UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 28, 2007
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 64116
Kansas City, Missouri (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(816) 584-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Convertible Common Stock: $.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes | | No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes | | No |X|
Indicate by check mark whether the registrant (1) has filed all 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 | | No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer | | Accelerated filer |X| Non-accelerated filer | |
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes | | No |X|
As of March 30, 2007 and March 28, 2008, the aggregate market value of the
Registrant's Class A Convertible Common Stock held by non-affiliates (using the
closing price) was approximately $196,346,000 and $100,039,000, respectively.
The number of shares outstanding as of June 2, 2008 of the Registrant's
Class A Convertible Common Stock was 19,387,454 and there were no shares
outstanding of the Registrant's Class B Convertible Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: None.
AMERICAN ITALIAN PASTA COMPANY
FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 28, 2007
INDEX
Page
Explanatory Note ii
PART I.........................................................................1
ITEM 1. BUSINESS.......................................................1
ITEM 1A. RISK FACTORS...................................................7
ITEM 1B. UNRESOLVED STAFF COMMENTS.....................................15
ITEM 2. PROPERTIES....................................................15
ITEM 3. LEGAL PROCEEDINGS.............................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........18
PART II.......................................................................18
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.............18
ITEM 6. SELECTED FINANCIAL DATA.......................................20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................64
ITEM 9A. CONTROLS AND PROCEDURES.......................................64
ITEM 9B. OTHER INFORMATION.............................................66
PART III......................................................................67
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE........67
ITEM 11. EXECUTIVE COMPENSATION........................................70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS....................87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE.....................................91
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES........................92
PART IV.......................................................................92
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.......................92
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Explanatory Note
Restatement of Historical Financial Statements
As more fully described in the Company's previously filed Annual Report on Form
10-K for fiscal year ended September 30, 2005 the Company restated its
previously issued audited consolidated financial statements for fiscal years
2001 through 2004 and its unaudited consolidated financial statements for the
first two quarters of fiscal year 2005, (the "Restatement").
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains statements concerning potential future
events. These forward-looking statements are based upon assumptions by our
management, as of the date of this Annual Report on Form 10-K, including
assumptions about risks and uncertainties faced by us. Readers can identify
these forward-looking statements by the use of verbs such as expects,
anticipates, believes, estimates, intends, projects, may, will, predicts, or
similar verbs or conjugations of such verbs. If any of our assumptions prove
incorrect or should unanticipated circumstances arise, our actual results could
materially differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors described below in Item 1A - Risk
Factors. Readers are strongly encouraged to consider those factors when
evaluating any such forward-looking statements. Except as otherwise required by
the federal securities laws, we will not update any forward-looking statements
in this Annual Report on Form 10-K to reflect future events or developments.
ii
PART I
ITEM 1. BUSINESS
General
American Italian Pasta Company is a Delaware corporation and was incorporated
and commenced operations in 1988. Unless the context otherwise indicates, all
references in this Annual Report on Form 10-K to "the Company", "we", "us",
"our", and similar words are to American Italian Pasta Company and its
subsidiaries. We believe we are the largest producer and marketer of dry pasta
in North America, by volume, 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. During the fiscal year ended September 28, 2007, we had revenues of
$398.1 million.
Our 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. Our 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 years
2007, 2006 and 2005 were 52 weeks and ended on September 28, 2007, September 29,
2006 and September 30, 2005.
We produce approximately 200 dry pasta shapes in milling, production and
distribution facilities, located in Excelsior Springs, Missouri, Columbia, South
Carolina, Tolleson, Arizona, and Verolanuova, Italy. We outsource distributing
operations at all of our facilities and we outsource milling at the Arizona and
Italy plants. Operations at our Wisconsin plant were temporarily idled in July
2004 through October 2004 and that plant was permanently closed in April 2006
and sold in August 2006. Our U.S. plants serve both retail and institutional
customers. 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. Our South Carolina
plant, which is also vertically integrated, commenced operations in 1995, and
our Arizona plant commenced operations in 2003. The Italy plant, which commenced
operations in 2001, serves retail and institutional customers internationally
and retail customers in the United States.
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 on Form 10-K.
AIPC Way
We have developed the AIPC Way, which embodies our vision, mission, operational
model, business approach, core capabilities and values. The components of the
AIPC Way are as follows:
• Vision - What we will achieve - To be, and to be seen as, the best
developer of category solutions for our customers in dry grocery.
• Mission - What we will do - Focus on dry grocery categories where we can
leverage our relationships and capabilities, to develop private label,
branded and ingredient solutions for our retail, foodservice and industrial
customers and by exceeding expectations, provide our customers and
shareholders with enhanced value.
• Operating Model - How we plan and execute - Always operate with high
ethical standards. Strategic planning. Business planning and performance
management. Sales and operations planning. People evaluation and
development.
• Core Capabilities - What do we need to be great - Great people. Category
leadership. Service leadership. Speed to market. Operational excellence.
Cross function collaboration. Strong customer relationships.
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• Values - What we believe - Integrity. Quality. Environmental
sustainability. Empowerment and accountability. Passion to exceed.
Products and Brands
Our product line is comprised of approximately 2,700 items or stock-keeping
units ("SKUs"). In many instances, we produce pasta to our customers' unique
specifications. We produce approximately 200 different shapes and sizes of pasta
products in multiple package configurations, including bulk packages for
institutional customers and smaller individually-wrapped packages for retail
consumers. The varied shapes and sizes include 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 fiscal year 2007, we continued our strategy to ensure we are pursuing a
profitable health platform through our private label and branded business in
grocery retailers, club stores, mass merchants and discount stores. We have
developed a number of whole wheat and multi-grain, enriched multi-grain and
organic products.
Our products are produced to satisfy the specifications of our customers as well
as our own product specifications. We conduct internal laboratory evaluation
against competitive products on physical characteristics and cooking
performance. Physical characteristics considered include color, speck count,
shape and consistency. Cooking performance considerations include starch
release, protein content, and texture. Our customers also 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 Excellent/Superior ratings. In addition, our
Tolleson, Arizona plant is certified organic by the Organic Crop Improvement
Association International. We also implemented a comprehensive Hazard Analysis
Critical Control Point ("HACCP") program to continuously monitor and improve the
safety, quality and cost-effectiveness of the Company's facilities and products.
Our Italian plant is inspected by AIB and a European representative similar to
AIB, the British Retail Consortium - Food Safety ("BRC"), one of the recognized
European Food Safety Bodies. Our facility received the "Grade A" certification
from the BRC. Our Italian plant is an ISO 9002 certified production facility and
certified organic by Consorzio Per Il Controllo Dei Prodotti Biologici
(Consortium for the Control of Biological Production). 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 domestic products through our sales employees
and with the use of food brokers and distributors throughout the United States,
Canada, Mexico, and the Caribbean. Our senior management is directly involved in
the selling process in all customer markets. Our over-arching sales and
marketing strategy is to provide category leadership, a complete product
offering, quality product, competitive pricing and superior customer service to
attract new customers and to maintain and grow pasta sales to existing
customers. We work with our customers to develop marketing and promotional
programs specifically tailored to stimulate pasta consumption in their trading
area based upon the 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 supply private label and branded pasta to
many of the largest grocery retailers in the United States, including serving as
a primary supplier of pasta to Wal-Mart, Inc. ("Wal-Mart"). We have historically
been the largest pasta supplier to Sysco, the nation's largest marketer and
distributor of food service products. We also have developed supply
relationships with leading food processors, which use our pasta as an ingredient
in their branded food products.
Our Italian plant enables us to offer authentic Italian pasta products. This
facility serves North American, European, and other international markets with
branded, private label, industrial and food service products.
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 products. Our category
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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 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 have demonstrated 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.
Our primary distribution centers in North America are strategically located at
our production facilities in South Carolina, Missouri and Arizona to serve the
national market. Finished products are automatically conveyed via enclosed case
conveying systems from the production facilities to the distribution centers for
palletizing and storage until shipping. The combination of integrated facilities
and multiple distribution centers enables us to realize distribution cost
savings and provides lead-time, fill rate and inventory management advantages to
our customers. The operation of the Missouri, South Carolina and Arizona
distribution centers is outsourced under a long term agreement with
Ozburn-Hessey Logistics, LLC ("OHL"), a firm specializing in warehouse and
logistics management services.
Pasta Production
Pasta's primary ingredient is semolina, which is extracted from durum wheat
through a milling process. Durum wheat is used primarily for pasta. 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. 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.
Durum wheat is a cash crop whose market price fluctuates. To a certain extent,
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 that are generally a few months in duration. We seek to manage the balance
of such risk through continued improvement in our efficiencies and pricing of
our products. Competitive pressures may limit our ability to pass-through these
costs.
Durum wheat is shipped by rail to our production facilities in Missouri and
South Carolina. We have one rail contract that will expire in July 2008. For
other rail carriers that we utilize, we negotiate annual pricing arrangements or
are subject to applicable tariff rates.
We purchase durum wheat and have it converted to semolina and semolina/flour
blends for our Tolleson, Arizona facility from an adjacent milling facility
owned by Bay State Milling Company ("Bay State") under the terms of a long-term
supply agreement. The agreement is for an initial 10-year term with renewal
provisions thereafter. In the event of ownership changes or sustained
under-performance, we have contractual rights to purchase the mill at a book
value established at the start of the supply agreement less future depreciation.
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 have
satisfied our minimum requirements and paid Bay State approximately $13.8
million in fiscal year 2007, $9.8 million in fiscal year 2006, and $12.6 million
in fiscal year 2005.
Until the April 2006 shutdown of our Kenosha, Wisconsin facility, we purchased
semolina for that plant from Horizon Milling, LLC ("Horizon"), (a joint venture
between Cenex Harvest States and Cargill Foods) under the terms of a long-term
supply agreement. In August of 2006, we advised Horizon that the economic and
business circumstances had changed since commencement of the supply agreement,
that we were invoking the material adverse effect provisions of the supply
agreement and that we had sold the facility. See Item 3 - Legal Proceedings.
3
In Italy, we purchase our semolina requirements from Italian mills to meet our
specific quality and customer needs.
We generate and sell by-products from our milling operations in the form of
flour and mill feed. These products compete in the marketplace with alternative
products for feed usage and, therefore, fluctuate in price accordingly. We
manage our by-product sales price risk through a variety of pass through
mechanisms and with forward sales contracts.
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. In addition, we rely on supply and operations planning to
optimize finished goods inventory, minimize the risk of obsolescence for
finished goods and raw materials, maximize customer service, and achieve
efficient factory utilization.
Trademarks and Patents
We hold a number of federally registered and common law trademarks which we
consider to be of value and importance to our business. We have also registered
other trademarks. 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 have accounted for a substantial
portion of our revenues. During the fiscal years ended September 28, 2007,
September 29, 2006 and September 30, 2005, sales to Wal-Mart accounted for
approximately 23%, 22% and 21%, respectively. During the fiscal years ended
September 28, 2007, September 29, 2006 and September 30, 2005, sales to Sysco
accounted for approximately 9%, 11% and 11%, respectively. We expect to continue
to rely on a limited number of major customers for a substantial portion of our
revenues in the future.
Through December 31, 2006, we had an exclusive supply contract with Sysco (the
"Sysco Agreement"). Under the terms of the Sysco Agreement, we served as the
exclusive U.S. private label supplier to Sysco of certain dry pasta products
bearing a Sysco-owned label and sold through Sysco's network of operating
companies. During the term of the Sysco Agreement, we were the primary supplier
of dry pasta to Sysco and had the exclusive right to supply dry pasta to Sysco
for sale under Sysco's brand names. Subsequent to December 31, 2006, we continue
to supply Sysco and its network of operating companies on a non-exclusive basis.
Under the terms of the Sysco Agreement, we were precluded from pursuing other
food service distributors. We are pursuing other food service distributors
representing a market opportunity of approximately 75% of the food service space
not occupied by Sysco.
We do not have long-term supply contracts with a substantial number of our other
customers, including Sysco and Wal-Mart. Accordingly, we are dependent upon our
customers to sell our products and to assist us in promoting market acceptance
of, and creating demand for, our products. An adverse change in 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.
Competition
We operate in a highly competitive environment against numerous well-established
national, regional and foreign companies, and many smaller 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 with which we compete 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 achieving distribution, product quality, pricing, packaging or advertising,
promotion and customer service and logistics capabilities.
Our direct competitors include Barilla (a large multi-national Italian-owned
diversified food company with two manufacturing facilities operating in the
U.S.), New World Pasta Company owned by Ebro Puleva (Spain's leading food
processor), Dakota Growers Pasta Company, Philadelphia Macaroni Co. Inc. and A.
Zerega's Sons, Inc., and
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foreign companies such as Italian pasta producer De Cecco. For sales in Europe
and other international markets, our Italian plant competes with Barilla and
numerous Italian pasta producers.
Pasta Markets
Although we have international sales, more than 93% of our revenues in fiscal
year 2007 were from sales in North America.
North American pasta (in all its forms) consumption is estimated to have been
approximately $5.6 billion in fiscal year 2007 (as measured by A.C. Nielsen,
which data does not include Wal-Mart). The pasta industry consists of two
primary customer markets: (i) Retail, which includes grocery stores, club
stores, mass merchants, drug and discount stores 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.
Customer Markets - Retail: The U.S. Retail market includes traditional grocery
retailers, club stores, mass merchants, drug and discount stores. We are the
leading producer of retail dry pasta in the U.S. consisting of our brands and
the Private Label businesses of our customers. The second, third and fourth
largest purveyors of retail pasta in the United States by volume are New World
Pasta, Barilla and Dakota Growers Pasta Company, respectively. Our strategy is
to provide our retail partners with a full portfolio of pasta products from
regional brands to store brands to authentic Italian imported products and
specialty 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. Food service
customers include businesses and organizations that sell products to
restaurants, healthcare facilities, schools, hotels and industrial caterers
("broadliners") and multi-unit restaurant chains that procure directly
("multi-units"). The food service market is highly fragmented and is served by
numerous regional and local food distributors. We were historically constrained
to the approximate 25% of the food service market occupied by Sysco Corporation.
Since January 1, 2007, we have been able to participate more fully in the other
75% of this market.
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. 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 the success of their products. 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. A substantial amount of the pasta used by food processors has been
and continues to be manufactured internally for use by food processors in their
own products.
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 ("FDA") and
the Occupational Safety and Health Administration, as well as 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 subject to certain safety regulations including regulations
issued pursuant to the U.S. Occupational Safety and Health Act. These
regulations require us to comply with certain manufacturing safety standards to
5
protect our employees from accidents. We believe that we are in material
compliance with all employee safety regulations.
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.
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.
In fiscal year 2004, we received the Customs Trade Partnership Against Terrorism
("C-TPAT") certification from the United States Customs and Border Protection
("CBP") division of the Department of Homeland Security. CBP developed C-TPAT
after the September 11, 2001 terrorist attacks as a way to identify low risk
importers and facilitate the efficient release of goods, even under heightened
security conditions. To become a participant of C-TPAT, our security measures
were reviewed and certified by CBP. As part of the C-TPAT certification and
review process, CBP is reviewing the implementation of our security measures.
C-TPAT certification includes certain benefits to participants and may help
reduce the risk of significant delays in the importation of our product.
All imported pasta is subject to U.S. import regulations. Duties are assessed in
accordance with the Harmonized Tariff Schedule of the United States.
See Item 3 - Legal Proceedings.
Employees
As of September 28, 2007, we employed 651 full-time persons worldwide of whom
176 were administrative and 475 manufacturing employees. Our 594 U.S. employees
were not represented by any labor unions. Our 57 Italian employees were subject
to a national labor agreement and were represented by a labor union. We consider
our employee relations to be excellent.
Pasta Industry Environment
During fiscal year 2007, the dry pasta market continued some improvement as
consumer demand for pasta products increased slightly compared to fiscal year
2006.
Restructuring and Rightsizing Program; Subsequent Company Developments
In response to the pasta industry conditions that existed in fiscal year 2004,
we announced a Restructuring and Rightsizing program during our third fiscal
quarter of that year. The key elements of the Restructuring and Rightsizing
program included reductions in our workforce, manufacturing capacity and
inventory levels and related changes to our distribution network. In that
regard, during the fourth quarter of fiscal year 2004, we idled full operations
at our Kenosha, Wisconsin manufacturing facility; temporarily shut down
production at two of our other domestic manufacturing facilities; and exited
certain leased domestic distribution centers.
In connection with this Restructuring and Rightsizing program, during fiscal
year 2004, we recorded $2.9 million of restructuring expenses primarily related
to employee severance and termination benefits, lease costs, and supply
agreement costs. In 2005, we recognized $0.6 million benefit related to the
reversal of a previously established restructuring reserve due to the early
reactivation of the Kenosha plant which was not contemplated at the time the
restructuring reserve was established.
6
Following the implementation of our Restructuring and Rightsizing Program in the
third quarter of 2004, production and manufacturing inefficiencies, reduced
inventory levels and product availability resulted in customer shipment delays
and other customer service shortfalls. We proceeded to rebuild inventory and it
took until the second quarter of fiscal year 2005 before customer shipment
delays were corrected and customer order fill rates had returned to historical
levels.
During the 2005 fiscal year, and through April 2006, we continued to operate our
Wisconsin plant on an "as needed" basis to meet production needs. In February
2006, we determined that the plant would be permanently closed and divested and
that we would relocate two production lines to our South Carolina plant. In that
regard, the plant was permanently closed in April 2006 and was sold in August
2006. We completed the relocation of our production lines to our South Carolina
plant in August 2006.
In late 2005, we performed a comprehensive review of the composition of our
inventory and identified significant quantities that had become excess, damaged
and obsolete due primarily to our significant decrease in revenues, and the
continued aging of our inventory. This focused effort continued into fiscal year
2006 and resulted in the sale or disposal of substantial quantities of excess
and/or obsolete finished goods, packaging and raw material inventories. In
fiscal year 2007, the composition of our inventory was at normal levels with
respect to finished goods, packaging and raw materials. In that regard, we
recorded obsolescence expense of approximately $12.2 million in fiscal year 2005
and an additional provision for obsolescence of $1.4 million in fiscal year 2006
and $0.8 million in fiscal year 2007.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, as well as the other
information included or incorporated by reference in this Annual Report on Form
10-K before investing in our common stock. If any of the following risks occur,
our business, financial condition or operating results could be materially
adversely affected. The risks described below are not the only risks we face.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also materially adversely affect our
business, financial condition and operating results.
Risks relating to lack of current information about our business.
Material information about our current operating results and financial condition
is unavailable because of the delay in filing with the SEC our 2005, 2006 and
2007 annual reports and quarterly reports for any quarter through the date of
this filing. While we have released periodic updates regarding our liquidity,
revenue performance and certain financial data, investors have not had access to
complete information about the current state of our business. When this
information becomes available to investors, it may result in an adverse effect
on the trading price of our common stock.
Reputational risks and other risks relating to negative publicity.
We may be subject to negative publicity resulting from our accounting
restatement and related investigations and litigation. While we believe our
customers focus primarily on the quality of our products and service levels,
this negative publicity could affect our relationship with our current customers
and suppliers if our customers and suppliers lose confidence in our ability to
fulfill our commitments, and could affect our ability to develop relationships
with potential customers and suppliers, which could have a material adverse
effect on our business.
We are subject to ongoing governmental investigations which could require us to
pay substantial fines or other penalties or otherwise have a material adverse
effect on us.
We have been responding to subpoenas from the Enforcement Division of the SEC
relating to our accounting practices, financial reporting, proxy solicitation
and other matters in connection with an ongoing formal, non-public investigation
by the SEC staff. While we are cooperating with this investigation, adverse
developments in connection with the investigation, including any expansion of
scope, could negatively impact us and could divert the efforts and attention of
our management team from our ordinary business operations. The United States
Attorney's Office for the Western District of Missouri ("DOJ") has been
coordinating with the SEC staff on this matter. The nature of the relief or
remedies the SEC or the DOJ may seek cannot be predicted at this time, but may
include
7
monetary penalties and/or injunctive relief, either of which could have a
material adverse effect on us. A more detailed description of these
investigations is included under the heading "Legal Proceedings" in this Annual
Report on Form 10-K.
We are currently cooperating with the DOJ on a matter related to the prior
revocation of the anti-dumping orders with respect to our Italian subsidiary,
Pasta Lensi, S.r.l. The DOJ may take action related to this matter that could
have a material adverse effect on us. A more detailed description of this matter
is included under the heading "Legal Proceedings" in this Annual Report on Form
10-K.
The efforts of our current management team and our Board of Directors to manage
our business have been hindered at times by their need to spend significant time
and effort to resolve issues related to our accounting restatement and matters
under investigation. To the extent our management team and our Board of
Directors will be required to devote significant attention to these matters in
the future, this may have, at least in the near term, an adverse effect on
operations.
Pending civil litigation and related claims could have a material adverse effect
on us.
A number of lawsuits have been filed against us and certain of our current and
former officers and directors relating to our accounting restatement. These
suits include our court approved settlement in the federal class action
securities lawsuit and derivative cases currently pending in the U.S. District
Court for the Western District of Missouri, the Circuit Court of Jackson County,
Missouri, and the Delaware Chancery Court for which we have an agreement in
principle to settle, subject to court approval. Our directors' and officers'
liability policies for the applicable policy year will be depleted as a result
of these lawsuits, and as a result, any such continuing or additional claims
could have a material adverse effect on our business, results of operations and
cash flows. We are unable at this time to estimate our potential liability in
such matters. The defense of these lawsuits may consume substantial time, and
they may divert management's attention and resources from our ordinary business
operations. More information regarding these lawsuits is included under the
heading "Legal Proceedings" in this Annual Report on Form 10-K.
Our indemnification obligations and limitations of our director and officer
liability insurance could have a material adverse effect on our business,
results of operations and financial condition.
Several of our current and former directors, officers and employees are the
subject of lawsuits and investigations relating to our accounting restatement.
Under Delaware law, our articles and bylaws, and certain indemnification
agreements, we may have an obligation to indemnify our current and former
officers and directors in relation to these matters. Some of these
indemnification obligations may be covered by certain insurers under applicable
directors' and officers' liability policies. Our applicable directors' and
officers' liability policies for the policy year during which these matters
arose has been depleted with the final court approval of the federal securities
class action lawsuit and the proposed settlement of the derivative cases,
thereby leaving certain additional indemnity obligations as uninsured. If we
incur significant uninsured indemnity obligations, these obligations could have
a material adverse effect on our business, results of operations and financial
condition.
Ongoing SEC review may require us to amend our public disclosures further.
We may receive comments from the staff of the SEC relating to this Annual Report
on Form 10-K and our other periodic filings. As a result, we may be required by
the SEC to amend this Annual Report on Form 10-K or other reports filed with the
SEC in order to make adjustments or additional disclosures.
We could face additional adverse consequences as a result of our late SEC
filings.
We will continue to incur additional expenses until we are current in our SEC
reporting obligations. Until we are current in our SEC reporting obligations, we
will be precluded from registering any securities with the SEC. In addition, we
will not be eligible to use a "short form" registration statement on Form S-3
until we have been current in our periodic reporting obligations for twelve
months, which would increase the cost of raising capital through the issuance
and sale of equity.
8
If we fail to establish and maintain effective disclosure controls and
procedures and internal control over financial reporting, we may have material
misstatements in our financial statements and we may not be able to report our
financial results in a timely manner.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act"), management has conducted an assessment of our internal
control over financial reporting. Management has identified material weaknesses
in our internal control over financial reporting and concluded that our internal
control over financial reporting was not effective as of September 28, 2007. A
description of these material weaknesses, is included under the heading
"Controls and Procedures" in this Annual Report on Form 10-K.
These and other previously reported historical material weaknesses in our
internal control over financial reporting contributed to the restatements to our
consolidated financial statements for fiscal year 2004 and prior periods. Each
of our material weaknesses resulted in more than a remote likelihood that a
material misstatement would not be prevented or detected. As a result, we
performed extensive additional work to obtain reasonable assurance regarding the
reliability of our financial statements. Even with this additional work, given
the numerous material weaknesses identified, there is a risk of additional
errors not being prevented or detected which could cause us to fail to meet our
reporting obligations or result in additional restatements.
We have developed and are implementing specific measures for remedying all of
the identified material weaknesses and other deficiencies that existed at the
end of fiscal year 2007. There can be no assurance as to when the remediation
plan will be fully implemented. Until our remediation efforts are completed,
management will continue to devote significant time and attention to these
efforts. There will also continue to be an increased risk that we will be unable
to timely file future periodic reports with the SEC, that a default under our
debt agreements could occur as a result of further delays, and that our future
financial statements could contain errors that will be undetected.
A change in our relationship with our major customers could adversely affect our
revenues.
Historically, a limited number of customers has accounted for a substantial
portion of our revenues. If our relationship with one or more of our major
customers changes or ends, our sales could suffer, which could have a material
adverse effect on our business, financial condition and results of operations.
We expect that we will continue to rely on a limited number of major customers
for a substantial portion of our revenues in the future. During the fiscal years
ended September 28, 2007, September 29, 2006 and September 30, 2005, sales to
Wal-Mart accounted for approximately 23%, 22% and 21%, respectively. During the
fiscal years ended September 28, 2007, September 29, 2006 and September 30,
2005, sales to Sysco accounted for approximately 9%, 11% and 11%, respectively.
Currently, we do not have long-term supply agreements with a substantial number
of our customers, including Wal-Mart and Sysco. Our exclusive arrangement with
Sysco expired on December 31, 2006. There is no guarantee that the Sysco volumes
and revenues will continue as they were under the contract.
Cost increases in raw materials, energy or packaging materials could adversely
affect us.
Increases in the cost of raw materials (including durum wheat ingredients and
egg products), energy (including transportation costs) or packaging materials
could have a material adverse effect on our operating profit and margins unless
and until we are able to pass the increased cost along to our customers.
Historically, changes in sale prices of our pasta products have lagged changes
in our materials costs. Competitive pressures may also limit our ability to
raise prices or affect the timing or magnitude of such price increases in
response to increased raw materials, energy, packaging materials or other costs.
Accordingly, we do not know whether, or the extent to which, we will be able to
offset raw materials, energy, packaging materials or other cost increases with
increased product prices. In addition, a consequent increase in pricing could
cause a reduction in both industry and our own sales volumes.
The principal raw material in our products is durum wheat. The cost of durum
wheat represents a substantial portion of our total cost of goods sold. Durum
wheat is used almost exclusively in pasta production and is a narrowly traded,
cash-only commodity crop. Our commodity procurement and pricing practices are
intended to reduce the risk of durum wheat cost increases on our profitability,
but by forward procurement of our durum needs, we may temporarily affect our
ability to benefit from possible durum wheat cost decreases. In 2006, durum
prices in North America escalated from recent historical levels and then
stabilized at the higher pricing levels. In the third quarter of fiscal year
2007 and continuing into fiscal year 2008, durum prices sharply escalated and
have risen to price levels not previously experienced.
9
The supply and price of durum wheat in North America and on a global scale is
subject to market conditions and is influenced by several factors beyond our
control, including:
• general economic conditions;
• global supply and demand (including acres planted and harvest
quality);
• natural disasters, insects, plant diseases, and weather conditions;
• competition;
• trade relations;
• governmental programs and regulations;
• natural gas costs; and
• transportation and fuel cost.
While we procure durum directly from North Dakota, Montana, and Canada for our
Missouri and South Carolina plants, our Arizona plant is highly dependent on
durum from the southwest section of the U.S. Adverse market conditions,
including supply constraints caused by weather or other conditions could have a
material adverse effect on our operating profit and margins.
We also rely on the supply of plastic, corrugated and other packaging materials
(a significant portion of our cost of goods sold), which fluctuate in price due
to market conditions beyond our control.
We also rely on rail carriers for transportation of durum wheat to our milling
facilities, and ocean and truck freight for movement of our finished goods.
Beginning in fiscal 2008, fuel costs escalated sharply, impacting our
transportation costs for raw materials and finished goods. If we are unable to
offset these costs through increased efficiencies or pricing, we could
experience additional adverse impact on our business, financial condition or
results of operations.
If our customers curtail their operations, our financial performance may be
adversely affected.
Due to the highly competitive environment currently existing in the food
retailing and foodservice industries, some of our retail and foodservice
customers have experienced economic difficulty. In addition, the food retailing
industry has experienced consolidation. A number of our customers have been
forced to close stores and certain others have sought bankruptcy protection. If
a material number of our customers, or any one large customer, closed a
significant number of stores, filed for bankruptcy protection, or consolidated
operations with another company, we could be materially adversely affected.
A decline in demand for dry pasta could adversely affect our financial
performance.
We focus primarily on producing and selling dry pasta. We expect to continue
this primary focus. Because of our product concentration, any decline in
consumer demand or preference for dry pasta or any other factor that adversely
affects the pasta market could have a significant adverse effect on our
business, financial condition and results of operations. During the latter half
of fiscal year 2004 and continuing in fiscal year 2005, we experienced a
significant decline in demand for dry pasta products caused primarily by diet
driven changes to consumer preference, which adversely affected our
profitability. If demand were to materially decline again, we could experience
additional material adverse impact on our business, financial condition and
results of operations.
If aggregate production capacity in the U.S. pasta industry increases or is
under-utilized, we may have to adopt a more aggressive pricing strategy, which
could adversely affect our results of operations.
Our competitive environment depends on the relationship between aggregate
industry production capacity and aggregate market demand for pasta products.
Production capacity above market demand can have a material adverse effect on
our business, financial condition and results of operations.
10
If we are not able to compete effectively with established domestic and foreign
producers of pasta products, our financial performance may be adversely
affected.
The markets in which we operate are highly competitive. We compete against
numerous well-established national, regional, local and foreign companies in
every aspect of our business. Our customers may not continue to buy our products
and we may not be able to compete effectively with all of these competitors.
Some of our competitors have longer operating histories, and greater brand
recognition and financial and other resources than we do. Our direct competitors
include:
• U.S. pasta producers, including Barilla, Ebro Puleva/New World Pasta
Company, Dakota Growers Pasta Company, Philadelphia Macaroni Co. Inc.
and A. Zerega's Sons, Inc.;
• Foreign pasta producers, including Barilla, Rummo, De Cecco and Ebro
Puleva;
• U.S. food processors that produce pasta internally as an ingredient
for use in food products, including Kraft Foods, ConAgra, Campbell
Soup Company and Stouffers Corp.; and
• Foreign food processors, including Pasta Foods, food brokers and
Italian pasta manufacturers.
If we are unable to manage our production and inventory levels, our ability to
operate cost-effectively and to maintain high customer service standards may be
adversely affected.
Unanticipated fluctuations in demand make it difficult to manage production
schedules, plant operations and inventories. Also, customer inventory management
systems that are intended to reduce a retailer's inventory investment increase
pressure on suppliers like us to fill orders promptly and thereby shift a
portion of the retailer's inventory management cost to the supplier. Any
production of excess inventory to meet anticipated demand could result in
markdowns and increased inventory carrying costs. Any temporary plant
suspensions or shutdowns may cause inventory shortfalls. In addition, if we
underestimate the demand for our products, we may be unable to provide adequate
supplies of pasta products to retailers in a timely fashion, and may
consequently lose sales. If product availability issues result in our not
maintaining high customer service standards, our customers may not continue to
purchase our products.
Our need for substantial capital and our level of indebtedness may restrict our
operating and financial flexibility and could adversely affect our business,
financial condition or operating results.
Our business required a substantial capital investment, which we financed
through third-party lenders and public equity offerings. The amount of debt we
carry and the terms of our indebtedness could adversely affect us in several
ways, including:
• our ability to obtain additional financing in the future for working
capital, capital expenditures, and general corporate purposes,
including strategic acquisitions, may be impaired;
• our ability to use operating cash flow in other areas of our business
may be limited because a substantial portion of our cash flow from
operations may have to be dedicated to the payment of the principal
and interest on our indebtedness;
• the terms of such indebtedness restrict our ability to pay dividends;
• our ability to use operating cash flow in other areas of our business
or to reduce our level of indebtedness may be limited because a
substantial portion of our cash flow from operations may have to be
dedicated to the payment of on-going legal, accounting and other
professional fees;
• we may be more highly leveraged than some of our competitors, which
may place us at a competitive disadvantage;
11
• the level of debt we carry could restrict our corporate activities,
including our ability to respond to competitive market conditions, to
provide for capital expenditures beyond those permitted by our loan
agreements, or to take advantage of acquisition opportunities and grow
our business; and
• because substantially all of our assets are now pledged as collateral
for our debt, an uncured default could allow our lenders to sell our
assets to satisfy our debt obligations.
In the event that we fail to comply with the covenants in our current credit
facility, or any future loan agreements, there could be an event of default
under the applicable instrument. As a result, all amounts outstanding under our
current or any future debt instruments may become immediately due and payable.
We have used, and may continue to use, interest rate protection agreements
covering our variable rate debt to limit our exposure to variable rates.
However, we may not be able to enter into such agreements or such agreements may
adversely affect our financial performance. If interest rates were to increase
significantly or if we are unable to generate sufficient cash flow from
operations in the future, we may not be able to service our debt and may have to
refinance all or a portion of our debt, structure our debt differently, obtain
additional financing or sell assets to repay such debt. We may not be able to
affect such refinancing, additional financing or asset sales on favorable terms
or at all.
If existing anti-dumping measures imposed against certain foreign imports
terminate, we will face increased competition from foreign companies and our
profit margins or market share could be adversely affected.
