.4 million for the three-month period ended March 31, 2001. This increase was primarily attributable to revenue growth associated with increased volumes and the higher per unit selling prices of our branded products. Additionally, the gross margin benefited from lower manufacturing costs and slightly lower durum costs. Gross profit as a percentage of revenues increased to 35.6% for the three-month period ended March 31, 2002 from 31.2% for the three-month period ended March 31, 2001. The increase in gross profit as a percentage of revenues relates to incremental gross profit on branded products subsequent to the acquisitions. For the remainder of the 2002 year, we expect year-over-year increases in gross profit to continue as a result of the brand acquisitions. Selling and Marketing Expense. Selling and marketing expense increased $5.8 million, or 82.9%, to $12.8 million for the three-month period ended March 31, 2002, from $7.0 million for the three-month period ended March 31, 2001. 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 brand acquisitions. Selling and marketing expense as a percentage of revenues increased to 13.5% for the three-month period ended March 31, 2002, from 9.4% for the comparable prior year period. Going forward, we expect selling and marketing expenses to exceed 10% of net revenues due to the additional promotional support dedicated to the branded business. General and Administrative Expense. General and administrative expenses increased $0.6 million, or 25.3% to $3.2 million for the three-month period ended March 31, 2002 from $2.6 million for the three-month period ended March 31, 2001. General and administrative expense as a percentage of revenues remained relatively the same at 3.4%. The majority of the increase relates to personnel costs associated with the acquired brands. Operating Profit. Operating profit for the three-month period ended March 31, 2002, was $17.7 million, an increase of $3.9 million or 28.0% over the $13.8 million reported for the three-month period ended March 31, 2001, and increased as a percentage of revenues to 18.6% for the three-month period ended March 31, 2002, from 18.4% for the three-month period ended March 31, 2001 as a result of the factors discussed above. Interest Expense. Interest expense for the three-month period ended March 31, 2002, was $2.4 million, increasing $0.3 million or 16.8% from the $2.1 million reported for the three-month period ended March 31, 2001. The increase related to borrowings associated with the brand acquisitions and capital expenditures, offset by lower interest rates in the current year. Income Tax. Income tax expense for the three-month period ended March 31, 2002, was $5.2 million, comparable to the $4.0 million reported for the three-month period ended March 31, 2001, and reflects effective income tax rates of approximately 34.0% and 34.5%, respectively. Net Income. Net income for the three-month period ended March 31, 2002, was $10.1 million, increasing $2.4 million or 30.8% from the $7.7 million reported for the three-month period ended March 31, 2001. Diluted earnings
per share was $0.54 per share for the three-month period ended March 31, 2002, an increase of 28.6% over the prior year quarter of $0.42 per share. Six months fiscal 2002 compared to six months fiscal 2001. Revenues. Revenues increased $45.4 million, or 32.1%, to $186.8 million for the six-month period ended March 31, 2002, from $141.4 million for the six-month period ended March 31, 2001. The increase for the six-month period ended March 31, 2002 was primarily due to higher volume due to the acquisitions along with strong organic growth. Volumes were up 25.4% over the prior year period. Volume growth was led by private label (26.2%) and ingredient (18.4%). In addition to volume growth, average prices were higher primarily due to the brand acquisitions. Also included in Retail revenue is $3.8 million, which represents 50% of the $7.6 million Department of Commerce payment received in December 2001 (see Note 3 to the Consolidated Financial Statements). Revenues for the Retail market increased $39.4 million, or 39.3%, to $139.9 million for the six-month period ended March 31, 2002, from $100.5 million for the six-month period ended March 31, 2001. The increase primarily reflects volume growth of 30.3%, much of which came from the brand acquisitions, and the higher per unit selling prices of the acquired brands. Revenues for the Institutional market increased $6.0 million, or 14.6%, to $46.9 million for the six-month period ended March 31, 2002, from $41.0 million for the six-month period ended March 31, 2001. This increase was primarily due to volume growth in the ingredient market of 18.4% offset by lower contract volumes. Gross Profit. Gross profit increased $24.1 million, or 56.7%, to $66.6 million for the six-month period ended March 31, 2002, from $42.5 million for the six-month period ended March 31, 2001. This increase was primarily attributable to revenue growth associated with increased volumes and the higher per unit selling prices of our branded products. Additionally, gross margin benefited from lower manufacturing costs. Gross profit as a percentage of revenues increased to 35.6% for the six-month period ended March 31, 2002, from 30.0% for the