Anti-dumping and countervailing duties on certain Italian and Turkish imports
imposed by the DOC in 1996 enable us and our domestic competitors to compete
more favorably against Italian and Turkish producers in the U.S. pasta market.
In September 2007, the U.S. International Trade Commission ("ITC") extended the
antidumping and countervailing duty orders for an additional five years, through
2011. If the anti-dumping and countervailing duty orders are repealed or foreign
producers sell competing products in the United States at prices lower than ours
or enter the U.S. market by establishing production facilities in the United
States, the result would further increase competition in the U.S. pasta market.
We may be unable to compete effectively with these competitors. This could have
a material adverse effect on our business, financial condition and results of
operations.
A write-off of our intangible and other long lived assets could adversely affect
our results of operations.
Our total assets reflect substantial intangible assets. The intangible assets
represent the value of our brands and trademarks resulting primarily from our
acquisitions of the Mueller's, Golden Grain/Mission, and seven other pasta
brands acquired from Borden Foods. We review our indefinite-lived assets for
impairment annually or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. When future operating
performance of one or more of our acquired brands falls significantly below
current or expected levels, we record an impairment expense. A determination
requiring the write-off of a significant portion of our intangible assets,
although a non-cash charge to operations, would have a material negative effect
on our results of operations and total capitalization. In fiscal year 2005, we
recorded brand impairment expenses of $88.6 million. In fiscal year 2006, we
recorded additional brand impairment of $1.0 million and sold brands resulting
in a net intangible write-off of approximately $4.7 million. There were no such
impairments in fiscal year 2007 due to improvements in demand, higher sales
prices and contribution margins. The balance of our brands and trademarks at
September 28, 2007 was $83.3 million.
Our total assets also reflect substantial long lived fixed assets for property,
plant and equipment. We review long-lived assets for impairment annually or
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. We evaluate recoverability of assets to be held
and used by comparing the carrying amount of an asset to future net cash flows
expected to be generated by the asset. 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. A determination requiring write off of a significant portion of
fixed assets, although a non-cash charge to operations, would have a material
negative effect on our results of operations and total capitalization. At
September 28, 2007 and September 29, 2006, long lived fixed assets totaled
$316.1 million and $324.5 million, respectively.
12
Because we produce food products, we may be subject to product liability claims
and have costs related to product recalls.
We may need to recall some of our products if they become adulterated, infested,
misbranded or mislabeled. We may also be subject to claims or lawsuits if the
consumption of any of our products causes injury. A widespread product recall or
a significant product liability judgment against us could cause products to be
unavailable for a period of time and result in a loss of consumer confidence in
our food products and could have a material adverse effect on our business. We
carry insurance against most of these matters; however, our insurance coverage
may not be adequate. The cost of commercially available insurance has increased
significantly and such insurance may not be available in the future at prices
that we can afford. In addition, because we often indemnify our customers for
costs related to product recalls, we could be subject to additional expenses and
any significant expenses not covered by insurance would negatively impact our
operating results.
The loss of the services of one or more members of our senior management team
could have a material adverse effect on our business, financial condition and
results of operations.
Our operations and prospects depend in large part on the performance of our
senior management team. We may not be able to find qualified replacements for
any of these individuals if their services were no longer available. We do not
currently maintain key person life insurance on any member of our senior
management team. While we maintain a Severance Plan and a long-term equity
program for employees, we do not provide employment agreements to our executive
officers, except for the agreement with Mr. John P. Kelly our President and
Chief Executive Officer.
If our competitors develop or acquire advanced technology, our financial
performance may be adversely affected.
If other pasta producers acquire equipment similar to our equipment or more
advanced equipment that provides greater efficiencies, what we believe to be our
current competitive advantage might be diminished or eliminated, potentially
causing pressure on profit margins or reducing our market shares. Erosion of
this advantage could have a material adverse effect on our business, financial
condition and results of operations.
Disruptions in transportation of raw materials or finished products or increases
in transportation costs could adversely affect our financial results.
Durum wheat is shipped by rail to our production facilities in Missouri and
South Carolina. We have one rail contract that will expire in July 2008. For
other rail carriers that we utilize, we negotiate annual pricing arrangements or
are subject to applicable tariff rates. There is no assurance that the
transportation costs will remain the same under these arrangements when renewed
as rail carriers have experienced recent fuel cost inflation which they are
passing on to their customers. We also have a rail contract to ship semolina,
milled and processed at the Missouri facility, to our South Carolina facility.
An extended interruption in our ability to ship durum wheat by railroad to the
Missouri or South Carolina plants, or semolina to our South Carolina facility,
could cause us to incur significantly higher costs and longer lead times
associated with the distribution of our pasta to our customers. If we are unable
to provide adequate supplies of pasta products to our customers in a timely
fashion due to such delays, we may subsequently lose sales. This could have a
material adverse effect on our business, financial condition and results of
operations. In addition, the inflationary pressure of higher fuel costs and
continued increases in transportation costs of our finished products, could have
a material adverse effect on our business, financial condition and results of
operations.
Our international business may not be successful.
We operate a pasta-producing facility in Italy. We do not have the same
competitive scale of operations or historic relationships with the European
trade or European supply base in these overseas markets that we do in the U.S.
There are several risks inherent in doing business on an international level.
These risks include:
• export and import restrictions;
13
• tariffs and other trade barriers;
• difficulties in staffing and managing foreign operations;
• managing regulatory requirements across multiple foreign
jurisdictions;
• fluctuations in currency exchange rates and inflation risks;
• seasonal fluctuations in business activity in other parts of the
world;
• changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
• potentially adverse tax consequences; and
• difficulty in securing or transporting raw materials or transporting
finished product.
Any of these risks could adversely impact the success of our international
operations. If our international revenues are inadequate to offset the expense
of maintaining foreign operations, our business and results of operations could
be harmed.
Our competitive position and financial results and condition could be adversely
impacted if we are unable to protect our intellectual property.
Our brand trademarks are important to our success and our competitive position.
Our actions to establish and protect our brand trademarks and other proprietary
rights may be inadequate to prevent imitation of our products by others.
Moreover, we may face claims by third parties that we violate their intellectual
property rights. Any litigation or claims against us, whether or not successful,
could result in substantial cost, divert management's time and attention from
our core business, significantly harm our reputation, our business and results
of operations.
A failure to comply with applicable laws and regulations could adversely affect
our business.
We are subject to laws and regulations administered by federal, state, and other
governmental agencies relating to the operation of our production facilities,
the production, packaging, labeling and marketing of our products and pollution
control, including air emissions. Any determination by the FDA or other agencies
that our facilities are not in compliance with applicable regulations could
interfere with the continued manufacture and distribution of the affected
products and, in some cases, might also require the recall of previously
distributed products. Any such determination could have a material adverse
effect on our business, financial condition and results of operations.
As a result of our voluntary disclosure to the DOC of incorrect data previously
reported by us to the DOC in connection with the DOC anti-dumping proceeding
regarding pasta imported from Italy through our Italian subsidiary, Pasta Lensi,
S.r.l., the DOC has initiated a change circumstances review of Pasta Lensi and
has reinstated Pasta Lensi in the existing antidumping order at a 45.6% cash
deposit rate. The preliminary determination applies, on a prospective basis, to
all imports of subject products from and after February 22, 2008. A cash deposit
rate of 45.6% would have a significant adverse impact to our working capital
position. We have appealed this determination. At the time of our disclosure to
the DOC, we also provided this information to the DOJ. Our disclosure of such
information could result in additional actions by the DOC and/or the DOJ taking
action that could have a material adverse effect on us. Additional information
is provided in this Annual Report on Form 10-K under the heading "Legal
Proceedings - Department of Commerce matter."
Under environmental laws, we are exposed to liability primarily as an owner and
operator of real property, and as such, we may be responsible for the clean-up
or other remediation of contaminated property. Environmental laws and
regulations can change rapidly and we may become subject to more stringent
environmental laws and regulations in the future that may be retroactively
applied to earlier events. In addition, compliance with more stringent
environmental laws and regulations could involve significant capital
investments. Additional information is provided in this Annual Report on Form
10-K under the heading "Business - Governmental Regulation; Environmental
Matters."
14
The suspension and delisting of our common stock from the NYSE could adversely
affect the value and liquidity of our common stock.
As a result of the delay in filing this Annual Report on Form 10-K and other SEC
periodic and annual reports, our common stock has been delisted from the NYSE.
We currently are quoted under the symbol ("AITP") on the Pink Sheets, an
electronic quotation service for securities traded over-the-counter. As a
result, there may be significantly less liquidity in the market for our common
stock. In addition, our ability to raise additional necessary capital through
equity financing, and attract and retain personnel by means of equity
compensation, may be impaired. Furthermore, we may experience decreases in
institutional and other investor demand, analyst coverage, market-making
activity and information available concerning trading prices and volume, and
fewer broker-dealers may be willing to execute trades with respect to our common
stock. The delisting may also decrease the attractiveness of our common stock
and cause the trading volume of our common stock to decline, which could result
in a decline in the market price of our common stock.
We intend to seek to be re-listed on a securities exchange when we become
current in our SEC reporting. There can be no assurance whether we will satisfy
the standards for listing on an exchange or that an exchange will approve our
listing. Nor can there be any assurance at this time when a re-listing would
occur. Continuing to be quoted only on Pink Sheets could adversely affect the
trading market - and potentially the market price - of our common stock.
Our ability to pay dividends to shareholders is restricted by factors including
contractual provisions and our financial performance.
We have not paid dividends since June 2005 and do not expect to pay dividends in
the foreseeable future. We anticipate that future free cash flow will be used
principally to fund interest expense and repayment of debt. Payment of dividends
is restricted by provisions in our credit facility.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Production Facilities: As of September 28, 2007, we owned pasta production
plants located in Excelsior Springs, Missouri, Columbia, South Carolina,
Tolleson, Arizona, and Verolanuova, Italy. The Kenosha, Wisconsin facility was
permanently closed in April 2006 and sold in August 2006 with two production
lines from the facility being moved to our South Carolina plant. Our U.S.
facilities are strategically located to support North American distribution of
our products and benefit from the rail and interstate highway infrastructure
near each facility. As of September 28, 2007, our facilities had combined annual
production capacity of approximately 940 million pounds of pasta. In addition,
we occasionally purchase pasta products from other manufacturers for resale.
Distribution Centers: We own the distribution centers adjoining our Missouri,
South Carolina, and Arizona plants. In addition, as of September 28, 2007, we
leased space in public warehouses located in Missouri and Arizona.
The warehousing operations at each of our distribution centers in Missouri,
South Carolina and Arizona, including our leased facility in Missouri, are
outsourced under a long-term agreement with OHL. OHL specializes in warehouse
and logistics management services. In addition, OHL provides traffic and freight
management services to us under a long term contract, thereby effectively
providing for the shipment of our finished products from our facilities.
Our credit facility, executed on March 13, 2006 and last amended December 27,
2007, and our prior credit facility, granted a collateral interest to our
lenders in substantially all of our tangible and intangible domestic assets.
ITEM 3. LEGAL PROCEEDINGS
Federal Securities, Shareholder Derivative Litigation
Since August, 2005, a number of substantially similar class action lawsuits have
been filed and consolidated into a single action in the United States District
Court for the Western District of Missouri styled In re American Italian
15
Pasta Company Securities Litigation (Case No. 05-CV-0725-W-ODS). The
consolidated amended complaint names us as a defendant and certain of our former
and current officers and directors, and our independent registered public
accounting firm, Ernst & Young LLP. It generally alleges that the defendants
made public statements concerning our financial results that were false and
misleading. The plaintiffs seek unspecified monetary damages for alleged
violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5
promulgated thereunder, and alleged violations of Section 20(a) of the
Securities Exchange Act of 1934. The consolidated amended complaint also
asserted purported shareholder derivative claims against various of our current
and former officers and directors for breaches of their fiduciary duties and
unjust enrichment, against certain of our former officers for violation of the
Sarbanes-Oxley Act, and against Ernst & Young LLP for professional negligence,
accounting malpractice, and aiding and abetting breaches of fiduciary duty.
These allegations generally related to our accounting practices and financial
reporting, as well as claimed improper insider trading and the claimed improper
award of bonuses to certain of our officers and directors. The court
subsequently dismissed the derivative claims. The case has been certified as a
class action on behalf of all purchasers of our common stock on or after January
23, 2002, and who held shares on August 9, 2005.
By a stipulation of settlement with us and our named former and current officers
and directors ("settling defendants"), executed on October 26, 2007 and filed
with the Court on October 29, 2007, lead counsel for plaintiffs and settling
defendants agreed to settle the consolidated action. On February 12, 2008, the
Court gave final approval to the settlement. The settlement of the federal
securities class action lawsuit was for $25 million, comprised of $11 million in
cash, to be provided by our insurers, and $14 million in our common shares.
Under the terms of the settlement, on March 27, 2008, class counsel received
527,903 common shares in satisfaction of the Court approved fee award. The class
will receive approximately 930,000 common shares, subject to adjustment upward
or downward, based upon the Company's stock price as provided in the stipulation
of settlement. The settlement was recorded in the fourth quarter of fiscal year
2005.
In November 2005, a shareholder derivative action styled Haag v. Webster, et al.
(Case No. 05-CV-33137) was filed in the Circuit Court of Jackson County,
Missouri. The petition names as defendants certain of our former officers and
directors and our independent registered public accounting firm, Ernst & Young
LLP. We are named as a nominal defendant. The petition alleges that the
defendants are liable to us for breaches of fiduciary duties and aiding and
abetting such breaches, corporate waste, gross mismanagement, unjust enrichment,
and abuse of control based upon our accounting practices and financial
reporting; that certain former and current officers and directors are liable for
breaches of fiduciary duties for insider selling and misappropriation of
information; and that Ernst & Young is liable for professional negligence and
accounting malpractice, aiding and abetting breaches of fiduciary duty, and
breach of contract. The petition seeks equitable relief and unspecified
compensatory and punitive damages. The proposed settlement requires the adoption
of certain governance reforms by the Company and payment of $1.5 million in
attorney's fees and costs to counsel for the plaintiff, which payment will be
made under our insurance policies. The settlement was recorded in the first
quarter of fiscal year 2006.
On September 6, 2006, an action styled Chaiet v. Allen, et al. (Case No.
06-744-CV-W-DW) was filed in the United States District Court for the Western
District of Missouri. The complaint asserts claims against certain of our former
and current officers and directors for breaches of their fiduciary duties
relating to our accounting practices and financial reporting. Plaintiff also
asserts claims on behalf of a putative class against our current directors for
failing to schedule or hold an annual meeting for 2006. We are named as a
nominal defendant. The complaint seeks unspecified monetary damages on our
behalf and an order requiring that an annual meeting be scheduled and held. The
defendants have moved to dismiss this lawsuit as well. On February 12, 2007, the
court stayed all future proceedings in the matter until forty-five days after we
issue restated financial results, and required us to provide monthly reports
regarding the status of its restatement process. On March 13, 2008, we reached
an agreement, in principle, subject to court approval, to settle this action on
a consolidated basis with the Haag action.
On March 7, 2007, a suit styled Zaleon v. American Italian Pasta Company (C.A.
No. 2775-N) was filed in the Delaware Chancery Court against us alleging that no
annual meeting of shareholders had been held since February 7, 2005, and
requesting that we be compelled to convene an annual meeting. Proceedings in
that matter are currently stayed by agreement of the parties. The agreement, in
principle, to settle the other two derivative actions will resolve this action.
16
SEC and DOJ Investigations
Since July 2005, we have been in communication with the staff of the Enforcement
Division of the SEC about the matters under investigation by our Audit
Committee. In late July 2005, the SEC staff issued a voluntary request to us for
a wide range of documents relating to, among other things, our accounting
practices, financial reporting and other public disclosures, 2004 restructuring
program, internal control weaknesses identified in our prior SEC filings, and
compensation and benefits information for certain persons employed by or
associated with us during the time period under investigation by the Audit
Committee.
On January 31, 2006, as part of a formal, non-public investigation, the SEC
staff issued a subpoena to us, expressly incorporating its earlier document
requests and requesting additional documents and information concerning, among
other things, actual or potential errors in our financial statements, budgeting
process, communications with investors, and compensation for and securities
transactions by certain persons employed by or associated with us during the
time period under investigation by the Audit Committee. Since that time, the SEC
staff has issued additional subpoenas to us, seeking additional documents,
testimony, and information relating to the same or similar subject matters.
Representatives of the DOJ have been coordinating with the SEC staff in this
investigation.
We are cooperating with these investigations and have provided information to
the SEC staff and the DOJ in response to the subpoenas and requests. We have
had, and are continuing to have, discussions with the SEC staff, and separately
with the DOJ, regarding the conclusion of their investigation activities and of
their respective views of appropriate bases on which to reach mutually
acceptable settlements. Such settlements could result in a Deferred Prosecution
Agreement, which could include the assignment of a corporate monitor, continued
cooperation with any ongoing investigations and/or a monetary fine. Due to the
status of ongoing discussions with the DOJ and SEC staff, the Company cannot
estimate a range of possible loss that could result from a monetary fine, if
any. There can be no assurance that any settlement would not have a material
adverse effect on our business, financial condition, results of operations or
cash flows. We have been cooperating with these investigations.
Department of Commerce Matter
In 1996, an investigation by the International Trade Administration of the DOC
revealed that 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. The International
Trade Commission ("ITC") subsequently determined that the unfair trade practices
caused or would cause material injury to U.S. manufacturers. As a result, the
ITC imposed anti-dumping duties (the "AD Order") and countervailing duties (the
"CV Order") on certain imported pasta from Italy and Turkey (collectively, the
"AD/CV Orders"). In 2001, the AD/CV Orders were extended five years through
2006. In September 2007, the ITC extended the AD/CV Orders for another five
years through 2011. Under the AD/CV Orders, U.S. importers of certain pasta from
Italian and Turkish producers are assessed anti-dumping and countervailing
duties at rates determined by the DOC for the relevant foreign producer. Each
foreign producer may undergo an annual administrative review which may result in
an increase or decrease of the producer's rate.
During its ongoing analysis of financial matters, we reviewed transactions
reported to the DOC for the period July 1, 2002 through June 30, 2003 in the
antidumping proceeding on pasta imported from Italy. Based on the data reported
by us and our Italian subsidiary, Pasta Lensi, S.r.l., the DOC revoked the AD
Order with respect to Pasta Lensi. During our investigation, information came to
our attention that certain data reported to the DOC was incorrect and as a
result, Pasta Lensi may not have been eligible for revocation of the AD Order.
We disclosed the issue to the DOC and simultaneously, we provided this
information to the DOJ, which requested further information on this matter. As a
result of our disclosure to the DOC, it published notice on February 22, 2008 in
the Federal Register of its preliminary determination to reinstate Pasta Lensi
in the existing antidumping duty order at a cash deposit rate of 45.6%. The
preliminary determination applies, on a prospective basis, to all imports of
subject products from and after February 22, 2008. A cash deposit rate of 45.6%
would have a significant adverse impact to our working capital position. We have
appealed this determination. We have substantially mitigated the impact of this
order by changing our ingredient to organic semolina in March 2008, thereby
manufacturing products for import into the U.S. that are exempt from the
antidumping duty order. Based on our review, we do not believe this order will
have a material adverse effect on our financial condition.
17
Arbitration
Until the April 2006 shutdown of our Kenosha, Wisconsin facility, we purchased
semolina for that plant from Horizon Milling, LLC (a joint venture between Cenex
Harvest States and Cargill) under the terms of a long-term supply agreement. In
August of 2006, we advised Horizon Milling, LLC ("Horizon") that the economic
and business circumstances had changed since commencement of the supply
agreement, that we were invoking the material adverse effect provisions of the
supply agreement and that we had sold the facility. Horizon has made a demand
for a purchase deficiency of $0.5 million from the contract year ending
September 30, 2006 and notified us that Horizon believes additional purchase
deficiencies of $2.1 million will be owed through September 2009, and filed a
claim in arbitration. An arbitration hearing was held on November 13 and 14,
2007. On December 21, 2007, the arbitrator ruled in favor of Horizon Milling,
LLC. Under the ruling, we are obligated to satisfy our minimum purchase
requirements for the purchase deficiencies for fiscal year 2006 and 2007
totaling $1.2 million (which were paid in the second quarter of fiscal year
2008) and annual purchase deficiencies for fiscal years 2008 and 2009 totaling
$1.4 million. The annual purchase deficiencies will be due at the conclusion of
each respective fiscal year. As a result, we recorded a $2.6 million liability
in fiscal year 2006 related to the cancellation of the supply agreement when we
permanently shutdown our Kenosha facility.
From time to time and in the ordinary course of our business, we are the subject
of government investigations or audits and named as a defendant in legal
proceedings related to various other issues, including worker's compensation
claims, tort claims and contractual disputes.
The matters described above are ongoing and their ultimate resolution may impact
our financial results for the period in which they are resolved, and may have a
material adverse effect upon our business or consolidated financial statements.
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 fiscal year 2007.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Class A Convertible Common Stock, par value $0.001 per share (the "common
stock") traded on the NYSE under the symbol "PLB" until the opening of trading
on December 20, 2006, at which time the NYSE suspended trading in shares of our
common stock due to our inability to file with the SEC by December 31, 2006 our
Annual Report on Form 10-K. Effective on the opening of trading on December 20,
2006, our common stock was eligible to be quoted on the Pink Sheets, an
electronic quotation service for securities traded over-the-counter, under the
symbol "AITP" or "AITP.PK." On April 23, 2007, our common stock was delisted
from the NYSE.
The range of the high and low prices per share of the common stock for fiscal
year 2007 and 2006 was as follows:
Year Ended Year Ended
September 28, 2007 September 29, 2006
High Low High Low
First Quarter $11.25 $ 7.06 $10.74 $ 5.83
Second Quarter $11.02 $ 8.95 $7.20 $ 3.43
Third Quarter $10.85 $ 9.60 $9.04 $ 6.44
Fourth Quarter $10.00 $ 7.80 $8.47 $ 7.51
18
Holders
As of June 2, 2008, there were 267 shareholders of record of our common stock.
No shares of our 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
on Form 10-K.
Dividends
We declared and paid dividends on our common stock in the amount of $10.3
million during fiscal year 2005 (paid in November 2004, March 2005, and June
2005). We have not declared or paid dividends since June 2005.
For the foreseeable future, we intend to use our earnings to provide funds for
the operation of our business and for the repayment of indebtedness. Our current
credit facility (executed on March 13, 2006 and last amended on December 27,
2007) contains limitations on the payment of dividends. We do not expect to pay
dividends in the foreseeable future. We had no restricted retained earnings at
September 28, 2007.
Securities Authorized for Issuance Under Equity Compensation Plans
Additional information on our equity compensation plans is available under the
heading "Security Ownership of Certain Beneficial Owners and Management" in this
Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
During fiscal year 2007 we purchased the following shares in connection with the
withholding of taxes upon vesting of restricted stock.
First Quarter Total Number of Average Price
Fiscal Year 2007 Shares Purchased Paid Per Share
- ---------------- ---------------- --------------
September 30 - October 27 - $ -
October 28 - November 24 - $ -
November 25 - December 29 7,198 $ 8.95
-------- -------
7,198 $ 8.95
======== =======
Second Quarter Total Number of Average Price
Fiscal Year 2007 Shares Purchased Paid Per Share
- ---------------- ---------------- --------------
December 30 - January 26 795 $ 9.41
January 27 - February 23 198 $ 10.78
February 24 - March 30 5,945 $ 10.50
-------- -------
6,938 $ 10.38
======== =======
Third Quarter Total Number of Average Price
Fiscal Year 2007 Shares Purchased Paid Per Share
- ---------------- ---------------- --------------
March 31 - April 27 - $ -
April 28 - May 25 79 $ 10.50
May 26 - June 29 245 $ 10.55
-------- -------
324 $ 10.54
======== =======
Fourth Quarter Total Number of Average Price
Fiscal Year 2007 Shares Purchased Paid Per Share
- ---------------- ---------------- --------------
June 30 - July 27 - $ -
July 28 - August 24 4,995 $ 6.33
August 25 - September 28 - $ -
-------- -------
4,995 $ 6.33
======== =======
19
On October 4, 2002, the Company's Board of Directors authorized up to $20
million to implement a common stock repurchase plan. There were no purchases
under the plan in fiscal year 2007. There is $7.9 million available under the
Common Stock repurchase plan.
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the fiscal years ended
September 28, 2007, September 29, 2006 and September 30, 2005, and the selected
balance sheet data as of September 28, 2007 and September 29, 2006 are derived
from our Consolidated Financial Statements including the Notes thereto. This
data should be read in conjunction with the Consolidated Financial Statements,
related notes, and other financial information included herein. The following
selected statement of operations data for the fiscal years ended October 1, 2004
and October 3, 2003, and the selected balance sheet data as of September 30,
2005, October 1, 2004 and October 3, 2003, have been derived from our financial
statements not included herein.
FISCAL YEAR ENDED
------------------------------------------------------------------------------------
Sept. 28, 2007 Sept. 29, 2006 Sept. 30, 2005 Oct. 1, 2004 Oct. 3, 2003
-------------- -------------- -------------- ------------ -------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues(1) $ 398,122 $ 367,023 $ 364,159 $ 392,702 $ 399,367
Cost of goods sold 308,819 284,777 300,151 320,851 304,228
--------- --------- ------------ ----------- ----------
Gross profit 89,303 82,246 64,008 71,851 95,139
Selling and marketing expense 21,503 22,871 20,342 27,155 21,649
General and administrative expense (2) 33,548 35,459 23,198 21,277 17,517
Litigation settlement (3) - - 14,000 - -
Impairment charges to brands and trademarks - 998 88,550 132 -
Loss on disposition of brands and trademarks (4) - 4,708 - - -
(Gains) losses related to long-lived assets (5) (109) 22,268 9,759 1,099 41
Provision for (recovery from) restructuring
program (6) - - (554) 2,868 -
Acquisition and plant start-up expenses (7) - - - 240 4,047
--------- --------- ------------ ----------- ----------
Operating profit (loss) 34,361 (4,058) (91,287) 19,080 51,885
Interest expense, net 29,421 29,509 16,234 10,990 12,937
Other (income) expense (8) (245) (913) ( 3,544) 2,518 6,871
--------- --------- ------------ ----------- ----------
Income (loss) before income taxes 5,185 (32,654) (103,977) 5,572 32,077
Income tax provision (benefit) (163) (2,241) (3,730) 1,513 11,357
--------- --------- ------------ ----------- ----------
Net income (loss) (9) $ 5,348 $(30,413) $ (100,247) $ 4,059 $ 20,720
========= ========= ============ =========== ==========
Net income (loss) per common share (basic) $ 0.29 $ (1.65) $ (5.49) $ 0.22 $ 1.16
========= ========= ============ =========== ==========
Weighted-average common shares outstanding 18,673 18,386 18,247 18,043 17,833
========= ========= ============ =========== ==========
Net income (loss) per common share
(assuming dilution) $ 0.28 $ (1.65) $ (5.49) $ 0.22 $ 1.12
========= ========= ============ =========== ==========
Weighted-average common shares outstanding
(including dilutive securities) 18,951 18,386 18,247 18,562 18,508
========= ========= ============ =========== ==========
Cash dividend declared per common share $ - $ - $ 0.5625 $ 0.3750 $ -
========= ========= ============ =========== ==========
OTHER FINANCIAL DATA (AT END OF PERIOD):
Cash and temporary investments $ 16,635 $ 22,805 $ 11,911 $ 2,712 $ 2,301
Working capital $ 55,505 $ 54,285 $ 58,971 $ 56,106 $ 67,476
Plant, property and equipment - net $ 316,109 $ 324,464 $ 360,740 $ 384,327 $ 387,211
Brand and trademarks $ 83,282 $ 82,772 $ 88,750 $ 178,736 $ 177,258
Total assets $ 527,963 $ 531,969 $ 571,926 $ 688,311 $ 708,755
Long-term debt, less current maturities $ 240,000 $ 260,500 $ 276,006 $ 286,795 $ 300,778
20
Stockholders' equity $ 171,918 $ 160,336 $ 186,026 $ 293,112 $ 290,693
Total debt/total capitalization 58% 62% 60% 50% 51%
Depreciation and amortization expense (10) $ 23,409 $ 24,895 $ 25,132 $ 24,956 $ 22,868
Amortization of deferred debt issuance cost (11) $ 1,265 $ 4,216 $ 2,051 $ 1,026 $ 838
- -------------------------------------------
(1) On October 28, 2000, the U.S. Government enacted the Continued Dumping and
Subsidy Offset Act of 2000 (the "CDSOA") 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,
revenues in fiscal years 2003, 2004, 2005 2006 and 2007 include payments
received from the Department of Commerce of $2.3 million, $1.5 million, $1.0
million, $2.6 million and $3.0 million, respectively, as our calculated share,
based on tariffs liquidated by the government during these periods on Italian
and Turkish imported pasta. Effective October 1, 2007, the CDSOA was repealed,
resulting in the discontinuation of future distributions to affected domestic
producers for duties assessed after such date.
(2) Included in general and administrative expense are costs related to civil
lawsuits and governmental investigations involving the Company, several of our
current and former directors and several of our former executive officers. We
continue to incur significant expense on behalf of the Company and on behalf of
the several individuals to whom we have indemnification obligations. In
addition, we continue to incur significant expense related to the completion of
our historical audits and SEC reporting requirements. The expenses we have
incurred through the fiscal year ended September 28, 2007, in connection with
all of these matters, including those associated with our restatement and
pending legal matters, net of insurance proceeds, were $2.5 million in fiscal
year 2005, $16.1 million in fiscal year 2006 and $13.3 million in fiscal year
2007 and are reflected in our Statement of Operations under the caption general
and administrative expense.
(3) Litigation settlement relates to our settlement of the federal securities
class action lawsuit. The settlement is for $25 million, comprised of $11
million in cash, to be provided by our insurers, and $14 million in our common
shares. The number of shares issued in connection with the settlement is
contingent upon the stock price at the date the court enters an order of
distribution of the common shares. The settlement was recorded in the fourth
quarter of fiscal year 2005.
(4) Loss on disposition of brands and trademarks relate to the sale of our Mrs.
Leepers and Eddie's Spaghetti brands in the second quarter of fiscal year 2006.
(5) Losses related to long-lived assets include the sale of our Kenosha plant in
fiscal year 2006 and certain pasta manufacturing and packaging equipment that
were disposed and excess equipment written down to fair market value principally
in fiscal years 2006, 2005 and 2004.
(6) Provision for (recovery from) restructuring expense relates to our
Restructuring and Rightsizing program and includes employee severance and
termination benefits, lease costs, supply agreement costs and other
miscellaneous costs, discussed in Item 1 and in Note 5 to the Company's
Consolidated Financial Statements, included in Item 8. In fiscal year 2005, we
recognized $0.6 million benefit related to the reversal of a previously
established restructuring reserve due to the early reactivation of the Kenosha
plant which was not contemplated at the time the restructuring reserve was
established.
(7) For fiscal year 2003, includes incremental costs associated with brand
acquisitions (primarily Golden Grain) of $2.7 million, international
acquisitions of $0.5 million and initial operating expenses related to our new
Arizona facility of $0.8 million, for a total of $4.0 million.
(8) For fiscal years prior to 2007, the amount primarily reflects foreign
currency transaction gains/losses on certain forward exchange contracts and
euro-denominated debt.
(9) The effect of adopting SFAS 123R in fiscal year 2006 was an increase to
expense of $1,761,000. The effect on basic and diluted earnings per share was
$0.10. There is no tax impact to this charge as deferred income tax benefits
otherwise provided are offset by the valuation allowances.
(10) Reflects aggregate depreciation and amortization expense of property, plant
and equipment and other amortizable assets excluding deferred debt issuance
costs (see note 11 below). Depreciation and amortization is reflected in our
Statement of Operations under the captions cost of goods sold and general and
administrative expense.
(11) Reflects amortization of deferred debt issuance costs, which are shown in
our Statement of Operations under the caption interest expense. The $4.2 million
in fiscal year 2006 includes $1.3 million related to the write-off of the
unamortized balance of deferred debt issuance costs, as well as $1.3 million of
amendment fees that were incurred, prior to the refinancing of our credit
facility in March 2006.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with "Selected Financial Data," our
consolidated historical financial statements and the notes to those statements
that appear elsewhere in this report. Our discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and
the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those
set forth under "Note Concerning Forward Looking Information" and "Risk Factors"
elsewhere in this report.
As more fully described in Footnote 3 to the Audited Consolidated Financial
Statements included in our previously filed Annual Report on Form 10-K for the
fiscal year ended September 30, 2005, we restated our previously issued audited
consolidated financial statements for fiscal years 2001 through 2004 and our
unaudited consolidated financial statements for the first two quarters of fiscal
year 2005.
The following table sets forth certain data from our Consolidated Statements of
Operations, expressed as a percentage of revenues, for each of the periods
presented.
FISCAL YEAR ENDED
------------------------------------------------------------------
September 28, 2007 September 29, 2006 September 30, 2005
------------------ ------------------ -------------------
Revenues:
Retail 76.5% 73.1% 72.9%
Institutional 23.5 26.9 27.1
------- ------- -------
Total revenues 100.0 100.0 100.0
Cost of goods sold 77.6 77.6 82.4
------- ------- -------
Gross profit 22.4 22.4 17.6
Selling and marketing expense 5.4 6.2 5.6
General and administrative expense 8.4 9.7 6.4
Litigation settlement - - 3.8
Impairment charges to brands and trademarks - 0.2 24.3
Loss on disposition of brands and trademarks - 1.3 -
(Gains) losses related to long-lived assets - 6.1 2.7
Recovery from restructuring expense - - (0.2)
------- ------- -------
Operating profit (loss) 8.6 (1.1) (25.0)
Interest expense, net 7.4 8.0 4.5
Other (income) expense (0.1) (0.2) (1.0)
------- ------- -------
Income (loss) before income taxes 1.3 (8.9) (28.5)
Income tax provision (benefit) - (0.6) (1.0)
------- ------- -------
Net income (loss) 1.3% (8.3)% (27.5)%
====== ======= =======
Overview
We began operations in 1988. We believe we are the largest producer and marketer
of dry pasta in North America. We believe our vertically-integrated facilities
and highly efficient production facilities focused primarily on specific market
segments and our highly skilled workforce make us an efficient company and
enable us to produce high-quality pasta at competitive costs. We believe that
the combination of our low cost structure, our product strategy of offering
branded, private label, imported and specialty products, our scalable production
facilities and our key
22
customer relationships create competitive advantages. We generate revenues in
two customer markets: retail and institutional. Retail market revenues include
the sales of our pasta products to customers who resell the pasta in retail
channels (including sales to grocery, club, mass merchant and discount stores)
and encompasses sales of our branded, private label, imported and specialty
products. These revenues represented 76.5% and 73.1% of our total revenue for
the years ended September 28, 2007 and September 29, 2006, respectively.
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 (meals away from home) market. It also includes revenues from
sales to government agencies and other customers that we pursue periodically.
The institutional market represented 23.5% and 26.9% of our total revenue for
the years ended September 28, 2007 and September 29, 2006, respectively.
Average sales prices for our non-branded products vary depending on
customer-specific packaging and raw material requirements, product manufacturing
complexity and other service requirements. Average prices for our branded
products are also based on competitive market factors. 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 higher than selling prices in
our other business units, including private label. Revenues are reported net of
cash discounts, product returns, and promotional and slotting allowances. We
have several arrangements with institutional customers that provide for the
"pass-through" of direct material cost and certain other cost changes as pricing
adjustments. The pass-throughs are generally limited to actual changes in cost
and, as a result, impact margins in periods of changing costs and prices. The
pass-throughs are generally effective 30 to 90 days following such cost changes
and thereby 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 decreases in raw material costs. Our
cost of goods sold consists primarily of raw materials, packaging, manufacturing
costs (including depreciation) and distribution (including transportation)
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. Since mid 2006, durum prices have increased
substantially and we anticipate these costs to remain at or above these
historically high levels for the foreseeable future. We manage some of our durum
wheat cost risk through durum wheat cost "pass-through" arrangements in
long-term contracts and other non-contractual arrangements with our customers as
discussed above and advance purchase contracts for durum wheat which are
generally a few months. For our non pass-through customers, we seek price
increases to cover our costs. We seek 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. Depreciation expense is a component of
inventory cost and cost of goods sold.
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 2 to our consolidated financial statements,
the preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting periods. On an ongoing basis, our management evaluates its
estimates and judgments, including those related to the impairment of long-lived
and intangible assets, the method of accounting for share-based compensation,
and the estimates used to record allowances for doubtful accounts, reserves for
slow-moving, damaged and discontinued inventory, reserves for obsolete spare
parts, promotional allowances, income tax accruals and derivatives. Our
management bases its estimates and judgments on 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 2 to
our consolidated financial statements for a complete listing of our significant
accounting policies. Our most critical accounting policies are described below.
Impairment Testing of Intangible Assets: In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," we do not amortize the cost of intangible assets with indefinite lives,
such as our brands and trademarks. 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. We completed
23
an impairment review of brands in the third quarter of fiscal year 2005 based on
impairment indicators of significant year-to-date declines in certain brand
revenues during the fiscal year. We subsequently completed our annual review of
fiscal year 2005 based on the 2006 fiscal year business plan and our forecast
available in the fourth quarter of fiscal 2005. The business plan and forecasts,
which included new information and marketing changes, resulted in the additional
brand impairment. These impairment tests are impacted by judgments as to future
cash flows and other considerations. 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. The results of the tests determined that our brand portfolios
were impaired. Based on those tests we recorded impairment charges of $29.9
million in the third quarter and $58.7 million in the fourth quarter of fiscal
year 2005. We completed our annual review of fiscal year 2006 based on the 2007
fiscal year business plan and our forecast available in the fourth quarter of
fiscal 2006. We recorded impairment charges of $1.0 million in the fourth
quarter of fiscal year 2006. We completed our annual review of fiscal year 2007
based on the 2008 fiscal year business plan and our forecast available in the
fourth quarter of fiscal 2007. Based on the review, no impairment charges were
recorded in fiscal year 2007. Future events could cause our management to
conclude that impairment indicators exist and that the value of intangible
assets is further impaired.
Long-Lived Assets: In accordance with SFAS No. 144, "Accounting For Impairment
or Disposal of Long-lived Assets," we review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. We evaluate recoverability of assets to be held
and used by comparing the carrying amount of an asset to future net cash flows
expected to be generated by the asset. 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 their carrying amount or fair value
less cost to sell. In fiscal year 2006, we decided to close the Kenosha plant.
The Kenosha plant and remaining assets were sold in fiscal year 2006 and a
pre-tax loss of $15,566,000 was recorded in fiscal year 2006 related to the
impairment and sale. Total (gain) loss related to long-lived assets amounted to
$(0.1) million, $22.3 million and $9.8 million for fiscal year 2007, 2006 and
2005, respectively.
Share-Based Compensation: In December 2004, the Financial Accounting Standards
Board issued SFAS No. 123R, "Share-Based Payment," which is a revision of SFAS
No. 123, "Accounting for Stock-Based Compensation" and is applicable to fiscal
years beginning after June 15, 2005. SFAS No. 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement under the fair value method. Prior to the
adoption of SFAS No. 123R and as permitted by SFAS No. 123 and SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," we
elected to follow Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for our share-based compensation plans and implemented the pro forma
disclosure only provisions of SFAS No. 123 and SFAS No. 148. Under APB 25,
share-based compensation expense was recorded when the exercise price of
employee stock options was less than the fair value of the underlying stock on
the date of grant. We adopted SFAS No. 123R on October 1, 2005 using the
modified prospective method in which prior year financial statements are not
restated for the adoption of the new standard. Under SFAS No. 123R, we use the
Black-Scholes option pricing model to determine the fair value of stock options.
The Black-Scholes model includes various assumptions, including the expected
life of stock options, the expected volatility and the expected risk-free
interest rate. These assumptions reflect our best estimates, but they involve
inherent uncertainties based on market conditions generally outside our control.
While we do not believe share-based compensation would have been materially
impacted by the variability in the range of reasonable assumptions we could have
applied to value option awards, we anticipate that share-based compensation
could be materially impacted by the application of alternate assumptions in
future periods. Also, under SFAS No. 123R, we are required to record share-based
compensation expense net of estimated forfeitures. Our forfeiture rate
assumption used in determining share-based compensation expense is estimated
based on historical data. The actual forfeiture rate and corresponding effect on
share-based compensation expense could differ from those estimates. For further
discussion of the impact of SFAS No. 123R on our financial statements, see Note
15 to the Consolidated Financial Statements included in Item 8.
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, and 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
24
the receivables are past due, and our historical experience. If circumstances
change (e.g., 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.
Reserve for Slow-Moving, Damaged and Discontinued Inventory: We carry our
inventory at standard costs, adjusted for capitalized variances, which
approximate the lower of cost, determined on a first-in, first-out (FIFO) basis,
or market. We periodically review our inventory for slow-moving, damaged and
discontinued items and provide reserves to reduce such items identified to their
recoverable amounts. During fiscal year 2007 our reserve decreased by $0.9
million from $1.5 million to $0.6 million. This decrease is the result of better
and more efficient management and producing to more accurate demand levels as
well as disposing of aged and discontinued goods previously identified and
reserved.
Promotional Allowance: Promotional allowances related to our sales are recorded
at the time revenue is recognized. Such allowances, where applicable, are
estimated based on anticipated volume and promotional spending with specific
customers. We periodically review our estimate for promotional allowances and
adjust accruals to reflect our estimate of the future liability.
Income Taxes: We estimate our income tax provision or benefit in each of the
jurisdictions in which we operate, including estimating exposures related to
examinations by taxing authorities. Although we believe that our accruals for
tax liabilities are reasonable and adequate, tax regulations are subject to
interpretation and the tax controversy process is inherently uncertain;
therefore, our assessment can involve both a series of complex judgments about
future events and rely heavily on estimates and assumptions. To the extent the
probable tax outcome of these matters changes, such changes in estimates will
impact the income tax provision in the period in which such determination is
made.
We must also make judgments regarding the realizability of deferred tax assets
and tax liabilities. Our judgments regarding future taxable income may change
due to changes in market conditions, changes in tax laws, tax planning
strategies or other factors. If our assumptions and consequently our estimates
change in the future, the valuation allowances we have established may be
increased or decreased, resulting in a respective increase or decrease in income
tax expense.
In accordance with criteria established by SFAS No. 109, "Accounting for Income
Taxes", the valuation allowance against deferred tax assets as of September 28,
2007 and September 29, 2006 was $49.8 million and $52.3 million, respectively.
The net change in total valuation allowance for the years ended September 28,
2007, September 29, 2006 and September 30, 2005 was a decrease of $2.5 million,
an increase of $10.2 million and an increase of $34.8 million, respectively. The
valuation allowance at September 28, 2007, September 29, 2006 and September 30,
2005 was related to federal and state net operating loss and tax credit
carryforwards and deferred tax assets as well as foreign net operating loss
carryforwards and deferred tax assets that in the judgment of management, are
not more likely than not to be realized. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets depends on the generation of future taxable
income during the periods in which those temporary differences are deductible.
Management considers the scheduled reversal of deferred tax liabilities
(including the impact of available carryback and carryforward periods) and tax
planning strategies in making this assessment. In order to fully realize the
deferred tax asset, the Company will need to generate future taxable income
before the expiration of the deferred tax assets as governed by the tax code.
Taxable income (loss) for the years ended September 28, 2007, September 29, 2006
and September 30, 2005 was $(1.1) million, $(32.4) million and $(32.2) million,
respectively, as reported in our tax returns. Due to the existence as of
September 28, 2007 of a three-year cumulative loss, management has not
considered future years' taxable income in determining the amount of valuation
allowance necessary, but has only considered taxable income from the reversal of
net temporary differences in existence as of September 28, 2007.
Derivatives: During fiscal 2006 and 2005, we held derivative financial
instruments to manage a variety of risk exposures including interest rate risks
associated with variable rate long-term debt and foreign currency risks
associated with our Italian operations. We used a mark-to-market convention to
account for our derivative contracts, recording the changes in fair market value
of the financial instrument as a gain or loss to interest expense or other
expense. We terminated all such derivative contracts in fiscal year 2006.
25
Prior to fiscal year 2007, we managed foreign currency risks using futures
contracts. The fair values of these instruments were determined from market
quotes. These forward contracts were 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
manage interest rate risks, an interest rate swap was used to effectively
convert a portion of variable rate debt to fixed rate. This instrument was
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 were based on an expectation of future interest rates
derived from observed market interest rate curves. We did not change our methods
of calculating these fair values or developing the underlying assumptions. The
values of these derivatives changed over time as cash receipts and payments were
made and as market conditions change. Our derivative instruments were 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 2 to our consolidated financial
statements and the section titled "Quantitative and Qualitative Disclosures
About Market Risk."
Pending Litigation; Indemnification Obligations
As described above in Item 3 - Legal Proceedings, there are a number of pending
civil lawsuits and governmental investigations involving the Company, several of
our current and former directors and several of our former executive officers.
We continue to incur significant expense on behalf of the Company and on behalf
of the several individuals to whom we have indemnification obligations. While we
continue to defend these matters vigorously, we cannot foresee what financial
impact, if any, the conclusion of these matters may have on the Company. In
addition, we continue to incur significant expense related to the completion of
our historical audits and SEC reporting requirements. The expenses we have
incurred through the fiscal year ended September 28, 2007, in connection with
all of these matters, including those associated with our restatement and
pending legal matters, net of insurance proceeds, were $2.5 million in fiscal
2005, $16.1 million in fiscal 2006 and $13.3 million in fiscal year 2007 and are
reflected in our Statement of Operations under the caption general and
administrative expense.
FISCAL YEAR ENDED SEPTEMBER 28, 2007 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 29,
2006
Revenues: Revenues increased $31.1 million, or 8.5%, to $398.1 million for the
fiscal year ended September 28, 2007, from $367.0 million for the fiscal year
ended September 29, 2006. Revenues increased $7.1 million, or 1.9%, due to
volume increase, and increased $23.7 million, or 6.5%, due to higher average
selling prices. Revenues increased by $0.3 million due to an increase in
payments received from the U.S. government under the Continued Dumping and
Subsidy Offset Act of 2000. Revenues for 2007 and 2006 are based on a 52-week
year.
Revenues for the Retail market increased $35.9 million, or 13.4%, to $304.4
million for the fiscal year ended September 28, 2007, from $268.5 million for
the fiscal year ended September 29, 2006. Revenues increased $15.4 million, or
5.7%, due to volume increase, and increased $20.2 million or 7.5% due to higher
average selling prices. Revenues increased by $0.3 million, or 0.1% due to an
increase in payments received from the U.S. government under the Continued
Dumping and Subsidy Offset Act of 2000.
Revenues for the Institutional market decreased $4.8 million or 4.9% to $93.7
million for fiscal year ended September 28, 2007, from $98.5 million for fiscal
year ended September 29, 2006. Revenues decreased $5.9 million, or 6.0% due to
volume losses and increased $1.1 million, or 1.1% due to higher average selling
prices and changes in sales mix.
Cost of goods sold: As a percentage of revenues, cost of goods sold remained at
77.6% for fiscal year 2007 and 2006. Our raw materials and other input costs
were unfavorable to prior year but the effect of the increase was offset by
higher selling prices. Cost of goods sold in 2007 also includes $0.8 million
provision for inventory obsolescence which was a reduction of $0.6 million, from
$1.4 million in fiscal year 2006.
Gross profit: Gross profit increased $7.1 million, or 8.6%, to $89.3 million for
the fiscal year ended September 28, 2007, from $82.2 million for the fiscal year
ended September 29, 2006. Gross profit as a percentage of revenues remained at
22.4% for both years. The increase in gross profit is directly related to the
volume growth described
26
above and the ability of the Company to increase sales prices at a level
approximately equal to the increased raw material and other production costs.
Selling and marketing expense: Selling and marketing expense decreased $1.4
million, or 6.1%, to $21.5 million for the fiscal year ended September 28, 2007,
from $22.9 million for fiscal year ended September 29, 2006. This decrease is
primarily related to decreased payroll of $0.4 million and a decrease of
share-based compensation expense of $0.5 million as compared to fiscal year
2006. Selling and marketing expense, as a percentage of revenue, decreased to
5.4% for the fiscal year ended September 28, 2007, from 6.2% for the comparable
prior year period.
General and administrative expense: General and administrative expense decreased
$2.0 million, or 5.6%, to $33.5 million for the fiscal year ended September 28,
2007, from $35.5 million for the comparable period last year. This decrease is
attributable primarily to decreased costs of professional fees. General and
administrative expenses as a percentage of revenues decreased to 8.4% for the
fiscal year ended September 28, 2007, from 9.7% for the fiscal year ended
September 29, 2006 due to the effect of these relatively fixed costs being
incurred on increased sales. During the fiscal year ended September 28, 2007,
$13.3 million of professional fees related to the restatement and pending legal
matters were recorded compared to $16.1 million in fiscal year 2006. These
professional fees, net of insurance, include legal, forensic accounting,
independent registered public accounting firm fees, public relations and Alvarez
& Marsal fees. Since the end of fiscal year 2007, we have continued to incur
significant costs related to the restatement and pending legal matters.
Impairment of brands and trademarks: We completed our annual review of fiscal
year 2007 brand intangible values based on the 2008 fiscal year business plan
and our forecast available in the fourth quarter of fiscal year 2007. The review
resulted in no brand impairment. During the year ended September 29, 2006, we
recorded $1.0 million of impairment charges.
Loss on disposition of brands and trademarks: During the second quarter of
fiscal year 2006, we sold our Mrs. Leeper's and Eddie's Spaghetti brands and
recorded a loss on disposition of brands and trademarks of $4.7 million. There
were no such dispositions in fiscal year 2007.
Loss related to long-lived assets: During the fiscal year ended September 28,
2007, a $0.1 million gain relating to the sale of long-lived assets was recorded
as compared to $22.3 million of losses related to long-lived assets in fiscal
year 2006. In the second quarter of fiscal 2006, we decided to close the Kenosha
facility and recognized an impairment loss based on the estimated fair value. In
April 2006, this facility was permanently closed and certain equipment was moved
to the Company's other manufacturing facilities. The Kenosha plant and remaining
assets were sold in fiscal year 2006 and a pre-tax loss of $15.6 million was
recorded in fiscal year 2006 related to the impairment and sale. We received net
cash proceeds from the sale of $5.0 million. In addition, certain pasta lines
and packaging equipment considered unnecessary for our production plans were
taken out of service. These assets were disposed or the excess equipment was
written down to fair market value.
Operating profit / (Loss): Operating profit for the fiscal year ended September
28, 2007, was $34.4 million, an increase of $38.5 million as compared to an
operating loss of $4.1 million reported for the fiscal year ended September 29,
2006. Operating profit (loss) increased as a percentage of revenues to 8.6% for
the fiscal year ended September 28, 2007, from (1.1)% for the fiscal year ended
September 29, 2006, as a result of the factors discussed above.
Interest expense: Interest expense for the fiscal year ended September 28, 2007,
was $29.4 million, decreasing 0.3% from the $29.5 million reported for the
fiscal year ended September 29, 2006. The decrease is attributable to lower
average borrowings outstanding offset by higher interest rates. The average
interest rate in effect during fiscal year 2007 and fiscal year 2006 was 11.4%
and 9.1%, respectively. In addition, we recorded amortization of deferred debt
issuance costs of $1.3 million in fiscal year 2007 and $4.2 million in fiscal
year 2006. The decrease in the amortization of deferred debt issuance is
primarily due to the $1.3 million write-off of the unamortized balance, as well
as $1.3 million of amendment fees that were incurred, prior to our refinancing
our credit facility in March 2006.
Other (income) expense: Other (income) for fiscal year 2007 was $(0.2) million,
representing (0.1)% of revenues. Other (income) for fiscal year 2006 was $(0.9)
million, representing (0.2)% of revenues. These amounts primarily reflect the
foreign currency transaction gains/losses.
27
Income tax expense / benefit: Income tax benefit for each of the fiscal years
ended September 28, 2007 and September 29, 2006 was $0.2 million and $2.2
million, respectively, and reflects effective income tax rates of 3.1% and 6.9%,
respectively. The effective rates in fiscal year 2007 and 2006 are substantially
below statutory rates primarily due to the changes in our valuation allowances
($2.5 million decrease in fiscal 2007 and $10.2 million increase in fiscal 2006)
related to the net operating loss and tax credit carryforwards and other
deferred tax assets.
Net income / loss: Net income for the fiscal year ended September 28, 2007, was
$5.3 million, an increase of $35.7 million from the $30.4 million loss for the
fiscal year ended September 29, 2006, as a result of the factors discussed
above. Net income (loss) as a percentage of net revenues was 1.3% versus (8.3)%
in the prior year.
Diluted income / (loss) per common share was $0.28 for the fiscal year ended
September 28, 2007, compared to $(1.65) for the fiscal year ended September 29,
2006.
FISCAL YEAR ENDED SEPTEMBER 29, 2006 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2005
Revenues: Revenues increased $2.8 million, or 0.8%, to $367.0 million for the
fiscal year ended September 29, 2006, from $364.2 million for the fiscal year
ended September 30, 2005. Revenues increased $2.1 million, or 0.6%, due to
volume increase, and decreased $0.9 million, or 0.2%, due to lower average
selling prices. Revenues increased by $1.6 million due to an increase in
payments received from the U.S. government under the Continued Dumping and
Subsidy Offset Act of 2000. Revenues for 2006 and 2005 are based on a 52-week
year.
Revenues for the Retail market increased $3.1 million, or 1.2%, to $268.5
million for the fiscal year ended September 29, 2006, from $265.4 million for
the fiscal year ended September 30, 2005. Revenues increased $0.3 million, or
0.1%, due to volume increase, and increased $0.4 million or 0.2% due to higher
average selling prices resulting from reduced promotional support relating to
branded sales. Revenues increased by $0.8 million, or 0.3%, as a result of the
lower amortization of slotting fees related to our discontinuation of reduced
carb products. Revenues increased by $1.6 million, due to an increase in
payments received from the U.S. government under the Continued Dumping and
Subsidy Offset Act of 2000.
Revenues for the Institutional market decreased $0.3 million, or 0.3% to $98.5
million for the fiscal year ended September 29, 2006, from $98.8 million for the
fiscal year ended September 30, 2005. Revenues increased $1.6 million, or 1.6%
due to volume gains, and decreased $1.9 million, or 1.9% due to lower average
selling prices and changes in sales mix.
Cost of goods sold: As a percentage of revenues, cost of goods sold decreased to
77.6% for fiscal year 2006, from 82.4% for fiscal year 2005. The majority of
this improvement is attributable to the decrease in obsolescence provisions from
$12.2 million in fiscal year 2005 related to the significant decline in sales
including our reduced carb products to $1.4 million in fiscal year 2006.
Gross profit: Gross profit increased $18.2 million, or 28.4%, to $82.2 million
for the fiscal year ended September 29, 2006, from $64.0 million for the fiscal
year ended September 30, 2005. Gross profit as a percentage of revenues
increased to 22.4% for the fiscal year ended September 29, 2006 from 17.6% for
the fiscal year ended September 30, 2005. Gross profit was impacted by a number
of factors as compared to the prior year, (as discussed above) including revenue
increases of $2.8 million.
Selling and marketing expense: Selling and marketing expense increased $2.6
million, or 12.8%, to $22.9 million for the fiscal year ended September 29,
2006, from $20.3 million for fiscal year ended September 30, 2005. This increase
is primarily related to increased compensation due to the adoption of SFAS No.
123R of $1.0 million and payroll and bonuses of $1.1 million. Selling and
marketing expense, as a percentage of revenue, increased to 6.2% for the fiscal
year ended September 29, 2006, from 5.6% for the comparable prior year period.
General and administrative expense: General and administrative expense increased
$12.3 million, or 53.0%, to $35.5 million for the fiscal year ended September
29, 2006, from $23.2 million for the comparable period last year. This increase
is attributable primarily to increased costs of professional fees being
partially offset by decreases in bad debt expense and payroll. General and
administrative expenses as a percentage of revenues increased to 9.7% for the
fiscal year ended September 29, 2006, from 6.4% for the fiscal year ended
September 30, 2005 due primarily
28
to the increased professional fees associated with the restatement. During the
fiscal year ended September 29, 2006, $16.1 million of professional fees related
to the restatement and pending legal matters were recorded. During fiscal year
2005 the Company recorded $2.5 million in professional fees related to the
restatement and pending legal matters. These professional fees, net of
insurance, include legal, forensic accounting, independent registered public
accounting firm fees, public relations and Alvarez & Marsal fees. Since the end
of fiscal year 2006, we have continued to incur significant costs related to the
restatement and pending legal matters.
Litigation settlement: By stipulation of settlement, we agreed to settle all
claims alleged in the federal securities class action lawsuit filed in fiscal
year 2005, for $25 million comprised of $11 million in cash, to be provided by
our insurers, and $14 million in our common shares. On March 27, 2008, we issued
527,903 shares to counsel for the class action plaintiffs, with the number of
shares issued to the members of the class in connection with the settlement is
contingent upon the exercise of certain rights in the settlement agreement or
entry of the Court's order of distribution to the class. There were no such
costs incurred in fiscal year 2006.
Impairment of brands and trademarks: During the year ended September 29, 2006,
we recorded $1.0 million of impairment charges. We completed our annual review
of fiscal year 2006 brand intangible values based on the 2007 fiscal year
business plan and our forecast available in the fourth quarter of fiscal year
2006. We completed an impairment review of brands in the third quarter of fiscal
year 2005 based on impairment indicators of significant year-to-date declines in
certain brand revenues during the fiscal year. We subsequently completed our
annual review of fiscal year 2005 based on the 2006 fiscal year business plan
and our forecast available in the fourth quarter of fiscal year 2005. The
business plan and forecasts, which included new information and marketing
changes, resulted in additional brand impairment. In connection with these two
impairment reviews conducted during the year ended September 30, 2005, $88.6
million in impairment charges were recorded.
Loss on disposition of brands and trademarks: During the second quarter of
fiscal year 2006, we sold our Mrs. Leeper's and Eddie's Spaghetti brands and
recorded a loss on disposition of brands and trademarks of $4.7 million. There
were no such costs incurred in fiscal year 2005.
Losses related to long-lived assets: During the fiscal year ended September 29,
2006, $22.3 million of losses related to long-lived assets were recorded
compared to $9.8 million in fiscal year 2005. In conjunction with our
restructuring and rightsizing program, we temporarily suspended full operations
at our Kenosha, Wisconsin, manufacturing facility in the fourth fiscal quarter
of 2004 and then reactivated this facility in the first quarter of fiscal year
2005. In April 2006, this facility was permanently closed and certain equipment
was moved to other of our manufacturing facilities. The Kenosha plant and
remaining assets were sold in fiscal year 2006 and a pre-tax loss of $15.6
million was recorded in fiscal year 2006 related to the closing and sale. We
received net cash proceeds from the sale of $5.0 million. In addition, certain
pasta lines and packaging equipment considered unnecessary for our production
plans were taken out of service. These assets were disposed or the excess
equipment was written down to fair market value.
Provision for (recovery from) restructuring expense: In fiscal year 2005, we
recognized $0.6 million benefit related to the reversal of a previously
established restructuring reserve due to the early reactivation of the Kenosha
plant which was not contemplated at the time the restructuring reserve was
established in fiscal 2004. There were no such costs or benefits in fiscal year
2006.
Operating profit / (loss): Operating loss for the fiscal year ended September
29, 2006, was $4.1 million, a decrease of $87.2 million as compared to operating
loss of $91.3 million reported for the fiscal year ended September 30, 2005.
Operating loss decreased as a percentage of revenues to (1.1)% for the fiscal
year ended September 29, 2006, from (25.0)% for the fiscal year ended September
30, 2005, as a result of the factors discussed above.
Interest expense: Interest expense for the fiscal year ended September 29, 2006,
was $29.5 million, increasing 82.1% from the $16.2 million reported for the
fiscal year ended September 30, 2005. The increase is attributable to higher
average borrowing rates and a higher interest rate spread under our lending
agreement. The interest rate in effect at September 29, 2006 and September 30,
2005 was 11.3% and 6.8%, respectively. In addition, we recorded amortization of
deferred debt issuance costs of $4.2 million in fiscal year 2006 and $2.1
million in fiscal year 2005. The increase in the amortization of deferred debt
issuance is primarily due to the $1.3 million write-off of the unamortized
balance, as well as $1.3 million of amendment fees that were incurred, prior to
our refinancing our credit facility in March 2006.
29
Other (income) expense: Other income for fiscal year 2006 was $0.9 million,
representing (0.2)% of revenues. Other income for fiscal year 2005 was $3.5
million, representing (1.0)% of revenues. These amounts primarily reflect the
foreign currency transaction gains/losses on certain forward exchange contracts
and euro-denominated debt that was outstanding through our refinancing in March
2006.
Income tax expense / benefit: Income tax benefit for each of the fiscal years
ended September 29, 2006 and September 30, 2005 was $2.2 million and $3.7
million, respectively, and reflects effective income tax rates of approximately
6.9% and 3.6%, respectively. The low effective rate in fiscal year 2006 and 2005
is primarily due to the $10.2 million and $34.8 million income effect of our
increased valuation allowances related to the net operating loss and tax credit
carryforwards and other deferred tax assets that management believes are not
more likely than not to be realized.
Net income / loss: Net loss for the fiscal year ended September 29, 2006, was
$30.4 million, a decrease of $69.8 million from the $100.2 million of loss for
the fiscal year ended September 30, 2005, as a result of the factors discussed
above. Net loss as a percentage of net revenues was (8.3)% versus (27.5)% in the
prior year.
Diluted income / (loss) per common share was $(1.65) per share for the fiscal
year ended September 29, 2006, compared to $(5.49) per share for the fiscal year
ended September 30, 2005.
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 $16.6 million
and net working capital totaled $55.5 million at September 28, 2007. Cash and
temporary investments totaled $22.8 million and net working capital totaled
$54.3 million at September 29, 2006.
Our net cash provided by operating activities totaled $23.9 million for the
fiscal year ended September 28, 2007 compared to $41.2 million for the fiscal
year ended September 29, 2006 and $29.7 million for the fiscal year ended
September 30, 2005. Our cash provided by operating activities decreased from
fiscal year 2006 to fiscal year 2007 primarily due to our increased investment
in inventory and accounts receivable due to higher raw material and production
costs and increased revenues in fiscal 2007 as compared to the impact of the
decreased investment in working capital in fiscal 2006 from that maintained in
fiscal 2005. Our cash provided by operating activities increased from fiscal
year 2005 to fiscal year 2006 due to improved operating margins and the
anticipated lowering of our investment in working capital, primarily through
control of inventory levels and management of our accounts payable and accrued
expenses.
Cash used in investing activities principally relates to investments in
production and distribution, milling and management information system assets.
Cash provided by investing activities principally relates to proceeds from
disposal of property, plant and equipment. Capital expenditures were $9.8
million, $12.6 million and $12.4 million for the fiscal years 2007, 2006 and
2005, respectively. Proceeds on the sale of property plant and equipment were
$0.3 million, $8.1 million and $1.1 million in fiscal year 2007, 2006 and 2005,
respectively. During fiscal year 2006, we sold our Kenosha facility for $5.0
million and sold two of our brands for $1.8 million.
Net cash used in financing activities was $21.0 million for fiscal year 2007 and
$27.8 million for fiscal year 2006 and $9.2 million for fiscal year 2005. The
$21.0 million of cash used in fiscal 2007 is primarily a result of a $20.5
million principal payment on our long-term debt. The $27.8 million of cash used
in fiscal 2006 is primarily a result of our $20.4 million net debt reduction
related to our refinancing of our credit facility in March 2006. We also
incurred $7.4 million for financing costs related to the credit facility
refinancing. The $9.2 million of cash used in fiscal 2005 is primarily a result
of a net $0.8 million principal payment on debt and the payment of $10.3 million
in dividends.
We currently use cash generated from operations to fund capital expenditures,
repayment of debt and working capital requirements.
30
Credit agreement amendments, waivers and refinancing
On March 13, 2006, we entered into a new $295 million, five-year senior credit
facility. The new facility replaced our $290 million senior credit facility that
would have expired on October 2, 2006.
The credit facility is comprised of a $265 million term loan and a $30 million
revolving credit facility. The facility is secured by substantially all of our
assets and provides for interest at either LIBOR rate plus 600 basis points or
at an alternate base rate calculated as prime rate plus 500 basis points. The
facility has a five-year term expiring in March 2011 and does not require any
scheduled principal payments. Principal pre-payments are required if certain
events occur in the future, including the sale of certain assets, issuance of
equity and the generation of "excess cash flow" (as defined in the credit
agreement). In fiscal year 2006, we used net proceeds from the sale of our
Kenosha facility to reduce the principal balance of the term loan by $4.5
million without incurring pre-payment penalties
Our credit facility 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 currently expect these
limitations to have a material effect on business or results of operations.
On March 14, 2007, the Company and its lenders agreed to an amendment to the
credit facility. Under the amended credit facility, we were required to deliver
our fiscal year 2005 and fiscal year 2006 audited financial statements to the
lenders by December 31, 2007. If we did not, we could have been in default of
this covenant and could have been subject to default interest. The amendment
also provided for a lower interest rate spread upon delivery of such statements.
The amendment also allowed us to make a one-time $10.0 million voluntary
pre-payment of the term loan without incurring a pre-payment penalty, which we
did in March 2007.
On December 27, 2007, the Company and its lenders agreed to an amendment to the
new credit facility. Under the amended credit facility, we are required to
deliver our fiscal year 2005, 2006 and 2007 audited financial statements to the
lenders by June 30, 2008. If we had not, we could be in default of this covenant
and could be subject to default interest. The amendment also provides for a
lower interest rate spread upon delivery of such statements.
At this time, the current and projected borrowings under our new credit facility
do not exceed the facility's available commitment. Absent any significant
increases in our historical levels of professional fees and indemnification
obligations expenditures, we believe that net cash expected to be provided by
operating activities and the cash available through our existing credit facility
will be sufficient to meet our expected capital and liquidity needs for the
foreseeable future.