six-month period ended March 31, 2001. The increase in gross profit as a percentage of revenues relates to incremental gross profit on our branded products subsequent to the acquisitions. For the remainder of the 2002 year, we expect year-over-year increases in gross profit to continue as a result of our brand acquisitions. Selling and Marketing Expense. Selling and marketing expense increased $14.1 million, or 112.1%, to $26.6 million for the six-month period ended March 31, 2002, from $12.6 million for the six-month period ended March 31, 2001. Selling and marketing expense as a percentage of revenues increased to 14.3% for the six-month period ended March 31, 2002, from 8.9% for the comparable prior year period. This increase was primarily due to higher marketing costs associated with higher retail revenues as well as incremental marketing and personnel costs associated with the brand acquisitions. Going forward, we expect selling and marketing expenses to exceed 10% of net revenues due to the additional promotional support dedicated to the branded business. General and Administrative Expense. General and administrative expense increased $1.4 million, or 30.4%, to $6.2 million for the six-month period ended March 31, 2002, from $4.7 million for the comparable prior period, and remained relatively the same as a percentage of revenues at 3.3% and 3.4% for the six-month periods ended March 31, 2002 and 2001, respectively. The majority of the increase relates to personnel costs associated with the brand acquisitions.
Provision for Acquisition Related Expenses. The provision for acquisition related expenses of $1.8 million for the six-month period ended March 31, 2001 consisted of one-time costs associated with the Mueller's brand acquisition. Operating Profit. Operating profit for the six-month period ended March 31, 2002, was $33.7 million, an increase of $10.4 million or 44.5% over the $23.3 million reported for the six-month period ended March 31, 2001, and increased as a percentage of revenues to 18.1% for the six-month period ended March 31, 2002, from 16.5% for the six-month period ended March 31, 2001 as a result of the factors discussed above. Excluding the impact of the $1.8 million charge for acquisition-related costs, operating profit for the prior six-month period totaled $25.2 million. Operating profit as a percentage of net revenues, excluding the non-recurring charge, was 17.8% versus 18.1% in the current year. Interest Expense. Interest expense for the six-month period ended March 31, 2002, was $5.0 million, increasing $1.4 million or 38.2% from the $3.6 million reported for the six-month period ended March 31, 2001. The increase related to borrowings associated with the brand acquisitions and capital expenditures, offset by lower interest rates in the current year. Income Tax. Income tax expense for the six-month period ended March 31, 2002, was $9.8 million, increasing $3.0 million from the $6.8 million reported for the six-month period ended March 31, 2001, and reflects effective income tax rates of approximately 34.2% and 34.5%, respectively. Net Income. Net income for the six-month period ended March 31, 2002, was $18.9 million, increasing $6.0 million or approximately 46.2% from the $12.9 million reported for the six months ended March 31, 2001. Excluding the impact of the $1.8 million charge for non-recurring acquisition costs, net income for the six months ended March 31, 2001, totaled $14.1 million. Diluted earnings per common share were $1.02 per share for the six-month period ended March 31, 2002 compared to $0.72 per share for the six-month period ended March 31, 2001. Excluding the impact of the $1.8 million charge for non-recurring acquisition costs, diluted earnings per common share were $0.79, and net income as a percentage of net revenue was 10.0% versus 10.1% in the current year. Financial Condition and Liquidity Our primary sources of liquidity are cash provided by operations and borrowings under our credit facility. Cash and temporary investments totaled $4.7 million, and working capital totaled $62.9 million at March 31, 2002. Our net cash provided by operating activities totaled $25.2 million for the six-month period ended March 31, 2002 compared to $29.2 million for the six-month period ended March 31, 2001. The decrease in the net cash provided by operations is due to higher working capital requirements, offset by an increase in net income before non-cash charges. Cash used in investing activities principally relates to our investments in manufacturing, distribution and milling assets. Capital expenditures were $29.6 million for the six-month period ended March 31, 2002 compared to $17.0 million in the comparable prior year period. The primary increase was related to capital expenditures for our new Arizona manufacturing facility. The total cost of this facility is expected to be approximately $45 million, and will be completed in early fiscal 2003. In addition to the new Arizona facility, we plan to spend approximately $10 million in the remainder of fiscal year 2002, primarily for cost savings projects, maintenance projects, and capacity