The following table shows our contractual payment obligations for our long-term
debt and future purchase obligations as of September 28, 2007. Interest is
calculated based on the contractual loan maturity at the interest rate (11.4%)
in effect at September 28, 2007 (in thousands):
Payments Due by Period
Less than 1-3 4-5 After 5
Certain Contractual Obligations Total 1 year years years years
-------------------------------- ----- ------ ----- ----- -----
Long-term debt $ 241,963 $ 1,963 $ - $ 240,000 $ -
Interest payments 100,068 27,393 59,394 13,281 -
Operating leases 3,208 1,130 1,889 189 -
Supply agreement 2,618 1,218 1,400 - -
Unconditional durum wheat and semolina
purchase obligations 71,625 67,625 2,000 2,000 -
--------- --------- -------- --------- ---------
Total contractual cash obligations $ 419,482 $ 99,329 $ 64,683 $ 255,470 $ -
========= ========= ======== ========= =========
We were in compliance with the restrictive covenants as of September 28, 2007.
31
Impact of Recent Accounting Pronouncements
In June 2006, the FASB issued Financial Accounting Board Interpretation ("FIN")
No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB
Statement No. 109." FIN No. 48 provides a comprehensive model for the
recognition, measurement and disclosure in the financial statements of uncertain
tax positions taken or expected to be taken on a tax return. Adoption is
required for fiscal years beginning after December 15, 2006. The Company will
adopt FIN No. 48 effective September 29, 2007, the beginning of fiscal year
2008. As of the date of this filing, the Company is in the process of analyzing
the impact of adoption on FIN No. 48 on our financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements." SAB No. 108 was issued
to address diversity in the practice of quantifying materiality of financial
statement misstatements. Prior practice allowed for the evaluation of
materiality on the basis of either (1) the error quantified as the amount by
which the current year income statement was misstated ("rollover method") or (2)
the cumulative error quantified as the cumulative amount by which the current
years balance sheet was misstated ("iron curtain method"). The guidance provided
in SAB No. 108 requires both methods to be used in evaluating materiality ("dual
approach"). We considered the provisions of SAB No. 108, as applicable, in
fiscal years ended September 28, 2007 and September 29, 2006.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles ("GAAP"), and expands disclosures about
fair value measurements. SFAS No. 157 does not require any new fair value
32
measurements in financial statements, but standardizes its definitions and
guidance in GAAP. Thus, for some entities, the application of this statement may
change current practice. SFAS No. 157 will be effective beginning January 1,
2008. We are currently evaluating the impact that adoption of this statement may
have on our financial position, results of operations, income per share and cash
flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to
choose to measure many financial instruments, and certain other items, at fair
value. SFAS No. 159 applies to reporting periods beginning after November 15,
2007. Management believes the adoption of this pronouncement will not have a
material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations". This
statement establishes a framework to disclose and account for business
combinations. The adoption of the requirements of SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or
after fiscal years beginning after December 15, 2008 and may not be early
adopted. Management believes the adoption of this pronouncement will not have a
material impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - An Amendment of SFAS No. 133". SFAS No. 161
requires enhanced disclosures about an entity's derivative and hedging
activities, including how an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. The provisions of SFAS No. 161
are effective for financial statements issued for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. We do not
expect the adoption of SFAS No. 161 to have a material impact on our
consolidated financial statements.
Off-Balance Sheet Arrangements
At September 28, 2007, we had no off-balance sheet arrangements that have or are
likely to have a material current or future effect on our financial condition,
revenues, expenses, results of operations, liquidity, capital expenditures, or
capital resources.
Effect of Inflation
In fiscal years 2007, 2006 and 2005, we experienced inflationary cost increases
in certain operating costs, including raw materials, utilities, freight,
insurance and benefit costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Average interest rates on borrowings under our U.S. credit facility were 11.4%
in fiscal year 2007. If interest rates had been 100 basis points higher, our
annual interest expense would have increased $1.5 million, assuming comparable
borrowing levels during the year.
The functional currency for our Italy operations is the Euro. At September 28,
2007, we had a net investment in our Italy operations of (euro)26.0 million
($36.5 million). While we have previously managed our investment exposure in
foreign subsidiaries with Euro borrowings, we did not have any such Euro
denominated debt under the U.S. credit facility in effect at September 28, 2007
or September 29, 2006.
Our net annual transactional exposure is approximately (euro)4.6 million ($6.1
million). We have minimal transactional exposure to various other European
currencies, primarily the British pound. We may use forward purchase contracts
to manage these exposures. We did not have any forward contracts at September
28, 2007.
We have forward contracts for a certain portion of our future durum wheat
requirements. These contracts are set price contracts to deliver grain to our
mill, and are not derivative in nature as they have no net settlement provision
and are not transferable. We have exposure to certain commodity fluctuations.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN ITALIAN PASTA COMPANY
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm on
Internal Controls Over Financial Reporting 35
Report of Independent Registered Public Accounting Firm on
the Consolidated Financial Statements 36
Consolidated Balance Sheets at September 28, 2007 and September 29, 2006 37
Consolidated Statements of Operations for the years ended
September 28, 2007, September 29, 2006 and September 30, 2005 38
Consolidated Statements of Stockholders' Equity for the years
ended September 28, 2007, September 29, 2006 and September 30,
2005 39
Consolidated Statements of Comprehensive Income for the
years ended September 28, 2007, September 29, 2006 and
September 30, 2005 40
Consolidated Statements of Cash Flows for the years ended
September 28, 2007, September 29, 2006 and September 30, 2005 41
Notes to Consolidated Financial Statements 43
Schedule II Valuation and Qualifying Accounts 95
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
American Italian Pasta Company
We have audited American Italian Pasta Company's (the Company) internal
control over financial reporting as of September 28, 2007, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria).
American Italian Pasta Company's management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management's Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weakness have been identified and included in management's
assessment. Management has identified material weaknesses in controls related to
the Company's policies and procedures, application of Generally Accepted
Accounting Principles (GAAP), financial statement close process, internal audit
function and disclosures required by GAAP. These material weaknesses were
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the fiscal year 2007 financial statements, and this report does
not affect our report dated June 27, 2008 on those financial statements.
In our opinion, because of the effect of the material weaknesses described
above on the achievement of the objectives of the control criteria, American
Italian Pasta Company has not maintained effective internal control over
financial reporting as of September 28, 2007, based on the COSO criteria.
/s/ Ernst & Young LLP
Kansas City, Missouri
June 27, 2008
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
American Italian Pasta Company
We have audited the accompanying consolidated balance sheets of American
Italian Pasta Company (the Company) as of September 28, 2007 and September 29,
2006, and the related consolidated statements of operations, stockholders'
equity, comprehensive income, and cash flows for each of the three years in the
period ended September 28, 2007. 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 the standards of the Public
Company Accounting Oversight Board (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 September 28, 2007 and September 29, 2006, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 28, 2007, in conformity with U.S. generally
accepted accounting principles. 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.
As discussed in Note 2 to the consolidated financial statements, effective
October 1, 2005 the Company changed its method of accounting for share-based
payments.
We were engaged to audit, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
American Italian Pasta Company's internal control over financial reporting as of
September 28, 2007, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated June 27, 2008,
expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
Kansas City, Missouri
June 27, 2008
36
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 28, 2007 September 29, 2006
------------------ ------------------
ASSETS
Current assets:
Cash and temporary investments $ 16,635 $ 22,805
Trade and other receivables, net 38,279 32,706
Inventories 44,443 40,638
Prepaid expenses and other current assets 7,629 6,389
Deferred income taxes 2,381 1,156
-------- --------
Total current assets 109,367 103,694
Property, plant and equipment, net 316,109 324,464
Brands and trademarks 83,282 82,772
Other assets 19,205 21,039
-------- --------
Total assets $527,963 $531,969
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,195 $ 18,555
Accrued expenses 31,523 28,258
Current portion of deferred revenues 99 99
Income taxes payable 1,082 715
Current maturities of long-term debt 1,963 1,782
-------- --------
Total current liabilities 53,862 49,409
Long-term debt, less current maturities 240,000 260,500
Deferred income taxes 35,286 34,728
Litigation settlement 26,500 26,500
Deferred revenue, less current portion 397 496
-------- --------
Total liabilities 356,045 371,633
Commitments and contingencies
Stockholders' equity:
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 21 21
Issued and outstanding shares - 20,832,627 and 18,674,628,
respectively, at September 28, 2007; 20,779,204 and
18,640,660, respectively, at September 29, 2006
Class B common stock, par value $.001
Authorized shares - 25,000,000 - -
Issued and outstanding - none
Additional paid-in capital 247,492 245,623
Treasury stock, 2,157,999 shares in 2007 and (52,029) (51,857)
2,138,544 shares in 2006, at cost
Accumulated other comprehensive income 15,352 10,815
Accumulated deficit (38,918) (44,266)
-------- --------
Total stockholders' equity 171,918 160,336
-------- --------
Total liabilities and stockholders' equity $527,963 $531,969
======== ========
See accompanying notes to consolidated financial statements.
37
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended Year Ended Year Ended
September 28, 2007 September 29, 2006 September 30, 2005
------------------ ------------------ ------------------
Revenues $ 398,122 $ 367,023 $ 364,159
Cost of goods sold 308,819 284,777 300,151
--------- --------- ----------
Gross profit 89,303 82,246 64,008
Selling and marketing expense 21,503 22,871 20,342
General and administrative expense 33,548 35,459 23,198
Litigation settlement - - 14,000
Impairment charges to brands and trademarks - 998 88,550
Loss on disposition of brands and trademarks - 4,708 -
(Gains) losses related to long-lived assets (109) 22,268 9,759
Recovery from restructuring expense - - (554)
--------- --------- ----------
Operating profit (loss) 34,361 (4,058) (91,287)
Interest expense, net 29,421 29,509 16,234
Other (income) expense, net (245) (913) (3,544)
--------- --------- ----------
Income (loss) before income taxes 5,185 (32,654) (103,977)
Income tax provision (benefit) (163) (2,241) (3,730)
--------- --------- ----------
Net income (loss) $ 5,348 $(30,413) $(100,247)
========= ========= ==========
Net income (loss) per common share (basic) $ 0.29 $ (1.65) $ (5.49)
Weighted-average common shares outstanding 18,673 18,386 18,247
========= ========= =========
Net income (loss) per common share
(assuming dilution) $ 0.28 $ (1.65) $ (5.49)
Weighted-average common shares outstanding
(including dilutive securities) 18,951 18,386 18,247
========= ========= =========
Cash dividend declared per common share $ - $ - $ 0.5625
========= ========= =========
See accompanying notes to consolidated financial statements.
38
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Year Ended Year Ended Year Ended
September 28, 2007 September 29, 2006 September 30, 2005
------------------ ------------------ ------------------
Class A Common Shares
Balance, beginning of year 20,779 20,567 20,234
Issuance of shares of common stock 54 212 333
--------- ---------- ---------
Balance, end of year 20,833 20,779 20,567
========= ========== ========
Class A Common Shares - par value
Balance, beginning of year $ 21 $ 21 $ 20
Issuance of shares of common stock - - 1
--------- ---------- --------
Balance, end of year $ 21 $ 21 $ 21
========= ========= ========
Additional Paid-in Capital
Balance, beginning of year $ 245,623 $ 243,708 $ 240,249
Reclassification of unearned compensation upon adoption of SFAS
No. 123R - (738) -
Cancellation of shares of restricted stock - - (100)
Issuance of shares of common stock - - 3,953
Re-measurement of restricted stock - - (1,222)
Issuance and termination of compensatory stock options - - (63)
Stock based compensation 1,869 2,653 891
--------- --------- ---------
Balance, end of year $ 247,492 $ 245,623 $ 243,708
========= ========= =========
Treasury Stock, at cost
Balance, beginning of year $(51,857) $(51,817) $(51,657)
Purchases of treasury stock (172) (40) (160)
--------- --------- ---------
Balance, end of year $(52,029) $(51,857) $(51,817)
========= ========= =========
Unearned Compensation
Balance, beginning of year $ - $ (738) $ (2,240)
Reclassification of unearned compensation upon adoption of SFAS
No. 123R - 738 -
Cancellation of shares of restricted stock - - 100
Issuance of shares of common stock - - (234)
Re-measurement of restricted stock - - 1,222
Issuance and termination of compensatory stock options - - 63
Earned compensation - - 351
--------- --------- ---------
Balance, end of year $ - $ - $ (738)
========= ========= =========
Accumulated Other Comprehensive Income
Foreign currency translation adjustment:
Balance, beginning of year $ 10,815 $ 8,705 $ 10,043
Change during the period 4,537 2,110 (1,338)
--------- --------- ---------
Balance, end of year $ 15,352 $ 10,815 $ 8,705
========= ========= =========
Retained Earnings (Deficit)
Balance, beginning of year $(44,266) $(13,853) $ 96,697
Net income (loss) 5,348 (30,413) (100,247)
Dividends declared - - (10,303)
--------- --------- ---------
Balance, end of year $(38,918) $(44,266) $(13,853)
========= ========= =========
Total Stockholders' Equity $ 171,918 $ 160,336 $ 186,026
========= ========= =========
See accompanying notes to consolidated financial statements.
39
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended Year Ended Year Ended
September 28, 2007 September 29, 2006 September 30, 2005
------------------ ------------------ ------------------
Net income (loss) $ 5,348 $ (30,413) $(100,247)
Other comprehensive income (loss):
Foreign currency translation adjustments 4,537 2,110 (1,338)
--------- --------- ---------
Comprehensive income (loss) $ 9,885 $(28,303) $(101,585)
========= ========= ==========
See accompanying notes to consolidated financial statements.
40
AMERICAN ITALIAN PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended Year Ended Year Ended
September 28, 2007 September 29, 2006 September 30, 2005
------------------ ------------------ ------------------
OPERATING ACTIVITIES:
Net income (loss) $ 5,348 $ (30,413) $ (100,247)
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depreciation and amortization 23,409 24,895 25,132
Amortization of deferred financing fees 1,265 4,216 2,051
Non cash litigation settlement - - 14,000
Impairment charges to brands and trademarks - 998 88,550
Loss on disposition of brands and trademarks - 4,708 -
(Gains) losses related to long-lived assets (109) 22,268 9,759
Losses related to disposition of spare parts - - 1,223
Provision for (recovery of) doubtful accounts 163 (127) 1,806
Provision for inventory obsolescence 788 1,420 12,155
Stock-based compensation expense 1,869 2,653 1,242
Deferred income tax expense (benefit) (667) (2,410) (4,452)
Gains related to interest rate swap transactions - (104) (1,671)
(Gains) losses related to euro debt borrowing - 981 (3,640)
Changes in operating assets and liabilities:
Trade and other receivables (5,372) 1,742 4,392
Inventories (4,182) 4,282 (2,338)
Prepaid expenses and other current assets (1,203) 2,079 586
Accounts payable and accrued expenses 2,839 5,244 (19,303)
Income taxes 306 (612) 1,126
Other (545) (628) (686)
---------- ---------- ----------
Net cash provided by operating activities 23,909 41,192 29,685
INVESTING ACTIVITIES:
Additions to property, plant and equipment (9,836) (12,577) (12,379)
Proceeds from disposal of pasta brands - 1,775 -
Proceeds from disposal of property, plant and equipment 356 8,122 1,107
---------- ---------- ----------
Net cash used in investing activities (9,480) (2,680) (11,272)
FINANCING ACTIVITIES:
Proceeds from issuance of debt - 265,000 79,962
Principal payments on debt (20,500) (285,351) (80,760)
Dividends declared and paid - - (10,303)
Proceeds from issuance of common stock net of issuance costs - - 3,719
Purchase of treasury stock (172) (40) (160)
Deferred financing costs (308) (7,369) (1,677)
---------- ---------- ----------
Net cash used in financing activities (20,980) (27,760) (9,219)
Effect of exchange rate changes on cash 381 142 5
---------- ---------- ----------
Net increase (decrease) in cash and temporary investments (6,170) 10,894 9,199
Cash and temporary investments, beginning of year 22,805 11,911 2,712
---------- ---------- ----------
Cash and temporary investments, end of year $ 16,635 $ 22,805 $ 11,911
========== ========== ==========
41
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 28,151 $ 22,551 $ 13,019
========= ========= ==========
Cash paid for income taxes $ 165 $ 694 $ 378
========= ========= ==========
Cash received from income taxes $ 91 $ - $ 2,105
========= ========= ==========
Accrual for common stock to be issued in litigation settlement $ - - $ 14,000
========= ========= ==========
See accompanying notes to consolidated financial statements.
42
AMERICAN ITALIAN PASTA COMPANY
Notes to Consolidated Financial Statements
1. DESCRIPTION OF THE 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 dry pasta in North America by volume and as of September 28, 2007
had manufacturing and distribution facilities located in Excelsior Springs,
Missouri, Columbia, South Carolina, Tolleson, Arizona, and Verolanuova, Italy.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and all majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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 years 2007, 2006 and 2005 were 52 weeks and ended
September 28, 2007, September 29, 2006 and September 30, 2005.
Revenue Recognition - Sales of the Company's products are recognized as revenues
upon transfer of title to the customer which is typically upon delivery at the
customers' place of business. Promotional allowances related to the Company's
sales are recorded at the time revenue is recognized and reflected as a
reduction of revenues on the accompanying consolidated statements of operations.
Such allowances, where applicable, are estimated based on anticipated volume and
promotional spending with specific customers. The Company recognizes revenue for
subsidy offset payments from the Department of Commerce (See Note 12) when the
amount and the right to receive payment can be reasonably determined.
Foreign Currency - The Company's functional currency is the U.S. dollar,
whereas, the Company's foreign operations utilize the Euro as their functional
currency. Accordingly, for purposes of translating foreign subsidiary financial
statements to the U.S. dollar reporting currency, assets and liabilities of the
Company's foreign operations are translated at fiscal year-end exchange rates
and income and expenses are translated at the weighted-average exchange rates
for the fiscal year. Foreign currency gains and losses resulting from foreign
currency transactions are included in consolidated operations in the year of
occurrence. The Company realized net foreign currency transaction gains of $0.1
million, $0.9 million and $3.5 million for fiscal year 2007, 2006 and 2005,
respectively, and are reflected in the Statement of Operations under the caption
other income, net. These amounts include the gains/(losses) related to the
Company's foreign currency forward exchange contracts and its euro-denominated
debt, discussed below.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires the
Company 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 when determined and have
generally been within management's expectations. The allowance for doubtful
accounts at September 28, 2007 and September 29, 2006 was $1,870,000 and
$1,989,000, respectively and is netted against accounts receivable in the
consolidated balance sheet. Uncollectible accounts are written-off against the
allowance for doubtful accounts after collection efforts have been exhausted.
For the fiscal years 2007, 2006 and 2005, bad debt expense (recovery) was
$163,000, $(127,000) and $1,806,000, respectively. At September 28, 2007 and
September 29, 2006, 21% and 23%, respectively, of trade and other receivables
were due from two customers.
43
Pasta is made from semolina milled from durum wheat and the Company mills the
wheat into semolina at certain of its plants. Durum wheat is a narrowly traded
commodity crop. The Company attempts to mitigate some of the effect of durum
wheat cost fluctuations through forward purchase contracts and raw material
cost-based pricing agreements with certain 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. Since none of the Company's derivative
instruments were designated as hedges in accordance with or met the continuing
effectiveness requirements of SFAS No. 133 to qualify for hedge accounting, the
gain or loss for each derivative instrument is recognized in current earnings
during the period of change.
Managing Cash Flow Risks - At September 28, 2007 and September 29, 2006, the
Company did not have foreign currency contracts. At September 30, 2005, the
Company had forward contracts with a fair value of $(597,000) reflected in its
consolidated balance sheets under the caption accrued expenses. The settlement
of derivative contracts is reflected in the consolidated statements of cash
flows as an operating cash flow.
At September 28, 2007 and September 29, 2006, the Company did not have interest
rate swap agreements. At September 30, 2005, the Company had interest rate swap
agreements that effectively convert a portion of its floating-rate debt to a
fixed-rate basis over the term of the related debt, thus minimizing the impact
of interest rate changes on future interest expense.
Managing Currency Risk Associated with the Investment in Foreign Operations - At
September 28, 2007 and September 29, 2006, the Company did not have any
long-term debt obligations in Euros. At September 30, 2005, long-term debt
included obligations of (euro)59,200,000 ($71,200,000). Changes in the U.S.
dollar equivalent of these euro-based borrowings were recorded as a component of
other expense in the fiscal 2005 consolidated statement of operations.
Financial Instruments - The carrying value of the Company's financial
instruments, including cash and temporary investments, trade and other
receivables, accounts payable and long term debt, as reported in the
accompanying consolidated balance sheets at September 28, 2007 and September 29,
2006, approximates fair value.
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 carried at standard costs adjusted for capitalized
variances, which approximate the lower of cost, determined on a first-in,
first-out (FIFO) basis, or market. The Company periodically reviews its
inventory for slow-moving, damaged or discontinued items and provides reserves
to reduce such items identified to their recoverable amount.
Property, Plant and Equipment - Capital additions and improvements 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 as
follows:
Number of Years
Land improvements 28 - 40
Buildings 30 - 40
Plant and mill equipment 10 - 30
Furniture, fixtures and equipment 5 - 10
44
Plant and mill equipment also includes spare parts, recorded at lower of average
cost or realizable value, which parts are not depreciated, but expensed when
placed in service. The Company periodically reviews its spare parts for excess
and obsolete items and provides reserves to reduce such items to their
recoverable amounts. At September 28, 2007 and September 29, 2006, the reserve
was $1.1 million and $1.3 million, respectively.
Brands and Trademarks - In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," the Company does not amortize the cost of intangible assets
with indefinite lives, such as its brands and trademarks. SFAS No. 142 requires
that the Company 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 other considerations. 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. See Note 9, Acquisitions - Brands and Trademarks
for a discussion of charges to income for brand impairments.
Other Long Lived Assets - In accordance with SFAS No. 144, "Accounting for
Impairment or Disposal of Long-lived Assets," the Company reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Company evaluates
recoverability of assets to be held and used by comparing the carrying amount of
an asset to future net cash flows expected to be generated by the asset. 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.
In conjunction with the restructuring and rightsizing program, the Company
temporarily suspended full operations at its Kenosha, Wisconsin, manufacturing
facility in the fourth fiscal quarter of 2004 and then partially reactivated
this facility in October 2004. In fiscal year 2006, the Company decided to close
the Kenosha plant. The Kenosha plant and remaining assets were sold in fiscal
year 2006 and a pre-tax loss of $15,566,000 was recorded in fiscal year 2006
related to the impairment and sale. The Company received net cash proceeds from
the sale of $5,031,000. Until the shut down of its Kenosha plant the Company
purchased semolina for that plant from Horizon Milling, LLC under a long-term
supply agreement. In August 2006, the Company advised Horizon that the economic
and business circumstances had changed since commencement of the supply
agreement, that it was invoking the material adverse effect provision of the
supply agreement and that it had sold the facility. Horizon made a demand for a
purchase deficiency of $0.5 million from the contract year ending September 30,
2006, and asserted that an additional deficiency of $2.1 million will be owed
through September 2009. Horizon has asserted its claims in an arbitration
proceeding for which a hearing was held November 13 and 14, 2007. On December
21, 2007, the arbitrator ruled in favor of Horizon. The Company is obligated to
satisfy its minimum purchase requirements for the purchase deficiencies for
fiscal years 2006 and 2007 totaling $1.2 million (which were paid in the second
quarter of fiscal year 2008) and purchase deficiencies for fiscal years 2008 and
2009 totaling $1.4 million, which will be due at the conclusion of the
respective fiscal years. As a result, the Company recorded a $2.6 million
liability related to the cancellation of the durum supply agreement in fiscal
year 2006.
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 basis 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. Deferred tax assets are evaluated as to
future realization and valuation allowances are established as necessary to
reduce the assets to amounts that are more likely than not expected to be
realized in accordance with SFAS No. 109 requirements.
Share-Based Compensation - On October 1, 2005 the Company adopted SFAS No. 123R,
"Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" using the modified prospective method. The effect of
adopting SFAS No. 123R in fiscal year 2006 was an increase to expense of
$1,761,000. The effect on basic and diluted earnings per share was $0.10. There
is no tax impact to this charge as deferred income tax benefits otherwise
provided are offset by the valuation allowances as discussed in Note 13. SFAS
No. 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement under the fair
value method. Under this transition method, the related compensation cost for
fiscal years 2006 and 2007 includes each year's portion of the expense for all
awards granted prior to October 1, 2005 and not yet vested as of that date, as
well as, all applicable awards granted or modified after such adoption date.
45
Accordingly, prior period amounts have not been restated. However, the balance
of unearned compensation on non-vested shares and prior stock options granted
with intrinsic value within stockholders' equity has been reclassified to
additional paid-in capital as of October 1, 2005. SFAS No. 123R also requires
that the benefits associated with the tax deductions in excess of recognized
compensation cost be reported as a financing cash flow, rather than an operating
cash flow as required under APB No. 25.
Under SFAS No. 123R, share-based compensation recognized in the Company's
results is based on awards ultimately expected to vest, and accordingly has been
reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be
estimated at the time of grant and revised appropriately in subsequent periods
if actual forfeitures differ from those estimates. Prior to fiscal year 2006,
the Company accounted for forfeitures as they occurred.
SFAS No. 123R requires the calculation of a beginning pool of excess tax
benefits in additional paid-in capital available to absorb any tax deficiencies
recognized after the adoption of SFAS No. 123R. The Company has elected the
alternative transition method for calculating the additional paid-in capital
pool as described in SFAS No. 123R - 3, "Transition Election Related to
Accounting for Tax Effect of Share-Based Payment Awards".
Prior to the adoption of SFAS No. 123R and as permitted by SFAS No. 123 and SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
the Company elected to follow APB No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for our stock-based
compensation plans and implemented the pro forma disclosure only provisions of
SFAS No. 123 and SFAS No. 148. Under APB No. 25, stock compensation expense was
recorded when the exercise price of employee stock options was less than the
fair value of the underlying stock on the date of grant.
Prior to fiscal year 2006, the Company modified certain share-based compensation
awards in connection with the termination of certain employees. At the
modification date of these awards, the Company applied the provisions of APB No.
25 and related FASB Interpretation No. 44, "Stock-Based Compensation" and EITF
No. 00-23, "Issues Related to the Accounting for Stock Compensation under APB
Opinion No. 25 and FASB Interpretation No. 44", which generally require the
intrinsic value of the award to be recognized as compensation expense on the
date of modification.
In addition, the Company has granted share-based compensation awards to certain
non-employee consultants. The Company follows the guidance in EITF No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services". Under EITF No.
96-18, non-employee stock-based compensation awards are recognized at their fair
values, as determined by the Company using a Black-Scholes model.
The Company utilizes the Black-Scholes option valuation model to calculate the
fair value of each option and stock appreciation right awards. Expected
volatility was based on the combination of the historical volatility of the
Company's common stock and the implied volatility of its options. The expected
term of the options and stock appreciation rights represent the period of time
until exercise or termination and is based on historical experience of similar
awards, including vesting schedules and expectations of future behavior. The
risk free interest rate is based on the U.S. Treasury rate at the time of the
grant for instruments of a comparable life. The Company does not currently
anticipate a dividend payout in the foreseeable future.
Advertising Costs - Advertising costs are expensed as incurred. Advertising
costs were $2,315,000 in fiscal year 2007, $3,743,000 in fiscal year 2006 and
$3,294,000 in fiscal year 2005.
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
operations.
Net Income (Loss) Per Common Share - Net income (loss) 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. There were 278,000 dilutive securities
consisting of options and stock appreciation rights included in the calculation
of diluted weighted average common shares for fiscal year 2007. There were no
dilutive securities in fiscal years 2006 and 2005. See Note 15.
Antidilutive shares comprised of stock options and stock appreciation rights for
fiscal year 2007 were 940,163 with prices ranging from $12.23 - $43.32.
Antidilutive shares comprised of stock options and stock appreciation rights
46
for fiscal year 2006 were 1,125,345 with prices ranging from $8.05 - $43.32.
Antidilutive shares for fiscal year 2005 were 1,714,054, with prices ranging
from $21.88 - $43.32.
Impact of Recent Accounting Pronouncements - In June 2006, the FASB issued
Financial Accounting Board Interpretation ("FIN") No. 48, "Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109." FIN
No. 48 provides a comprehensive model for the recognition, measurement and
disclosure in the financial statements of uncertain tax positions taken or
expected to be taken on a tax return. Adoption is required for fiscal years
beginning after December 15, 2006. The Company will adopt FIN No. 48 effective
September 29, 2007, the beginning of fiscal year 2008. As of the date of this
filing, the Company is in the process of analyzing the impact of adoption on FIN
No. 48 on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles ("GAAP"), and expands disclosures about
fair value measurements. SFAS No. 157 does not require any new fair value
measurements in financial statements, but standardizes its definitions and
guidance in GAAP. Thus, for some entities, the application of this statement may
change current practice. SFAS No. 157 will be effective beginning January 1,
2008. The Company is currently evaluating the impact that adoption of this
statement may have on its financial position, results of operations, income per
share and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to
choose to measure many financial instruments, and certain other items, at fair
value. SFAS No. 159 applies to reporting periods beginning after November 15,
2007. Management believes the adoption of this pronouncement will not have a
material impact on the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
No. 141R"). This Statement establishes a framework to disclose and account for
business combinations. The adoption of the requirements of SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or
after fiscal years beginning after December 15, 2008 and may not be early
adopted. Management believes the adoption of this pronouncement will not have a
material impact on the Company's consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - An Amendment of SFAS No. 133". SFAS No. 161
requires enhanced disclosures about an entity's derivative and hedging
activities, including how an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. The provisions of SFAS No. 161
are effective for financial statements issued for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. The Company
does not expect the adoption of SFAS No. 161 to have a material impact on its
consolidated financial statements.
3. RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL STATEMENTS
As more fully described in Footnote 3 to the Audited Consolidated Financial
Statements included in the Company's previously filed Annual Report on Form 10-K
for fiscal year ended September 30, 2005 the Company restated its previously
issued audited consolidated financial statements for fiscal years 2001 through
2004 and its unaudited consolidated financial statements for the first two
quarters of fiscal year 2005.
4. CHANGE IN ACCOUNTING PRINCIPLE AND METHOD OF ACCOUNTING
Effective October 1, 2005 (fiscal year 2006), the Company voluntarily changed
its method of accounting for certain warehousing costs, principally storage
costs. Prior to this change, the Company capitalized warehousing costs as a
component of finished goods inventory. Beginning in fiscal year 2006, such costs
are reflected as a period expense. The Company believes that reflecting these
warehousing costs as a period expense is an improvement in presenting
47
financial condition and results of operations, particularly with respect to
providing a more accurate reflection of the carrying value of inventory on a
lower of cost or market basis, the costs of storing inventory subsequent to the
cessation of the production process and the cost of goods ultimately sold. The
Company also believes this produces a better matching of the costs incurred to
manufacture inventories with the revenues generated upon their sale, and is more
reflective of the substance of both the storage of such goods for varying
periods of time prior to customer demand and the gross profit realized upon
their ultimate sale. SFAS No. 154, "Accounting Changes and Error Corrections,"
issued by the FASB in May 2005, requires that voluntary changes in an accounting
principle are to be applied retrospectively to prior financial statements. The
effect of the change was to increase (decrease) net income by $131,000 and
$(118,000) for fiscal years 2006 and 2005, respectively. The retroactive
application to beginning retained earnings as of October 2, 2004, the first day
of fiscal year 2005, was a decrease of $798,000. The effect on earnings per
share assuming dilution was $0.01 and $(0.01) for fiscal years 2006 and 2005,
respectively.
5. RESTRUCTURING AND RIGHTSIZING PROGRAM
During the third quarter of fiscal year 2004, the Company announced a
restructuring and rightsizing program to better align its production capacity
and cost structure with the Company's current business and operating profile and
the pasta industry environment. The restructuring program responded to
industry-wide reductions in demand related to recent changes in consumer diet
trends and to manufacturing overcapacity in the pasta industry. The key
strategic elements of the restructuring and rightsizing program included
reductions in the Company's workforce, manufacturing capacity and inventory
levels and the related reconfiguration of its distribution network. In that
regard, during the fourth quarter of fiscal 2004, the Company suspended full
operations at one of its manufacturing facilities; temporarily shut down
production at two of its four domestic manufacturing facilities; and exited
certain leased domestic distribution centers.
During fiscal year 2005, the Company recorded $554,000 of income due to the
restructuring. The 2005 income results from a reduction in the total costs
originally provided in fiscal year 2004 due to lower severance and termination
benefits than expected and a reduction in supply agreement costs due to higher
than anticipated level of operations at the Kenosha plant in fiscal year 2005.
There was no remaining liability related to this restructuring and rightsizing
program at September 28, 2007 or September 29, 2006.
6. INVENTORIES
Inventories consist of the following (in thousands):
September 28, 2007 September 29, 2006
------------------ ------------------
Finished goods $ 30,713 $ 29,373
Raw materials, additives, packaging materials and work-in-process 14,373 12,764
Reserves for slow-moving, damaged and discontinued inventory (643) (1,499)
---------- ----------
$ 44,443 $ 40,638
========== ==========
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
48
September 28, 2007 September 29, 2006
------------------ ------------------
Land and improvements $ 11,867 $ 11,603
Buildings 112,434 108,722
Plant and mill equipment 348,617 337,866
Furniture, fixtures and equipment 30,848 27,118
---------- ----------
503,766 485,309
Accumulated depreciation (199,369) (176,782)
---------- ----------
304,397 308,527
Spare parts, net of reserve 8,154 7,824
Construction in progress 3,558 8,113
---------- ----------
$ 316,109 $ 324,464
========== ==========
The Company capitalizes interest costs associated with the construction and
installation of property, plant and equipment. During the fiscal years ended
September 28, 2007, September 29, 2006 and September 30, 2005, $789,000,
$489,000 and $584,000, respectively, of interest cost was capitalized.
Depreciation expense for the fiscal years ended September 28, 2007, September
29, 2006 and September 30, 2005, was $21,758,000, $22,472,000 and $22,882,000,
respectively. Plant and mill equipment, at cost, includes the write-down to fair
value due to impairment amounting to $3,966,000 and $5,245,000 at September 28,
2007 and September 29, 2006, respectively, related to impairment charges
recorded in years prior to fiscal 2007. The impairment charge is recorded in
losses related to long-lived assets in the accompanying consolidated statements
of operations. There were no impairment write-downs during fiscal year 2007.
In the second quarter of fiscal 2006, the Company decided to close the Kenosha
facility and recognized an impairment loss based on the estimated fair value. In
April 2006, this facility was permanently closed and certain equipment was moved
to the Company's other manufacturing facilities. The Kenosha plant and remaining
assets were sold in fiscal year 2006 and a pre-tax loss of $15,566,000 was
recorded in fiscal year 2006 related to the impairment and sale. The Company
received net cash proceeds from the sale of $5,031,000.
The Company maintains certain property, plant and equipment in Italy with a net
book value totaling $43,836,000 and $41,638,000 at September 28, 2007 and
September 29, 2006, respectively.
8. OTHER ASSETS
Other assets consist of the following (in thousands):
September 28, 2007 September 29, 2006
------------------ ------------------
Package design costs $ 12,713 $ 11,488
Deferred debt issuance costs 6,406 6,098
Insurance settlement 12,500 12,500
Other 1,173 1,692
---------- ----------
32,792 31,778
Accumulated amortization (13,587) (10,739)
---------- ----------
$ 19,205 $ 21,039
========== ==========
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 and customer specifications. These
costs are amortized ratably over a three 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 $2,079,000 and $2,418,000 at September 28, 2007
and September 29, 2006, respectively. Annual amortization of package design
costs is estimated to be $1,186,000, $586,000 and $307,000 in fiscal year 2008,
2009 and 2010, respectively.
Deferred debt issuance costs relate to the Company's long-term debt and credit
facilities and are amortized over the term of the credit facility which is a
five-year period ending March 2011. Annual amortization is recorded as a
component of interest expense. Deferred debt issuance costs, net of accumulated
amortization at September 28,
49
2007 and September 29, 2006, were $4,484,000 and $5,441,000, respectively. The
Company refinanced its credit facility and long-term debt in March 2006 and
charged income for the remaining unamortized deferred debt issuance cost at that
time.
The insurance settlement asset relates to the Company's stipulation to settle
all claims alleged in the federal securities class action lawsuit for $25
million composed of $11 million in cash, to be provided by its insurers, and $14
million in its common shares. The number of shares issued in connection with the
settlement is contingent upon the stock price at the date the court enters an
order of distribution of the common shares. The fiscal year 2006 insurance
settlement also includes $1.5 million for settlement related to shareholder
derivative action to be provided by the Company's insurers. See Note 14 for
additional information.
9. ACQUISITIONS - BRANDS AND TRADEMARKS
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", the
Company assigned an indefinite life to trademarks and brand names, previously
acquired by the Company, and accordingly, records no amortization expense
related to these assets. The trademarks and brand names are the Company's only
intangible assets.
The Company performed an impairment review of its brands in the third quarter of
fiscal year 2005 based on impairment indicators of significant year-to-date
declines in certain brand revenues during the fiscal year. The result of the
review, using a discounted cash flow model, was a brand impairment charge
aggregating $29.9 million being recorded. The Company subsequently completed its
annual impairment review of fiscal year 2005 using a discounted cash flow model
and based on the 2006 fiscal year business plan and its forecast available in
the fourth quarter of fiscal year 2005. The business plan and forecasts, which
included new information and marketing changes, resulted in the additional brand
impairment. The result of this review was a brand impairment charge in the
fourth quarter of fiscal year 2005 of $58.7 million. The total brand impairment
charges recorded in fiscal year 2005 was $88.6 million.
The Company sold the Mrs. Leeper's brand and Eddie's Spaghetti brand trademarks
and related inventory in fiscal year 2006 for $1.8 million in net proceeds and
recorded a write-down of approximately $4.7 million related to brands and $0.3
million related to the write-off of the unamortized non-compete agreement
obtained in connection with this brand acquisition.
The Company performed its fiscal year 2006 annual review of its brands and
trademarks based on the fiscal year 2007 business plan and forecasts. The result
of this review was a brand impairment of $1.0 million.
The Company performed its fiscal year 2007 annual review of its brands and
trademarks based on the fiscal year 2008 business plan and forecasts, which
indicated no brand impairment in fiscal year 2007.
10. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
September 28, 2007 September 29, 2006
------------------ ------------------
Accrued promotional costs $ 10,389 $ 9,370
Accrued interest expense 3,969 4,479
Accrued bonus expense 5,290 3,216
Other accrued expenses 11,875 11,193
--------- --------
$ 31,523 $ 28,258
========= ========
11. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
50
September 28, 2007 September 29, 2006
------------------ ------------------
Borrowings under U.S. credit facility $ 240,000 $ 260,500
Borrowings under Italian credit facility 1,963 1,782
------------ ------------
241,963 262,282
Less current portion 1,963 1,782
------------ ------------
$ 240,000 $ 260,500
============ ============
On March 13, 2006, the Company entered into a new $295 million, five-year senior
credit facility. The facility replaced the Company's $290 million senior credit
facility that would have expired on October 2, 2006. The credit facility is
comprised of a $265 million term loan and a $30 million revolving credit
facility. The facility is secured by substantially all of the Company's assets
and provides for interest at either LIBOR rate plus 600 basis points or at the
agent bank's base rate calculated as prime rate plus 500 basis points. The
facility has a five-year term expiring in March 2011 and does not require any
scheduled principal payments. Principal pre-payments are required if certain
events occur in the future, including the sale of certain assets, issuance of
equity and the generation of "excess cash flow" (as defined in the credit
agreement). The Company used net proceeds from the sale of its Kenosha facility
in fiscal year 2006 to reduce the principal balance of the term loan by $4.5
million without incurring pre-payment penalties. The credit facility also
includes a quarterly unused commitment fee equal to 1% times the amount by which
the credit facility commitment exceeds the total of outstanding loans and
outstanding letters of credit as defined in the agreement. As of September 28,
2007 and September 29, 2006, the Company had an Italian credit facility
providing for available borrowing of $7.0 million and $6.4 million,
respectively. The Italian credit facility is secured by Italian receivables. The
interest rates in effect at September 28, 2007 and September 29, 2006 were 11.4%
and 11.3%, respectively, on the U.S. credit facility. The interest rates in
effect at September 28, 2007 and September 29, 2006 were 5.1% and 3.7%,
respectively, on the Italian credit facility.
The Company's credit facility 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
its ability to enter into certain contractual arrangements. The Company does not
currently expect these limitations to have a material effect on its business or
results of operations. The Company was in compliance with its restrictive
covenants under the credit facility at September 28, 2007 and September 29,
2006.
On March 14, 2007, the Company and its lenders agreed to an amendment to the new
credit facility. The amendment provided, among other things, the extension of
certain financial reporting covenants. Under the amended credit facility, the
Company was required to deliver its fiscal 2005 and fiscal 2006 audited
financial statements to the lenders by December 31, 2007. If the Company did
not, it could be in default of this covenant and could be subject to default
interest. The amendment also provided for a lower interest rate spread upon
delivery of such statements. The amendment also allowed the Company to make a
one-time $10.0 million voluntary pre-payment of the term loan without incurring
a pre-payment penalty, which the Company did in March 2007.
On December 27, 2007, the Company and its lenders agreed to an amendment to the
new credit facility. Under the amended credit facility, the Company is required
to deliver its fiscal year 2005, 2006 and 2007 audited financial statements to
the lenders by June 30, 2008. If the Company does not, it could be in default of
this covenant and could be subject to default interest. The amendment also
provides for a lower interest rate spread upon delivery of such statements.
The Company also has outstanding letters of credit that total approximately
$2,456,000 and $1,531,000 at September 28, 2007 and September 29, 2006,
respectively.
Annual maturities of long-term debt obligations for each of the next five fiscal
years reflecting the terms of the credit facility discussed above, are as
follows (in thousands):
2008 $ 1,963
2009 -
2010 -
2011 240,000
2012 -
---------
$ 241,963
=========
51
12. 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"), commonly known as the Byrd Amendment,
which provides that assessed anti-dumping and subsidy duties liquidated by the
Department of Commerce on Italian and Turkish imported pasta after October 1,
2000 will be distributed to affected domestic producers. The legislation
creating the dumping and subsidy offset payment provides for annual payments
from the U.S. government. The Company recognized revenue under the Act of
$2,959,000, $2,628,000 and $1,043,000 in fiscal years 2007, 2006 and 2005,
respectively. Effective October 1, 2007, the Act was repealed, resulting in the
discontinuation of future distributions to affected domestic producers for
duties assessed after such date.
13. INCOME TAXES
Significant components of the income tax provision are as follows (in
thousands):
Year ended Year ended Year ended
September 28, 2007 September 29, 2006 September 30, 2005
------------------ ------------------ ------------------
Current income tax expense (benefit):
U.S. $ 452 $ 89 $ 581
Foreign 52 80 141
------- ------- -------
504 169 722
------- ------- -------
Deferred income tax expense (benefit):
U.S. (722) (2,719) (4,655)
Foreign 55 309 203
------- ------- -------
(667) (2,410) (4,452)
------- ------- -------
Net income tax expense (benefit) $ (163) $(2,241) $(3,730)
======= ======== ========
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 (in thousands):
September 28, 2007 September 29, 2006
------------------ ------------------
Deferred tax assets:
Net operating loss carryforwards $ 42,018 $ 46,309
Tax credit carryforwards 15,226 15,127
Inventory valuation 1,088 1,274
Stock-based compensation 2,934 2,456
Intangible assets 8,277 12,536
Accounts receivable valuation 2,330 2,399
Prepaid expenses and other current assets 2,357 509
Other 5,184 5,085
------------ ----------
79,414 85,695
Valuation allowance (49,759) (52,333)
------------ ----------
Total deferred tax assets 29,655 33,362
------------ ----------
Deferred tax liabilities:
Tangible assets 62,560 66,934
------------ ----------
Net deferred tax liabilities $ 32,905 $ 33,572
============ ==========
The following is the component of income (loss) before income tax expense
(benefit) for domestic and foreign operations:
52
Year ended Year ended Year ended
September 28, 2007 September 29, 2006 September 30, 2005
------------------ ------------------ ------------------
Domestic $ 5,666 $ (31,565) $ (104,883)
Foreign (481) (1,089) 906
----------- ---------- -----------
$ 5,185 $ (32,654) $ (103,977)
=========== ========== ===========
The reconciliation of income tax computed at the U.S. statutory tax rate to
income tax expense is as follows (in thousands):
Year ended Year ended Year ended
September 28, 2007 September 29, 2006 September 30, 2005
------------------ ------------------ ------------------
Income / (loss) before income taxes $ 5,185 $ (32,654) $ (103,977)
U.S. statutory tax rate X 35% X 35% X 35%
-------- ------------ -----------
Federal income tax expense / (benefit) at
U.S. statutory rate 1,815 (11,429) (36,392)
State income tax expense / (benefit),
net of federal tax effect (5) (969) (2,251)
Foreign tax rate differential 365 (173) (71)
Change in valuation allowance (2,574) 10,237 34,756
Tax credits - (62) (36)
Other, net 236 155 264
-------- ------------ -----------
Total income tax expense / (benefit) $ (163) $ (2,241) $ (3,730)
======== ============ ============
The income tax benefit related to stock option deductions for fiscal year 2005
initially recorded as an increase to additional paid-in capital has been fully
offset by a valuation reserve to reduce the amount of the deferred tax asset
otherwise recorded in the amount of $1,315,000, as the Company does not believe
it is more likely than not that the net operating loss related thereto will be
utilized prior to expiration. There are no such stock option deductions recorded
in fiscal years 2007 and 2006.
The Company had federal net operating loss carryforwards of $103,553,000 at
September 28, 2007, expiring in 2024 through 2027, and $115,586,000 at September
29, 2006, expiring in 2024 and 2026. A partial valuation allowance has been
established against the federal net operating loss carryforward at September 28,
2007 and September 29, 2006 as the Company does not believe it is more likely
than not that the carryforward will be utilized prior to expiration. In making
this determination, the Company did not consider future taxable income due to
the existence of a three-year cumulative loss as of September 28, 2007 and
September 29, 2006. The Company only considered taxable income to the extent of
reversals of net temporary differences in existence as of September 28, 2007 and
September 29, 2006.
The Company had various state net operating loss carryforwards of $160,903,000
at September 28, 2007 and $170,296,000 at September 29, 2006, that have various
expiration dates from 2008 to 2027. The realizability of these losses is subject
to the Company's ability to generate taxable income in future years and is also
dependant upon the Company's continued business activity in each state and its
corresponding apportioned taxable income in each state. A full valuation
allowance has been established against these net operating loss carryforwards at
September 28, 2007 and September 29, 2006, as the Company does not believe it is
more likely than not that they will be utilized prior to expiration.
The Company had AMT credit carryforwards of $10,376,000 and $10,277,000 at
September 28, 2007 and September 29, 2006, respectively, with no expiration
date. A partial valuation allowance has been established against these credits
at September 28, 2007 and September 29, 2006 as the Company does not believe it
is more likely than not that these credits will be fully utilized. In making
this determination, the Company did not consider future taxable income due to
the existence of a three-year cumulative loss as of September 28, 2007 and
September 29, 2006. The Company only considered taxable income to the extent of
reversals of net temporary differences in existence as of September 28, 2007 and
September 29, 2006.
The Company had general business credit carryforwards of $705,000 at both
September 28, 2007 and September 29, 2006, with various expiration dates from
2013 to 2023. A full valuation allowance has been established against these
credits as of September 28, 2007 and September 29, 2006 as the Company does not
believe it is more likely than not
53
that these credits will be utilized prior to expiration. In making this
determination, the Company considered that the net operating loss carryforwards
existing at September 28, 2007 and September 29, 2006 would be utilized prior to
the utilization of the general business credit carryforwards and general
business credit carryforwards are set to expire prior to the expiration of the
net operating loss carryforwards.
At September 28, 2007 and September 29, 2006, the Company had state tax credit
carryforwards of $4,145,000 that have varying expiration dates from 2011 to
2020. A full valuation allowance has been established against these credits for
both years as the Company does not believe it is more likely than not that these
credits will be utilized prior to expiration
No U.S. income taxes have been provided on the undistributed earnings of foreign
subsidiaries that have been retained for reinvestment. Any taxes paid to foreign
governments on those earnings may be used, in whole or in part, as credits
against the U.S. tax on any dividends distributed from earnings. The Company did
not have undistributed earnings at September 28, 2007.
14. COMMITMENTS AND CONTINGENCIES
Purchase and Supply Agreements:
The Company had durum wheat and semolina purchase commitments totaling
approximately $72.6 million and $30.0 million at September 28, 2007 and
September 29, 2006, respectively.
Under agreements with one of its primary rail carriers, the Company is obligated
to transport substantially all wheat volumes purchased on these carriers. The
Company was in compliance with these obligations at September 28, 2007.
The Company purchases its raw material requirements (including semolina and
semolina/flour blends) for its Tolleson, Arizona facility from Bay State Milling
Company under the terms of a long-term supply agreement (10-year term with
renewal provisions). The Company is obligated to purchase 80% of its annual
Tolleson requirements for semolina from Bay State with an annual minimum of 50
million pounds. The Company has satisfied its minimum requirements for fiscal
years 2007, 2006 and 2005. In the event Bay State's ownership changes or under
performs, the Company has contractual rights to purchase the mill at an
established book value less applicable depreciation to that point.
Operating Leases:
The Company leases office space, computer equipment and other equipment, under
lease agreements accounted for as operating leases. The office lease agreement
contains renewal options and rental escalation clauses, as well as provisions
for the payment of utilities, maintenance and taxes. As of September 28, 2007,
the Company's future minimum rental payments due under the non-cancelable
operating lease agreements consist of the following (in thousands):
2008 $ 1,130
2009 1,104
2010 785
2011 188
2012 1
Thereafter -
-------
$ 3,208
=======
Rent expense was approximately $1.2 million for fiscal year 2007 and $1.1
million for each of the fiscal years 2006 and 2005.
54
Governmental Investigations and Other Matters:
• Beginning in the late summer of 2005, the Company received document
requests and formal subpoenas from the Enforcement Division of the SEC
relating to its accounting practices, financial reporting, proxy
solicitation and other matters in connection with a formal, non-public
investigation by the SEC staff of the Company and certain persons and
entities employed by or associated with the Company. The United States
Attorney's Office for the Western District of Missouri ("DOJ") has also
been investigating these matters and has been coordinating with the SEC
staff. The Company has had, and is continuing to have, discussions with the
SEC staff, and separately with the DOJ, regarding the conclusion of their
investigation activities and of their respective views of appropriate bases
on which to reach mutually acceptable settlements. Such settlements could
result in a Deferred Prosecution Agreement, which could include the
assignment of a corporate monitor, continued cooperation with any ongoing
investigations and/or a monetary fine. Due to the status of ongoing
discussions with the DOJ and SEC staff, the Company cannot estimate a range
of possible loss that could result from a monetary fine, if any. There can
be no assurance that any settlement would not have a material adverse
effect on our business, financial condition, results of operations or cash
flows. The Company is cooperating with these investigations.
• On October 28, 2005, the Company received notice from the Employee Benefit
Security Administration of the U.S. Department of Labor ("EBSA") that the
EBSA was commencing an investigation regarding its 401(k) plan. The EBSA
visited the Company's offices on January 18, 2006 to review requested
information and interview its Director of Human Resources regarding the
401(k) plan. The Company is cooperating with the EBSA and has provided the
EBSA with all requested information.
• During the Company's ongoing analysis of financial matters, it reviewed
transactions reported to the U.S. Department of Commerce (the "DOC") for
the period July 1, 2002 through June 30, 2003 in the antidumping proceeding
on pasta imported from Italy. Based on the data reported by the Company and
its Italian subsidiary, Pasta Lensi, S.r.l., the DOC revoked the AD Order
with respect to Pasta Lensi. During its investigation, information came to
the Company's attention that certain data reported to the DOC was incorrect
and as a result, Pasta Lensi may not have been eligible for revocation of
the AD Order. The Company disclosed the issue to the DOC. Simultaneously,
the Company provided this information to the DOJ, which requested further
information on this matter. As a result of the Company's disclosure to the
DOC, it published notice on February 22, 2008 in the Federal Register of
its preliminary determination to reinstate Pasta Lensi in the existing
antidumping duty order at a cash deposit rate of 45.6%. The preliminary
determination applies, on a prospective basis, to all imports of subject
products from and after February 22, 2008. A cash deposit rate of 45.6%
would have a significant adverse impact to our working capital position.
The Company has appealed this determination. The Company has substantially
mitigated the impact of this order by changing its ingredient to organic
semolina in March 2008, thereby manufacturing products for import into the
U.S. that are exempt from the antidumping duty order. Based on the
Company's review, the Company does not believe this order will have a
material effect on its financial condition.
Each of these matters is ongoing and involves various risks and uncertainties
that could have a material adverse effect on our business, results of operations
and financial condition.
Litigation Claims and Disputes:
• Beginning in August, 2005, seven lawsuits containing similar allegations of
misrepresentations and omissions concerning the Company's financial
statements and asserting both derivative and direct claims were filed in
the United States District Court for the Western District of Missouri
against the Company, certain of its current and former directors and
officers, and its independent registered public accounting firm, Ernst &
Young, LLP. These lawsuits were consolidated into a single lawsuit
asserting both derivative and direct claims. On June 16, 2006, the Court
dismissed the derivative claims because the plaintiffs failed to make a
required demand on the Company's Board of Directors. By stipulation of
settlement filed with the Court on October 29, 2007, the Company agreed to
settle all claims alleged in the lawsuit, including those alleging
violations of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. On February 12, 2008, the Court granted final approval of the
settlement. The settlement of the federal securities class action lawsuit
was for $25 million, comprised of $11 million in cash, to be provided by
the Company's insurers, and $14 million in the Company's common shares.
Under the terms of the settlement, on March 27, 2008, class counsel
received 527,903 common shares
55
in satisfaction of the Court approved fee award. The class will receive
approximately 930,000 common shares, subject to adjustment upward or
downward, based upon the Company's stock price as provided in the
stipulation of settlement. The settlement was recorded in the fourth
quarter of fiscal year 2005.
• In November 2005, a shareholder derivative action was filed in the Circuit
Court of Jackson County, Missouri. The plaintiff alleges that certain of
the Company's former officers and directors are liable to the Company for
breaches of fiduciary duties and aiding and abetting such breaches,
corporate waste, gross mismanagement, unjust enrichment, abuse of control
based upon the Company's accounting practices and financial reporting,
insider selling and misappropriation of information, and that its
independent registered public accounting firm, Ernst & Young LLP, is liable
for professional negligence and accounting malpractice, aiding and abetting
breaches of fiduciary duties and breach of contract. The Company is named
as a nominal defendant in this matter. The plaintiff seeks equitable relief
and unspecified compensatory and punitive damages. On March 13, 2008, the
Company reached an agreement in principle, subject to court approval, to
settle this action. The proposed settlement requires the adoption of
certain governance reforms by the Company and payment of $1.5 million in
attorney's fees and costs to counsel for the plaintiff, which payment will
be made under our insurance policies. The settlement was recorded in the
first quarter of fiscal year 2006.
• In September 2006, another action was filed in the United States District
Court for the Western District of Missouri. The plaintiff asserts
derivative claims against certain of the Company's former and current
officers and directors for breaches of their fiduciary duties relating to
the Company's accounting practices and financial reporting. Plaintiff also
asserts claims on behalf of a putative class against the Company's current
directors for failing to schedule or hold an annual meeting for 2006. The
Company is named as a nominal defendant. The plaintiff seeks unspecified
monetary damages on the Company's behalf and an order requiring that an
annual meeting be scheduled and held. On February 12, 2007, the Court
stayed all further proceedings in the suit until forty-five days after the
Company's issuance of restated financial results, and required the Company
to provide monthly reports regarding the status of its restatement process.
On March 13, 2008, the Company reached an agreement in principle, subject
to court approval, to settle this action on a consolidated basis with the
November 2005 shareholders derivative action described above.
• On March 7, 2007, a lawsuit was filed in the Delaware Chancery Court
against the Company alleging that no annual meeting of shareholders had
been held since February 7, 2005, and requesting that the Company be
compelled to convene an annual meeting. Proceedings in that matter are
currently stayed by agreement of the parties. On March 13, 2008, the
Company reached an agreement in principle, subject to court approval, to
settle this action as part of the resolution of the other two derivative
actions.
Each of these actions is ongoing, and the Company continues to defend them
vigorously. Although the Company cannot predict the outcome of any of these
actions, an adverse result in one or more of them could have a material adverse
effect on its business, results of operations and financial condition.
From time to time and in the ordinary course of its business, the Company is
named as a defendant in legal proceedings related to various issues, including
worker's compensation claims, tort claims and contractual disputes. While the
resolution of such matters may have an impact on the Company's financial results
for the period in which they are resolved, the Company believes that the
ultimate disposition of these matters will not, individually or in the
aggregate, have a material adverse effect upon its business or consolidated
financial statements.
Indemnification and Pending Litigation Obligations:
The Company has incurred and will continue to incur significant expense on
behalf of the Company and on behalf of the several individuals to whom the
Company has indemnification obligations related to certain claims and
investigations involving the Company and these individuals. In addition, the
Company continues to incur significant expense related to the completion of its
historical audits and SEC reporting requirements. The expenses the Company has
incurred through the fiscal year ended September 28, 2007, in connection with
all of these matters, including those associated with its restatement and
pending legal matters, net of insurance proceeds, were $2.5 million in fiscal
year 2005, $16.1 million in fiscal year 2006 and $13.3 million in fiscal year
2007.
56
Employment and Consulting Agreements:
The Company had employment agreements with certain officers providing for
payments to be made in the event the employee is terminated related to a change
in control as well as severance provisions not related to change in control.
On September 28, 2005 the Company entered into a consulting agreement with
Alvarez & Marsal LLC, to provide management services and a co-chief executive
officer. The agreement calls for fees and incentive cash bonuses, as well as
warrants for the Company's stock, which warrants are described more fully in
Note 20, Restricted Stock and Warrants.
15. 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, key employees and contract employees. In December 2000, a fourth stock
option plan was established that authorizes the granting of restricted shares,
options and stock appreciation rights to purchase up to 1,000,000 shares of the
Company's common stock by certain officers, key employees and contract
employees. In February 2004, shareholders approved an additional 800,000 shares
under the 2000 plan. The stock options become exercisable over the next one to
five years in varying amounts, depending on the terms of the individual option
agreements, and expire 10 years from the date of grant. The stock appreciation
rights become exercisable over the next one to four years in varying amounts
depending on the terms of the individual agreements, and expire seven years from
the date of grant.
The Company adopted SFAS No. 123R on October 1, 2005 using the modified
prospective method. The effect of the adoption of SFAS No. 123R is discussed in
Note 2.
The assumptions used to record share-based compensation expense for stock
options and stock appreciation rights under SFAS No. 123R for fiscal year 2007
and 2006 and present the pro forma information under SFAS No. 123 for fiscal
year 2005 are as follows:
Risk-Free Dividend Expected Life Black Scholes
Interest Rate Yield Volatility (years) Values
---------------------------------------------------------------------------
Fiscal Year 2005 Weighted Average 3.93% 2.0% 34.9% 4.3 $ 7.99
Fiscal Year 2006 Weighted Average 4.70% 0.0% 45.9% 4.5 $ 1.69
Fiscal Year 2007 Weighted Average 4.65% 0.0% 39.2% 4.4 $ 3.56
A summary of the Company's stock option activity, and related information, is as
follows:
57
Weighted
Average
Remaining
Weighted Contractual
Number of Average Term
Shares Exercise Price (in years)
------ -------------- ----------
Outstanding at September 29, 2006 1,094,630 $30.16
Exercised - -
Granted - -
Cancelled/Expired (154,466) $29.98
---------
Outstanding at September 28, 2007 940,164 $30.19 4.3
=========
Vested or expected to vest at 930,664 $30.20 4.3
September 28, 2007
Exercisable at September 28, 2007 865,949 $30.28 4.1
There is no aggregate intrinsic value for any options outstanding, vested or
expected to vest, or exercisable at September 28, 2007 as the market price of
the Company's stock, on that date, was less than the exercise price of all
outstanding options.
There was no weighted-average grant date fair value of options in fiscal year
2007 and fiscal year 2006 as no options were issued during the year. The
weighted-average grant date fair value of options granted during the fiscal year
2005 was $7.99. There was no intrinsic value of stock options exercised in
fiscal year 2007 and 2006 as no stock options were exercised during those years.
The total intrinsic value of stock options exercised in the fiscal year 2005 was
$4,630,000. No cash was received in fiscal 2007 and 2006 as no stock options
were exercised during those years. The Company recorded cash received from the
exercise of stock options of $3,550,000 in the fiscal year 2005.
The total fair value of options that vested during the fiscal years 2007, 2006
and 2005 was $1.4 million, $1.9 million, and $5.6 million, respectively.
The following table summarizes outstanding and exercisable options at September
28, 2007:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Average Average Weighted
Contractual Weighted Contractual Average
Number Life Average Number Life Exercise
Exercise Prices Outstanding (in years) Exercise Price Exercisable (in years) Price
--------------- ----------- ---------- -------------- ----------- ---------- -----
$ 12.23-18.50 134,736 1.5 $ 18.24 134,736 1.5 $ 18.24
$ 19.70-24.38 58,550 1.7 $ 22.43 55,700 1.4 $ 22.49
$ 25.00-28.68 240,297 4.5 $ 26.36 213,457 4.2 $ 26.24
$ 28.90-36.00 130,400 6.1 $ 30.40 94,475 5.8 $ 30.95
$ 36.81-43.32 376,181 5.0 $ 38.05 367,581 5.0 $ 38.05
Under SFAS No. 123R, the Company recognized compensation expense related to
stock option awards of $972,000 and $1,797,000 in fiscal 2007 and 2006,
respectively.
Prior to the implementation of SFAS No. 123R, the Company had issued certain
stock option awards whereby the exercise price was less than the market price on
the measurement date. The Company has recognized total compensation expense
related to stock option awards of $731,000 in fiscal year 2005. The Company has
recognized expense related to other stock awards of $200,000, $140,000 and
$160,000 in fiscal years 2007, 2006 and 2005, respectively.
A summary of the Company's stock appreciation rights activity, and related
information, is as follows:
58
Weighted
Average
Weighted Aggregate Remaining
Number of Average Intrinsic Contractual Term
Shares Exercise Price Value (in years)
------ -------------- ----- ----------
Outstanding at September 29, 2006 789,615 $5.66
Exercised - -
Granted 526,944 $8.96
Cancelled/Expired (85,776) $6.63
----------
Outstanding at September 28, 2007 1,230,783 $7.00 $ 1,894,000 5.8
==========
Vested or expected to vest 1,085,729 $6.99 $ 1,684,000 5.8
Exercisable 97,552 $5.70 $ 248,000 5.5
The following table summarizes outstanding and exercisable stock appreciation
rights at September 28 2007:
Stock Appreciation Rights Outstanding Exercisable
------------------------------------- -----------
Weighted Weighted
Average Average Weighted
Contractual Weighted Contractual Average
Number Life Average Number Life Exercise
Exercise Prices Outstanding (in years) Exercise Price Exercisable (in years) Price
--------------- ----------- ---------- -------------- ----------- ---------- -----
$ 5.50- 8.40 748,184 5.5 $ 5.71 97,552 5.5 $5.70
$ 7.47- 9.02 482,599 6.3 $ 9.01 - - $ -
The weighted average fair value for stock appreciation rights granted was $3.56
and $1.69 for the fiscal years ended September 28, 2007 and September 29, 2006.
As of September 28, 2007, the Company had $2,152,000 of future unrecognized
compensation costs related to stock options and stock appreciation rights. These
costs are expected to be recognized over a weighted average period of 2.80
years.
In the first half of fiscal year 2008, the Company granted stock appreciation
rights with respect to 954,868 shares of common stock with a weighted average
exercise price of $7.43.
The pro forma information regarding net income (loss) and net income (loss) per
share has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS No. 123 as required for fiscal 2005.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model.
The Company's pro forma information follows (in thousands, except for per share
information):
September 30, 2005
------------------
Net income (loss) as reported $ (100,247)
Total stock based compensation expense
included in net income, net of related tax effects 1,242
Deduct stock based compensation expense
determined under fair value based method for all
awards, net of related tax effects (5,877)
-----------
59
Pro forma net income (loss) $ (104,882)
===========
Basic earnings (loss) per share:
As reported $ (5.49)
Pro forma $ (5.75)
Diluted earnings (loss) per share:
As reported $ (5.49)
Pro forma $ (5.75)
There is no income tax effect provided above related to the actual and pro forma
compensation as deferred income tax benefits otherwise provided are offset by
valuation allowances as discussed in Note 13.
16. 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, which is not to exceed 6% - 12% of the employee's
salary, depending on the length of the employee's service to the Company. The
Company may contribute additional amounts to the plan as determined annually by
the Board of Directors. Employer contributions related to the plan totaled
$764,000, $726,000 and $706,000 for the years ended September 28, 2007,
September 29, 2006 and September 30, 2005, respectively.
The Company sponsors an Employee Stock Purchase Plan ("ESPP") which offers all
employees the election to purchase the Company common stock at a price equal to
90% of the market value on the last day of the calendar quarter. Authorized
shares under this plan were 100,000. During fiscal year 2005, the Company
suspended the ESPP.
17. STOCK REPURCHASE PLAN AND TREASURY SHARES
In October 2002, the Company's Board of Directors authorized up to $20,000,000
to implement a common stock repurchase plan. The Company did not purchase any
shares in fiscal years 2007, 2006 and 2005 under this program.
The Company repurchased 19,455 shares at a weighted average price of $8.82,
4,946 shares at a weighted average price of $7.99 and 7,902 shares at a weighted
average price of $20.27 connection with the withholding of taxes upon vesting of
restricted stock in fiscal year 2007, 2006 and 2005, respectively.
18. DIVIDENDS
The Company declared and paid dividends in the first three quarters of fiscal
year 2005, totaling $10,303,000 ($.5625 per share). No dividends have been
declared or paid since the third quarter of fiscal year 2005. See Note 11,
Long-Term Debt, regarding credit facility restrictions on payment of future
dividends.
19. STOCKHOLDER RIGHTS PLAN
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
60
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.