expansion projects. We anticipate completion of these projects during the fiscal year ending September 30, 2002. Net cash provided by financing activities was $3.9 million for the six-month period ended March 31, 2002 compared to $18.0 million for the six-month period ended March 31, 2001. In the prior year, borrowings under our revolver increased by $20.0 million to fund the Mueller's pasta brand purchase and the purchase of treasury stock. We currently use cash from operations and borrowings to fund capital expenditures, repayments of debt and working capital requirements. We expect that future cash requirements will principally be for capital expenditures, repayments of indebtedness and working capital requirements. We have current commitments for $27.9 million in raw material purchases for fiscal years 2002 and 2003. Additionally, we have approximately $52.0 million, including the new Arizona facility, in expenditures remaining under our current capital expenditure programs. Included in this total, is $42 million for the Arizona facility, which is expected to be spent over the remainder of fiscal 2002 and early in fiscal 2003. We expect to fund these commitments from operations and borrowings under our credit facility. The credit facility currently has available a credit of approximately $80 million. At this time, the current and projected borrowings under the credit facility do not exceed the facility's available commitment. The facility matures on October 2, 2006. We currently have no other material commitments. We believe that net cash provided by operating and financing activities will be sufficient to meet our expected capital and liquidity needs for the foreseeable future. Item 3. 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 associated with borrowings denominated in foreign currency. We occasionally utilize simple derivative instruments such as interest rate swaps to manage our mix of fixed and floating rate debt. We had various fixed interest rate swap agreements with notional amounts of $145 million outstanding at March 31, 2002. The estimated fair value of the interest rate swap agreements of $(508,000) is the amount we would be required to pay to terminate the swap agreements at March 31, 2002. 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 quarter ended March 31, 2002. We hedge our net investment in our foreign subsidiaries with euro borrowings under our credit facility. Changes in the U.S. dollar equivalent of euro-based borrowings are recorded as a component of the net translation adjustment in the consolidated statement of stockholders' equity. The functional currency for our Italy operation is the Euro. At March 31, 2002, long-term debt includes obligations of 63.3 million Euros ($55.0 million) under a credit facility which bears interest at a variable rate based upon the Euribor rate.
PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------------------------------- Not applicable Item 2. Changes in Securities - ------------------------------- Not applicable Item 3. Defaults Upon Senior Securities - ------------------------------- Not applicable Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------- The Annual Meeting of Shareholders was held on February 6, 2002. There were two matters submitted to a vote of security holders. The first matter was for the election of directors. Each of the persons named in the Proxy Statement as a nominee for director was elected. Following are the voting results on each of the nominees for director: Election of Directors Votes For Votes Withheld Jonathan E. Baum 16,089,038 111,523 Robert H. Niehaus 16,140,270 60,291 Richard C. Thompson 16,140,639 59,922 The following directors continued in office: Serving Until 2003 Serving Until 2004 Horst W. Schroeder Tim M. Pollak Mark C. Demetree John P. O'Brien Timothy S. Webster William R. Patterson James A. Heeter The second matter was the ratification of the Board of Directors' selection of Ernst & Young LLP to serve as the Company's independent auditors for the fiscal year 2002. The shareholders cast 16,099,689 votes in the affirmative and 88,797 votes in the negative and shareholders holding 12,075 votes abstained from voting on the ratification of Ernst & Young LLP as the Company's independent auditors for the fiscal year 2002.
Item 5. Other Information - ------------------------------- Not applicable Item 6. Exhibits and Reports on Form 8-K - ------------------------------- (a) Exhibits. 10. Letter Agreement among American Italian Pasta Company and Bay State Milling Company dated March 28, 2002. (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 ([*])). (b) Reports on Form 8-K. None
SIGNATURES Pursuant to the requirements 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 May 6, 2002 /s/ Timothy S. Webster - --------------------------- ---------------------------------------------------- Date Timothy S. Webster President and Chief Executive Officer (Principal Executive Officer) May 6, 2002 /s/ Warren B. Schmidgall - --------------------------- ---------------------------------------------------- Date Warren B. Schmidgall Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
EXHIBIT INDEX Exhibit No. Description - ----------- ----------------------------------------------------- 10. Letter Agreement among American Italian Pasta Company and Bay State Milling Company dated March 28, 2002. (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 ([*])).