20. RESTRICTED STOCK AND WARRANTS
During the years ended September 28, 2007 and September 29, 2006, the Company
issued 76,994 and 239,682 shares of restricted stock to employees of the
Company, respectively, with a weighted-average grant date values of $8.80 and
$4.25, respectively. In fiscal year 2006, the Company adopted SFAS No. 123R and
has recorded expense on the restricted stock as it vests equal to the fair value
at the end of each reporting period. For fiscal year 2005 and prior, the Company
recorded these restricted stock awards as unearned compensation. The Company
maintains certain restricted stock compensation plans for which employees are
allowed to elect to have taxes withheld at amounts greater than minimum required
amounts on vested shares through the Company's repurchase of shares triggering
variable accounting treatment in fiscal 2005 and prior. The awards contained
either a cliff or straight line vesting provision and, therefore, expense is
recognized over the vesting period. The compensation expense is calculated under
an accelerated vesting method in accordance with FASB Interpretation 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans". The expense recognized was $697,000, $289,000 and $351,000 in
fiscal years 2007, 2006 and 2005, respectively. Under APB No. 25, for fiscal
year 2005 and prior, the unearned compensation is classified as a reduction to
stockholders' equity in the accompanying statement of stockholders' equity. In
addition, subsequent to fiscal 2007, the Company granted 154,263 shares of
restricted stock with a weighted average grant date value of $7.73. At September
28, 2007, unrecognized cost related to restricted stock awards total
approximately $1,228,000. These costs will be recognized over a weighted average
period of 2.5 years.
The Company's restricted stock activity is as follows:
Weighted Average
Number of Shares Grant Date
---------------- Fair Value
----------
Outstanding at September 29, 2006 234,047 $ 8.89
Granted 76,994 $ 8.80
Vested (42,204) $ 16.24
Cancelled (42,511) $ 7.38
--------
Balance at September 28, 2007 226,326 $ 7.77
========
On September 28, 2005, the Company entered into a letter agreement with Alvarez
& Marsal, LLC ("A&M") for their evaluation of the Company's business and
recommendations for improving its operating and financial performance. Part of
A&M's compensation includes warrants that expire in September 2010, to purchase
shares of the Company's common stock. On March 10, 2006 the September 28, 2005
letter agreement was amended, and among other compensation adjustments,
finalized the number of warrants at 472,671 with an established exercise price
of $5.67 per share. Based on the performance period specified in the September
28, 2005 agreement, the warrants vested on January 26, 2006, and based on the
value of the warrants at the date of vesting and the subsequent amendment to the
September 28, 2005 agreement, the total value of the warrants expensed in fiscal
year 2006 was $427,000. The prorated expense to fiscal year ended September 30,
2005 was immaterial.
61
21. MAJOR CUSTOMERS
Sales to Wal-Mart, Inc. during the years ended September 28, 2007, September 29,
2006 and September 30, 2005, represented 23%, 22% and 21% of revenues,
respectively. Sales to Sysco during the fiscal years ended September 28, 2007,
September 29, 2006 and September 30, 2005, represented 9%, 11% and 11%,
respectively.
22. BOARD OF DIRECTORS STOCK REMUNERATION
The Company provides outside directors with an annual retainer amount in common
stock equal to $20,000 per director.
23. QUARTERLY FINANCIAL DATA - UNAUDITED
The following 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.
Quarterly financial data is as follows (in thousands, except per share data):
62
First Second Third Fourth
2007 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Revenues $ 94,105 $ 96,793 $ 97,158 $ 110,066
Cost of goods sold 69,818 75,098 77,441 86,462
-------- -------- -------- ---------
Gross profit 24,287 21,695 19,717 23,604
Selling and marketing expense 4,843 5,716 4,778 6,166
General and administrative expense 8,302 8,530 8,086 8,630
(Gains) losses related to long-lived assets 23 (68) (23) (41)
-------- -------- -------- ---------
Operating profit 11,119 7,517 6,876 8,849
Interest expense, net 7,759 7,399 7,057 7,206
Other (income) expense (58) (80) (57) (50)
-------- -------- -------- ---------
Income (loss) before income taxes 3,418 198 (124) 1,693
Income tax provision (benefit) (133) 22 108 (160)
-------- -------- -------- ---------
Net income (loss) $ 3,551 $ 176 $ (232) $ 1,853
======== ======== ======== =========
Net income (loss) per common share (basic) $ 0.19 $ 0.01 $ (0.01) $ 0.10
Net income (loss) per common share (assuming dilution) $ 0.19 $ 0.01 $ (0.01) $ 0.10
Due to changes in stock prices during the year and timing of issuance of
shares, the cumulative total of quarterly net income (loss) per share amounts
may not equal income per share for the year.
First Second Third Fourth
2006 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Revenues $ 93,766 $ 91,560 $ 85,998 $ 95,699
Cost of goods sold 72,213 71,047 68,562 72,955
-------- -------- -------- ---------
Gross profit 21,553 20,513 17,436 22,744
Selling and marketing expense 5,385 6,685 6,294 4,507
General and administrative expense 10,156 9,815 6,551 8,937
Impairment charges to brands and trademarks - - - 998
Loss on disposition of brands and trademarks - 4,708 - -
Losses (gains) related to long-lived assets 73 16,561 5,634 -
-------- -------- -------- ---------
Operating profit (loss) 5,939 (17,256) (1,043) 8,302
Interest expense, net 5,765 8,652 7,362 7,730
Other (income) expense (1,017) 258 (181) 27
-------- -------- -------- ---------
Income (loss) before income taxes 1,191 (26,166) (8,224) 545
Income tax provision (benefit) 97 (1,609) (813) 84
-------- -------- -------- ---------
Net income (loss) $ 1,094 $(24,557) $(7,411) $ 461
======== ========= ======== =========
Net income (loss) per common share (basic) $ 0.06 $ (1.33) $ (0.40) $ 0.02
Net income (loss) per common share (assuming dilution) $ 0.06 $ (1.33) $ (0.40) $ 0.02
Due to changes in stock prices during the year and timing of issuance of
shares, the cumulative total of quarterly net income (loss) per share amounts
may not equal income per share for the year.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Background
As of September 28, 2007, the end of the period covered by this Annual Report on
Form 10-K, management performed an evaluation of the effectiveness of our
disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act. The assessment was performed under the supervision and with
the participation of our then Chief Executive Officer and our current principal
financial officer, who was our controller throughout the 2007 fiscal year. Based
on such evaluation, our current Chief Executive Officer, who joined us on
November 6, 2007, and our principal financial officer, who was named our Chief
Financial Officer in January 2008, have concluded that, as of the end of such
period, that our disclosure controls and procedures were not effective as a
result of the material weaknesses in internal control over financial reporting
discussed below.
Not withstanding the assessment of our internal control over financial reporting
as not effective, our management has concluded that the consolidated financial
statements included in this Annual Report on Form 10-K fairly present, in all
material respects, our consolidated financial position, results of operations
and cash flows for the periods presented in conformity with generally accepted
accounting principles ("GAAP").
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Internal control over financial reporting is a
process designed by, or under the supervision of, our principal executive and
principal financial officers, or persons performing similar functions, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP. Internal control over financial reporting includes those policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our
assets; that provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP;
that provide reasonable assurance that receipts and expenditures are being made
only in accordance with proper authorization; and that provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on our
consolidated financial statements. This assessment used the criteria in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO").
Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper override of controls. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting.
Management assessed the effectiveness of the company's internal control over
financial reports as of September 28, 2007 using the COSO framework. Based on
its assessment, management has identified material weaknesses and has concluded
that the Company's internal control over financial reporting was not effective
as of September 28, 2007. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the Company's annual
or interim financial statements will not be prevented or detected on a timely
basis.
As a result of its continuing efforts to complete the restatement of prior
fiscal periods, management was unable to take necessary corrective actions to
remediate the following identified material weaknesses as of September 28, 2007:
64
Material Weaknesses
• Policies and Procedures
We did not maintain adequate policies and procedures related to
initiating, authorizing, recording, processing and reporting
transactions. In addition, we did not maintain, or did not
perform, appropriate review procedures. This led to (a)
inconsistent execution of business practices, (b) inability to
ensure practices were in accordance with management standards, (c)
ambiguity in delegation of authority, (d) misapplication of GAAP,
and (e) errors in financial reporting.
• Application of GAAP
We did not provide appropriate training for our personnel,
resulting in material misapplications of GAAP, including the
primary categories of accounting for share-based compensation and
income taxes.
• Financial Statement Closing Process
The controls over the financial statement closing process did not
operate effectively. Due to the additional requirements associated
with the Restatement, the Company had not been able to file
required reports with the SEC on a timely basis, nor had we been
able to perform related internal control activities including
reconciliations and financial statement reviews on a timely basis.
• Internal Audit
We did not operate an adequate internal audit function.
• Disclosure Controls
We did not maintain effective disclosure controls and procedures,
including an effective Disclosure Committee, designed to ensure
complete and accurate disclosure as required by GAAP and various
regulatory bodies. In addition, we did not file various periodic
reports on a timely basis as required by the rules of the SEC and
the NYSE. The Company believes the disclosure controls and
procedures described herein are key elements of internal control
over financial reporting that provide reasonable assurances that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP.
Changes in Internal Control over Financial Reporting
We have engaged in, and are continuing to engage in, substantial efforts to
improve our internal control over financial reporting and disclosure controls
and procedures related to many areas of our financial statements and
disclosures.
Remediation Initiatives
In fiscal 2007, we continued our substantial efforts, which began in fiscal
2005, to address our previously reported material weaknesses. To fully remediate
the material weaknesses necessitates designing new business process controls,
and testing them to ensure that they address the previously reported material
weaknesses. We continue to review and make necessary changes to the design of
our system of internal control, through critical assessments of the roles and
responsibilities of each functional group within the organization, enhancing and
documenting policies and procedures and providing relevant training, supervision
and review where appropriate.
The following material weaknesses were identified by management as of September
29, 2006, and have had the following remediation during our fiscal year ended
September 28, 2007:
65
• Application of GAAP
We have added internal staff with appropriate training and
experience in GAAP application and established a procedure to
research and document GAAP issues and decisions. We have engaged
external consultants to review and document our application of
GAAP. In addition, we have enhanced our general ledger and
automated other accounting systems. However, there are still areas
for improvement.
• Tax Accounting
We have engaged external resources to perform required tax
accounting procedures.
Since September 28, 2007, we have the following changes to our internal control
over financial reporting:
• Policies and Procedures
We continue to establish policy statements and process overviews
in appropriate areas of accounting and financial reporting
controls, as well as continuing to develop implementation
procedures under each policy statement.
• Internal Audit
We have added a Director of Internal Audit to our staff.
• Disclosure Controls
We have established a disclosure committee. We have filed our
consolidated financial statements contained in our annual reports
for the fiscal years ended September 30, 2005 and September 29,
2006.
Continued Internal Control and Financial Reporting Matters
Our ability to improve our internal control process and implement our
remediation initiatives and test the effectiveness of enhancements to internal
controls has been limited.
Our testing and evaluation of the operating effectiveness and sustainability of
the changes to our internal control over financial reporting with respect to
these material weaknesses will continue as the above referenced remediation
actions are still in the implementation process. As a result, we may identify
additional changes that are required to remediate these material weaknesses or
to otherwise improve internal controls.
ITEM 9B. OTHER INFORMATION
None.
66
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers
The following table sets forth certain information about each of our executive
officers as of June 2, 2008.
NAME AGE POSITION
- ---- --- --------
John P. Kelly............... 56 Chief Executive Officer and President
Walter N. George........... 51 Executive Vice President - Operations and
Supply Chain
Paul R. Geist............... 45 Executive Vice President - Chief Financial
Officer
Robert W. Schuller.......... 47 Executive Vice President - General Counsel
JOHN P. KELLY joined the Company on November 6, 2007 as Chief Operating Officer
and was named Chief Executive Officer and President and elected as a director in
January, 2008. Mr. Kelly has over 30 years of experience in consumer packaged
goods, including employment with Oscar Mayer Foods Corporation, Kraft Foods,
Inc., Haagen-Dazs Company and Fiorucci Foods. From June 2002 to May 2007, Mr.
Kelly was President of VDW Acquisition Ltd. d/b/a San Antonio Farms, a maker and
marketer of Mexican sauces. From May 2007 to his appointment by the Company, Mr.
Kelly was Senior Vice President of Bay Valley Foods, LLC, an operating division
of Treehouse Foods, which acquired San Antonio Farms.
WALTER N. GEORGE joined the Company in January 2001 as Senior Vice President -
Supply Chain and Logistics. He was promoted to Executive Vice President -
Operations and Supply Chain in February 2003. Prior to joining the Company, Mr.
George was Vice President of Supply Chain for Hill's Pet Nutrition, Inc., a pet
food producer, from February 1989 to January 2001.
PAUL R. GEIST joined the company as Vice President and Corporate Controller on
October 18, 2004. He was named principal accounting officer on August 14, 2006,
and serves as principal financial officer. In January 2008, he was named
Executive Vice President and Chief Financial Officer. Prior to joining us, Mr.
Geist was the Vice President/Controller for Potbelly Sandwich Works, a
privately-owned restaurant company, from March 2004 to September 2004 and was an
independent financial consultant from January 2003 to February 2004. Mr. Geist
was employed by Westar Energy, Inc, an electric utility, from November 1999 to
January 2003, serving as Senior Vice President and Chief Financial Officer from
October 2001 to January 2003 and Vice President Corporate Development from
February 2001 to September 2001.
ROBERT ("Bob") W. SCHULLER was named Executive Vice President and General
Counsel on June 5, 2006. Mr. Schuller has 20 years of legal experience, both in
corporations and in private practice. Mr. Schuller was general counsel at VT,
Inc. from September 2004 to May 2006, a privately held company with affiliated
automobile dealerships and related insurance and real estate holdings. From May
2002 to December 2003, Mr. Schuller was general counsel and corporate secretary
of Farmland Industries, Inc. ("Farmland"), which at the time was one of the
largest agricultural cooperatives in the nation with operations throughout the
U.S. and overseas and which filed a petition under the Federal bankruptcy laws
in May 2002. Previously, Mr. Schuller held a number of in-house legal positions
with Farmland from 1994 to 2002.
67
Information Regarding Directors of the Company
Our Board of Directors consists of 9 independent directors and Mr. Kelly, our
CEO and president, who are divided into three separate classes. Directors are
elected for three year terms, or until their successors are elected. The
following table sets forth certain information about each of our current
directors. Information on Mr. Kelly is set forth above.
COMMITTEE
NAME AGE (1) MEMBERSHIPS
- ---- ------- -----------
David W. Allen...................... 47 Compensation
Jonathan E. Baum.................... 47 Audit, Compensation
(Chair)
Mark C. Demetree.................... 51 Compensation
Robert J. Druten.................... 61 Audit (Chair)
James A. Heeter..................... 59 Audit, Nominating and
Governance
(Chair)
John P. Kelly........................ 56 -
Ronald C. Kesselman................. 65 Compensation
Terrence C. O'Brien................. 45 Nominating and Governance
William R. Patterson................ 66 Audit
Tim M. Pollak....................... 62 Nominating and Governance
(1) As of June 2, 2008
DAVID W. ALLEN became a member of the Board on May 2, 2006, filling an existing
vacancy. Mr. Allen was appointed Senior Vice President, Supply Chain Operations
of Del Monte Foods Co., in June 2006, having served as a consultant to Del Monte
beginning in November 2005. Prior to that, Mr. Allen was Chief Operating Officer
of U.S. Foodservice, a division of Royal Ahold, from 2004 to 2005 and Chief
Executive Officer of WorldChain, Inc., a supply chain services company, from
2001 to 2004. He served as Vice President, Worldwide Operations of Dell Inc.
from 1999 to 2000. From 1991 to 1999, Mr. Allen held a variety of positions at
Frito-Lay North America, a division of PepsiCo Inc., most recently as its Senior
Vice President, Operations.
JONATHAN E. BAUM has served as a Director of the Company since 1994. Mr. Baum
has been the Chairman and Chief Executive Officer of George K. Baum & Company,
an investment banking firm, since 1994. Mr. Baum is also a director of George K.
Baum Merchant Banc, L.L.C. and Prairie Capital Management, Inc., both merchant
banking firms that are affiliated with George K. Baum & Company. Recently he has
become a trustee and member of the finance and investment committee at Midwest
Research Institute and a board member and audit committee chair of the Greater
Kansas City Community Foundation.
MARK C. DEMETREE has served as a Director since 1998. Since 1997, Mr. Demetree
has been Chairman and CEO of British Salt Holdings, LLC ("British Salt").
British Salt is the largest vacuum salt producer in the United Kingdom, and
through its affiliate, US Salt, LLC, is the fourth largest vacuum salt producer
in North America. Mr. Demetree is non-executive Chairman of the Board of Texas
Petrochemicals, Inc., a processor and refiner of petro-chemical products. He is
a managing member of Pinnacle Properties Holdings, LLC, a Boston-based real
estate investment and development fund. He is also an Operating Partner in
Silverhawk Capital Partners, a private equity investment fund based in
Greenwich, Connecticut.
68
ROBERT J. DRUTEN became a member of the Board on December 12, 2007, filing an
existing vacancy. Mr. Druten served as Executive Vice President and Chief
Financial Officer of Hallmark Cards, Inc., until his retirement in 2006. From
1991 until 1994, he served as Executive Vice President and Chief Financial
Officer of Crown Media, Inc., a cable communications subsidiary of Hallmark.
Prior to his employment with Hallmark and Crown Media, Mr. Druten held executive
positions with Pioneer Western Corporation a subsidiary of Kansas City Southern,
and was employed as a certified public accountant. Mr. Druten serves on the
boards of directors of Kansas City Southern, rail transportation company,
Alliance Holdings, GP, L.P., a publicly traded limited partnership whose
publicly traded subsidiary is engaged in the production and marketing of coal,
and Entertainment Properties Trust, a real estate investment trust for
entertainment related properties.
JAMES A. HEETER has served as a Director since May of 2000. Mr. Heeter, an
attorney, has been the Managing Partner of the Kansas City, Missouri office of
the law firm of Sonnenschein Nath & Rosenthal, a limited liability partnership,
for over five years. Mr. Heeter serves on the Firm-wide Executive Committee.
RONALD C. KESSELMAN became a member of the Board on June 1, 2006, filling an
existing vacancy. Mr. Kesselman has a 30-year career of holding senior executive
and management positions with consumer products and food processing companies.
He is currently a consumer products consultant and was previously the Chairman
of the Berwind Group, a privately held enterprise. Mr. Kesselman also serves on
the Board of Directors of Homax Products, Inc., a privately held company and
supplier of home improvement products. Mr. Kesselman was the Chairman and Chief
Executive Officer of Elmer's Products from 1995 to 2004. Mr. Kesselman has also
served in a number of management positions with Fortune 500 companies, including
Borden, Inc., Mattel Corporation and Quaker Oats Company.
TERENCE C. O'BRIEN has served as a Director since April 2003. Mr. O'Brien has
been the Chairman and Chief Executive Officer of Wholesome Holdings Group, LLC,
a food and beverage acquisitions group, since June 2006. Prior to that, Mr.
O'Brien had been President and CEO of Brach's Confections, Inc., a candy
company, which is a subsidiary of Barry-Callebaut Group, a publicly listed
company on the Swiss Stock Exchange since August, 2003. Prior to that, Mr.
O'Brien served as Senior Vice President of Sales and Customer Marketing for
Morningstar Foods, a division of Dean Foods, a processor and distributor of
dairy products from 1998 to 2003. From 1997 to 1998, Mr. O'Brien was Chief
Operating Officer for Beaconeye, Inc., a publicly held pioneer in the consumer
laser vision correction field.
WILLIAM R. PATTERSON has served as a Director since 1997. He was named
non-executive Chairman of the Board on October 17, 2005. Mr. Patterson is a
founder and manager of Stonecreek Management, LLC, a private investment firm
since August 1998. Prior to that, he served as Vice President of PSF Holdings,
L.L.C., and the Executive Vice President, Chief Financial Officer and Treasurer
of its wholly-owned subsidiary, Premium Standard Farms, Inc. ("PSF, Inc."), a
fully-integrated pork producer and processor from October 1996 to August 1998.
From January to October 1996, Mr. Patterson was a principal of Patterson
Consulting, LLC, a financial consulting firm, and as a consultant was acting
chief financial officer for PSF, Inc. From 1976 through 1995, Mr. Patterson was
a partner in Arthur Andersen LLP. Mr. Patterson is also a director of Paul
Mueller Company, a manufacturer of stainless steel vessels and processing
systems.
TIM M. POLLAK has served as a Director since June 2001. Mr. Pollak has been
President of Sagaponack Associates, Inc., a private consulting firm specializing
in branding and marketing, since 1998. Since 2007, Mr. Pollak has been a partner
of Vertical Knowledge LLC. Also, since 2006, Mr. Pollak has been a partner of
Reason, Inc. From 1978 to 1998, Mr. Pollak held various senior positions at
Young & Rubicam, Inc., a global advertising company, including CEO of New York
and Asia-Pacific divisions and Vice Chairman, Worldwide Director of Client
Services and he was also a director. Mr. Pollak was also previously a director
of the Meow Mix Company, a cat food company.
The Audit Committee
The Audit Committee is responsible for and oversees a number of matters related
to the Company's financial statements, and its relationship to and use of its
independent registered public accounting firm. A more complete description of
the Audit Committee's functions is provided in its Charter, which is available
on the Company's website at http://www.aipc.com. The current members of the
Audit Committee are Messrs. Druten, Patterson,
69
Heeter and Baum. Mr. Druten is the Chairman of the Audit Committee and the Board
has determined that Mr. Patterson is an "audit committee financial expert" as
defined in Item 407(d) (5) of Regulation S-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors, executive officers, and persons who own more than 10 percent of our
common stock (collectively, "Reporting Persons"), to file reports of their
ownership of such stock, and the changes therein, with the SEC and to furnish us
with a copy of such reports (the "Section 16 Reports"). Based upon a review of
Forms 3 and 4 and amendments thereto furnished to us during the most recent
fiscal year and any written representation from a person that no Form 5 is
required to be filed with the SEC, all such reports due were filed in a timely
manner during fiscal year 2007, except for one late Form 4 filed for Mr. George
with respect to the withholding of shares for the for the payment of taxes.
Code of Ethics
Our Board of Directors has adopted a Code of Ethics ("the Code") applicable to
all directors, officers and employees. The Code is posted on our website at
http://www.aipc.com. We will satisfy any disclosure requirements under Item 5.05
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 at
http://www.aipc.com, or in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The following discussion of executive compensation contains descriptions of
various employee benefit plans and agreements. These descriptions are qualified
in their entirety by reference to the full text or detailed descriptions of the
plans and agreements which are filed as exhibits to our SEC filings.
Introduction
This section presents an overview and perspective on executive compensation at
the Company. We discuss our compensation philosophy and objectives and describe
the structure and process for making executive compensation decisions. We also
discuss the design of the major elements of our executive compensation programs
and provide additional detail on the compensation of our "named executive
officers" for 2007 as defined by SEC rules.
The SEC has delineated certain reporting requirements for the five most highly
compensated executive officers of a public company. We did not have five
executive officers in 2007. Our named executive officers for 2007 as shown in
the Summary Compensation Table are as follows:
Name Title
---- -----
James Fogarty (1) Chief Executive Officer and President
Walter George Executive Vice President, Operations & Supply Chain
Paul Geist Executive Vice President, Chief Financial Officer
Bob Schuller Executive Vice President, General Counsel
-----------------------
(1) Mr. Fogarty, as an employee of Alvarez & Marsal, received no
compensation from the Company for his services. Accordingly, no
compensation information is presented for Mr. Fogarty. See "Related
Party Transactions" for a description of amounts paid to Alvarez &
Marsal. Mr. John P. Kelly became our Chief Operating Officer in
November 2007 and Chief Executive Officer and President in January
2008, and received no compensation in fiscal 2007.
70
American Italian Pasta Company Culture and Company-wide Compensation Philosophy
We emphasize pay for performance throughout the Company and design our
compensation programs at all levels with performance as our primary goal. The
compensation design is not significantly different for our executives than it is
for all team members -- each position is paid competitively relative to the
market for that type of role and level of responsibility. Here are a few
examples of how reward programs work in our Company:
• We are committed to building compensation programs that compensate our
team members in a fair and equitable fashion and bring stockholder
value through results-driven performance. Annual bonuses for all
salaried employees are based on the same Company performance metrics,
with manufacturing employees having certain operations-based metrics.
In addition to Company performance, individual performance is a factor
in compensation outcomes. Named executive officers in 2007 were
assigned performance ratings by the Chief Executive Officer.
• The process we use for setting our executive base salaries each year
mirrors the process used throughout the rest of the Company. Base
salary ranges are set to be competitive at the median of the
appropriate market for each position. Based upon the individual's
annual performance assessment and current salary level, base salary is
determined using a merit increase matrix and other common salary
administration guidelines.
• The Company contribution to our 401(k) plan is no different for
executives than it is for all other team members who participate in
the plan. We provide a service-based match as follows: For individuals
with less than five years of Company service, a 50 cents-on-the-dollar
match, up to 6% of compensation, for individuals with between five to
ten years of service, a 50 cents-on-the-dollar match, up to 8% of
compensation, for individuals with ten to 15 years of service, a 50
cents-on-the-dollar match, up to 10% of compensation, and for
individuals with more than 15 years of service, a 50
cents-on-the-dollar match, up to 12% of compensation is provided. All
amounts are subject to applicable IRS limits. We do not offer any type
of special executive pension plan to our officers.
• We do not provide Company-paid cars, country club memberships, or
other similar perquisites to our executives.
• We offer equity compensation as a long-term incentive for executives
and key managers representing approximately the top ten percent of the
organization.
• We offer a severance plan designed to retain executives and other
employees.
Philosophy and Objectives of Executive Compensation
We operate in a challenging and dynamic sector of the packaged food industry,
where quality, price and service must be consistently delivered to our
customers. In our business, success depends on a strong culture and an engaged
workforce. Our results are driven, in large part, by our ability to attract,
retain and motivate outstanding leaders and team members.
In keeping with our Company-wide philosophy, our executive compensation
philosophy is designed to fulfill three primary objectives:
• To attract, retain and motivate highly qualified senior executives, by
providing competitive, well-designed programs.
• To enhance the Company's near-term financial performance, by basing
annual cash incentives on objective, quantifiable performance measures
that relate to enhancement of the value of our Company and
profitability during the measured period.
71
• To increase stockholder value, by designing long-term incentives
around stock ownership and aligning the interests of senior executives
and key managers with those of our stockholders while placing a
significant portion of our senior executives' compensation at risk.
To achieve these objectives, we utilize a mix of compensation components
including base salary, annual cash incentives, long-term equity incentives, and
benefits.
Structure and Process for Compensation Decisions
The Compensation Committee of our Board has overall responsibility for
evaluating and approving our executive officer compensation plans, policies and
programs and making decisions regarding specific compensation to be paid or
awarded to our executive officers. A copy of the Compensation Committee Charter
can be found on-line at www.aipc.com under the Investors section, Corporate
Governance tab. The Compensation Committee is scheduled to meet as often as
necessary to carry out its responsibilities. The Compensation Committee chair
works with management to set the agenda for each meeting. At each meeting,
executive sessions are held without management present.
In 2007, the Compensation Committee was made up of five independent directors
who collectively offered extensive experience in general management and human
resources. Members of the Compensation Committee for 2007 were Mr. Baum, Mr.
Kesselman, Mr. Allen, Mr. Niehaus and Mr. Demetree. Mr. Niehaus resigned from
the Board of Directors effective January 31, 2008.
The Compensation Committee has authority to engage and terminate outside
consultants and approve all fees. In carrying out its duties and
responsibilities for 2007, the Compensation Committee engaged Hay Group ("Hay"),
a global consultancy with recognized expertise in compensation, benefit programs
and workplace issues. Hay works on behalf of the Compensation Committee and
works with our human resources department in the design and analysis of
executive compensation programs. The Compensation Committee directs Hay to
provide market data and recommendations on compensation levels and structure
that align with our compensation philosophy. Hay then develops and recommends to
the Compensation Committee the compensation structure for the named executive
officers. In addition, Hay reviews the design and analysis performed by our
human resources department on base salary, annual cash incentive bonus and
long-term incentive structure for other senior officers. Hay provides this
information to the Compensation Committee for evaluation and review.
Management plays a significant role in the compensation-setting process,
including recommending performance targets, evaluating performance and
recommending salary levels. Personnel from the human resources department, and
other senior officers work with Hay to discuss our philosophy and structure and
to address relevant tax and accounting issues. Based on this input, our Chief
Executive Officer, General Counsel and Hay present this information to the
Compensation Committee for discussion and approval of compensation and benefit
plans, policies and programs. In 2007, Mr. Fogarty, who was not an employee of
the Company, participated in this process. Going forward, our Chief Executive
Officer will play no role in setting his own compensation.
The Compensation Committee reviewed, provided input and approved all strategies
and elements of compensation for our executive officers in 2007. The 2007
process included meetings beginning in October 2006, through January 2007. Among
the steps in the Compensation Committee's process were the following:
• Reviewing and updating our executive compensation philosophy to ensure
it continues to serve the interests of our stockholders.
• Evaluating executive officer compensation structures using market data
developed by Hay, along with publicly available information.
• Reviewing benchmarking data to ensure our ability to attract and
retain key executive officers.
• Incorporating individual and Company performance metrics into
executive compensation programs.
72
• Establishing bonus performance metrics and target, threshold and
maximum amounts under our annual cash bonus plans, and approving final
cash bonus payouts.
• Reviewing and approving equity awards consistent with our long-term
incentive philosophy.
The Compensation Committee also assessed the services provided and fees charged
by Hay. The assessment included a review of Hay's independence, expertise,
understanding of the business environment and dynamics, including emerging
trends in executive compensation and their applicability to the Company, and
Hay's ability to clearly summarize their findings to the Compensation Committee
and management. The Compensation Committee determined that Hay demonstrated
expertise in these areas and that fees charged for services were reasonable and
within competitive practice.
During discussions, the Compensation Committee reviewed tally sheets for each of
the named executive officers. The tally sheet provides a summary of annual
compensation, including the value of salary, target annual cash bonus and
long-term incentive awards.
Summary of Executive Compensation Design
Our compensation programs are designed to support the Company's business
strategy, promote our pay for performance philosophy and attract and retain
highly qualified senior executives. In keeping with our compensation philosophy,
we have developed an executive compensation program designed to be competitive
and reward senior executives over the short-term and long-term for achieving
Company financial objectives and increasing stockholder value. As a result, a
substantial portion of our named executive officers' compensation is contingent
upon achievement of those objectives.
For 2007, as we do each year, with the assistance of Hay, we set target ranges
for total compensation that are competitive with those offered by companies in
the Hay All Industrial Market database. This database is Hay's annual survey of
executive compensation levels at over 200 companies spanning several industries,
including food and beverage, consumer products, and light manufacturing. When
evaluating the data, Hay uses "job size" as the primary variable for comparison.
Hay considers the knowledge, scope, complexity and accountability of each
position and compares to similar positions in the Hay All Industrial Market.
Our approach to compensation design includes four major elements for all named
executive officers. These elements support our pay-for-performance culture,
working together to provide varied incentives linked to our short-term and
long-term performance, as well as individual performance goals. Following is a
summary of each element, its purpose and the method used to determine target
ranges of executive compensation for our named executive officers in 2007:
• Base Salary. The starting point in a compensation package that will
attract and retain executives is an annual salary that provides a
steady income as a base upon which performance incentives can be
designed. We set base salary ranges for each executive level, utilize
midpoints that are at or near the median of the base salaries for
executives in the Hay All Industrial Market.
• Annual Incentive. The annual incentive is a cash bonus designed to
support the near-term initiatives of the business and to position us
for the future by focusing on annual goals, both financial and
operational. We set target annual cash incentive opportunities so that
target total cash (base salary midpoints, plus target annual cash
incentive opportunities) would be between the 50th to the 75th
percentile of total cash for executives in the Hay All Industrial
Market when our performance results achieve the targeted performance
levels.
• Long-Term Incentives. The long-term element is an equity-based
compensation plan designed to reward performance objectives that
deliver stockholder value over a sustained period of time, generally
four or more years. As a result, all long-term incentive awards vest
over four years. Awards in 2007 were in the form of time-vested stock
appreciation rights ("SARs") and restricted stock. The inherent
performance-based nature of SARs supports our pay for performance
philosophy. Time-vested restricted stock has
73
some pay for performance attributes but is used more for retention
purposes. We set long-term incentive equity award levels so that total
direct compensation (target total cash plus the targeted present value
of annual stock awards) would be at the 75th percentile of total
direct compensation for executives in the Hay All Industrial Market.
To determine the value of equity awards, we engaged an outside
consultant to provide valuations using the Black-Scholes methodology.
• Benefits. We provide the same benefits to executives as we offer to
all other team members of the company. These benefits include a 401(k)
plan, health plan and group life insurance. In addition, Mr. George
and Mr. Geist and 25 other key managers are provided with an
individual long-term-disability program.
Percentages of total compensation actually earned from each element will vary
based on a number of factors, including performance against objectives and the
value of equity awards upon any disposition of the underlying stock. We do not
have a specific policy governing the mix of these elements, but view them in
light of market conditions and our overall compensation philosophy.
The Compensation Committee recognizes that the engagement of strong talent in
critical functions may, at times, entail recruiting new executives and involve
negotiations with individual candidates. As a result, the Committee may
determine in a particular situation that it is in our best interests to
negotiate compensation packages that deviate from the established norms and
stated compensation design.
Explanation of Material Elements of Compensation
The following provides a more detailed discussion of our decision-making process
for each of the major elements of our executive compensation programs.
Base Salary
Base salary target ranges are set using the Hay data as discussed above. For
named executive officers, individual performance was not considered in
establishing merit increases in 2007. The Compensation Committee believes that a
competitive base salary is essential to help ensure that the executive team
remains in place to focus on the short- and long-term business strategy. Base
salaries for named executive officers are generally reviewed by the Compensation
Committee in December of each year and any increases are effective in January.
Based on the Hay market data for the positions, the base salaries of our named
executive officers other than Mr. Fogarty for 2007 were as follows:
Base Salary
(effective
Name as of 1/1/07)
- --------------------------------------------------------------------------------------
Walter George, Executive Vice President, Operations & Supply Chain 267,150
Paul Geist, Executive Vice President, Chief Financial Officer (1) 205,500
Bob Schuller, Executive Vice President, General Counsel 226,050
(1) Mr. Geist's base salary was adjusted to $245,500 effective February 1,
2007.
Annual Incentive Compensation
We provide an Annual Incentive Plan ("AIP") which provides a cash incentive
payout. Under the AIP, each year the Compensation Committee sets objective
performance measures chosen from certain predetermined categories on a
Company-wide basis. In addition to setting the target performance, the
Compensation Committee also sets the threshold and maximum amounts for each
performance measure and the bonus percentage to be paid if the performance
measures are met. In 2007, the performance measures for earning bonuses under
the AIP were the same for all named executive officers. No adjustments to the
performance measures were made by the Compensation Committee when approving
final 2007 bonuses. Upon determining whether targets have been met Company-wide,
certain incremental changes to final payouts are made based on individual
performance evaluations.
74
Performance objectives for annual incentive awards are generally developed
through the following process. First, management, including the named executive
officers, develops preliminary recommendations for Compensation Committee review
based on the Company's business plan for the upcoming year. The business plan is
developed by management with review, modification and ultimate approval made by
the Board of Directors. Next, the Compensation Committee and Hay review
management's recommendation (and relevant incentive benchmark data provided by
Hay) and the Compensation Committee establishes the final incentive compensation
plan based on the Company's business plan. In establishing the final incentive
compensation plan, the Compensation Committee seeks to ensure that the
incentives are consistent with the strategic goals set by the Board and the
business plan approved by the Board, that the goals are sufficiently ambitious
so as to provide meaningful incentive and that bonus payments, assuming target
levels of performance are attained, would be consistent with the overall
compensation program established by the Compensation Committee. Each performance
measure has a payout range of threshold, target, and maximum designed to reward
certain levels of achievement above and below target. However, no bonus is
earned for any performance metric that is achieved at a level below threshold.
The Compensation Committee sets the target level for each performance measure
based on our business plans for that year. We believe these target levels are
aggressive but achievable if our executives implement our business plan. Maximum
levels are designed to reward exceptional performance and are not easily
attainable.
In 2007, the performance measures approved by the Compensation Committee for all
named executive officers were earnings before interest taxes depreciation and
amortization (EBITDA), as defined, and net debt reduction. These performance
metrics were selected because management and the Compensation Committee believed
that the achievement of these objectives was important given the financial
condition of the Company and its financial and operating priorities in 2007.
Following is a definition of each of our bonus performance metrics and a brief
explanation of their alignment with our business strategy:
- -------------------------------------- -------------------------------------- ----------------------------------------
Metric Definition Strategic Importance
------ ---------- --------------------
- -------------------------------------- -------------------------------------- ----------------------------------------
EBITDA Total Company earnings before income Indicator of overall Company financial
taxes, depreciation and performance for executives,
amortization. (1) stockholders, and the investment
community.
- -------------------------------------- -------------------------------------- ----------------------------------------
Net Debt Reduction Reduction of current debt. Key indicator of future financial
stability, growth and profitability.
- -------------------------------------- -------------------------------------- ----------------------------------------
(1) Also excludes long-term incentive compensation, impairment charges
related to brands and fixed assets, gains or losses on disposition of fixed
assets or brands and professional fees.
For 2007, EBITDA requirements were $60.7 million at threshold, $63.0 million at
target and $67.0 million at maximum. Net debt reduction requirements were $14.3
million at threshold, $16.6 million at target and $20.6 million at maximum.
The Compensation Committee sets target bonuses at a specified percentage of base
salary based on our compensation philosophy for cash bonuses. The target bonus
is paid if the performance measures are achieved at the target levels. Bonuses,
as a specified percentage of base salary, may be paid below the target bonus, if
the performance measures are achieved at lower, threshold levels, or above the
target bonus if the performance measures are achieved at higher, maximum levels.
Actual bonuses are paid on a sliding scale between threshold and maximum levels
based on actual achievement of each performance measure individually. The
following reflects the bonus that could have been paid for 2007, as a percentage
of base salary, for each named executive officer, if the performance measures
were achieved at the threshold, target and maximum levels.
75
----------------------- ---------------- ---------- --------------- ------------ ----------------- --------------
Name Threshold Target Maximum
---- --------- ------ -------
----------------------- ---------------- ---------- --------------- ------------ ----------------- --------------
Walter George 36.5% $97,510 50% $133,575 65.0% $173,648
----------------------- ---------------- ---------- --------------- ------------ ----------------- --------------
Paul Geist 25.6% 62,725 35% 85,925 45.5% 111,703
----------------------- ---------------- ---------- --------------- ------------ ----------------- --------------
Bob Schuller 36.5% 82,508 50% 113,025 65.0% 146,933
----------------------- ---------------- ---------- --------------- ------------ ----------------- --------------
The Compensation Committee believes the overall design of the annual cash
incentive plan for 2007 supports the key initiatives of the Company, are strong
industry indicators, and enhanced the linkage between Company performance and
stockholder value. Both performance measures of EBITDA and net debt reduction
were met at the maximum level of performance for payout. This established the
base AIP bonus payout for 2007. After all bonus calculations are made
Company-wide, certain incremental changes, up or down, are made to the final
payouts based on individual performance evaluations. The actual bonuses paid in
2007 are shown on the Summary Compensation Table in the Non-Equity Incentive
Plan Compensation column of this annual report on Form 10-K.
Long-Term Incentive Compensation
We utilize a mix of equity awards, in lieu of cash compensation, to comprise the
long-term incentive program. Our program design keeps us competitive with
emerging trends in executive compensation, with other companies with which we
compete for executive talent, and links the success of the Company to increases
in stockholder value.
Grants are made under the 2000 Plan. We use a combination of SARs and restricted
stock for executive officers and vice presidents. Below vice president,
recipients receive 100% of the award in SARs. The mix of SARs and restricted
stock promotes a balance among long-term growth for the organization, executive
retention, and stockholder value. Initial award values are set based on a ratio
of 60% SARs and 40% restricted stock. This ratio was set after reviewing trends
in equity compensation that showed a majority of long-term incentive was being
delivered in stock options or their equivalent.
The Compensation Committee approved the equity awards to be granted to each
named executive officer on January 9, 2007. Details of all the named executive
officer grants are included in the Summary Compensation Table and the Grants of
Plan-Based Awards Table.
The SARs, and restricted stock will vest ratably over four years. All SARs have
an exercise price equal to the closing stock price on the date of grant.
Beginning in 2006, our award agreements provide that 50% of any award
outstanding and not exercisable or subject to restrictions, shall, subject to
certain exceptions, become exercisable in the event of a change of control, with
our Board maintaining discretion to accelerate the remaining balance. Upon
exercise of the SARs, the executives receive the number of shares of common
stock equal to the value of appreciation in the company's stock from the grant
date to the exercise date times the number of shares. Executives holding shares
of restricted stock are eligible to receive all dividends and other
distributions paid during the restriction period. The 2000 Plan prohibits the
re-pricing, replacing or re-granting of outstanding stock options either in
connection with the cancellation of such stock option or by amending an award
agreement to lower the strike price of the stock option.
Benefits
Executives receive the same 401(k), health and group life insurance benefits as
the rest of our employees Mr. Geist and Mr. George and 25 other key managers
have a long-term disability policy. We provide no perquisites to our executives.
Employment Agreements and Elements of Post-Termination Compensation
We have a written employment agreement with Mr. Kelly who became our CEO in
fiscal 2008. We have a severance agreement with Mr. George, which is discussed
below under Potential Payments Upon Termination or Change-in-Control.
On November 6, 2007, Mr. Kelly and the Company entered into an employment
agreement, which may be terminated by either party, with or without cause. Under
the employment agreement, Mr. Kelly is entitled to receive
76
an initial annual base salary of $450,000, subject to annual adjustments at the
discretion of the Compensation Committee. Mr. Kelly was awarded 49,000 shares of
restricted stock and 145,000 stock appreciation rights under the Company's 2000
Equity Incentive Plan, vesting 25% in each of the first two years and 50% in the
third year. These awards fully vest if Mr. Kelly is terminated by the Company
for any reason other than cause, as defined in the employment agreement. The
employment agreement provides for annual cash incentives upon reaching specified
targets, and Mr. Kelly is entitled to participate with other senior executives
in all Company benefit plans. Upon termination, for cause or resignation, Mr.
Kelly shall be entitled only to payment of base salary and annual incentive
payments earned through the date of termination. Upon termination without case
or a material reduction of responsibilities, Mr. Kelly will receive the benefits
available under the Company's Severance Plan. The non-compete, non-solicitation
and non-disparagement provisions of Mr. Kelly's employment agreement remain in
effect for 18 months following the termination date. The confidentiality
provisions of the employment agreement remain in effect indefinitely.
Severance Plan
We maintain a Severance Plan that is generally available to all employees of the
Company. The Severance Plan permits eligible employees, who are involuntarily
terminated by the Company, to receive severance pay equal to an amount based on
the position the terminated employee had with the Company and the number of his
or her service years with the Company, if certain requirements are met. In
addition, for certain senior level employees of the Company, including named
executive officers, all outstanding equity awards accelerate and immediately
vest in the event of a change in control and the employee's termination other
than for cause within twelve months.
See Potential Payments Upon Termination or Change-in-Control below for a
discussion of this Severance Plan. We believe this plan is in keeping with
competitive practice within our peer group and is necessary to attract and
retain talented executives.
Impact of Tax Treatment
In designing executive compensation programs, the Compensation Committee takes
into consideration the impact of various regulatory issues such as Section
162(m) and Section 409A of the Internal Revenue Code. Section 162(m) of the
Internal Revenue Code denies a tax deduction to any publicly held corporation
for compensation in excess of $1 million paid in a year to any individual who,
on the last day of that year, is a named executive officer, unless such
compensation qualifies as performance-based under Section 162(m) of the Internal
Revenue Code. Generally, the Compensation Committee believes that it is in the
best interest of our stockholders to only pay compensation which is deductible
by the Company. However, where it is deemed necessary and in our best interest
to continue to attract and retain the best possible executive talent, and to
motivate executives to achieve the goals of our business strategy, the Committee
may approve compensation to executive officers that may exceed the limits of
deductibility.
Timing of Compensation Decisions
The Compensation Committee develops an annual agenda to assist it in fulfilling
its responsibilities. In the fourth quarter of the preceding year, in connection
with our annual budget process and approval of a business plan by our Board of
Directors, the Compensation Committee establishes performance criteria for the
current year bonus program. In the first quarter of each year, the Compensation
Committee:
• Reviews prior year incentive plan performance, including whether bonus
targets were met and authorizes the distribution of annual incentive
pay-outs, if any, for the prior year.
• Approves the equity grants for the current year.
• Establishes the bonus percentages and target amounts for the current
year.
• Reviews and approves base pay for executives.
77
Equity awards may be made only by the Compensation Committee or those authorized
by the Compensation Committee in accordance with applicable laws and our equity
plan, subject to pre-established limitations on individual awards and total
awards. Grants can only be authorized in writing. Authorizations of amendments,
modifications or changes to awards must be in writing and can only be adopted
with the approval of the Compensation Committee. For option and SAR awards, the
awards must be granted at the closing price of our stock on the grant date.
New hire grants, grants upon promotions and other awards that occur during a
year are normally made upon the later of the event date or the date approved by
the Compensation Committee.
Compensation Committee Report
The Compensation Committee of the Company has reviewed and discussed the
Compensation Discussion and Analysis contained in this Annual Report on Form
10-K with management. Based on such review and discussions, the Compensation
Committee recommended to the Board of Directors that the Compensation Discussion
and Analysis be included in this Annual Report on Form 10-K for the fiscal year
ended September 28, 2007.
COMPENSATION COMMITTEE
Jonathan E. Baum, Chairman
David W. Allen
Mark C. Demetree
Ronald C. Kesselman
Summary Compensation Table for Fiscal 2007
The table below summarizes the total compensation paid or earned by each of the
named executive officers for 2007. Information is not included for Mr. Fogarty,
who received no compensation from us, or Mr. Kelly, who became our CEO in fiscal
2008.
- ----------------------- ----- ------------ ---------- ---------- ---------- --------------- ------------- ---------
Non-equity
incentive
Stock Option plan
Awards Awards compensation All Other
Name and Principal Salary Bonus (3) (4) (5) Compensation Total
Position Year ($) ($) ($) ($) ($) ($) ($)
- ----------------------- ----- ------------ ---------- ---------- ---------- --------------- ------------- ---------
Walter George, EVP 2007 265,363 - 111,661 61,157 184,334 8,502 631,017
Operations & Supply
Chain
- ----------------------- ----- ------------ ---------- ---------- ---------- --------------- ------------- ---------
Paul Geist, EVP, 2007 230,587(1) 40,000(2) 8,022 18,611 118,577 8,521 424,318
Chief Financial
Officer
- ----------------------- ----- ------------ ---------- ---------- ---------- --------------- ------------- ---------
Bob Schuller, EVP, 2007 224,538 - 10,226 8,022 155,975 7,505 406,266
General Counsel
- ----------------------- ----- ------------ ---------- ---------- ---------- --------------- ------------- ---------
(1) Mr. Geist received $23,077 in additional base pay as special compensation
for performance of the duties of principal financial and accounting
officer.
(2) Mr. Geist received $40,000 as a special bonus related to work on the
Company's restatement process.
(3) The amounts shown in this column represent restricted stock grants under
our 2000 Plan. See Compensation Discussion and Analysis for additional
information on the 2000 Plan and equity grants under the 2000 Plan. This
column reflects the dollar amount recognized for financial statement
reporting purposes for the fiscal year ended September 28, 2007, in
accordance with SFAS 123R (excluding estimated forfeitures) and thus
includes amounts from awards granted in and prior to 2007. Assumptions used
in the calculation of this amount are included in Note 15 to our audited
financial statements for the fiscal year ended September 28, 2007 included
in this Annual Report on Form 10-K. There were no forfeitures in 2007 by
the named executive officers. See the Grants of Plan Based Awards and
Outstanding Equity Awards tables below for additional information on our
equity grants.
(4) The amounts shown in this column represent SARS granted under our 2000
Plan. See Compensation Discussion and Analysis for additional information
on the 2000 Plan and equity grants under the 2000 Plan.
78
This column reflects the dollar amount recognized for financial statement
reporting purposes for the fiscal year ended September 28, 2007, in
accordance with SFAS 123R (excluding estimated forfeitures) and thus
includes amounts from awards granted in and prior to 2007. Assumptions used
in the calculation of this amount are included in Note 15 to our audited
financial statements for the fiscal year ended September 28, 2007, included
in this Annual Report on Form 10-K. There were no forfeitures in 2007 by
the named executive officers. See the Grants of Plan Based Awards and
Outstanding Equity Awards table below for additional information on our
equity grants.
(5) Represents the annual incentive bonus earned for fiscal 2007. See
Compensation Discussion and Analysis for further discussion of this cash
incentive plan.
Grants of Plan-Based Awards in Fiscal 2007
The following table provides information about non-equity and equity awards
granted to the named executive officers in 2007.
- ------------------ ------------ -------------------------------- ---------- ------------ ---------- -------------
All
other
stock All other
awards: option
number awards:
of number of Exercise
shares securities or base Grant Date
of stock underlying price of fair value
Estimated future payouts or units options option of stock
under non-equity incentive (2) (3) awards and option
Name Grant Date plan awards (1) (#) (#) ($/Sh) awards
--------------------------------
Threshold Target Maximum
($) ($) ($)
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
Walter George 01/09/07 31,619 9.02 $ 120,152
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
01/09/07 8,885 80,143
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
97,510 133,575 173,648
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
Paul Geist 01/09/07 16,096 9.02 $ 55,531
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
01/09/07 4,101 36,991
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
62,725 85,925 111,703
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
Bob Schuller 01/09/07 21,403 9.02 $ 81,331
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
01/09/07 6,015 54,255
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
10/25/06 16,884 7.47 52,847
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
10/25/06 10,953 81,819
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
82,508 113,025 146,933
- ------------------ ------------ ---------- ---------- ---------- ---------- ------------ ---------- -------------
(1) Represents the threshold, target and maximum amounts payable under our
annual cash incentive plan for fiscal 2007. See Compensation Discussion
and Analysis for a discussion of this plan. See the Summary Compensation
Table for the actual amounts paid in 2007.
(2) Consists of annual restricted stock grant under our 2000 Plan. The awards
vest ratably over four years from the grant date, with the exception of
Mr. Schuller's October 25, 2006 grant, which vest upon the anniversary of
his hire date of June 5, 2006 with 50% vesting ratably and 50% upon the
fourth anniversary of his hire date. See Compensation Discussion and
Analysis for additional information on equity grants under our 2000 Plan.
(3) Consists of an annual SAR grant under our 2000 Plan. The awards vest
ratably over four years from the grant date, with the exception of Mr.
Schuller's October 25, 2006 grant, which vest upon the anniversary of his
hire date of June 5, 2006 with 50% vesting ratably and 50% upon the
fourth anniversary of his hire date. Upon exercise of the SAR, the
executive receives the number of shares of common stock equal in value to
the difference between the fair market value on the grant date and the
fair market value on the exercise date multiplied by the number of shares
exercised. See Compensation Discussion and Analysis for additional
information on equity grants under our 2000 Plan.
79
Outstanding Equity Awards at 2007 Fiscal Year-End
The following table provides information on the outstanding option and SAR
awards and stock awards for our named executive officers at 2007 fiscal year
end.
- ------------------------------------------------------------------------------------ ----------------------------------
Option Awards Share Awards
- ------------------------------------------------------------------------------------ ----------------------------------
Number of Number of Option Option Number of Market
securities securities Exercise Expiration shares or value of
underlying underlying Price Date units of shares or
unexercised unexercised stock that units of
options options have not stock that
(#) (#) ($) vested have not
exercisable unexercisable (2) vested
Name (1) (#) ($)
- -------------- ---------------- ----------------- ---------------- ----------------- ----------------- ----------------
Walter
George 8,885 73,212
- -------------- ---------------- ----------------- ---------------- ----------------- ----------------- ----------------
- 31,619 9.02 01/09/14 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
- - - 29,254 241,053
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
5,626 39,380 5.50 03/06/13 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
9,000 - 26.73 02/02/15 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
- - - 6,000 49,440
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
18,000 12,000 28.90 08/04/14 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
10,000 - 39.60 02/07/13 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
9,500 - 38.90 10/23/12 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
35,000 - 36.81 08/27/12 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
35,000 - 27.81 01/15/11 - -
- -------------- ---------------- ----------------- ---------------- ----------------- ----------------- ----------------
Paul
Geist 4,101 33,792
- -------------- ---------------- ----------------- ---------------- ----------------- ----------------- ----------------
- 16,096 9.02 01/09/14 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
- - - 7,769 64,017
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
1,494 10,458 5.50 03/06/13 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
3,500 - 26.73 02/02/15 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
4,000 6,000 27.54 10/26/14 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
- - - 360 2,966
- -------------- ---------------- ----------------- ---------------- ----------------- ----------------- ----------------
Bob
Schuller 6,015 49,564
- -------------- ---------------- ----------------- ---------------- ----------------- ----------------- ----------------
- 21,403 9.02 01/09/14 - -
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
- - - 9,584 78,972
---------------- ----------------- ---------------- ----------------- ----------------- ----------------
2,111 14,773 7.47 06/05/13 - -
- -------------- ---------------- ----------------- ---------------- ----------------- ----------------- ----------------
80
(1) The following table provides information with respect to the vesting of
outstanding stock options and SARs. Upon exercise of the SAR, the executive
receives the number of shares of common stock equal in value to the difference
between the fair market value on the grant date and the fair market value on the
exercise date multiplied by the number of shares exercised. See Compensation
Discussion and Analysis for a discussion of vesting.
- ---------------- ---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
Award Vesting Vesting Vesting Vesting
Name Type # Shares Date # Shares Date # Shares Date # Shares Date
- ---------------- ---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
Mr. George Option 6,000 8/4/08 6,000 8/4/09
---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
SAR 5,626 3/06/08 5,626 3/06/09 28,128 3/06/10
---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
SAR 7,905 1/09/08 7,905 1/09/09 7,905 1/09/10 7,904 1/09/11
- ---------------- ---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
Mr. Geist Option 2,000 10/26/07 2,000 10/26/08 2,000 10/26/09
---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
SAR 1,494 3/06/08 1,494 3/06/09 7,470 3/06/10
---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
SAR 4,024 1/09/08 4,024 1/09/09 4,024 1/09/10 4,024 1/09/11
- ---------------- ---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
Mr. Schuller SAR 2,111 6/05/08 2,111 6/05/09 10,551 6/05/10
---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
SAR 5,351 1/09/08 5,351 1/09/09 5,351 1/09/10 5,350 1/09/11
- ---------------- ---------- ----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
(2) The following table provides information with respect to the vesting of
outstanding shares of restricted stock. See Compensation Discussion and
Analysis for a discussion of vesting.
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
Vesting Vesting Vesting Vesting
Name # Shares Date # Shares Date # Shares Date # Shares Date
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
Mr. George 3,000 8/04/08 3,000 8/04/09
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
4,179 3/06/08 4,179 3/06/09 20,896 3/06/10
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
2,221 1/09/08 2,221 1/09/09 2,221 1/09/10 2,222 1/09/11
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
Mr. Geist 120 10/24/07 120 10/24/08 120 10/24/09
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
1,110 3/06/08 1,110 3/06/09 5,549 3/06/10
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
1,025 1/09/08 1,025 1/09/09 1,025 1/09/10 1,026 1/09/11
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
Mr. Schuller 1,369 06/05/08 1,369 06/05/09 6,846 06/05/10
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
1,503 1/09/08 1,504 1/09/09 1,504 1/09/10 1,504 1/09/11
- ---------------- ----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
Option Exercises and Stock Vested In Fiscal 2007
The following table provides information on stock options or SARS exercised or
restricted stock vested in 2007.
Options/SARs Awards Stock Awards
---------------------------------- --------------------------------------
Number of Number of
shares shares acquired Value realized
acquired on Value realized on vesting on vesting (1)
Name exercise on exercise (#) ($)
- ---------------------------------------- --------------- -------------------- ------------------- --------------------
Walter George - - 7,373 71,600
- ---------------------------------------- --------------- -------------------- ------------------- --------------------
Paul Geist - - 1,230 12,531
- ---------------------------------------- --------------- -------------------- ------------------- --------------------
Bob Schuller - - 1,369 14,306
- ---------------------------------------- --------------- -------------------- ------------------- --------------------
(1) Amounts reflect the market value of the stock on the vesting date.
81
Potential Payments Upon Termination or Change-In-Control
Severance Plan
Under our Severance Plan, an executive will be entitled to benefits if he or she
is involuntarily terminated from employment by the Company other than due to:
(1) willful and continual failure to substantially perform duties; (2)
commission of an act or acts that constitute a misdemeanor (other than a traffic
violation) or a felony under the law of the United States or its subdivisions or
any country to which he or she is assigned or its subdivisions, including a
conviction for or plea of guilty or no contest to such misdemeanor or felony;
(3) commission of an act or acts in material violation of the Company's
significant policies and/or practices applicable to executives employed by the
Company; (4) willful act or willful failure to act in a manner that was
injurious to the financial condition or business reputation of the Company; (5)
act in a manner unbecoming of an executive employed by the Company regardless of
whether such act was in the course of employment, or (6) subjection to a fine,
censure or sanction of any kind, permanent or temporary, issued by the SEC or
the New York Stock Exchange.
In addition, to qualify for severance benefits, the executive must have entered
into an agreement satisfactory to the Company that includes, among other things,
a full and general release of claims against the Company, a confidentiality
agreement, a non-solicitation agreement, a non-competition agreement, a
non-disparagement agreement, a cooperation agreement and a requirement that any
severance payments will be subject to offsetting mitigation.
Those named executive officers who become eligible to receive severance pay will
receive the following benefits:
• 2 weeks base salary at the rate in effect on the date of termination for
every year of service with the Company plus an additional 52 weeks base
salary at the rate in effect at the date of termination, but in no event
more than a cumulative cap of 78 weeks of base salary (the applicable
number of base weeks will be the "Severance Period"); notwithstanding the
foregoing, these payments will be reduced by any other amount paid by us
due to termination of employment, any amounts received by the officer from
any employer during the Severance Period, and any unemployment benefits or
payments pursuant to the Worker Adjustment and Retraining Notification Act;
• In the event a "change of control" occurred within 12 months prior to the
termination date, any unvested restricted stock and stock appreciation
rights related to Company stock and granted to the executive prior to the
executive's termination date will be accelerated and fully vested;
• Additional severance pay equal to the bi-weekly Company subsidy for active
employees for the level of medical, dental and vision coverage, if any,
that was in effect for the executive at the time of termination (provided
that such payment will not be made to the executive and instead will be
contributed to the health plan for the period equal to one week for every
year of the executive's service with the Company (not to exceed 26 weeks)
if termination is part of a reduction in force, Company reorganization or
restructuring or changes in the Company's operating requirements), plus a
tax reimbursement of 32%, (provided that such payment will not be made to
the executive and instead will be contributed to the health plan for the
period equal to one week for every year of the executive's service with the
Company (not to exceed 26 weeks) if termination is part of a reduction in
force, Company reorganization or restructuring or changes in the Company's
operating requirements), provided that this additional severance pay will
stop upon the executive becoming employed by another employer and will be
based on the level of health plan coverage in effect on the date of
termination of employment, and will be paid regardless of whether COBRA
coverage is elected;
• All severance pay will stop upon the executive being reemployed by the
Company.
The maximum severance pay is two times the lesser of the officer's W-2 wages for
the calendar year preceding the calendar year in which the termination occurs,
or the maximum amount that may be taken into account under a qualified
retirement plan pursuant to Code section 401(a)(17) ($440,000 for 2006) for the
year in which the termination of employment occurs. All severance pay must be
paid no later than December 31 of the second calendar year following the
calendar year in which the termination of employment occurs.
82
For purposes of the Severance Plan, "change of control" means if "any person,"
as such term is used in Sections 13(d) and 14(d) of the 1934 Act (other than the
Company, any trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13(d)(3) under the Exchange Act), directly or indirectly, of
securities of the Company representing more than 50% of the Company's then
outstanding securities or more than 50% of the combined voting power of the
Company's then outstanding securities, and if, within 12 months thereafter,
members of the Board of Directors of the Company at the beginning of that 12
month period ("existing directors") together with any director whose election
was subsequently approved by vote of at least two-thirds of the Board of
Directors in office at the time of such election who are either existing
directors or approved directors ("approved directors") cease to constitute a
majority of the Board of Directors.
Severance Agreement for Mr. George
On October 1, 2005, the Company entered into a severance agreement with Mr.
George. Under the terms of the severance agreement, Mr. George agreed that
during his employment and for a period of 18 months after any termination of
employment, he will not compete with the Company nor solicit employees or
customers of the Company. Mr. George also agreed to hold confidential certain
information of the Company.
The severance agreement provides that if Mr. George is terminated by the Company
without cause (as defined in the severance agreement) or if he resigns for good
reason (as defined in the severance agreement), the Company will pay to Mr.
George severance in the amount of (1) unpaid base salary and earned bonus as of
the termination date; and (2) base salary for a period of twelve months
following termination. In addition, if at the date of termination Mr. George has
been employed for 10 consecutive years, he will be paid 50% of the prorated
bonus he would have been entitled to if employed through the bonus period. Mr.
George shall also be entitled to participate for 18 months after termination in
Company health, medical and other benefit plans. Participation shall cease when
Mr. George becomes eligible for comparable programs of a subsequent employer.
All severance obligations are conditioned on compliance by Mr. George with his
non-competition, non-solicitation and confidentiality obligations.
"Cause" is defined as a termination because (i) Mr. George willfully and
continually failed to perform his duties; (ii) failed to comply with any
material term of the Severance Agreement; (iii) committed a misdemeanor or
felony; (iv) committed a violation of the Company's policies or practices; (v)
acted in a manner injurious to the Company or unbecoming of his position; or
(vi) was subject to any fine or sanction of a regulatory or government
authority. "Good Reason" means any of the following actions taken by the Company
without Mr. George's written consent: (1) continued failure to pay compensation
if not corrected in a specified time period; (2) specified demotion or reduction
in base salary; or (3) material refusal to comply with the Severance Agreement
if not corrected in a specified time period.
Equity Awards Under 2000 Plan
Awards made under our 2000 Plan contain certain provisions which provide for
acceleration of vesting upon a termination. Upon a termination not related to a
change-in-control, executives are entitled to awards already vested.
Notwithstanding the terms described below, upon a change-in-control, as defined
by the severance plan, that occurs in the 12 months prior to an involuntary
termination entitling the individual to severance benefits under the Severance
Plan summarized above, all outstanding unvested stock appreciation right awards
and restricted stock awards are fully vested.
Outstanding, unvested option awards may provide for full, immediate vesting upon
a "change in control"; provided that if the "change in control" is due to a
merger or asset sale and the successor corporation does not either assume the
outstanding option award or substitute an equivalent option award, then the
option award fully vests, but is only exercisable for a period of 25 days after
notice from the Compensation Committee.
Outstanding, unvested stock appreciation right awards provide for full,
immediate vesting of 50% (subject to the discretion of the Compensation
Committee to accelerate all or part of the remaining 50% of outstanding,
unvested stock appreciation right awards) of outstanding, unvested stock
appreciation right awards upon a "change of control". "Change in control" is
defined in the award agreement to occur if any person, as defined in Sections
13(d)
83
and 14(d) of the 1934 Act is or becomes the beneficial owner of more than 50% of
the Company's outstanding securities or combined voting power of outstanding
securities and if within 12 months thereafter (1) continuing directors (as
defined below) cease to constitute a majority of the Board of Directors and (2)
there is a termination of service. If a merger or asset sale occurs and the
successor corporation does not either assume the outstanding stock appreciation
right award or substitutes an equivalent stock appreciation right award, then
50% of the stock appreciation right award fully vests, but it is only
exercisable for a period of 25 days after notice from the Company and for
equivalent consideration as received by the stockholders of the Compensation
Committee in the merger or asset sale.
Stock options and stock appreciation rights are exercisable for (1) one year
after termination on account of retirement, disability or death, and (2) three
months following a termination for any reason other than retirement, disability
or death (subject to the discretion of the Compensation Committee to extend this
period). They terminate immediately upon a termination for cause. "Retirement"
is defined as retiring pursuant to any Company retirement program or as
otherwise agreed.
Outstanding, unvested restricted stock awards provide for full, immediate
vesting upon termination due to death, disability or the normal or early
retirement of the executive under the terms of the retirement plan maintained by
the Company in which the executive participates (or if none, after reaching age
65). In addition, 50% (subject to the discretion of the Compensation Committee
to accelerate all or part of the remaining 50% of outstanding, unvested
restricted stock awards) of outstanding, unvested restricted stock awards fully
vest upon the occurrence of a "change of control", as defined above in the
description of stock appreciation rights.
Except as set forth above in the descriptions of stock appreciation rights and
restricted stock awards, for purposes of the 2000 Plan, "change in control"
means any one of the following: (1) "any person," as such term is used in
Sections 13(d) and 14(d) of the 1934 Act (other than the Company, any trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or any corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock of the
Company), is or becomes the "beneficial owner" (as defined in Rule 13(d)(3)
under the Exchange Act), directly or indirectly, of securities of the Company
representing more than 50% of the Company's then outstanding securities or 51%
or more of the combined voting power of the Company's then outstanding
securities; (2) during a period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors ("existing
directors") and any new Board member other than a Board member designated by a
person who has entered into an agreement with the Company to effect a
transaction described in (1), (2) or (3) ("approved director") whose election by
the Board of Directors or nomination for election by the Company's shareholders
was approved by a vote of at least two-thirds of the Board members in office at
the time of such election who are either existing Directors or approved
directors ("continuing directors") cease to constitute a majority of the Board
of Directors; (3) the consummation of the merger or consolidation of the Company
with any other corporation, other than a merger with a wholly-owned subsidiary,
the sale of substantially all of the assets of the Company, or the liquidation
or dissolution of the Company, unless, in the case of a merger or consolidation,
(x) the Directors in office immediately prior to such merger or consolidation
will constitute at least a majority of the Board of the surviving corporation of
such merger or consolidation and any parent (as such term is defined in Rule
12b-2 under the Exchange Act) of such corporation, or (y) the voting securities
of the Company outstanding immediately prior thereto represent (either by
remaining outstanding or by immediately being converted into voting securities
of the surviving entity) more than 66 2/3% of the combined voting power of the
voting securities of the Company or such surviving entity and are owned by all
or substantially all of the persons who were the holders of the voting
securities of the Company immediately prior to the transaction in substantially
the same proportions as such holders owned such voting securities immediately
prior to the transaction; or (4) the stockholders of the Company approve either
a plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets
(or any transaction having similar effect).
The following tables provide information on potential benefits that could be
received by each named executive officers upon a termination or change of
control.
84
Walter George
- -----------------------------------------------------------------------------------------------------------------------
Termination Termination after a
Executive Benefits and Payments Involuntary Not for For Good Change in
Upon Termination (1) Cause Termination Reason Control
- ---------------------------------------- ---------------------------- ------------------------- -----------------------
Compensation:
Base Salary $333,938 $267,150 $333,938
- ---------------------------------------- ---------------------------- ------------------------- -----------------------
Equity Vesting (2) - - $320,816
- ---------------------------------------- ---------------------------- ------------------------- -----------------------
Benefits and Perquisites
- ---------------------------------------- ---------------------------- ------------------------- -----------------------
Post-Termination Health Care (3) $17,726 $17,726 $17,726
- ---------------------------------------- ---------------------------- ------------------------- -----------------------
Total $351,664 $284,876 $672,480
- ---------------------------------------- ---------------------------- ------------------------- -----------------------
(1) Assumes termination as of September 28, 2007. The closing price for the
Company's stock as of the last trading day of fiscal 2007 was $8.24.
(2) Represents the value of accelerated vesting of all outstanding awards upon
a change in control. Unvested restricted stock also fully vests upon death,
disability or retirement. This amount is $290,493.
(3) Represents the value of post-termination health care benefits or equivalent
severance payment.
Paul Geist
- ----------------------------------------------------------------------------------------------------------------------
Executive Benefits and Payments Involuntary Not for Termination after a
Upon Termination (1) Cause Termination Change in Control
- ------------------------------------------- ----------------------------------------- --------------------------------
Compensation:
Base Salary $273,827 $273,827
- ------------------------------------------- ----------------------------------------- --------------------------------
Equity Vesting (2) - $69,103
- ------------------------------------------- ----------------------------------------- --------------------------------
Benefits and Perquisites
- ------------------------------------------- ----------------------------------------- --------------------------------
Post-Termination Health Care (3) $12,760 $12,760
- ------------------------------------------- ----------------------------------------- --------------------------------
Total $286,587 $355,690
- ------------------------------------------- ----------------------------------------- --------------------------------
(1) Assumes termination as of September 28, 2007. The closing price for the
Company's stock as of the last trading day of fiscal 2007 was $8.24.
(2) Represents the value of accelerated vesting of all outstanding awards upon
a change in control. Unvested restricted stock also fully vests upon death,
disability or retirement. This amount is $61,050.
(3) Represents the value of post-termination health care benefits or equivalent
severance payment.
Bob Schuller
- ------------------------------------------------------------------------------------------------------------------------
Executive Benefits and Payments Involuntary Not for Termination after a
Upon Termination (1) Cause Termination Change in Control
- --------------------------------------------- ----------------------------------------- --------------------------------
Compensation:
Base Salary $239,091 $239,091
- --------------------------------------------- ----------------------------------------- --------------------------------
Equity Vesting (2) - $139,911
- --------------------------------------------- ----------------------------------------- --------------------------------
Benefits and Perquisites
- --------------------------------------------- ----------------------------------------- --------------------------------
Post-Termination Health Care (3) $12,051 $12,051
- --------------------------------------------- ----------------------------------------- --------------------------------
Total $251,142 $391,053
- --------------------------------------------- ----------------------------------------- --------------------------------
85
(1) Assumes termination as of September 28, 2007. The closing price for the
Company's stock as of the last trading day of fiscal 2007 was $8.24.
(2) Represents the value of accelerated vesting of all outstanding awards upon
a change in control. Unvested restricted stock also fully vests upon death,
disability or retirement. This amount is $128,536.
(3) Represents the value of post-termination health care benefits or equivalent
severance payment.
Director Compensation
All directors in 2007 were non-employee directors. All non-employee directors
are paid an annual retainer of $20,000, payable in common stock and $14,000,
payable in cash. The Chairman of the Board receives an annual cash retainer of
$65,000. Directors are paid $1,750 for each meeting of the Board attended, and
$350 for each telephonic Board meeting participation. Directors who are members
of a committee (other than the Audit Committee) of the Board are paid $1,000 for
each committee meeting attended, and $350 for each telephonic committee meeting
participation. The Chairman and other members of the Audit Committee are paid
$3,500 and $1,500 per meeting, respectively, for in person meetings and $350 for
each telephonic meeting participation. A director who is chairman of the
Compensation and/or Nominating and Governance Committee is paid an annual cash
retainer of $3,500. The Audit Committee Chairman is paid an annual cash retainer
of $80,000. All directors are reimbursed for out of pocket expenses incurred in
connection with attendance at Board and Committee meetings.
As called for by the Corporate Governance Principles, we have adopted a policy
regarding minimum stock ownership by members of the Board. The policy generally
requires that at all times each director own at least the number of shares equal
to the annual stock retainer payment discussed above. The minimum number of
shares required to be held by a director is calculated as of the date the
payment is made. Any subsequent change in the value of the shares will not
affect the amount of stock a director is required to hold. During fiscal year
2007, all directors were in compliance with this policy.
2007 Director Compensation Table
The following table sets forth the compensation paid to our non-employee
directors in 2007.
- -------------------------------------------------------------------------------------------------
Fees
Earned or
Paid in Stock
Name Cash Awards (1) Total
- -------------------------------------------------------------------------------------------------
David Allen $ 37,867 $ 20,000 $57,867
- -------------------------------------------------------------------------------------------------
Jonathan Baum 44,150 20,000 64,150
- -------------------------------------------------------------------------------------------------
Mark Demetree 25,200 20,000 45,200
- -------------------------------------------------------------------------------------------------
James Heeter 39,700 20,000 59,700
- -------------------------------------------------------------------------------------------------
Ronald Kesselman 49,384 20,000 69,384
- -------------------------------------------------------------------------------------------------
Terrance O'Brien 25,850 20,000 74,850
- -------------------------------------------------------------------------------------------------
William Patterson 185,200 20,000 205,200
- -------------------------------------------------------------------------------------------------
Tim Pollack 22,050 20,000 42,050
- -------------------------------------------------------------------------------------------------
Raymond Silcock (2) 36,067 20,000 56,067
- -------------------------------------------------------------------------------------------------
Robert Niehaus (2) 22,050 20,000 42,080
- -------------------------------------------------------------------------------------------------
(1) The amounts in this column represent stock grants under our 2000 Plan. All
stock is fully vested upon grant. This column reflects the dollar amount
recognized for financial reporting purposes for the fiscal year ended
September 28, 2007, in accordance with SFAS 123R (excluding estimated
forfeitures). Assumptions used in the calculations of these amounts are
included in Note 15 to our audited financial statements for the fiscal year
ended September 28, 2007 included in this Annual Report on Form 10-K. There
were no forfeitures during the year by these persons. The table below sets
forth the grant date fair value of stock awards in 2007 and the number of
shares awarded in 2007.
(2) Mr. Silcock resigned on August 2, 2007 and Mr. Niehaus resigned effective
January 31, 2008.
86
- ---------------------------------------------------------------------------------
2007 2007
Awards Grant Shares of
Name Date Fair Value Stock Granted
- ---------------------------------------------------------------------------------
David Allen $20,000 1,878
- ---------------------------------------------------------------------------------
Jonathan Baum 20,000 1,878
- ---------------------------------------------------------------------------------
Mark Demetree 20,000 1,878
- ---------------------------------------------------------------------------------
James Heeter 20,000 1,878
- ---------------------------------------------------------------------------------
Ronald Kesselman 20,000 1,878
- ---------------------------------------------------------------------------------
Terrance O'Brien 20,000 1,878
- ---------------------------------------------------------------------------------
William Patterson 20,000 1,878
- ---------------------------------------------------------------------------------
Tim Pollack 20,000 1,878
- ---------------------------------------------------------------------------------
Raymond Silcock 20,000 1,878
- ---------------------------------------------------------------------------------
Robert Niehaus 20,000 1,878
- ---------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
STOCK OWNED BENEFICIALLY BY DIRECTORS, NOMINEES
AND CERTAIN EXECUTIVE OFFICERS
The following table sets forth information regarding beneficial ownership of the
Company's Common Stock as of June 2, 2008 by: (i) each Director; (ii) the Named
Executive Officers; and (iii) all Directors and executive officers as a group.
CLASS A COMMON STOCK
BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER (1) NUMBER OF SHARES (2) PERCENT
- ---------------------------- -------------------- -------
Jonathan E. Baum (3) 21,073 *
Tim M. Pollak 13,559 *
Robert J. Druten 3,960 *
Mark C. Demetree 14,378 *
William R. Patterson 18,922 *
Terence C. O'Brien 11,870 *
James A. Heeter (4) 7,954 *
Walter N. George (2) 219,185 1.1
Ronald C. Kesselman 5,838 *
David W. Allen 5,838 *
James P. Fogarty -- *
John P. Kelly 49,000 *
Paul R. Geist (2) 42,178 *
Robert W. Schuller (2) 39,930 *
All Directors and executive officers
as a group (13 persons) (2) 453,685 2.3
* Less than 1% of the outstanding common stock.
87
(1) Beneficial ownership is determined in accordance with the rules of
the United States Securities and Exchange Commission, but generally
refers to either the sole or shared power to vote or dispose of the
shares. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person.
Except as otherwise indicated in a footnote to this table, the
persons in this table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by
them.
(2) In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock
subject to options and warrants held by that person that are
currently exercisable or will become exercisable within 60 days of
June 2, 2008 are deemed beneficially owned by that person. Options or
stock appreciation rights to purchase shares of common stock that are
currently exercisable or will become exercisable within 60 days of
June 2, 2008 to purchase shares of common stock are as follows: Mr.
George (141,656 shares), Mr. Geist (16,512 shares) and Mr. Schuller
(9,572 shares) and all executive officers and directors as a group
(167,740 shares). Also includes shares of restricted stock held by
Mr. Kelly, Mr. George, Mr. Geist and Mr. Schuller, which are subject
to time vesting.
(3) Includes 13,292 shares held by George K. Baum Holdings, Inc. and
1,172 shares held by Grandchild, L.P. (as to which Mr. Baum
disclaimed beneficial ownership). As an officer and/or equity owner
of the entities holding such shares, Mr. Baum may share voting power
with respect to such shares. Mr. Baum also may be deemed to own
beneficially 200 shares held by his wife, Sarah Baum, and 1,600
shares held by his wife as custodian for their minor children.
(4) Mr. Heeter also may be deemed to own beneficially 4,344 shares held
by Sonberk Profit Sharing Plan (c/o Sonnenschein Nath & Rosenthal)
IDA FBO James A. Heeter, 745 shares held by his wife, Judith S.
Heeter, and 300 shares held by his wife as custodian for their minor
children. Mr. Heeter disclaims beneficial ownership of such shares
held by or for the benefit of his wife and children.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of June 2, 2008 by each person owning
beneficially more than five percent of the outstanding shares of common stock,
based on information available to the Company. Beneficial ownership is generally
either the sole or shared power to vote or dispose of the shares. The percentage
ownership is based on the number of shares outstanding as of June 2, 2008.
Except as otherwise noted, the holders have sole voting and dispositive power.
Class A Common Stock
Beneficially Owned
Name and Address of Beneficial Owner Number of Shares Percent (1)
- ------------------------------------ ---------------- -----------
Jana Partners, LLC (2)
200 Park Avenue, Suite 3300 2,898,223 14.9%
New York, NY 10166
SCSF Equities, LLC (3)
5200 Town Center Circles, Suite 470 2,888,300 14.9%
Boca Raton, FL 33486
PrimeCap Management Company (4)
225 So. Lake Avenue #400 1,889,081 9.7%
Pasadena, CA 91101
FMR Corp. (5)
82 Devonshire Street 1,939,400 10.0%
Boston, MA 02109
88
Kenmare Capital Partners L.L.C. (6) 1,268,683 6.5%
712 5th Avenue, 9th Floor
New York, NY 10019
Dimensional Fund Advisors, LP (7)
1299 Ocean Avenue, 11th Floor 1,207,150 6.2%
Santa Monica, CA 90401
Arnhold and S. Bleichroeder Advisors LLC (8) 1,148,806 5.9%
1345 Avenue of Americas
New York, NY 10105
Franklin Resources, Inc. (9)
One Franklin Parkway 975,000 5.0%
San Mateo, CA 94403-1906
- ----------------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
United States Securities and Exchange Commission. In computing the
number and percentage of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options and warrants held by that person that are currently exercisable
or will become exercisable within 60 days of June 2, 2008 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person.
(2) Based on a Form 4 filed April 8, 2008.
(3) Number of shares based on a Form 4 filed April 7, 2008. Based on an
amended Schedule 13D dated July 21, 2006, these securities are owned by
various individual and institutional investors. According to such
Schedule 13D, SCSF Equities, LLC, Sun Capital Securities Offshore Fund,
Ltd., Su Capital Securities Fund, LP, Sun Capital Securities Advisors,
LP, Sun Capital Securities, LLC, Marc J. Leder, and Rodger R. Krouse
share voting power.
(4) Based on an amended Schedule 13G dated February 6, 2008. According to
such Schedule 13G, PrimeCap Management Company has sole voting power
with respect to 1,766,971 shares and sole power to dispose of 1,889,081
shares.
(5) Based on an amended Schedule 13G, dated February 14, 2007. Fidelity Low
Priced Stock Fund (Fidelity), 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR Corp., and an
investment adviser registered under the Investment Advisers Act of
1940, is the beneficial owner of 1,843,000 common shares as a result of
acting as investment adviser to various investment companies. Edward C.
Johnson 3d, FMR Corp., through its control of Fidelity, and the funds
each has sole power to dispose of the 1,843,000 shares. Neither FMR
Corp., nor Edward C. Johnson 3d, Chairman of FMR Corp., has the sole
power to vote or direct the voting of the shares owned directly by the
Fidelity Funds, which power resides with the Funds' Boards of Trustees.
Fidelity carries out the voting of the shares under written guidelines
established by the Funds' Boards of Trustees. Members of the Edward C.
Johnson 3d family are the predominant owners of Class B shares of
common stock of FMR Corp., representing approximately 49% of the voting
power of FMR Corp. The Johnson family group and all other Class B
shareholders have entered into a shareholders' voting agreement under
which all Class B shares will be voted in accordance with the majority
vote of Class B shares. Accordingly, through their ownership of voting
common stock and the execution of the shareholders' voting agreement,
members of the Johnson family may be deemed, under the United States
Investment Company Act of 1940, to form a controlling group with
respect to FMR Corp.
89
(6) Based on an amended Schedule 13G dated February 14, 2008 filed on
behalf of Kenmare Capital Partners L.L.C., Kenmare Select Management
L.L.C., Kenmare Offshore Management L.L.C. (collectively "Kenmare") and
Mark McGrath, principal of Kenmare, relating to the purchase of shares
of the Company by Kenmare for the account of Kenmare Fund I, L.P.
(Kenmare I"), Kenmare Select Fund L.P. ("Kenmare Select") and Kenmare
Offshore Fund, Ltd. ("Kenmare Offshore"). Kenmare Capital, as the
general partner of Kenmare I and Kenmare Select Management, as the
general partner of Kenmare Select have no voting or dispositive power.
Kenmare Offshore Management, as the general partner of Kenmare
Offshore, has the sole power to vote and dispose of the 1,268,683
shares held by Kenmare Offshore. As principal, Mr. McGrath may direct
the vote and disposition of the 1,268,683 shares beneficially owned by
Kenmare.
(7) Based on an amended Schedule 13G dated February 6, 2008. The Schedule
13G indicates that Dimensional Fund Advisors LP (formerly, Dimensional
Fund Advisors Inc.) ("Dimensional"), an investment advisor registered
under Section 203 of the Investment Advisors Act of 1940, furnishes
investment advice to four investment companies registered under the
Investment Company Act of 1940, and serves as investment manager to
certain other commingled group trusts and separate accounts. These
investment companies, trusts and accounts are the "Funds." In its role
as investment advisor or manager, Dimensional possesses investment
and/or voting power over the securities of the Issuer described in this
schedule that are owned by the Funds, and may be deemed to be the
beneficial owner of the shares of the Issuer held by the Funds.
However, all securities reported in this schedule are owned by the
Funds. Dimensional disclaims beneficial ownership of such securities.
(8) Based on a Schedule 13G dated February 12, 2008. Arnhold and S.
Bleichroeder LLC ("ASB") may be deemed to be the beneficial owner of
1,148,806 shares as a result of acting as investment advisor to various
clients.
(9) Based upon an amended Schedule 13G dated January 31, 2007, these
securities are beneficially owned by one or more closed-end investment
companies or other managed accounts that are investment advisory
clients of investment advisors that are direct and indirect
subsidiaries of Franklin Resources, Inc ("FRI"). Charles B. Johnson and
Rupert H. Johnson, Jr. (the "Principal Shareholders") each own in
excess of 10% of the outstanding common stock of FRI and are the
principal stockholders of FRI. FRI and the Principal Shareholders are
the beneficial owners of securities held by persons and entities
advised by FRI subsidiaries.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued
upon the exercise of options and stock appreciation rights under our 1992
Nonqualified Stock Option Plan, 1993 Nonqualified Stock Option Plan, 1997 Equity
Incentive Plan and 2000 Equity Incentive Plan and that may be purchased under
our Employee Stock Purchase Plan as of September 28, 2007. The Company has no
equity plans that have not been approved by stockholders.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of securities
Number of securities to be remaining available for
issued upon exercise of Weighted-average exercise future issuance under
outstanding options, price of outstanding equity compensation plans
warrants and stock options, warrants and (excluding securities
appreciation rights rights reflected in column (a))
Plan Category (a) (1) (b) (c) (2)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by stockholders 1,170,378 $17.04 2,158,884
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(1) Includes an estimate of the number of shares that would be issued under
the 2000 Equity Incentive Plan due to the exercise of stock
appreciation rights based upon the closing price of the stock on
September 28, 2007. Upon exercise of the stock appreciation rights the
executives receive the number of shares of common stock equal in value
to the difference between the fair market value on the grant date and
the fair
90
market value on the exercise date times the number of shares. Only the
number of shares delivered at exercise will count against the
securities remaining available for future issuance.
(2) Includes an estimate of the number of shares that would be issued under
the 2000 Equity Incentive Plan due to the exercise of stock
appreciation rights based upon the closing price of the stock on
September 28, 2007. Upon exercise of the stock appreciation rights the
executives receive the number of shares of common stock equal in value
to the difference between the fair market value on the grant date and
the fair market value on the exercise date times the number of shares.
Only the number of shares delivered at exercise will count against the
securities remaining available for future issuance. Includes 47,476
shares reserved for issuance under the Employee Stock Purchase Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Policies and Procedures Regarding Related Party Transactions
The Company has not adopted a formal policy with respect to related party
transactions. All related party transactions, regardless of size, are first
reviewed by the Nominating and Governance Committee who then reports to the
entire Board of Directors with a recommendation as to approval of the
transaction. The Board of Directors then makes the final determination.
Agreement with Alvarez & Marsal
On September 28, 2005, the Company entered into a letter agreement, as amended,
with A&M. Under the terms of the letter agreement, Mr. Fogarty, a managing
director of A&M, served as Chief Executive Officer and President of the Company
from September 2005 to January 18, 2008 and additional A&M personnel provide
services at the Company's request.
The Company paid A&M $600 per hour for the services of Mr. Fogarty and hourly
rates ranging from $200 to $500 for the services of the additional personnel.
However, the maximum number of hours A&M could bill the Company for Mr.
Fogarty's time in any one month is 200 hours. The Company also compensates A&M
for reasonable out-of-pocket expenses. In addition, A&M has received $1.5
million of incentive compensation based upon satisfactory completion of certain
enumerated financial targets for fiscal year 2006. A&M has received additional
incentive compensation of $520,000 based on certain financial targets for fiscal
year 2007 being met and has received additional incentive compensation of
$520,000 upon the Company filing its fiscal year 2005 Annual Report on Form
10-K.
In addition, the Company issued A&M a warrant to purchase 472,671 shares of the
Company's Class A Convertible Common Stock. The warrant provides for an exercise
price of $5.67 per share. The warrant is fully vested and will expire on
September 28, 2010. The warrant contains anti-dilution protection and provides
for certain adjustments to the number of shares that may be purchased and the
exercise price in the event the Company declares a stock dividend, a stock
split, combines or consolidates the shares, or in the event of any
reclassification, change in the outstanding securities of the Company,
reorganization or merger of the Company, or sale of all or substantially all of
its assets.
The letter agreement may be terminated by either party with or without cause. If
the Company terminates the letter agreement for cause at any time, the warrant
will terminate and the Company will be relieved of all of its payment
obligations thereunder, except for the payment of fees and expenses incurred by
A&M through the effective date of termination, the potential maintenance of
director and officer liability insurance for two years following termination,
and the obligation to indemnify A&M and its affiliates against certain claims or
losses arising out of their performance of services for the Company. If the
Company terminates the letter agreement without cause or A&M terminates the
letter agreement for good reason, A&M will be entitled to retain the warrant, to
receive fees and expenses incurred by A&M through the effective date of
termination, and to receive any remaining incentive compensation upon
satisfaction of the enumerated financial target. In addition, A&M and its
affiliates will be
91
entitled to be indemnified against certain claims or losses arising out of their
performance of services for the Company and the Company may be required to
maintain director and officer liability insurance for two years following
termination.
Determination of Independence
The Board has affirmatively determined that, except for Mr. John Kelly, our CEO
and president, no current director or former director who served during the most
recent fiscal year has or had a material relationship with us and each current
or former director is an "Independent Director," as defined by the rules of the
NYSE. While the Company is no longer listed on the NYSE, the Board has
determined to continue to use the NYSE independence standards.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees and Services of Ernst & Young LLP
The following table summarizes fees billed to the Company by Ernst & Young LLP
for fiscal years 2007 and 2006:
Service 2007 2006
------- ------------ ----------
Audit fees $ 1,260,000 $1,137,000
Audit-related fees 56,000 407,000
------------ ----------
Total audit and audit-related fees 1,316,000 1,544,000
------------ ----------
------------ ----------
Total tax fees 344,000 536,000
------------ ----------
Total fees $ 1,660,000 $2,080,000
============ ==========
Audit-related fees principally relate to benefit plan audits and Sarbanes-Oxley
compliance. Total tax fees principally relate to tax preparation services,
foreign trade zone qualification assistance and other tax consultations.
The Audit Committee approves in advance all audit and non-audit services
performed by Ernst & Young. There are no other specific policies or procedures
relating to the pre-approval of services performed by Ernst & Young. The Audit
Committee considered whether the audit and non-audit services rendered by Ernst
& Young were compatible with maintaining Ernst & Young's independence as
auditors of the Company's financial statements.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(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
operations, cash flows, stockholders' equity, and comprehensive income
for the three fiscal years ended September 28, 2007, September 29, 2006
and September 30, 2005 and the consolidated balance sheets as of
September 28, 2007 and September 29, 2006, and related notes and the
Report of Independent Registered Public Accounting Firm are included
under Item 8 of this Annual Report on Form 10-K.
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
on Form 10-K is incorporated by reference herein in partial response to
this Item 15.
92
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/ John P. Kelly
------------------------------------
John P. Kelly
President and Chief Executive Officer
Date: June 27, 2008
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 Robert
Schuller 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/ William R. Patterson Chairman of the Board of Directors June 27, 2008
- -------------------------
William R. Patterson
/s/ John P. Kelly President, Chief Executive Officer and Director
- -------------------------
John P. Kelly (principal executive officer) June 27, 2008
/s/ Paul R. Geist Executive Vice President and Chief Financial Officer June 27, 2008
- -------------------------
Paul R. Geist (principal financial and accounting officer)
/s/ Jonathan E. Baum Director June 27, 2008
- -------------------------
Jonathan E. Baum
/s/ Tim M. Pollak Director June 27, 2008
- -------------------------
Tim M. Pollak
/s/ Mark C. Demetree Director June 27, 2008
- -------------------------
Mark C. Demetree
/s/ James A. Heeter Director June 27, 2008
- -------------------------
James A. Heeter
/s/ Terence C. O'Brien Director June 27, 2008
- -------------------------
Terence C. O'Brien
/s/ David W. Allen Director June 27, 2008
- -------------------------
David W. Allen
/s/ Ronald C. Kesselman Director June 27, 2008
- -------------------------
Ronald C. Kesselman
/s/ Robert J. Druten Director June 27, 2008
- -------------------------
Robert J. Druten
93
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.
94
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
AMERICAN ITALIAN PASTA COMPANY
Balance at Charged Balance
Beginning to Costs at End
Description of Period and Expense Deductions (1) of Period
- ----------- --------- ----------- -------------- ---------
Year Ended September 28, 2007:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,989,000 $ 163,000 $ 282,000 $ 1,870,000
Allowance for slow-moving, damaged and
discontinued inventory 1,499,000 788,000 1,644,000 643,000
----------- ----------- ---------- ------------
Total $ 3,488,000 $ 951,000 $1,926,000 $ 2,513,000
=========== =========== ========== ============
Year ended September 29, 2006:
Deducted from asset accounts:
Allowance for doubtful accounts $ 2,116,000 $ (127,000) $ - $ 1,989,000
Allowance for slow-moving, damaged and
discontinued inventory 10,470,000 1,420,000 10,391,000 1,499,000
------------ ----------- ----------- ------------
Total $12,586,000 $ 1,293,000 $10,391,000 $ 3,488,000
============ =========== =========== ============
Year ended September 30, 2005:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,351,000 $ 1,806,000 $ 1,041,000 $ 2,116,000
Allowance for slow-moving, damaged and
discontinued inventory 3,702,000 12,155,000 5,387,000 10,470,000
----------- ------------ ---------- ------------
Total $ 5,053,000 $ 13,961,000 $ 6,428,000 $ 12,586,000
=========== ============ =========== ============
(1) Deductions from the allowance for doubtful accounts equal accounts
receivable written off, less recoveries, against the allowance.
Deductions from allowance for slow-moving, damaged and discontinued
inventory equal inventory written off, less recoveries, against the
allowance.
95
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 (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report
on Form 10-K for fiscal 2005, filed June 16, 2008).
3.2 The Company's amended and restated Bylaws dated October
7, 1997 (incorporated by reference to Exhibit 3.2 to
the Company's Annual Report on Form 10-K for fiscal
2005, filed June 16, 2008).
(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 (incorporated by reference to Exhibit 4.1 to the
IPO Registration Statement).
4.2 The specimen certificate representing the Company's
Class B Convertible Common Stock, par value $0.001 per
share (incorporated by reference to Exhibit 4.2 to the
IPO Registration Statement).
4.3 Section 7.1 of the Company's amended and restated
Certificate of Incorporation (filed as Exhibit 3.1
hereto).
4.4 Article II of the Company's amended and restated Bylaws
(filed as Exhibit 3.2 hereto).
4.5 Sections 1, 2, 3, 4 of Article III of the Company's
amended and restated Bylaws (filed as Exhibit 3.2
hereto).
4.6 Article VII of the Company's amended and restated
Bylaws (filed as Exhibit 3.2 hereto).
4.7 Article IX of the Company's amended and restated Bylaws
(filed as Exhibit 3.2 hereto).
4.8.1 Amended and Restated Credit Agreement, dated as of
March 13, 2006, by and between the Company and Bank of
America, N.A., as Lender, letter of credit issuer and
Administrative Agent (incorporated by reference to
Exhibit 4.1 to the Company's Form 8-K filed March 15,
2006).
4.8.2 First Amendment to Amended and Restated Credit
Agreement, dated as of March 13, 2007 (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K
filed March 16, 2007.)
4.8.3 Second Amendment to Amended and Restated Credit
Agreement, dated as of December 27, 2007 (incorporated
by reference to Exhibit 4.1 to the Company's Form 8-K
filed December 31, 2007).
4.9 Shareholders Rights Agreement, dated December 3, 1998,
between American Italian Pasta Company and UMB Bank,
N.A. as Rights Agent (incorporated by reference to
Exhibit 1 to the Company's Registration Statement dated
December 14, 1998 on Form 8-A12B (Commission File No.
001-13403)).
96
4.10 Certificate and First Amendment to Rights Agreement
(incorporated by reference to Exhibit 4 to the
Company's Form 8-K filed January 6, 2003).
4.11 Warrant to Purchase Class A Convertible Common Stock
dated March 10, 2006 (incorporated by reference to
Exhibit 10.2 to the Company's Form 8-K filed March 16,
2006).
(10) Material Contracts
10.1* Board of Directors Compensation Program (incorporated
by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-K for fiscal 2005, filed June 16,
2008).
10.2* Form of Indemnification Agreement with Officers and
Directors (incorporated by reference to Exhibit 10.2
to the Company's Form 8-K filed August 16, 2005), and
schedule of parties (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form
10-K for fiscal 2005, filed June 16, 2008).
10.5.1* Employment Agreement between the Company and Timothy
S. Webster dated May 30, 2002 (incorporated by
reference to Exhibit 10 to the Company's Form 10-Q for
the period ending June 30, 2002).
10.5.2* Employment Agreement dated September 1, 2002 between
the Company and Warren B. Schmidgall (incorporated by
reference to Exhibit 10.10 to the Company's Form 10-K
for the period ending September 30, 2002) and
Amendment to Employment Agreement (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K
filed August 16, 2005).
10.5.3* Employment Agreement by and between American Italian
Pasta Company and Horst W. Schroeder dated January 14,
2003 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the period ending March 31,
2003).
10.5.4* Employment Agreement dated August 25, 2003, between
the Company and Daniel W. Trott (incorporated by
reference to Exhibit 10.32 to the Company's Form 10-K
for the period ending October 3, 2003).
10.5.5* Employment Agreement dated September 10, 2004, between
the Company and George D. Shadid (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K
dated September 15, 2004).
10.5.6* Severance Agreement between the Company and Walt
George dated October 1, 2005 (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K
filed October 6, 2005).
10.5.7* Retention Bonus for Chief Financial Officer
(incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed November 18, 2005).
10.5.8* Separation Agreement between the Company and Timothy
S. Webster dated December 5, 2005 (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K
filed December 8, 2005).
10.5.9* Separation Agreement between the Company and Horst W.
Schroeder dated January 25, 2006 (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K
filed January 31, 2006).
97
10.5.10*Cash Incentive Plan for fiscal 2006, 2007 and 2008
(incorporated by reference to Exhibit 10.5.10 to the
Company's Annual Report on Form 10-K for fiscal 2005,
filed June 16, 2008).
10.5.11*Employment agreement dated November 6, 2007 between
the Company and John P. Kelly (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K
filed November 8, 2007).
10.6.1* 1996 Salaried Bonus Plan (incorporated by reference to
Exhibit 10.13 to the IPO Registration Statement).
10.6.2* 1997 Equity Incentive Plan (incorporated by reference
to Exhibit 10.14 to the IPO Registration Statement).
10.6.3* First amendment to 1997 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the period ending July 31,
1998).
10.6.4* American Italian Pasta Company 2000 Equity Incentive
Plan, as amended (incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q for the
period ending June 29, 2001).
10.6.5* Amendment to the 2000 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the period ending January 2,
2004).
10.6.6* Form of Restricted Stock Agreement for Restricted
Stock Awards granted pursuant to the Company's 2000
Equity Incentive Plan (incorporated by reference to
Exhibit 10.25 to the Company's Form 10-K for the
period ending September 30, 2002).
10.6.7* Form of Stock Option Award Agreement for Stock Option
Awards Pursuant to the Company's 2000 Equity
Incentive Plan (incorporated by reference to Exhibit
10.4 to the Company's Form 10-Q for the period ending
March 31, 2003).
10.6.8* New Form of Restricted Stock Agreement (incorporated
by reference to Exhibit 10.1 to the Company's Form
8-K filed March 8, 2006).
10.6.9* Form of Stock Appreciation Rights Award Agreement
(incorporated by reference to Exhibit 10.2 to the
Company's Form 8-K filed March 8, 2006).
10.10 Product Supply and Pasta Production Cooperation
Agreement dated May 7, 1998 between the Registrant
and Harvest States Cooperatives (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q
for the period ending July 31, 1998).
10.11 Flour Purchase Agreement by and between American
Italian Pasta Company and Bay State Milling Company
dated August 7, 2002 (incorporated by reference to
Exhibit 10.22 to the Company's Form 10-K for the
period ending September 30, 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 ([*])).
10.12 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
98
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 ([*])
(incorporated by reference to Exhibit 10.0 to the
Company's Form 10-Q for the period ending June 30,
2003).
10.13 Letter Agreement between the Company and Alvarez &
Marsal, LLC, dated September 28, 2005 (incorporated
by reference to Exhibit 10.1 to the Company's Form
8-K filed October 4, 2005).
10.14 Letter Agreement between the Company and Alvarez &
Marsal, LLC, dated March 10, 2006 (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K
filed March 16, 2006).
10.15 Letter Agreement between the Company and Alvarez &
Marsal, LLC, dated March 21, 2007 (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K
filed March 27, 2007).
10.16 Letter Agreement between the Company and Alvarez &
Marsal, LLC, dated January 24, 2008 (incorporated by
reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for fiscal 2005, filed June 16,
2008).
10.17 Real Estate Contract between the Company and ST
Specialty Foods, Inc. dated June 12, 2006
(incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed June 16, 2006).
10.18* American Italian Pasta Company Severance Plan for
Senior Vice Presidents and Above.
(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 on Form 10-K.
(31.1) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
(31.2) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
(32) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* Represents a management contract or a compensatory plan or arrangement.
99
